Rekenthaler Report: The Perpetual Headwind

Investors react to risk more than they anticipate.

John Rekenthaler 21 January, 2009 | 12:44PM
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Ben Inker of GMO Asset Management has published a thoughtful paper called "When Diversification Failed." It touches on several timely and provocative topics--the limitations (and strengths) of conventional concepts of portfolio diversification, the distinction between the New Era bubble of the late 1990s and the real estate/finance-led bubble of the mid-2000s, and the failure of so-called "alternative" investment strategies to protect against the 2008 debacle. But what struck me most were two charts illustrating GMO's long-term forecasts for various asset classes in June 2007, and then again in October 2008.

The June 2007 chart foretold a dire story. In contrast with conventional finance theory, which states that riskier assets should compensate for their dangers with higher eventual

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John Rekenthaler

John Rekenthaler  is vice president of research for Morningstar.