Diversification among asset classes is one of the key factors that investors ought to follow for success with investing in stocks. It is never a wise idea to put all money into one type of asset – whether it is growth stocks or value stocks or real estate or bonds. Assets of different types perform differently every year and it is impossible to predict which one will be top performer. The following chart illustrates this theory.

In 2021, REITs were the best performer with a total return of over 41%. This is much higher than the S&P 500’s 28.7%. Small caps had an average return. Emerging market equities were the worst with a loss of over 2%.

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Source: Novel Investor

Related ETFs:

• SPDR S&P 500 ETF (SPY)
• iShares MSCI Germany Index Fund (EWG)
• iShares MSCI Canada Index Fund (EWC)
• Vanguard Total Bond Market ETF (BND)
• iShares TIPS Bond ETF (TIP)
• iShares MSCI Emerging Markets ETF (EEM)
• iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)

Disclosure: No positions

Fixed income is an important asset class to own in a well diversified portfolio. Though bonds do not offer the thrill of stocks and potential high returns, they provide stability and earn a decent income during good times and bad. For instance, in a prolonged bear market for equities even dividends can get suspended or reduced. Bonds will provide a consistent source of income during such periods without interruptions. When equity markets become volatile investors try to seek shelter in bonds and other relatively safe assets. The following chart from PIMCO shows the diversification benefits of owing bonds:

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Source: PIMCO

Related ETFs:

• iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)
• iShares TIPS Bond ETF (TIP)
• Vanguard Total Bond Market ETF (BND)
• iShares Core Total U.S. Bond Market ETF (HYG)
• SPDR® Barclays High Yield Bond ETF (JNK)

Disclosure: No positions