Why Diversify?

Equity markets experienced a sharp decline to start 2016, causing some investors and analysts to re-evaluate their core investment principles.  One common question being asked is whether or not there is a still a need for global diversification, which is not a surprising one given the investment returns so far this decade.

While we recognize that stocks in non-U.S. developed and emerging markets have delivered disappointing returns relative to the United States over the past few years, we look at these results as in line with our core belief in the value of global diversification.

One way to remind ourselves of the value is to look back just one short decade – the decade that began with Y2K, experienced the dot-com bubble and rapid recovery, and ended with the world emerging from the great recession. At the end of 2009, many experts believed that the United States was getting left behind and as proof they pointed to the worst 10-year period the U.S. stock market ever had (-0.95%) and coined the term “the lost decade.”

While the “lost decade” was a catchy headline and found its way into much of the investment literature, the decade was actually quite rewarding for diversified investors. When you look beyond U.S. large cap equities, conditions were more favorable for global investors as many asset classes generated positive returns. As a result a broadly diversified $100,000 portfolio (allocated to 70% global equity, 30% fixed income) ended the “lost decade” worth $174,000, while a portfolio of U.S. stocks ended with only $91,000 of value – the difference of $83,000 was a painful price to pay for non-diversified investors.  

Expanding beyond this period and looking at performance for each of the 11 decades starting in 1900 and ending in 2010, the U.S. market outperformed the world market in five decades and underperformed in the other six.

This further reinforces our core principle of maintaining exposure to the global equity markets, in a disciplined and consistent manner during the unpredictable but inevitable market cycles that favor one region over another. Broadly diversified investors are positioned to capture the gains of the market – wherever and whenever they occur.   

Our approach to helping clients achieve their long term goals uses the ever expanding global opportunity set as the starting point.  As our world changes and evolves so do the opportunities for global investors.

We are always looking for new opportunities to efficiently capture global returns. The addition of global real estate in 2009 and more recently global bonds in 2015 are examples of how we continue to refine the diversification of client portfolios.

The pie chart below shows the benefit to investors of consistent exposure to both U.S. and non-U.S. equities over the last 45 years.  

While the next 45 years will surely be different than the previous, we expect the benefits of diversification will be similar.