As U.S. stocks continue to climb to new highs, investors may begin to question the benefits of diversifying their portfolios. Since 2009, an investor holding only the S&P 500 would be up over 300%, while a moderate investor with a diversified mix would have gained roughly half of that return. This large divergence in returns may cause some investors to want to take on unnecessary risk in an attempt to capture those higher returns — but is it worth it?
Since the start of the century, a more diversified, moderate-risk portfolio has delivered a far smoother ride, while achieving just modestly lower returns than the S&P 500 over the nearly 20-year period. While the diversified mix lagged in up periods, it also dampened the drawdown experienced in bear markets, allowing investors to recoup losses faster (see accompanying commentary where we discuss the math of volatility).
Although strong equity returns may be enticing, chasing performance is often a losing strategy, and we believe investors would be remiss to dismiss the benefits of diversification today. While risk tolerance, time horizon, and investment goals are unique to each investor, we believe defining a plan and maintaining the discipline to stick to it remains a critical component to a successful investment strategy.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.