The importance of staying diversified

Each January, we look back on the performance of nine distinct asset classes, not only for clues about which investments are unloved and undervalued, but as a reminder of how unpredictable markets can be from year to year.

Despite last year’s strong 12.0% gain for the S&P 500, four of the five best performers in 2016—small-cap (+21.3%), high-yield (+14.3%), commodities (+11.8%) and emerging markets (+11.6%)—were 2015’s worst performers, posting losses of –4.4%, –2.7%, –24.7% and –14.6%, respectively.

More importantly, over the past 15 years (2002–2016), a broadly diversified portfolio (gray box) has returned 6.9% annually, versus a 6.7% return for the S&P 500 (green box), with less volatility—11.0% versus 15.9% as measured by standard deviation. See data in far right columns.

2016 Callan Chart

Source: Barclays, Bloomberg, FactSet, MSCI, NAREIT, Russell, Standard & Poor’s, J.P. Morgan Asset Management. Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg Commodity Index, High Yield: Barclays Global HY Index, Fixed Income: Barclays Aggregate, REITs: NAREIT Equity REIT Index. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Barclays Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. Annualized (Ann.) return and volatility (Vol.) represents period of 12/31/01 – 12/31/16. All data represents total return for stated period. Data are as of December 31, 2016.

To us, this comes as no surprise, and we don’t think there’s a better example of the importance of staying diversified, practicing regular rebalancing and focusing on the long term.

About the Author

W. Kirk Taylor, CFP®

W. Kirk Taylor, CFP®

W. Kirk Taylor, CFP® is Chief Investment Officer at 1st Portfolio Wealth Advisors. He has been advising individuals, business owners, and affluent families about complex investment and financial planning topics since 1988. He writes and blogs frequently about timely investment and financial topics and is the former host of The Investment Challenge radio program broadcast in the Washington, D.C. metro area on Business Radio AM 570/1260.