Diversification Can Feel Disappointing

Friday, July 12th, 2019

By: Peter Vander Ploeg, CFP®

Undoubtedly one of the most popular ways to invest is an S&P 500 index fund or ETF. It’s cheap, easy, and every year in recent memory, the S&P 500 has been one of the best places to invest. 2019 is no exception, up almost 20% through the second quarter the S&P 500 is in position to provide investors great returns once again. With all the hype, it may seem very tempting to invest your savings in the S&P 500, but should you put all your money there?

The S&P 500 is only one asset class, representing large-cap US stocks. Despite favorable recent returns, investing all your money in the S&P 500 can expose you to unnecessary risk. A better strategy is to diversify. A well-diversified portfolio is designed to help you achieve your long-term goals as well as limit your portfolio’s downs (and ups). But it doesn’t always feel good. By spreading your savings across stocks (US stocks – Small, Mid, and Large-cap, International Stocks – Developed and Emerging) bonds and cash, you may get upset when you inevitably lose money during certain periods (though your loss is likely less than that of the S&P 500 Index). You may also be disappointed during up markets when you see how well the S&P 500 Index performed, and you didn’t do as well. The good news: a diversified portfolio may produce a better outcome for you in the long-term.

 

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Source: Morningstar as of 12/31/18. Past performance does not guarantee or indicate future results. Diversified Portfolio is represented by 40% S&P 500 Index, 15% MSCI EAFE Index, 5% Russell 2000 Index. 30% Bloomberg Barclays U.S. Aggregate Bond Index, and 10% Bloomberg Barclays U.S. Corporate High Yield Index. Index performance is for illustrative purposes only. You cannot invest directly in the index. Diversification does not guarantee a profit or protect against a loss in a declining market.
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