By Kostya Etus, CFA, Senior Portfolio Manager
A more stable experience
Diversifying into various asset classes, such as U.S. equities, international equities, and bonds, has historically provided better and more stable returns than investing in a single asset class. By investing in a balanced and diversified portfolio globally, we believe that investors can reduce risk and experience smoother returns over time, helping them stay invested through market ups and downs and ultimately instance, providing more chances of achieving long-term financial goals.
Since the 2008 financial crisis, US equities have experienced one of the longest and strongest stock markets in history, while international equities have performed lower, leading many investors to rethink their diversification strategy. This “fear of getting lost” mentality (the thought that, by staying invested in one investment, will sacrifice better returns in another), has caused some investors to be overweight in high-yield allocations.
But if history is a guide, no asset class is constantly kept in your head for too long. Staying invested long-term is how diversification is earned. Since 2000, a period that includes both the technology bubble and the financial crisis, globally balanced and diversified portfolios outperformed all U.S. equity portfolios and did so at a much lower risk. We believe this is further proof that investing in a balanced and diversified global portfolio makes sense for investors, perhaps now more than ever.
Find a balance
By investing in a diversified portfolio, investors not only tend to invest more time eliminating short-term market noise, but also decrease the risk of single-class asset investments.
For example, an investor who invests only in financial stocks during the 2008 financial crisis would have caused significant losses. But by increasing the variety of positions in a portfolio, investors reduce the risk of overweighting their portfolio to an investment or asset class.
The attached graph lists the performance of individual asset classes each year since 2000. As you can see, an asset such as emerging markets (light blue) can have extreme highs and lows from year to year compared to much smoother yields of a world. balanced portfolio (gray). We believe that having exposure to multiple asset classes limits the negative impact of lower-yield allocations while providing more stable returns that will help you maintain your long-term investment.
Many investors understand the negative effects of high buy and low sell. But in times of market uncertainty, emotions can make irrational decisions seem rational. A natural tendency of human beings is to buy at the top of the market when things are right and sell during the troughs of the market when fear is high.
To quantify the effect of human nature, we evaluate the difference between investor-driven returns and the actual returns on an investment. This difference between these two performance figures is known as the “behavior gap” (the cost associated with human behavior). A recent study by Dalbar, an independent research firm, showed that investors lost approximately 3.6% in average annual returns between 2007 and 2017 due to their behavioral biases and investment errors based on emotions.
It seems that no matter what people invest in, they need to save themselves. This is where we believe that globally balanced and diversified portfolios come to the rescue.
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