Diversification - 1st Quarter 2012


Our recent blog post titled “Death of Diversification?” noted that 2011 was an exceptionally poor year for diversified investment positions. You may ask what we meant by diversified. For our purposes, we were referring to asset classes that are not US stocks as measured by the S&P 500 and US bonds as measured by the BarCap Aggregate Bond indexes. 

A similar, although altogether more painful time period was 2008 where all but the most risk-averse assets were in free-fall. Past performance does not predict future returns, but history has a funny way of rhyming. In 2009, as markets determined the world was not ending, diversified portfolios were richly rewarded.

January’s returns offer a peek into the behavior of markets coming out of a period where diversification has not worked.


In the chart above we compare US Stocks & US Bonds to common diversifiers. This illustrates (on an admittedly smaller scale) another inflection point for diversification where additional asset classes contributed positively to returns similar to the time period starting in March 2009.

The jury is out as to whether this period favoring diversification will sustain itself through 2012. At some point the diversification ship will right itself and reward investors that hang on with variety’s smoothing effect.

* Large Cap Stocks – S&P 500, International Stocks – MSCI EAFE NR USD, Small Cap Stocks – Russell 2000, Commodities – Morgan Stanley Commodity-Related, US Bonds – BarCap US Aggregate, Global Bonds – BarCap Global Aggregate, High Yield Bonds – BarCap Corporate High Yield.