Why is it important to diversify my investments?

Holding a wide variety of assets can help reduce your portfolio volatility over time and might help you increase returns. This can be especially important in times of high volatility.

A 20-Year Snapshot

It’s important to own a mix of stocks, bonds and cash, diversified across different market caps and styles. This spreads your risk because you own a variety of asset types, which may perform differently from one another in any given time period.  It’s important to note that asset allocation and diversification strategies do not guarantee profits in declining markets.

The chart below shows certain asset classes ranked by performance from best to worst each year for the last 20 years.

Front of Chart

A diversified portfolio may "smooth" the ride

As the chart shows:

 

number 1 In 1994, International was the best performing asset class, up around 8%.
number 2 That year, Large Cap Core was in the middle of the pack, up 1.3%.
number 3 And Fixed Income trailed with -2.9%.
number 4 If you follow International year by year, you’ll see that it did relatively poorly (although still had positive returns) in 1995 - 1997, did quite well in 1998 and 1999, had poor relative returns again in 2000 - 2002, ranked well in 2003 - 2007, performed poorly in 2008, was again a top performer in 2009, was in the middle in 2010, performed poorly in 2011, did well in 2012 and was in the middle in 2013. It was not consistently either the best or worst performer.
number 5 The diversified portfolio shown here has mitigated a lot of the volatility extremes over the years. Since it’s impossible to predict with any certainty which asset class will "win" in a given year, it’s important to own a mix of stocks, bonds and cash, diversified across different market caps and styles.

 


Investing for the Long Term

One of the most basic tenants of investing is to adopt a sound asset allocation and diversification strategy – preferably one designed to correspond with your long-term goals – and stick with it.

This chart shows performance of a hypothetical $100,000 invested in certain asset classes over the last 20 years and demonstrates how a diversified portfolio may provide steadier performance.

Back of Chart

Diversification has provided more steady performance

As the chart shows:


number 6

Large Cap Value stocks performed the best over this time period, ending with $637,939. Fixed income and cash had lower volatility but also lower returns.
number 7 However, between 2000 and 2002, when U.S. stocks were down, fixed income continued to climb. A portfolio with a mix of stocks and bonds would have weathered the volatility better than an equity-only portfolio.

 


Investing involves risk, including possible loss of principal.

Diversification and asset allocation may not protect against market risk or loss of principal.

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