After a year like 2014 when one asset class (S&P 500) outperformed almost every other, investors naturally ask themselves whether broad global diversification still make sense. The simple answer is yes.
Broad diversification remains one of the best risk management tools available to investors. However, a broadly diversified portfolio’s returns will never be better than the best performing component of that portfolio. So, in 2014 while a broadly diversified portfolio contained investments in the S&P 500, the rate of return it returned was less than that of the S&P 500.
Conversely, the performance of the diversified portfolio will always be better than the worst performing component of the portfolio. Patient rebalancing among the components of the portfolio allow the diversified investor to earn more consistent and smoother returns than the more volatile portfolio components.
We recently produced a video titled “Diversity” as part of the launch of our new Evidence Based Investing website. We hope that it will help you maintain the discipline and diversification that is critical to the success of an effective long-term investment strategy. As always, we appreciate your feedback.