Impact of Diversification

Pictures always say it much better than words.

Here is a graph of returns over time of 3 different asset classes:



Here is a graph of the returns including that of the average - represented by the black line - of the 3 asset classes



Source: The Coffeehouse Investor

As the author, Bill Schultheis, points out, the above chart

clearly shows that volatility is reduced (by diversification) without sacrificing long-term returns. In the short run, the top performing asset class will outperform the black line. That is to be expected. In the long run the black line (your diversified portfolio) keeps up with all the individual asset classes.

Want to argue that the above is just a theoretical graph with no numbers? Well, here is a graph based on actual data for a 38-year period in the US markets:

Source: Merriman

Interestingly, the next chart show what happens when you combine local stocks with international stocks - you get almost the same level of returns - but with less risk.


Source: Merriman

I rest my case!