Diamonds Are An Investor's Best Friend

SINCE THE 2008 FINANCIAL CRISIS, DIAMONDS HAVE PROVIDED EFFECTIVE PORTFOLIO DIVERSIFICATION FOR THOSE OWNING SHARES AND BONDS, AND AN INVESTMENT ALTERNATIVE TO REAL ESTATE

by Francesca Beccacece, Dept. of Decision Sciences, Bocconi
Translated by Alex Foti

Portfolio diversification, if correctly implemented, can improve return on investment and reducing volatility in periods of economic turbulence. Given continuing recession in Europe and slow growth in America, the issue of portfolio diversification has taken a new importance, and has become know also to non-specialists. Its effectiveness lies on a very simple principle: by combining investments which are little or differently affected by market trends, in order to arrive at a global portfolio that offers a good risk-return tradeoff.

But which are the alternative asset classes that an investor should target to diversify his/her assets? The investors’ attention has recently focused on real assets such as commodities, or more innovative and exotic assets, such works of art, fine wines etc.

From the US to the EU

Recent US data show that an asset class which is not usually employed for financial purposes, diamonds, is in fact a very good candidate for investment portfolio diversification. Given its high and stable return, which is relatively uncorrelated with other assets, it can be asserted that diamonds increase return for a constant level of risk. The interest in this asset class has grown so much that practitioners are exploring the possibility to use it as an investment asset, encouraged as they are by the creation of the Diamonds ETF.

Are diamonds an attractive investment option for Europeans to fight against portfolio risk? Can diamonds improve performance, when introduced in European financial portfolios? And could diamonds be substitutes for more traditional forms of investment such as real estate?

Possibly unexpectedly, but in line with US empirical findings, looking at the data for the last decade, what emerges is that diamonds can improve financial performance at certain levels of risk, in EU portfolios comprised of equities and bonds, thanks to low or even negative correlation with the returns of these other assets. The result should be of interest especially for those private investors who typically invest in stocks and bonds, or put their savings into buying a home (it shouldn’t be forgotten that 80% of Italians are home owners, compared to just 50% in Germany). In particular, in Italy diamonds give a premium with respect to bricks and mortar, because they offer higher and less volatile returns for the same level of risk. So should one buy diamond rings rather than apartments? It should be borne in mind that these considerations are valid in the aftermath of the 2008 financial crisis, which depressed the value of real estate assets and boosted the price of diamonds. So diamonds might well be a girl’s best friend, but in a crisis they are an investor’s best friend, too.