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.