What does it mean to be "diversified" when everything is expensive?
That's a good question. Does "diversification" help when everything is in a bubble? Maybe at the margin, right? I mean, "diversification" entails holding assets the returns on which are negatively correlated but when all of those assets are in bubble territory, the implication is that at best, returns going forward are going to constrained and at worst, returns will be negative. So while being diversified across a bunch of assets that are all expensive might help mitigate exposure to one of those assets plunging, the concept of "diversification" becomes more ambiguous in an environment where everything is overvalued.
As Goldman writes, in a new piece out Tuesday evening, "valuations across assets are expensive vs. history, which reduces the potential for returns and diversification [as] valuations become a speed limit for returns."
Hopefully, you can already see where this is going. A combination of factors have conspired to push valuations across assets higher, even as we are in the midst of the longest period of negative stock/bond return correlations this century.
Equity and bond returns hav
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