The Investing Challenge
Because asset classes around the world do not behave consistently or predictably, combining them in diversified balanced strategies can eliminate much of this randomness.
The chart features the annual performance of major asset classes in the US, international, and emerging markets over a 48-year period.
In both US and non-US markets, there is little predictability in asset class performance from one year to the next. Studying the annual data above reveals no obvious pattern in returns that can be exploited for excess profits, strengthening the case for broad diversification across many asset classes.
The Diversification Advantage
The benefits of diversification are obvious and well-known.
- Less Variability—Each year’s portfolio performance would be in the mid range of asset class rankings since the portfolio’s return is a composite of all asset classes.
- Greater Tax Efficiency—Taxable accounts switching to the best performing asset class would have a capital gains tax liability each year.
While there are no guarantees, history shows that a diversified portfolio strategy can be expected to provide a superior return compared to a concentrated bet on last year’s winning asset class.