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4. Ignoring the power
of diversification
Individual asset classes go in and out of favor over time. When investors build their own
portfolios, they often neglect asset classes that provide important diversification benefits.
Harnessing proper diversification can enhance returns and help to cushion against volatility.
Diversifying your investments across a range of different companies,
industries, asset classes, and regions ensures that you haven't placed all
of your eggs in one basket, helping to enhance returns and potentially
protect against volatility.
The table on the opposite page reminds us that no one
can accurately predict how investments will perform from
one year to another.
As you can see, no single asset class remained at the top for more than
one year—and in fact, often trailed the market in succeeding years. For
example, despite leading all asset classes in 2015, Short Duration was the
worst performer (out of 13) just two years later.
There may be no more
powerful risk management
tool than diversification.
Diversification may not protect against market risk.
