With stock market volatility at a 20-year low, the value of adding diversification to an equity portfolio has never been greater, say quantitative managers in the Chicago office of Weiss, Peck & Greer.
Subdued price movements won't last forever, and when prices begin to jump, the benefits of owning more diversified portfolios will increase, said Joseph N. Pappo, principal and managing director in quantitative equities. So right now may be one of the best times to get into stocks that increase diversity, in other words, stocks with a low correlation to the market, he said.
The idea is that as stock market volatility picks up, investors will seek out stocks with a low correlation to the market and those stocks should outperform.
Mr. Pappo pointed out that increasing portfolio diversity is not the same as buying the whole market or an index fund. There are much better options to owning the Standard & Poor's 500 if an investor wants to increase portfolio diversity, WPG executives say. WPG tries to do that by looking at the correlation of stocks to the market, among other things, in building portfolios that will be less volatile than typical portfolios.
Mr. Pappo said that marketing a volatility enhancing strategy has been difficult at a time when the market has been rewarding portfolios for taking on volatility. But if volatility does pick up, as it is likely to do, investors will be handsomely rewarded for getting into low correlated stocks early, he said.