3 assets that may not diversify as well as you think

Real estate, high-yield bonds, and cryptocurrency don’t always live up to their reputation as portfolio diversifiers

Diversification is a core principle of sound investing: A portfolio that includes assets with different performance characteristics often leads to better risk-adjusted returns than one that relies on a single asset class.

But building a diversified portfolio can be easier in theory than practice, as many asset classes often touted as good portfolio diversifiers may not live up to their reputation.

In some past periods, real estate investment trusts didn’t move closely in tandem with the broader US equity market.

Rolling three-year correlations have dropped as low as 0.10 during some periods, such as the early 2000s. And being untethered to the overall equity market can lead to better risk-adjusted returns when real estate is added to a diversified portfolio.

In recent years, however, real estate has generally moved more in line with stocks overall. This has also made it a less valuable cushion against bear-market declines.

Real estate had previously held up better than the overall market during some market corrections, such as the tech-stock correction that started in early 2000. But during the three most recent bear markets, real estate suffered heavier-than-average losses.

High-yield bonds (also known as junk bonds) are issued by corporations with below-average credit ratings, generally defined as BB+ or lower from a major credit rating agency.

As a result, they tend to trade more in line with broad credit markets, overall economic trends, and company-specific factors than they do with Treasuries. As a result, they’re less sensitive to interest-rate movements than investment-grade bonds, which