May 26, 2018

Fed Chief Reaffirms Fervor for Stimulus

Mr. Bernanke said he still expected to reach that point in the coming months but, in what may have been his final appearance before the House Financial Services Committee, he cautioned that Congress itself posed the greatest risk to growth.

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he told the committee.

The sluggish economy has been a constant background for Mr. Bernanke’s biannual testimony. Unemployment, at 7.6 percent, remains stubbornly above the Fed’s goals. Inflation has sagged to the lowest pace on record. Growth continues at a “modest to moderate pace,” the Fed said Wednesday in its monthly beige book survey of economic conditions across the country, released separately from Mr. Bernanke’s testimony.

Mr. Bernanke’s message on Wednesday was that the Fed would cut back on its monthly asset purchases — $85 billion of mortgage-backed securities and Treasury securities — only if conditions were improving. If unemployment instead stays high and growth rates do not improve, the Fed will keep buying bonds. If inflation stays low, the Fed will keep buying bonds. If longer- term interest rates go up, the Fed will keep buying bonds.

Mr. Bernanke revived a talking point from earlier this year, insisting the Fed was willing to buy more than $85 billion a month. “Because our asset purchases depend on economic and financial developments, they are by no means on a preset course,” Mr. Bernanke told the committee.

Even as Mr. Bernanke said that the Fed would keep its options open, he continued to suggest that the Fed would like to start reducing its asset purchases this year and then end them as soon as possible. If the economy needs more stimulus, the Fed would prefer to extend its policy of holding short-term interest rates near zero. Mr. Bernanke, who refers to this shift as “a change in the mix of tools,” has not explained the rationale and was not asked to do so.

The Fed’s course will not be determined by Mr. Bernanke much longer. He is widely expected to step down as Fed chairman at the end of his second term in January. Members of both parties took the opportunity to praise him, although Republicans generally added that they opposed the Fed’s recent efforts. No one paid much attention to the finger Mr. Bernanke had pointed at them.

“You acted boldly and decisively and creatively — very creatively, I might add,” said the committee’s chairman, Jeb Hensarling, Republican from Texas.

“You’ve had a lot of compliments today. In my business it’s called a eulogy,” said Emanuel Cleaver, a Missouri Democrat, who is an ordained minister.

“You have never been boring,” said Carolyn Maloney, a New York Democrat.

Mr. Bernanke then did his best to be boring, sending the message to markets roiled by his comments last month that it was much ado about nothing.

Markets purred. The yield on the benchmark 10-year Treasury bond sank slightly, falling below 2.5 percent, while stock markets posted modest gains.

The announcement last month that the Fed expected to reduce its asset purchases later this year drove up interest rates on mortgages and other loans. Some investors concluded that the Fed was curtailing its ambitions for the recovery, while others saw evidence that the Fed was overly optimistic in its forecasts.

Mr. Bernanke described that response as “unwelcome,” but he said it had probably reduced some “excessively risky or leveraged positions” — easing concerns among some Fed officials that its efforts are pumping up new bubbles.

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Bucks: Let Diversification Do Its Job

Carl Richards

Investors typically set up a diversified investment portfolio to reduce their risk. Just hold a good mix of different kinds of stocks, along with some bonds and cash, and your problems are over.


Not exactly. Diversification comes with its own risk. But before we get to the risk, let’s talk about how we define this term in the first place.

When people say diversification, they’re often talking about two separate things. First, there’s equity diversification where you split up the portion of your money invested in stocks among big ones, small ones, undervalued ones, international ones and so on.

The idea behind this strategy is that you can reduce your risk, since different types of stocks often behave differently depending on market conditions.

Sometimes, it works. Dimensional Fund Advisors reported that in 1998, the large company stocks that make up the S.P. 500 gained 28.6 percent while small-cap value stocks lost 10 percent. Then in 2001, the S.P. 500 was down 11.9 percent, while those same small-cap value stocks gained 40.6 percent.

Since it does help sometimes, equity diversification is a useful strategy. Do it. But you have to understand that equity diversification sometimes fails to deliver exactly what you expect it to and often fails when you need it most.

We saw this in 2008-2009, when almost every type of investment fell. Granted, diversification would have saved you from making a mistake like putting everything in Lehman Brothers stock, but you still saw equity holdings plummet.

If you think back to that time, you will most likely remember hearing people say that diversification was broken, that it no longer worked. I remember thinking that myself.

But remember, when that happens and people start running around again saying diversification doesn’t work, they’re talking about equity diversification. There’s another, more important type of diversification: the way you split your money between stocks, bonds, cash and other investments.

This portfolio-level diversification is the primary lever to help you manage the risk and return in your portfolio. Each type of investment plays a different role:

  • Stocks provide the growth.
  • Short and intermediate bonds provide more safety and a little income.
  • Cash is there for liquidity and to protect your money.

The idea is to balance these investments in a way that gives up some higher returns in exchange for lower overall risk. Essentially, you’ve given up the opportunity to hit home runs for the benefit of never striking out.

With that out of the way, let’s talk about the risk of diversification.

Whenever you diversify, if you’ve done it correctly, there will always be something in your portfolio that you’re in love with and something that you want to dump (or will at least be the source of concern, as bonds are now in some circles). Some investment or asset class will be doing fantastic compared to the rest of your portfolio, and something will be doing much worse than everything else.

The trouble is, you never know when all of this will change. The thing you want to buy more of now will someday become the thing you want to sell.

Think back to the example from 1998. Having lived through it, I can tell you it was awfully tempting to move all your money out of small-cap value stocks and into large-cap stocks. But that would have been a terrible decision given how well small-cap value stocks did just two years later.

The same is true when you diversify among stocks, bonds and cash. When the stock market is tumbling like it did in 2008, you want to move everything to cash, and it’s really hard to keep money in bonds or cash when the stock market is having one of those great years.

But here is the point. The risk of diversification is that you will bail on it as a strategy at exactly the wrong time.

That feeling you get — the one that says, I wish I could dump this lame investment so I could buy a whole bunch more of this incredibly hot one — can get you into trouble fast. The temptation is greatest when it would be the most catastrophic for you to succumb.

But that feeling is actually telling you that you’ve done the right thing: You’re diversified. So remember that when the current fad ends and today’s rejects come back into style, you’ll be okay. And you’ll be awfully glad you didn’t give in to the temptation to give up on being diversified.

The next time diversification appears to not be working, remind yourself that it is a long-term strategy that can’t be judged on your short-term experience. In other words, just because something isn’t working right this minute — or even right this year — doesn’t mean it’s broken. So instead of thinking, “I am a rocket scientist and I can come up with something better,” just let diversification do its job.

Then go for a hike in the mountains instead of sitting hunched over the sell button on your broker’s Web site.


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Greece Extends Deadline for Debt Buyback

LONDON — Greece, on the verge of completing a crucial plan to reduce its debt burden, extended for another two days the deadline for foreign investors and Greek banks to sell their deeply discounted bonds back to the government.

Announced a week ago, the deadline for taking part in the buyback was to have been last Friday. But even though Greek banks and hedge funds offered close to €26 billion in bonds, the government fell short of the goal of €30 billion, or $39 billion, that its international creditors have set as a minimum for the deal to be called successful.

The new deadline is noon in London on Tuesday.

Having borrowed €10 billion from one of the European bailout funds to buy back the debt, the goal is for net debt relief of €20 billion — an amount the International Monetary Fund has said Greece must retire if the institution is to keep lending to the country.

Bankers close to the deal say that hedge funds, which for weeks have been coy about whether they might agree to sell at what would be an average price of around 33 cents per euro, have participated in larger-than-expected numbers. And they still expect the buyback to be completed. But with Greek banks reluctant to sell all of their restructured bonds back to the government, the buyback’s success remains very much dependent on foreign investors selling the majority of their holdings.

While Greek banks are believed to own €17 billion worth of bonds, they have not tendered the entire amount. Unlike foreign investors, many of whom bought the securities at knockdown prices, the Greek banks will not be reaping big profits from selling the bonds at around 33 cents per euro. Bankers estimate that foreigners, which own about €24 billion worth of bonds, have offered between €15 billion and €17 billion in debt so far.

At a time when blue-chip collateral is hard to find in Europe, the restructured bonds are seen by the Greek banks as a premium asset that can be used to borrowing much-needed funds from the European Central Bank.

“If the foreigners do not come in we are toast,” said one banker who was involved in the transaction but requested anonymity because he was not authorized to speak publicly.

The head of the Greek debt management agency, Stelios Papadopoulos, in a statement Monday, made it clear to reluctant investors that they may never get another chance to sell their debt at prices as high as the government is offering.

“Investors should bear in mind that even if Greece accepts all bonds tendered in the invitation, it will continue to engage with its official sector creditors in considering further steps to put its debt on a sustainable path,” Mr. Papadopoulos said in the statement. “Future measures may not involve an opportunity to exit investments in designated securities at the levels offered for this buyback.”

Such measures might include a second offering at a lower price, with the government invoking collective action clauses to force holdout investors to accept the revised terms. The government could also try to use provisions in the bond contracts that might allow Greece to keep paying its European creditors while forcing private-sector bondholders to take losses.

Such steps are aggressive, though, and. as the bonds are government by English law, would surely be challenged in British courts by foreign investors. And given the recent successes that hedge funds have had in suing Argentina and Ireland with regard to past bond restructurings, Greece — and Europe — will think long and hard before taking this type of action.

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E.C.B. Promises Continued Support for Europe Banks

And while the central bank left its benchmark interest rate unchanged at 1 percent Thursday, the bank’s president, Mario Draghi, indicated he was prepared to take further steps to ease credit, if necessary.

The Italian Treasury found brisk demand Thursday in selling 8.5 billion euros ($10.9 billion) of 12-month bills at an interest rate of 2.735 percent. It was the lowest interest rate Italy has been able to sell one-year debt at since an auction in June — and less than half the 5.952 percent Italy had to offer at the last sale, in early December.

In Madrid, the Spanish Treasury said Thursday it sold a total of 10 billion euros ($12.8 billion) of bonds — twice the amount it had set as a target — with yields down from previous auctions. For example, $4.3 billion in three-year notes were sold at a yield of 3.384 percent, compared with 5.187 percent in December for three-year notes.

Both Spain and Italy have been under intense pressure from investors because of their public finances, with recently installed governments scrambling to push through additional austerity packages to rein in deficits and debt levels.

Both countries’ longer-term debt yields, which reflect higher risk and uncertainty, remain relatively high. Another bellwether of the crisis comes Friday, when Italy tries to auction more than $9 billion in longer-term debt. The question remains whether enough investors will bid on that debt and feel confident enough in Italy’s fiscal health to justify declining yields.

The interest rate on Italy’s 10-year debt has dipped to 6.6 percent from 7.1 percent earlier this week, though it is still unsustainably higher than the 4 percent to 5 percent it traded at for much of the last two years.

But Thursday’s solid auctions were the latest sign that shorter-term government debt has become more attractive to commercial banks and other investors since the central bank last month began a program of offering low-interest three-year loans to commercial banks in the euro currency region.

While a large portion of that money has been used simply to pay off other lenders, it has clearly eased pressures on the banks and helped free up cheap money the banks can use to purchase sovereign debt.

“We do think this decision has prevented a credit contraction that would have been much more serious,” Mr. Draghi said Thursday.

He said the central bank would continue to support commercial banks in the euro zone and predicted that the bank’s next refinancing operation, in February, would attract even more lenders.

The central bank, based in Frankfurt, left its benchmark interest rate unchanged Thursday, after having cut rates by a quarter point twice since Mr. Draghi became its president at the beginning of November. The rate cuts have been meant to help slow an economic downturn in the 17 countries in the European Union that use the euro. Mr. Draghi said the bank was pausing in its rate cutting amid what it called “tentative” signs of increased economic stability. But he indicated the central bank was prepared to take further steps, if necessary.

Analysts took Mr. Draghi’s comments as a clear sign that the central bank stands ready to reduce its benchmark interest rate below the already historic low of 1 percent to counter a recession.

“He kept the door open,” said Jacques Cailloux, the chief European economist for Royal Bank of Scotland. “He made a very clear statement that the E.C.B. stands ready to act.”

Earlier Thursday, in London, the Bank of England kept its benchmark interest rate at a record low of 0.5 percent as the British government’s tough fiscal measures and the crisis in the euro zone exacerbated economic problems.

The Bank of England also voted to continue with its existing bond purchasing program of £275 billion ($422 billion). Many economists expect the British central bank to expand the asset-buying program at its next meeting in February in a bid to pump more capital into the economy.

Some economists expect the central bank to move as early as next month for a rate cut. But others predict that the governing council will hold off until March, when a fresh growth forecast for the euro zone is to be issued.

Reporting was contributed by Julia Werdigier from London, David Jolly from Paris and Raphael Minder from Madrid.

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The Week Ahead

ECONOMIC REPORTS Data will include the S. P./Case-Shiller home price index for October and consumer confidence for December (Tuesday); weekly jobless claims, the Chicago purchasing managers’ index for December, and pending home sales for November (Thursday).

IN THE UNITED STATES On Monday, financial markets and government offices will be closed for the observed Christmas holiday.

IN EUROPE This week, the European Central Bank will release results of its program to drain 211 billion euros in excess market liquidity created by its purchases of sovereign debt, including Spanish and Italian bonds.

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Italy Bond Market as Euro Proxy

But a calmer market should not be confused with an optimistic one. Investors are still deeply worried about Italy’s mounting political and debt financing woes.

Even the seeming rallying point on Thursday — Italy’s ability to sell out an offering of 5 billion euros in one-year bonds — had a dark side. The interest rate was 6 percent, up from 3.5 percent only a month ago.

In fact, investors and analysts say, the very depth and sophistication of Italy’s 1.9 trillion euro ($2.6 trillion) bond market, the third-largest in the world after the United States and Japan, has made it a proxy of sorts for the euro zone’s deeper problems. Those include the possible exit of Greece from the euro and Germany’s resistance to assuming a larger financial burden in rescuing weaker economies.

Investors have been dumping Italian bonds that they own, and ramping up their negative bets by selling Italian bond futures as well.

The Italian bond market is the only large market in the euro zone outside of Germany to offer investors the ability to buy or sell futures contracts. That has allowed many investors to use Italian futures to place bearish bets on Italy, and as a proxy for the broader euro zone itself.

“The futures market for Italian bonds has become the main conduit now for all investor angst with regard to the euro zone,” said Yra Harris, a trader at Praxis Trading on the Chicago Mercantile Exchange.

In what has become a highly volatile trading environment, investor fears can shift sharply, turning sellers into buyers, especially if it becomes clear that the European Central Bank has started buying bonds. That is why, after Italian 10-year yields touched a dangerously high level of 7.4 percent on Wednesday, word that the bank had started buying the bonds sent yields as low as 6.7 percent on Thursday.

Market jitters were also calmed by indications that Italy was moving closer to appointing a new government with a revamped legislative initiative, making it more likely that the European Central Bank will follow through with additional Italian bond purchases. And further soothing came from the resolution of the Greek political drama, with the appointment of Lucas Papademos, the former vice president of the European Central Bank, as the country’s new prime minister.

Still, European officials are keeping the pressure on Italy. At a news conference Thursday, Olli Rehn, the European Union commissioner for economic and monetary affairs, insisted that Italy’s meeting its fiscal targets and adopting structural reforms was a “sine qua non for restoring confidence in the Italian economy.”

At the root of this confidence drain is the substantial size of debt that Italy must raise from local and foreign investors next year alone: about 350 billion euros. That is about the size of Greece’s total debt.

Over the years, Italy has become a very efficient debt-raising machine, with more than 50 percent of its financing needs met by local banks and investors.

But a substantial amount still must come from foreign investors, which in the past have largely been major European banks. Now these banks are selling their positions to avoid the prospect of having to book losses from their reduced value. And if they are continuing to participate in new bond auctions, as with Thursday’s one-year offering, they are demanding much higher interest rates.

Meanwhile, the negative betting continues. According to officials at Eurex, Europe’s main derivatives exchange, the market for Italian bond futures has increased substantially of late, to as much as one billion euros a day. That is more or less the same size as the market for buying and selling Italian bonds directly.

Many people entering into these futures trades are doing it for hedging purposes or to protect their portfolios if Italy defaults.

But as broader worries about Greece are added to the concern that Italy may no longer be able to finance its debt burden, traders have started to sell Italian bond futures directly — a bet that the euro zone itself might collapse and that Italian bonds will continue to lose value.

Louise Story contributed reporting from New York.

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Shares Shrug Off Italian Downgrade

Stocks rose Tuesday as investors appeared to anticipate progress on two fronts: efforts to resolve debt problems in Greece, and efforts by Federal Reserve policy makers to stimulate the United States economy, analysts said.

The gains also suggested that investors had shrugged off the downgrade of Italy’s debt by the credit ratings agency Standard Poor’s late on Monday. The S.P. move took aim at the euro region’s most indebted member after Greece and opened up the latest development in the European sovereign debt crisis.

Jason Pride, director of investment strategy at Glenmede, said that the S.P. move was “emblematic” of the already known and, in some cases, priced-in problems in the euro zone. The European Central Bank has already been buying Italy’s bonds.

“The markets have backed off a good amount on these concerns,” Mr. Pride said. “To have one additional downgrade, where the E.C.B. is already out there purchasing the bonds? We are telling our clients that you have got to take the backdrop as it is. There is a lot of risk out there.”

In addition, many investors have concluded that the central bank will announce new steps to promote economic growth after a highly anticipated meeting of the Fed that ends on Wednesday.

“The thought is that Operation Twist is going to be announced tomorrow,” said Michael A. Mullaney, a vice president, of the Fiduciary Trust Company, using an insider phrase to describe when the Fed sells shorter term securities for longer term ones. “Quite frankly, most likely it is going to be ‘buy the rumor, sell the news.’ ”

Such a move by the Fed would reflect an effort to reduce long-term interest rates, which would allow businesses and consumers to borrow more cheaply. Already, long-term interest rates have moved as if the Fed had already announced the decision.

Investors could also be reacting to hopeful signals on discussions about aiding Greece.

Greek Finance Minister Evangelos Venizelos described the talks on Monday with a so-called troika of foreign creditors — the International Monetary Fund, the European Commission and the European Central Bank — as productive. The talks were to continue later Tuesday. The troika would be the one to release the latest tranche of loans, which the country needs by mid-October to avoid running out of cash to pay its bills.

Keith B. Hembre, the chief economist and chief investment strategist at Nuveen Asset Management, said equities also could be responding also to the news that Greece had made an interest payment, lessening the possibility of immediate default.

Overall, “It seems like probably a very calm, low-volume day, based on the market moves,” said Mr. Hembre. “You get these moves that are unexplained, and it sort of appears to be movements are more flow-related as opposed to reaction to information.”

The Euro Stoxx 50 index of euro zone blue chips ended trading up 2.1 percent. The FTSE 100 in London rose 1.9 percent. In afternoon trading on Wall Street, the Dow Jones industrial average and the Standard Poor’s 500-share index were up just over 1 percent, and the Nasdaq composite was up by 0.7 percent.

United States government 10-year Treasury yields were 1.95 percent, about the same as levels on Monday. Yields on the benchmark 10-year note fell to a record low of 1.88 percent earlier this month.

S.P. cited Italy’s weakening economic growth prospects and higher-than-expected levels of government debt as reasons for cutting its debt rating by one notch to A from A+.

S. P. said Italy’s fragile governing coalition and policy differences in Parliament would continue to limit the government’s ability to respond decisively to economic head winds. It also cast doubt on whether the government’s projected 60 billion euros, or $82 billion, in fiscal savings would be realized because growth prospects are weakening, the budgetary savings rely on revenue increases, and market interest rates are anticipated to rise.

The Italian government reacted angrily, describing the move as out of touch with reality.

Prime Minister Silvio Berlusconi’s office issued a statement early Tuesday noting that his government had a solid majority in Parliament. It said the government was preparing steps to lift growth and recently passed measures to control public finances through tax increases and spending cuts.

“The evaluations of Standard Poor’s seem dictated more by behind the scenes reports in newspapers than reality and seem influenced by political considerations,” the statement said. The yield on Italian 10-year bonds was up slightly Tuesday, but at more than 5.6 percent, Italy’s borrowing costs are more than three times what Germany, the euro-zone anchor, pays. S. P.’s A rating for Italy is still five steps above junk status, but it is three below that given by another agency Moody’s Investors Service, which is currently assessing Italy.

Investors have also been scrutinizing economic data to gauge to what extent the economy is slowing. The latest on Tuesday showed a decline of 5 percent in housing starts in the United States in August, a steeper decline than forecast. Problems in the housing and construction sector, while well known, still put a dampening effect on sentiment, but it is usually confined to related trading sectors rather than the overall market.

A research note from Capital Economics said that the statistics suggest demand for new homes remains close to “rock bottom.”

“This goes some way to explaining why equity prices of homebuilders have recently fallen by more than the wider market,” the economists said.

Matthew Saltmarsh reported from London. Elisabetta Povoledo contributed reporting from Rome.

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Bucks: Why (and How) Diversified Investors Win

Carl Richards

Diversification remains one of the most fundamental investing principles, and it’s often one of the most misunderstood. In order to understand diversification you first have to take a comprehensive view of the process of planning a portfolio.

Investors tend to view individual investments in isolation. This often happens because of the focus we place on finding the best overall investment versus figuring out how individual investments work together for the benefit of the whole.

Instead of looking at investments in isolation, we should consider them part of a much larger tapestry, and make sure that the overall picture reflects intelligent portfolio design concepts backed up by an academic approach.

Diversification’s primary power is that it lets us reduce risks that are avoidable.

These avoidable risks include:

  • Betting on a particular industry or sector. We see this in the form of trying to pick the next hot sector, like technology, banking or oil stocks.
  • Market timing. Most of us believe that you can’t figure out when stocks will zig and bonds will zag. At the same time, we’re often quick to latch on to anything that might look like detailed research about the direction of the markets. In reality, it’s nothing more than a guess.
  • Owning individual stocks. While it’s certainly not impossible to identify the next Apple, history proves that it’s highly improbable. Placing large, concentrated bets on individual stocks can be a path to incredible wealth, but so can a single spin of the roulette wheel (if you get lucky).

The magic of diversification is that you can take two individual investments, which when viewed in isolation are individually risky, and blend them in a portfolio. Doing so creates an investment that’s actually less risky than the individual components and often comes with a greater return. In finance, this is as close as we get to a free lunch.

What Diversification Looks Like

Here’s what a sample, diversified portfolio might look like.

First, let’s start with two, undiversified portfolios. Portfolio A is invested 100 percent in United States stocks, as measured by the SP 500-stock index, and Portfolio B is invested 100 percent in international stocks, as measured by the MSCI EAFE index. We’ll use 34 years (1976-2010) for our sample period since it’s the longest period available for which we have data from MSCI EAFE.

During those 34 years the SP 500 had an annualized return of 11.17 percent, and international stocks had an annualized return of 10.72 percent. (All of the portfolios mentioned in this post were rebalanced quarterly. And yes, I know that you can’t invest in an index per se, but you can buy index funds and similar vehicles for next to nothing.)

Now let’s look at the risk associated with each of these hypothetical investments.

Although there are many ways to view risk, for our purposes we’ll focus on the number of negative quarters and volatility as measured by standard deviation (the lower this number is, the better). From 1976-2010, the SP 500 had 42 negative quarters and a standard deviation of 15.39 percent. International stocks had 45 negative quarters with a standard deviation of 17.26 percent.

As you can see, each of these portfolios look risky individually. But the magic of diversification is that when we blend them, the whole is better than the sum of its parts.

So let’s create Portfolio C using use a fairly standard 60 percent allocation to the SP 500 and 40 percent allocation to international stocks. Now this portfolio gets a return of 11.21 percent. While that’s not much better than the SP 500 alone, in terms of risk, this 60/40 portfolio only had 37 negative quarters with a standard deviation of 14.45 percent.

That may not sound like much, but it is indeed a free lunch. This portfolio returns at a higher rate with less risk using the simple concept of diversification.

Reducing Risk

When I talk about diversification, I often get told that it’s been irrelevant over the last 10 years, particularly during the global credit crisis in 2008-2009.

Sure, you can see the  benefits of diversification clearly when you’re focused on different types of stocks. But in times of large systematic risks to the stock market (like what we’ve seen during the last five years), the value of diversification among equity asset classes can often go away.

So while it is still a valuable exercise to carefully plan your equity portfolio to take advantage of a free lunch where you can, the real power of diversification comes in the form of risk reduction when you start to mix stocks and bonds.

Let’s compare the 60/40 stock portfolio we built above (Portfolio C) to a portfolio where we add 40 percent in bond exposure.

Remember that Portfolio C generated a return of 11.21 percent with 37 negative quarters and a standard deviation of 14.54 percent. When we blend in a 40 percent allocation to bonds (in the form of the Barclays Capital Aggregate Bond Index), creating Portfolio D, we get a return of 10.4 percent. That’s not much lower than the all-stock portfolio, and we reduce the number of negative quarters to 35.

But the real impact is in the risk reduction we see in the form of a much lower volatility as measured by standard deviation at 9.48 percent. In other words, the ups and downs of Portfolio D will be much less sharp than Portfolios A, B, and C.

While I’m not suggesting that this portfolio is right for every individual or serves as a predictive model, the historical data at least show how being diversified can give you a way to protect yourself from many of the random events that have ruined fortunes.

Plus, diversification allows you to position yourself to take advantage of the returns that equities tend to deliver, balanced with the safety that high-quality bonds provide.

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Stocks & Bonds: Shares Close Ahead Slightly After Mixed Data

The gains lifted the Dow Jones industrial average briefly into positive territory for the year, but it slipped near the end of trading.

The Dow rose 20.70 points, or 0.18 percent, to 11,559.95, just shy of the 11,577.51 at the beginning of 2011. The Standard Poor’s 500-stock index rose 2.84 points, or 0.23 percent, to 1,212.92, and the Nasdaq composite index gained 14 points, or 0.55 percent, to 2,576.11; both are still more than 2 percent below their levels at the year’s start.

The Treasury’s benchmark 10-year note rose 25/32, to 99 18/32, and the yield fell to 2.18 percent from 2.26 percent late Monday.

The United States markets digested a full agenda of economic data, as well as the release of Federal Reserve minutes from a meeting of the bank’s policy makers this month.

The report said Fed policy makers at the Aug. 9 meeting considered changing the size or composition of the Fed’s balance sheet and reducing the interest rate paid on banks’ excess reserve balances. Three members dissented on a vote that promised two more years of low rates, and they agreed to consider other options at their meeting in September, which was extended.

The minutes hardly made waves, with a slight rise in stocks after the report and a brief rally in bonds.

“I think it was in line with expectations, insofar as we have known that they have been getting more into debate and disagreements with one another over what might be prudent,” said Linda A. Duessel, equity market strategist at Federated Investors.

She said it reaffirmed a message that investors had heard from the Fed chairman, Ben S. Bernanke, in a speech last week that there is not much more the Fed can do.

Ms. Duessel and other analysts noted that the report on consumer confidence on Tuesday was one of the worst in recent years. The Conference Board consumer confidence index fell to 44.5 in August, from a reading of 59.2 in July. Stocks dipped in early trading but recovered.

Joshua Shapiro, chief United States economist at MFR Inc., said the index was at its lowest level in more than two years, since a level of 40.8 in April 2009.

In a separate report, residential real estate prices in the United States showed a 3.6 percent increase in the second quarter, according to the Standard Poor’s/Case-Shiller national home price index. But they also had an annual decline of 5.9 percent when compared with the second quarter of 2010. Home price levels for June 2011 were below those of June last year.

Brian M. Youngberg, an energy analyst for Edward Jones, said the markets weathered the consumer confidence numbers.

“It’s a mixed bag, but given everything, the market is holding up relatively well,” Mr. Youngberg said.

Oil prices were up 2 percent, for example, which is a sign of expectations for economic growth, he said. Crude futures for October traded in New York were up slightly at $88.90 a barrel. Gold on the Comex was up more than 2 percent at $1,838.10 an ounce.

Shares in Exxon Mobil, which signed an agreement on Tuesday with Russia’s top crude oil producer, Rosneft, declined 0.3 percent, to $73.91, and was the most widely traded stock on the energy index. Other top energy-related stocks rose slightly.

Philip J. Orlando, chief equity market strategist at Federated Investors, said that with a consumer report that was a “disaster” and the Fed minutes as expected, the attention was turning to the jobs report on Friday.

“The focus is going to be on the data,” he added.

New nonfarm payroll jobs are forecast to be 75,000 for August, compared with 117,000 the previous month, while the unemployment rate of 9.1 percent was not expected to change.

Catherine Rampell contributed reporting.

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Stocks & Bonds: Markets Post an Upturn in Europe

Opinion »

Editorial: Power-Hungry Devices

Television set-top boxes are not really off when you think they are off.

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