In a world where the best- and worst-performing
asset classes tend to dominate the headlines,
it's easy to lose sight of the fact that a diversified
investment portfolio is generally the most reliable
approach for meeting long-term investment
objectives.
Diversification rarely wins in any given year …
By design, diversified portfolios hold a mix of asset classes. In any given
year, some will outperform while others will underperform. As a result,
diversified portfolios will never beat the top-performing asset class.
The Asset Class Returns chart on the next page (Figure 1) illustrates the
potential damage of market timing. As you'll see, asset classes that were at
the top one year often trailed most other asset classes during succeeding
years.
With perfect foresight, investors could simply allocate all of their money
to the best-performing asset class each year. Absent this divine ability,
however, you also have the option to invest in a variety of asset classes
that react differently to a variety of market forces. This may help moderate
the ups and downs of portfolio performance, providing a better chance of
reaching long-term goals.
