Is Diversification Still a Viable Investment Strategy?

Transcript:

Kevin Grogan: 2022 was a year where both stocks and bonds were both down considerably, which obviously makes it a very challenging environment for all investors. And it has led some investors to start asking the question, does diversification even still work?

50 Years of Quarterly Returns

Kevin Grogan: And so I was thinking, you know, over the last couple of weeks of kind of new, different ways to kind of answer that question, I took a look at some data that I thought was interesting and thought it would be worth sharing in today's video. So what I did is I looked at quarterly returns for three different indexes. So I looked at the S&P 500, which is an index of U.S. large cap stocks. The MSCI EAFE, which is an index of international large cap stocks and then the Bloomberg U.S. Government Intermediate Bond Index, which as its name indicates, is an index of government bonds, sort of intermediate term maturities. And what I did was look at how frequently or how often each of these indexes delivered negative returns. And so that's what you see on the slides. So this data runs from January 1973 through March of 2023. So we have just over 200 quarters to look at, so 201 quarters over that stretch of time. It's obviously just a little over 50 years is the dataset that we're working with. And so where I would direct your attention first is on the far right hand side of the table, which indicates that there was just 14 times out of those 201 quarters where all three of those indexes were negative. So it's a pretty rare occurrence where you have U.S. stocks, international stocks and bonds all down in the same quarter, although it had happened before. So 2022 wasn't the first time we'd ever seen stocks and bonds both down at the same time. But it is pretty rare. Just 7% of the quarters show time periods where U.S. international stocks and bonds all down in the same quarter. And so you might be wondering how many quarters last year were all three negative. And in three of the four quarters last year, all three of those indexes were negative. So again, it's a rare event, but it has happened before. The other thing I would point out on this slide is on the left hand side of the slide, more than half the time you have at least one of those indexes being negative. So being diversified means it is likely, more often than not, have some portion of your portfolio that's delivering negative returns. So you don't know where it will be. But one of those three indexes was down more than half of the time.

Three Historical Lessons Supporting Diversification

Kevin Grogan: And so what I think kind of the lessons out of this are, number one, what we saw last year wasn't the first time that we saw all three indexes going negative. Number two, that diversification is working for you even during periods when one part of your portfolio is down. And number three, as best you can, try to ignore the quarter-to-quarter variations and market returns, because what delivers returns over the long run is staying disciplined to your plan. If you do have any questions and anything I've covered today, please don't hesitate to reach out to your advisor or click the link in the description below.

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