Diversification is one of the simplest and smart way to reduce risk in a portfolio. In order to be successful in the long-term with equity and bond investing, investors need not take unnecessary risks like putting all eggs in a single stock or a handful of stocks or bonds.
To benefit greatly from diversification, investors should spread their assets across asset classes and regions. The Callan Periodic Table of Investment Returns is an excellent tool that shows why diversification works. The Callan chart for 2016 for can be found here and here.
Below is another chart showing why diversification is important:
The diversified portfolio shown in the chart above as “Div Portfolio” is made up of 35% bonds and the remaining in stocks allocated among various equity types. It is also worth noting that last year US small caps lagged large cap growth stocks but this year they are far ahead of large caps. This proves that no two asset types can always the top performer every year.
- SPDR S&P 500 ETF (SPY)
- S&P MidCap 400 SPDR ETF (MDY)
- SPDR Consumer Discretionary Select Sector SPDR Fund (XLY)
- SPDR Consumer Staples Select Sector SPDR Fund (XLP)
- SPDR Energy Select Sector SPDR Fund (XLE)
- SPDR Financials Select Sector SPDR Fund (XLF)
- iShares Dow Jones Select Dividend ETF (DVY)
- SPDR S&P Dividend ETF (SDY)
- Vanguard Dividend Appreciation ETF (VIG)
- iShares MSCI Emerging Markets ETF (EEM)
- Vanguard MSCI Emerging Markets ETF (VWO)
- Vanguard Total Bond Market ETF (BND)
Disclosure: No Positions