A diversified portfolio generally protects better during volatile periods but may also recover more rapidly when conditions improve.
Last year’s market turbulence reinforced the benefits of diversification, as both equity and fixed income played an important, and complementary, role in portfolio construction.
Stocks provide long-term growth potential for a portfolio. However, that higher-return potential has been accompanied by greater volatility. Meanwhile, fixed income investments enhance portfolio diversification, provide a more stable income stream, and typically provide some portfolio protection during periods of heightened risk.
As illustrated in the chart above, from mid-February (when the market downturn began) to the end of March, the stock market dropped sharply. However, the decline for an investor holding a balanced portfolio split evenly between bonds and global equities was far less dramatic. Additionally, as the market recovered, a balanced portfolio fully recovered its pre-drawdown value in just four months — faster than a 100% stock portfolio. That experience points clearly to the value of diversification — a more volatile portfolio requires a higher rate of return to recover after a market downturn.
The bottom line? Markets will encounter periods of volatility from time to time. Investing in a diversified portfolio provides a cushion on the downside, while also positioning a portfolio to recover when conditions improve. While the optimal mix of stocks and bonds will depend on an investor’s time horizon, overall risk tolerance, and long-term objectives, most investors benefit from maintaining some degree of broad diversification not only during challenging periods, but over the course of a market cycle.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
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.