Like life in general, achieving balance in your overall portfolio is key to investment success. Diversification is a basic investment principle that can help investors balance the risk and return potential of their investments through the years. It is the simple practice of spreading out your investments across several asset classes – including equities, fixed income, and alternative investments.

How Diversification Works
When an investor’s portfolio is well diversified, the poor performance of one investment in a particular market environment may be balanced out by the success of other investments in the same market environment. This table highlights diversification at work:

  • Consider how the top asset class one year may be a bottom performer the next year.
  • Emerging market equities were the best performer in 2017, but the worst in four other years.
  • REITs (real estate investment trusts) had the top returns in 2012 and 2014, but fell to the bottom in 2020.
  • Bonds helped offset negative returns in stocks in 2018.
  • Of course, diversification does not ensure a profit or guarantee against loss.

Morningstar Category Classifications (As of 12/31/21)

Key
Large Value Large Growth Emerging Markets Bonds Int'l Mid Value Mid Growth Large Core REITs Small Growth Small Value
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
19.70 43.30 28.03 5.67 31.74 37.75 0.01 36.39 38.49 28.34
18.63 35.74 14.75 2.83 20.00 30.21 -1.51 35.47 35.99 28.27
18.51 34.52 13.45 0.92 17.34 25.62 -4.04 31.43 34.63 27.60
18.05 33.48 13.24 0.55 12.05 25.27 -4.75 28.48 20.96 26.45
17.90 33.46 13.05 -0.20 11.60 22.17 -4.78 27.06 18.69 26.09
17.51 33.11 11.90 -0.39 11.32 21.69 -8.27 26.54 8.28 25.16
16.42 32.53 5.97 -1.38 8.63 13.66 -9.31 22.66 7.51 12.73
15.81 23.29 5.60 -3.83 7.33 13.34 -12.29 22.39 4.96 11.78
15.26 2.86 4.22 -4.78 7.08 8.67 -12.86 21.91 4.63 2.83
14.59 -2.02 -1.82 -7.47 2.65 7.84 -13.36 18.90 2.80 -1.54
6.54 -2.27 -4.48 -14.60 1.51 3.54 -14.25 8.72 -9.04 -2.22

Source: Morningstar

What Is the Right Balance for You?
You want to make sure your portfolio is efficiently diversified so you are not caught by surprise when a stock market correction appears out of nowhere. That said, it is important to get the investment mix right for your specific needs. For example, if you are a Millennial in your 30s, your portfolio mix will probably look a lot different than that of a Baby Boomer in their 60s readying to retire.

Your financial advisor can help you determine the right balance of equities, fixed income, and alternative investments you need depending on your age, risk tolerance and financial goals. Be sure to reach out to your financial advisor to discuss the portfolio diversification right for you – as well as maintaining that diversification by regular or systematic rebalancing.
S&P 500® Index is a widely recognized measure of US stock market performance. It is an unmanaged index of 500 common stocks chosen for market size, liquidity, and industry group representation, among other factors. It also measures the performance of the large-cap segment of the US equities market.

Bloomberg Barclays U.S. Aggregate Index is an unmanaged index that covers the US-dollar denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, government-related, corporate, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities sectors.

Large Cap is measured by the Russell 1000® Index, an unmanaged index that measures the performance of the large-cap segment of the U.S. equity universe.
Mid Cap is measured by the Russell Midcap® Index, which measures performance of the 800 smallest companies (31% of total capitalization) in the Russell 1000 Index, with weighted average market capitalization of approximately $6.7 billion, median capitalization of $3.6 billion, and market capitalization of the largest company $13.7 billion.

Small Cap is measured by the Russell 2000® Index, which measures the performance of the small-cap segment of the U.S. equity universe. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

Bonds is measured by the Bloomberg Barclays U.S. Aggregate Bond Index, which is an unmanaged index that covers the U.S.-dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, government-related, corporate, mortgage-backed securities, asset-backed securities, and collateralized mortgage-backed securities sectors.

International Developed is measured by the MSCI EAFE Index, which is an unmanaged index that is designed to measure the equity market performance of developed markets, excluding the United States and Canada.

Emerging Markets is measured by the MSCI Emerging Markets Index, which is an unmanaged index that is designed to measure the equity market performance of emerging markets.

Long/Short Equity is measured by the Credit Suisse Long/Short Equity Hedge Fund Index, which measures the aggregate performance of dedicated short bias funds. Long/short equity funds typically invest in both long and short sides of equity markets, generally focusing on diversifying or hedging across particular sectors, regions or market capitalizations.

Managed Futures is measured by the Credit Suisse Managed Futures Hedge Fund Index, which measures the aggregate performance of dedicated short bias funds. Managed futures funds (often referred to as CTAs or Commodity Trading Advisors) typically focus on investing in listed bond, equity, commodity futures and currency markets, globally.

Multi-strategy is measured by the Credit Suisse Multi-Strategy Hedge Fund Index, which measures the aggregate performance of dedicated short bias funds. Multi-strategy funds typically are characterized by their ability to allocate capital based on perceived opportunities among several hedge fund strategies.

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All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

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