When people talk about the lost decade from 2000 to 2010 there is a lot of truth to that, assuming you invested your money entirely in the S&P 500. After all, the return of that index including dividends was 1.4%.
It’s a good thing for our clients that we don’t investment money entirely in the S&P 500 or any index entirely. The NYT nicely articulates the benefits of diversification over that decade pointing out the returns of the following equity asset classes:
- Small Caps – 6.3%
- Real Estate – 10.4%
- International (Developed) – 3.9%
- International (Emerging) – 16.2%
The article then points out that with equal allocations to each and no rebalancing the portfolio would have returned 8.35%.
Further, in most all cases it is prudent to have a fixed income allocation for stability or even appreciation in a down stock market. When a 40% allocation to the Barclays US Government Intermediate-Term Index is added to the evenly allocated equity portfolio the return would have been 7.83% with less volatility.
Although no investment strategy can guarantee a profit or protect from a loss in a declining market and all investments are subject to the risk of loss, being broadly diversified over various asset classes that exhibit low correlation to each other was and probably will continue to be a good way to invest.
Further, I would add that making small short-term tactical allocations and rotating to undervalued asset classes over the long-term can enhance an investor’s already well-diversified portfolio.
