The Importance of Diversification

February 7, 2012

From year to year the best-performing asset classes can change dramatically. Diversifying investments into different asset classes helps you take advantage of economic cycles, reduce portfolio volatility, and increase the likelihood of consistent returns.

Investment principles

At Wealth Enhancement Group we believe

  • clients need a diversified portfolio to reduce overall risk
  • active investment managers can add value to a portfolio
  • tactical allocation can add value over the long term because economies and markets change
  • investors who want growth should be exposed to broad asset classes, including U.S. markets, international markets and emerging markets

As part of our investment philosophy at Wealth Enhancement Group, we look beyond a single year. We manage for both risk and long-term returns for our clients and we believe that, over time, diversified strategies and portfolios will help you get better returns.

Benchmarks

But it’s easy for an investor to look at a single year and focus on the Dow Jones Industrial Average, which tracks 30 large-cap stocks, or on the Standard & Poor’s 500, which tracks 500 mid- and large-cap stocks, and wonder why his/her total portfolio didn’t do as well as those two indices. That’s what happened in 2011, a year marked by market volatility and uncertainty, where investments in other parts of the world performed less well than U.S. investments.

The key is that we use other indices for non-U.S. asset classes, and the active managers we measure performed well within their asset classes.

Looking toward 2012

It’s natural to think that if global economic growth is going to be weak, then investors should avoid stocks. There may, however, still be attractive returns from U.S. stocks, particularly small-caps, and from emerging market equities.

As we move into 2012, we’ll continue to monitor the markets and make timely and appropriate allocation adjustments based on the global economic and political environment.

 

James Copenhaver, Director of Investment Management

 

 

Past performance is no guarantee of future results. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

International and emerging market investing involves special risks such as currency fluctuation and political instability.