Diversification Through Time

Investors have two basic options. They can concentrate their portfolios – in, say, the S&P 500 or U.S. Treasuries, or real estate – or they diversify broadly over a weighted cross-section of global stocks, bonds and real estate. Which strategy is more likely to produce better long-terms results? Which strategy is less risky?

To investigate these questions, Schultz Collins modeled portfolios consisting of 70% stock (including real estate) / 30% bonds, in three different years:

  1. 1995 – a particularly good year to start an investment program;
  2. 2000 – a particularly bad year to start an investment program;
  3. 2005 – a good starting year closely followed by the 2007-2008 global financial meltdown.

We depict the results in a series of charts that show cumulative year-by-year results throughout each planning horizon. They may be found at the link below.

Not surprisingly, it makes a big difference when you begin an investment program. Both the sequence of realized returns and the ending results differ greatly depending on the portfolio’s launch date. However, one fact remains patently evident: the risk/return results of diversification consistently trump the attempt to invest in the single “magic bullet” investment category.

The empirical evidence is compelling.




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