Does diversification still make sense for U.S. investors?
Although there are countless strategies, theories and approaches to investing, there is one concept that nearly everyone tends to agree on: The value of diversification.
Simply put, diversification is rooted in the notion that you do not want to “put all your eggs in one basket”—because what if that one basket fails. When it comes to investing, this means that a multi-asset portfolio—made up of a variety of asset classes—is typically less risky and may have higher returns over longer time periods, than a portfolio that is concentrated in one individual area of the market.
Source: Russell, Bloomberg, MSCI and FTSE NAREIT.
U.S. Equity—Russell 3000® Index; Non-U.S. Developed Equity—MSCI EAFE; Emerging Markets—MSCI Emerging Markets; U.S. Bonds—Bloomberg U.S. Aggregate Bond Index; Global real estate—FTSE EPRA/NAREIT Developed Index; Commodities—Bloomberg Commodity Index.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
As of September 2017. Source: Russell, Bloomberg, MSCI, FTSE, Bank of America/Merrill Lynch, S&P.
U.S. equities—Russell 3000® Index; International Developed equities—MSCI EAFE; Emerging Markets: MSCI Emerging Markets; U.S. Bonds—Bloomberg U.S. Aggregate Bond Index; Global high yield—Bank of America/Merrill Lynch Global High Yield Index; Global real estate—FTSE EPRA/NAREIT Developed Index; Commodities—Bloomberg Commodity Index; Global infrastructure—S&P Global Infrastructure Index.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.
This chart offers a slight twist on the classic quilt chart of asset class performance. Rather than stack-ranking asset class performance for a given calendar year relative to zero, this chart illustrates the returns of various asset classes relative to the U.S. equity market (highlighted in the center of the chart). So, any asset class that appears above U.S equity outperformed for that calendar year, while any asset class that appears below U.S. equity underperformed for the calendar year.
This chart also helps remind investors that it wasn’t that long ago when U.S. equity was not a very popular place to invest. From 2000–2007, U.S. equities consistently trailed most other asset classes. U.S. equities experienced a particularly rough patch from 2002–2006, underperforming International Developed Equities, Emerging Markets Equities, Global Real Estate and Global Infrastructure in every calendar year. This underperformance has caused many people to refer to 2000–2009 as the “Lost Decade” for U.S. equity investment returns. Diversified investors were rewarded, though, as other asset classes earned positive returns in this time period, with some asset classes more than doubling in value, as the table below shows.
Emerging Markets Equity: MSCI Emerging Markets; Global real estate—FTSE EPRA/NAREIT Developed Index; Commodities—Bloomberg Commodity Index; Global high yield—Bank of America/Merrill Lynch Global High Yield Index; U.S. Bonds—Bloomberg U.S. Aggregate Bond Index; International Developed Equity—MSCI EAFE; U.S. Equity—Russell 3000® Index; Global infrastructure—S&P Global Infrastructure Index.Source: MSCI, FTSE, Bloomberg, Bank of America/Merrill Lynch, Russell, S&P.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.
Diversification sounds great—but isn’t always easy to stick to
Sound as the theory appears, it’s not always easy to stick to the strategy. Case in point: many U.S. investors have questioned the value of owning anything other than U.S. stocks as they’ve watched the U.S. stock market (Russell 3000® Index) repeatedly reach new record highs over the last few years and beat all other major asset classes. If your experience and view is like the chart below, then diversification seems like a losing strategy.
Source: Russell, Bloomberg, MSCI and FTSE NAREIT.
U.S. Equity—Russell 3000® Index; Non-U.S. Developed Equity—MSCI EAFE; Emerging Markets—MSCI Emerging Markets; U.S. Bonds—Bloomberg U.S. Aggregate Bond Index; Global real estate—FTSE EPRA/NAREIT Developed Index; Commodities—Bloomberg Commodity Index.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
Nothing lasts forever
The key is to assess the data from various angles. One cut of the data—in this case, annualized returns—doesn’t tell the whole story. Calendar-year returns lead to a different conclusion, as the chart below illustrates.
As of September 2017. Source: Russell, Bloomberg, MSCI, FTSE, Bank of America/Merrill Lynch, S&P.
U.S. equities—Russell 3000® Index; International Developed equities—MSCI EAFE; Emerging Markets: MSCI Emerging Markets; U.S. Bonds—Bloomberg U.S. Aggregate Bond Index; Global high yield—Bank of America/Merrill Lynch Global High Yield Index; Global real estate—FTSE EPRA/NAREIT Developed Index; Commodities—Bloomberg Commodity Index; Global infrastructure—S&P Global Infrastructure Index.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.
This chart offers a slight twist on the classic quilt chart of asset class performance. Rather than stack-ranking asset class performance for a given calendar year relative to zero, this chart illustrates the returns of various asset classes relative to the U.S. equity market (highlighted in the center of the chart). So, any asset class that appears above U.S equity outperformed for that calendar year, while any asset class that appears below U.S. equity underperformed for the calendar year.
This chart also helps remind investors that it wasn’t that long ago when U.S. equity was not a very popular place to invest. From 2000–2007, U.S. equities consistently trailed most other asset classes. U.S. equities experienced a particularly rough patch from 2002–2006, underperforming International Developed Equities, Emerging Markets Equities, Global Real Estate and Global Infrastructure in every calendar year. This underperformance has caused many people to refer to 2000–2009 as the “Lost Decade” for U.S. equity investment returns. Diversified investors were rewarded, though, as other asset classes earned positive returns in this time period, with some asset classes more than doubling in value, as the table below shows.
Emerging Markets Equity: MSCI Emerging Markets; Global real estate—FTSE EPRA/NAREIT Developed Index; Commodities—Bloomberg Commodity Index; Global high yield—Bank of America/Merrill Lynch Global High Yield Index; U.S. Bonds—Bloomberg U.S. Aggregate Bond Index; International Developed Equity—MSCI EAFE; U.S. Equity—Russell 3000® Index; Global infrastructure—S&P Global Infrastructure Index.Source: MSCI, FTSE, Bloomberg, Bank of America/Merrill Lynch, Russell, S&P.
Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.