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Case for Diversification

Click on image above to enlarge.

You don’t have to be an investment management expert to see from the chart above that there is no investment type that consistently outperforms the others over time. If there were, we would all hold only that investment all of the time! Diversification means holding a lot of different types of investments, so you can take advantage of certain sectors’ short-term high performance without getting hurt too badly when one (or some) sectors have a significant decline.

In a recent Vanguard blog titled “When the World Beckons” by Scott Donaldson, he says, “It’s important to note that as correlations between U.S. and non-U.S. financial markets change, the impact of diversification can change as well. But let’s not forget that the value of international diversification is more than just understanding that the U.S. and international markets alternate top performance. The amount of international exposure should always be based upon the long-term diversification benefit rather than recent short-term outperformance.”

The importance of investing for your particular situation cannot be overemphasized. Chasing short term performance (most recently, large US companies) can be a dangerous strategy, and it is one that has been proven not to work consistently. Studies have shown that investors who try to “time the market” usually end up hurting their own performance when compared to indexes and many types of mutual funds.

Attempting to pick which color will be the next best performer is virtually impossible. There are too many unknowns, and as we have all learned, the market does not always behave rationally!

Pick a Color
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