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| Home > Education and Planning > Investor Education > Diversification Workshop |
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| WHY Diversify? |
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Myth: Investing part of your portfolio among different asset classes will pull down your returns.
Fact: A balanced, diversified portfolio can capitalize on changing market conditions. Thus, having a portion of your portfolio spread out in different asset classes may actually lead to a greater return.
Some investors have the notion that investing a part of their portfolio among several different asset classes will diminish their overall return. Research indicates the opposite, a properly diversified portfolio may in fact outperform one invested primarily in large-cap U.S. stocks, for example.
The chart below highlights the 20-year performance of a “model” diversified portfolio compared with the S&P 500 Index, a typical investment benchmark for large-cap U.S. stocks. The model portfolio is equally divided between five segments of the investment world: small-cap stocks, mid-cap stocks, large-cap stocks, bonds and international investments. After 20 years, the investment growth of this hypothetical portfolio actually beats that of the S&P 500 — often considered the barometer for investment success. Why? The model diversified portfolio is better positioned to capitalize on changing conditions in the market and the world.
Do Aggressive Investors Need To Diversify?
Although Aggressive investors have accepted a higher degree of risk for the potential or higher returns on their portfolio, they can still benefit from analyzing the composition of their investments.
A diversified portfolio outperformed the S&P 500 and did so with less risk. It posted positive returns in all but three years, while the S&P 500 had four negative years. The chart below shows that, hypothetically, the diversified portfolio would have been in the ideal quadrant relative to the S&P 500 — that of greater return and less risk. While risk and return are closely related, a smart investor will strive to reduce risk while aiming for maximum return.
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