The Triumph of Diversification
- Joshua M Brown
- October 3rd, 2012
In a market meltup, it’s difficult for an advisor to make the case to certain clients that bonds have a place in their portfolios. They look at their bond holdings with disdain during periods where they drag against a runaway stock market. These are the same clients who are furious that they’re fully invested through a correction, but that’s a whole other blog post…
Fidelity Investments is out with a piece that shows how a diversified portfolio, in which both stocks and bonds can live together, was the thing that really helped you throughout the credit crash and recovery period.
Here’s how a 70/30ish portfolio would have fared since the outset of the crisis (versus an all-in or all-out approach):
Diversification has not failed
While it may have felt like diversification failed during the downturn, it didn’t. The major asset classes are not perfectly correlated, only more highly correlated. There’s a difference—it means that diversification still helped contain portfolio losses, only the benefit was lower than before the market decline.
Consider the performance of three hypothetical portfolios: a diversified portfolio of 70% stocks, 25% bonds, and 5% short-term investments; a 100% stock portfolio; and an all-cash portfolio.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.