Is Diversification Back?

Many financial advisors are currently trying to attract clients by offering non-traditional methods of investing. They justify these non-traditional approaches by claiming diversification among common asset classes is no longer effective.

Admittedly, diversification did not protect investor’s portfolios in 2008. The performance of all equity asset classes – such as large cap, mid cap, small cap, international, growth, and value stocks – declined in value between 34 and 43 percent in 2008. Thus, regardless of the equity classes within your portfolio, your losses were similar to other equity investors during the recent market pullback.

Does 2008 indicate that diversification is dead? Let’s examine how different asset categories have performed since the market turnaround on March 9, 2009:

Large Growth (measured by the Vanguard Growth Index): +51.08%
Large Value (the Vanguard Equity Income Index): +54.89%
Mid Growth (the Russell Mid Growth Index): +63.74%
Mid Value (the Russell Mid Value Index): +76.55%
Small Growth (the Russell 2000 Growth Index): +69.63%
Small Value (the Russell 2000 Value Index): +76.26%
International Growth (Vanguard International Growth Index): +74.63%
International Value (Vanguard International Value Index): +74.73%

Corporate Bonds (the Vanguard Corporate Bond ETF): +6.38%
Government Bonds (the Vanguard Government Bond ETF): +0.65%
International Bonds (the Vanguard International Bond ETF): +19.00%

Obviously, all equity asset classes have rebounded well. However, there is a 25.47 percent different between the top performing equity asset class (mid value) and the worst performing equity asset class (large growth). This is over only a six month period. Consequently, it is clear there has been a large amount of variance amongst the performance of the various equity asset classes during the recovery. I believe this is evidence that the traditional diversification strategy driving traditional financial planning methods is as relative and vital as ever. Don’t be tricked into believing the short-term, non-traditional approaches currently being promoted by financial planners who will say whatever it takes to get your business.