Asset diversification has the potential to deliver enhanced risk-adjusted returns on investment portfolios. These gains are usually gauged by examining the contemporaneous correlation matrix. While this approach maybe appropriate when formulating tactical investment decisions, strategic asset allocation can be more appropriately formulated by examining the long-run correlation using cointegrating analysis. This paper explores various relationships between bonds, real estate and shares for the Australian investment market. Empirical findings suggest that no long-run bivariate relationships exist between these asset classes. However, when the models are augmented with real economy variables, there is evidence of cointegrating relationships. A longrun equilibrium relationship is found between listed property, direct property and employment. This implies that diversification benefits are limited to short and medium term investment horizons across these two asset classes. Furthermore, the short-term influence of economic factors indicates their relevance in tactical allocation strategies.