Why Did I Diversify?
Central banks are setting asset prices, correlations remain stubbornly high, and U.S. equities are outperforming just about everything, causing many investors to ask themselves, “Why did I diversify?” Diversification concerns have been particularly acute for U.S. investors, given the strong performance of equities and bonds in their home market.
“Diversification is the tortoise and concentration is the hare. The tortoise is slow and steady and often wins the race, while the hare takes big leads and then falls behind, rarely winning over the long haul.”
In this commentary, we review the rationale for diversification, looking at the historical periods during which simple portfolios dominated. While the history of modern, highly diversified, equity-dominated portfolios is relatively short, our analysis suggests that such periods are transitory and set the stage for diversified investors that stay the course to outperform in subsequent periods. Investors willing to take contrarian positions in cheap assets also tend to benefit as underperforming, undervalued asset classes ultimately recover as the value of assets drives market pricing over the long term.