One of the reasons for recommending diversification of asset classes (stocks, bonds, real estate, commodities, etc) is that since different asset classes are imperfectly correlated this will reduce volatility and risk. A recent report from Merrill Lynch shows that the correlation between different asset classes have increased over the last year. Your best bet for diversification? Short-term bonds with maturities of a 2 to 5 years. My bet is on treasuries, particularly TIPS. For my personal portfolio, I lend money on the P2P lending site prosper.com and I expect to earn an 8.5% annual return with little effort.
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