Importance of Diversification

The best performing market or asset class varies from year to year – and there is not a way to predict the best performers in advance. Therefore, prudent investors diversify their portfolios to participate in the gains of top performers while mitigating exposure to the poorest performers.

In the early 1950s, Harry Markowitz laid the foundation for Modern Portfolio Theory by showing that proper diversification is not simply adding more investments to your portfolio, but combining assets that behave differently; specifically, those with less than perfect correlations.¹ The optimal outcome is a portfolio of investment assets whose collective expected risk has been lowered without reducing the collective expected return.

Proper diversification does not eliminate risk, it minimizes risk for a given return expectation while improving the potential for a less volatile path towards achieving investment objectives.

¹ Markowitz, Harry. 1952. “Portfolio Selection.” The Journal of Finance, vol. 7, no. 1 (March): 77-91.

“A very low-cost index fund is going to beat a majority of professionally-managed money. The gross performance [of actively managed money] may be reasonably decent, but fees will eat up a significant percentage of the returns.”

Warren Buffet, Berkshire Hathaway

2007 Shareholders Meeting

“All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage.”

Peter Lynch, former Fidelity Magellan Fund Manager

Beating the Street, 1993

"The industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative returns for the class of active managers confirms it. Yet, what a price investors are willing to pay!"

Bill Gross, PIMCO Co-founder

Former Manager of World's Largest Bond Fund