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The Triumph of Diversification

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.

Source:

The pros’ guide to diversification (Fidelity)

Read Also:

The Question on Everyone’s Mind (TRB)

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

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