Myth: If you invest in mutual funds, you’re already diversified.
Fact: To truly diversify your investments — even in mutual funds — you should spread your investments across multiple asset classes.
Just as putting all your money in one or two stocks can be a high-risk proposition, putting all your money in the same types of investments also carries risk. If all your investments are in technology stocks, for example, your portfolio has no balance. If tech goes down, your portfolio may take a greater dive than if it were balanced by investments in a cross section of different asset classes, like small company stocks, government bonds and international stocks.*
Did you know that over the long haul, a diversified portfolio has the potential to outperform any single category of investments? Diversification of your overall investment portfolio, however, does not assure a profit or protect against a loss in declining markets. Look at the chart below. Over two decades, each of these five different sections of the marketplace had good years and bad. This shows there is no "best" sector of the market. Instead, different asset classes are favored from year to year.
Historic Performance of Different Asset Classes
| Year |
Small-Cap
Stocks |
Mid-Cap
Stocks |
Large-Cap
Stocks |
Bonds |
International |
| 1983 |
29.13% |
23.82% |
17.27% |
8.36% |
24.61% |
| 1984 |
-7.30% |
1.43% |
1.40% |
15.15% |
7.86% |
| 1985 |
31.05% |
32.01% |
26.33% |
22.10% |
56.72% |
| 1986 |
5.68% |
18.19% |
14.62% |
15.27% |
69.94% |
| 1987 |
-8.77% |
0.22% |
2.03% |
2.75% |
24.93% |
| 1988 |
24.89% |
19.82% |
12.40% |
7.89% |
28.59% |
| 1989 |
16.24% |
26.25% |
27.25% |
14.53% |
10.80% |
| 1990 |
-19.51% |
-11.49% |
-6.56% |
8.96% |
-23.20% |
| 1991 |
46.04% |
41.51% |
26.31% |
16.00% |
12.50% |
| 1992 |
18.62% |
16.35% |
4.46% |
7.40% |
-11.85% |
| 1993 |
18.90% |
14.29% |
7.06% |
9.75% |
32.94% |
| 1994 |
-1.82% |
-2.07% |
-1.54% |
-2.92% |
8.06% |
| 1995 |
28.34% |
34.46% |
34.11% |
18.47% |
11.55% |
| 1996 |
16.49% |
19.00% |
20.26% |
3.63% |
6.36% |
| 1997 |
22.36% |
29.01% |
31.01% |
9.66% |
2.06% |
| 1998 |
-2.55% |
10.09% |
26.67% |
8.68% |
20.33% |
| 1999 |
21.26% |
18.23% |
19.53% |
-0.83% |
27.30% |
| 2000 |
-3.15% |
8.26% |
-10.14% |
11.63% |
-13.96%
|
| 2001 |
2.49% |
-5.63% |
-13.04% |
8.42% |
-21.20% |
| 2002 |
-20.48% |
-16.19% |
-23.37% |
10.27% |
-15.66% |
| 2003 |
47.25% |
40.08% |
28.69% |
4.11% |
39.17% |
|
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