Despite the fact all asset classes fell at the same time during the height of the current global financial market downturn, suggesting diversification doesn't work, investors must continue to invest across a variety of assets, according to Axa chief investment officer Mark Dutton.
"Every now and then you get a dominant factor that affects all things and in this case it was risk aversion. So it didn't matter what was going on in any of the underlying economics of any of these asset classes, the dominant feature through September and October last year was risk aversion," Dutton said.
Investors needed to be aware that diversification is not necessarily about achieving certainty in the investment world, he said.
"It is about biasing the odds in our favour."
Correlation is a factor investors have to be conscious of when looking to diversify but when the markets fell many asset classes seemed to have a correlation of one, adding to the current scepticism towards the merit of diversification.
However, Dutton said that investors always have to take into account that correlation moves.
"It means the diversification benefit varies over time in a big way. It's not a single number and it's not a stationary variable," Dutton said.
"The absolute worst and least effective case you could have is if the correlation was actually one, in which case you don't get a benefit from diversification," he said.
"But you'll never get a dis-benefit from it."
The concept of diversification will always have a varying degree of effectiveness and that is something investors need to learn, Dutton said.
