The Importance of Diversification

August 15, 2019

 

Yesterday, Wednesday, August the 14th, the market dropped 3%. We know that hurt, but how did a diversified portfolio fare? Yes, the Dow dropped 3%. Fortunately, if you're diversified, you discovered that international equities dropped far less, and fixed income bonds - that asset class that everybody loves to hate today - they did well. Interest rates fell. It was one of the triggers for the market. When interest rates fall, bonds do well. Now, it's very instructive to look at history when we look at these events. In 2018, five-year global bonds were the best performing asset class. In fact, all equities were in negative territory, and international equities were definitely leading the pack in the downside.

 

Randomness of Returns

The firm Dimensional Fund Advisors has a wonderful matrix book that discusses the randomness of returns in different asset classes. We've attached the chart to this video. What it does is, it highlights the foolishness of putting all of your eggs in one asset class. It's pretty much on par with trying to put all your eggs in just a handful of stocks. In fact, in 2006, 2010, 2014, and most of the first decade of this century, US real estate investment trusts were the best performing asset class. Most striking when you look at this chart is the seesaw effect, the previous year's losers are very likely to be the subsequent year's winners. Now, domestic equities have had their day in the limelight this year. We really don't know what's next for them, but history does not bode well. In addition, interest rate changes, trying to talk down the strength of the dollar, all of these portend a probable recession. Again, diversification is the secret to understanding how to get through these tough and turbulent times. We wish you the best of investing success.

 

Dimensional Fund Advisors, my.dimensional.com/tools/matrix_book/261531/.

 

“Stock Markets Stable after China Trade Warning.” BBC News, BBC, 15 Aug. 2019, www.bbc.com/news/business-49356027.

 

Videos, Markets

Subscribe to Email Updates

Connect with Us

The 100K Commitment

Recent Posts