Diversification is a cornerstone of Modern Portfolio Theory and portfolio risk management. We spread our investments across a range of asset classes to ensure participation in the upside and reduce exposure to the downside. This is a time-honored strategy that works ... most of the time. But during epic market downturns, equity asset classes tend to march to the same dismal drumbeat.

This latest update shows some recovery of the diversification effect in the equity classes, although the most conspicuous is the relative underperformance of the REIT index.

How do we protect against these infrequent but destructive events? First we need to understand that they do happen — a reality this website has endeavored to illustrate over the past 18 months. Followers of buy-and-hold investing need to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets in their portfolios. This will help to minimize the chance that a market implosion near or in retirement is a life-changer.

Another approach is to employ a tactical asset allocation strategy that attempts to reduce equity holdings when the market appears significantly overvalued or when it is trending down. Both of these conditions, market valuation and moving averages, are periodically addressed at this website.