The Power of Diversification

Diversify to Enhance Return Potential and Reduce Volatility

By diversifying across a broad spectrum of asset classes, investors can spread their risk and potentially enhance returns, as strong performance in one market may offset weaker performance in other markets.

Consider the returns of a hypothetical portfolio with assets allocated evenly across eight different investment categories. As you can see from the chart below, the Diversified Portfolio delivered results that were more consistent than other asset classes over the last 20 years.

A Diversified Portfolio May Provide Stability in Changing Markets

Annual Returns for Select Asset Classes (ranked in order of performance—best to worst)

Click on the chart to enlarge

Source: Wilshire Associates. Indices are unmanaged. Investors cannot invest directly in these indices. Past performance is not a guarantee of future results. See below for additional information.

 

Diversification vs. Chasing Performance ChartDon’t Chase Performance

Investors who make asset allocation decisions based on last year’s performance may be in for a surprise. Investments that perform well one year may not do as well the next.  For example, of the asset classes in the above table, Large Cap Growth stocks were the top asset class performer in 1999, earning 33.14%, but in 2000, it dropped to the bottom of the rankings with returns of -22.43%.

Rather than chasing performance, consider diversifying to potentially improve returns and reduce volatility. Look at the hypothetical growth of $10,000 invested annually in a diversified portfolio versus last year’s best asset class. The Diversified Portfolio outperformed the portfolio invested in last year’s best asset class by more than $40,000 over the last 20 years.

Note: Diversification does not ensure a profit or protect against market loss. There is no assurance a diversified portfolio will outperform a non-diversified portfolio.

 

 

 

 

 

Additional Information on Indices

Market Segment: Represented by:
International Stocks Growth MSCI EAFE Index - includes a selection of stocks from 21 developed markets, but excludes those from the U.S. & Canada.
Large Growth Russell 1000 Growth Index - measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Large Value Russell 1000 Value Index - measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values.
S&P 500 Index S&P 500 Index - one of the most commonly-used benchmarks for the U.S. equity market. The 500 stocks are market-capitalization weighted and adjusted for free float. They are selected by the S&P Index Committee based to be broadly representative of the U.S. large-cap equity market.
Small Cap Russell 2000 Index - measures the performance of the small-cap segment of the U.S. equity universe. It includes the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
High-Yield Bond Merrill Lynch High Yield Master II Index - tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
Bonds Barclays Capital U.S. Aggregate Bond Index - covers a broad array of domestic fixed income securities, including government, corporate, mortgage and asset-backed securities.
Cash Citigroup Global Markets 3 Month T-Bill Index - measures monthly return equivalents of yield averages for the last three three-month Treasury bill issues.
Diversified Portfolio Equal annual investments in the eight different market segments noted