Yesterday I posted on
how market timing can materially reduce long-term investment returns. An
excellent way to eliminate the negative impacts of emotionally-based market
timing is through holding a portfolio that is diversified across several asset
classes. Case in point: a recent study by Morningstar looked at the last 20
years ending March 31, 2020 and showed that a diversified (60% equity, 40%
bond) portfolio achieved a total cumulative return of 176% compared with the
stock market (S&P500) return of 155%. Diversification worked by resulting
in lower portfolio drawdowns during market declines and allowing for faster
capital recovery in market uptrends. Moreover, the study shows that in highly
volatile markets like the last 20 years, diversification is important in both
preserving capital and delivering higher absolute and risk-adjusted return.
Bob Toomey, CFA/CFP
VP, Research
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