Revisiting Diversification
The last decade of investment returns has been dominated by U.S. Large Cap stocks, which has generally minimized the benefits of asset class diversification. It is important to remember, especially for long-term investors, that future returns can look very different from recent history.
A good example is the 10-year period from 2004-2013 (pictured below). Interestingly, U.S. Large Cap only made the top-three in annual returns once during the period, and Real Estate and International/Emerging Market equities led in most calendar year periods.
The Callan Periodic Table of Investment Returns
Annual Returns for Key Indices Ranked in Order of Performance (2004–2013)
Source: Callan Institute
With the benefit of hindsight, 2012/2013 would have been a great time to overweight portfolios to U.S. Large Cap. It also likely would have been extremely difficult to meaningfully move away from asset classes that had worked so well in previous years. No one knows how this chart will look over the next 10 years. We can reasonably guess that it will look significantly different from the previous 10 years.
Sources: Callan Institute, https://www.callan.com/research/2023-classic-periodic-table/#
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