Please stay tuned for important disclosure information at the conclusion of this episode.

Welcome to Investing Insights. I'm your host, Ivana Hampton. The classic 60-40 portfolio has earned a

following because of its simplicity and results. Yet some investors desire to

broaden beyond stocks and bonds to other asset classes to get better results. But how do these two

portfolios size up against each other? A trio of Morningstar researchers examined that in the

2024 diversification landscape report, Amy Arnott is one of the co-authors

and a portfolio strategist for Morningstar Inc. Here's our conversation.

Thanks for being here, Amy. Great to be here. So let's start with a quick explainer about the

benefits of portfolio diversification. And what should people hope to achieve?

Yeah, so the basic idea behind portfolio diversification goes back to the idea of not putting all of your eggs in one basket,

so you don't want to be overexposed to any particular security or asset class.

And typically by holding many different securities or asset classes,

you can reduce the risk profile of your portfolio.

And we measure the potential for diversification by looking at something called a correlation coefficient,

which measures how closely to securities

or asset classes tend to move in relation to each other. So if the correlation coefficient

is positive one that would indicate that the two asset classes have moved perfectly in step

with each other. So they're basically

both going up or going down consistently 100% of the time. If the correlation coefficient is zero,

that would indicate that they have basically no relationship to each other. And if it's

negative one, that would indicate that they're perfectly negatively correlated.

So they're moving in opposite directions.

...