“I think it’s important to be diversified not only across different companies, but across different industries and, most importantly, across different countries.” – Mark Mobius
This graph produced by BlackRock is a great illustration of the benefits of having a diversified investment portfolio. And when I talk about diversification, I mean not only by asset class (stocks and bonds), but within the asset classes as well (small cap, mid cap, global, etc.).
The diversified (purple line) portfolio contains:
- 12% S&P 500 Large Cap Index
- 12% S&P 400 Mid Cap Index
- 12% S&P 600 Small Cap Index
- 12% MSCI EAFE Index (International)
- 12% Emerging Markets Index
- 13.3% Barclays Credit Index
- 13.3% Barclays US Treasury Index
- 13.3% Barclays Capital US High Yield Index
The undiversified portfolio (blue line) contains:
- 60% S&P 500 Large Cap Index
- 40% Barclays Credit Index
The mix of large, mid, small, international and emerging market stocks in the diversified portfolio might look familiar if you have read my article on how to invest 100% of your portfolio in the stock market. It’s actually the same exact balanced mix of stock indexes that I used to create a global stock portfolio.
There will be times when being this diversified will seem like the wrong move. This year the US markets are all showing double digit performance while emerging markets are down over 10% and developed international markets are barely positive in some countries and negative in many others.
But if you go back to 2009, emerging market stocks were up almost 80% while the S&P 500 was up about 26%. And in 2006 international and emerging market stocks were both up about 30% while US stocks were up about 15%. In 2000, the S&P 500 was down almost 10% while small and mid-cap stocks were both up double digits.
The same rings true for bond investments as treasuries, corporates and high yield all have periods of relative outperformance. I could go on with more examples, but the point is that it’s very difficult to pick which market will do the best in any given year, so it makes sense to have wide exposure to different markets and strategies.
Take a look at this interesting piece of research by Mark Mobius:
Unfortunately, many investors have portfolios that invest in only one country… their own. I see this as a big mistake because they are missing out on potential opportunities all over the globe, which is the job of my team and I to uncover.
Our research showed that in the 25 years we studied from 1988 – 2012, and of the 72 stock markets in the world we examined, there wasn’t a single market that was the best performing for two consecutive years.
You could spend your time forecasting what you think will be the best stock and bond markets or strategies each year to invest in. But good luck with that if you try it. I know I don’t have the ability to choose the best markets year in and year out.
Wouldn’t it be much easier to invest in a low-cost, diversified mix of all of the markets and rebalance periodically to take advantage of the differences in performance from year to year?
As some markets outperform, you’ll take your gains and reinvest in the losing markets. Not perfect, but it will give you the best chance for success over the long haul.
This allows you to make your investment plan based on a disciplined process instead of your ability to forecast the future.