This is part 3 of the “Withstanding Market Cycles” series on portfolio diversification and asset allocation…some of your best safeguards in times of volatility.
- Part 1: The Benefits of Portfolio Diversification
- Part 2: How to Determine the Right Asset Mix for Your Portfolio
The tradeoff between risk and return is inescapable. Higher-risk, higher-volatility assets like stocks have historically produced better returns than lower-risk, lower-volatility assets like bonds. But there’s a price for that better return: you have to be able to handle that increased risk. There is no way to consistently enjoy that better return without accepting higher risk.
In the short-run, an investor who lowers their risk in a portfolio through diversification should not expect to see returns that match the best performing asset class over that same timeframe. This is a fundamental concept of investing, and it is unavoidable.
However, over a long enough time frame, a “reversion to the mean” happens – meaning the diversified approach often comes quite close to the performance of that high-risk asset class over longer timeframes.
Have questions about portfolio diversification? Contact a financial advisor.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
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