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It’s difficult to talk about the value of diversification in the current market scenario, when U.S. stocks clearly appear to be the place to be in.  U.S. stocks look quite attractive compared with most other asset classes like bonds, emerging markets and gold, even after the recent bull-run.

But we cannot underestimate the benefits of portfolio diversification over a longer period of time.  Diversified portfolios always have better risk adjusted returns over long term. So while some adjustments to the portfolio based on short-term market movements definitely make sense, the overall asset allocation approach should be focused on investing in assets having low correlations.

Per AAII’s June asset allocation survey--stock and stock fund allocations were at 62.1%, above their historical average of 60% while bond and bond fund allocations were at 17.2%, the smallest allocation to bonds since August 2009 but still above their historical average of 16%.

Year-to-date ETF fund flows show that investors have been withdrawing funds from gold, emerging markets and long-duration bond ETFs and putting money into Japan, U.S. stocks and short-duration/floating rate bond ETFs.

Are you close to your long-term target asset mix of stocks, bonds and other asset classes or is your portfolio focused on U.S. stocks now? 

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