Jim'sMoneyBlog

Financial Opinion and Insights

Does Diversification Really Help?

The Independent Financial GroupApparently it does!  Of course, that comes as no surprise to us financial types who’ve been preaching that gospel to anyone who would stop in front of our soap box; but, it’s still worth taking a look at this chart, supplied to us by the folks at JP Morgan Asset Management.  While some asset classes seem to have done better than others in a number of years, none of them have consistently outperformed the others and, indeed, a few have been all over the map.

Obviously, predictions can be difficult, especially when you try to make them in advance – take that, Yogi Berra!

 JP Morgan Chart-AssetClassReturns_3-31-2021

Besides the unpredictability of the markets, there is another lesson we can see pretty clearly:     Diversified portfolios, connected here to highlight their volatility, seemed to provide a smoother ride.  No surprises here.  Allocated portfolios apparently were never the stars, but they never seemed to be the ‘dogs’ either. 

The lesson seems clear:  Those who have diversified seem to sleep better at night.  The reason is simple:  It’s hard to buy back losses.  For example, if a stock drops from 100 to 80, that’s a 20% loss.  But, to get from 80 back to 100 requires a 25% gain!   If it takes a 25% gain to offset a 20% loss, it naturally follows that reducing volatility can be important to successful portfolio management. 

The right diversification can do wonders for reaching long term goals.  It’s just a matter of resisting short-term temptations.

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG has no financial relationship with any investment service or provider.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

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IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

Written by Jim Lorenzen, CFP®, AIF®

May 31, 2012 at 8:00 am