In The Absence of a Crystal Ball
Why should we diversify our investments?
By Kevin Laman
The Callan Periodic Table of Investment Returns clearly illustrates the diverse performance of various asset classes over time. Obviously, we would love to avoid the worst performing asset classes for each year and concentrate our investments in those that will provide the highest future returns. The only problem is an overwhelming amount of academic research has shown us that predicting the stock and bond markets on an annual basis is a “fool’s errand.” Rather than waste our time trying to accomplish the impossible, we choose to focus our time and energy on assessing the long term outlook for each asset class so we can position our clients’ portfolios appropriately. We also take care to look into each client’s ability to withstand a temporary loss in their investment accounts. This approach to managing client assets is designed to mitigate market risk.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.