Diversification

Within the broad universe of investments, there are different asset classes or types of investments.  This chart is a twenty-year snapshot of asset class returns (%) from 1991 – 2010.  The best performing asset classes are listed from the top down to the worst at the bottom.   As you can see, no two years are the same and the top-performing asset classes vary from year to year.  So how do you successfully predict year after year which will be the best and which will be worst?  We do not believe it can be done – at least not consistently – so we are advocates of diversification.  A well-diversified portfolio has exposure to several asset classes.  While by definition it will never be the top performer, it will also never be the worst, as evidenced by the diversified portfolio shown below in white.

10-year-quilt 

Rebalancing and Market Sensitivity Example

This graph illustrates the concept that investing can be counter-intuitive. Within a diversified portfolio, there are investments representing different asset classes that help stabilize growth during market fluctuations. In this hypothetical example, as the value of Investment “B”, represented by the blue line, dips below the median line, an opportunity to buy low may exist. On the other hand, as Investment “A”, represented by the gold line, peaks above the median line, consideration may be given to selling high and rebalancing the portfolio overall.

rebalancing-market-sensitivity

 

ASSET CLASSES DEFINED

Aggregate Bonds (Agg Bnd) - Composed of the Barclays Capital Government/Corporate Bond Index and the Barclays Capital Mortgage-Backed Securities Index and includes Treasury issues, agency issues, corporate bond issues and mortgage-backed securities.

Large Blend (LgBl) - Measures the performance of the S&P 500, an unmanaged index that consists of the common stocks of 500 large capitalization companies, within various industrial sectors, most of which are listed on the New York Stock Exchange.

Large Foreign (LgFrn) - Measures the performance of the MSCI EAFE, an unmanaged index that measures the total returns of developed foreign stock markets in Europe, Asia and the Far East.

Large Growth (LgGr) - Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Large Value (LgVal) - Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

Natural Resources (NatRscs) - Tracks investment performance in the commodity markets comparable to the S&P 500 or FT equity indices.  As such, the S&P Goldman Sachs Commodity Index (GSCI) is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

Small Blend (SmBl) - Dow Jones Wilshire Real Estate Securities.  An index of publicly traded real estate equity securities.

Small Growth (SmGr) - Measures the performance of those Russell 2000 companies with higher price-to-book ratios and lower forecasted growth values.

Small Value (SmVal) - Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

Standard Diversified Portfolio (StdDvsfd) - A standard portfolio comprised of 35% Barclays Capital Aggregate Bond, 10% Morgan Stanley Capital International (MSCI) EAFE, 10% Russell 2000, 22.5 Russell 1000 Growth and 22.5% Russell 1000 Value.