Using Diversification To Manage Risk and Return

Key Takeaways

Despite growing uncertainty surrounding trade, geopolitics, and the global economy throughout 2019, all major asset classes posted positive returns. U.S. large-cap equity was the best performing asset class, followed closely by mid- and small-cap stocks.

• Investing only in the top-performing asset class each year would likely generate the best returns, however, such a feat is extremely difficult, if not impossible, to do consistently, even for seasoned investors.
• Because forecasting market performance is challenging, we believe it's important to hold a diversified portfolio, even though it will produce a lower return than if you were able to pick the best performer in any given year.
• Among its potential benefits, diversification is likely to generate more consistent returns. As a result, over the long term, a diversified portfolio may increase more in value than one that produces more volatile returns, which is the likely result of being concentrated in a single asset class. Of course, diversification does not guarantee investment returns or eliminate risk of loss.

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