Having a diversified portfolio is still the way to go
Money Magazine takes on all those people who say that the recent economic downslide proves that diversifying your investments doesn’t work
They say:
Diversification did work last year, even if it didn’t get the investment results you might have preferred.
You see, diversification was never designed to provide a guarantee against losses. No strategy - even sticking to T-bills - can do that.
Rather, the idea behind diversifying is that all your money won’t be subject to the fortunes of one investment or asset class. So to the extent you spread your money around, you’ll experience a broad spectrum of returns, not a single return on all your money.
And check it out, numbers to prove their point:
For the 12 months through the first week of April, for example, large-cap U.S. stocks lost about 39%. Foreign stocks as a group lost about 46%. Real estate-related stocks were down about 59%.
Bonds, meanwhile, fared better, although how much better depended on what types of bonds you owned. Because of the flight to quality, government bonds fared best with long-term government bonds gaining over 10%. Not surprisingly, given concerns about the economy and corporate profitability, high-yield junk bonds did the worst, losing about 21%.
So diversification isn’t dead yet. I remain a strong advocate of a diversified portfolio. No, diversification will not garuntee you a profit, but it will minimize your exposure to risk. And that’s a good enough reason to embrace it wholeheartedly.
