Broad Portfolio Diversification Increases Returns While Decreasing Volatility
Key Investment Principle #5
- In the chart below we see that the equal combination of U.S. stocks S&P500, foreign stocks (EAFE), real estate (REITS), and the GSCI Commodities Index produced higher return with less standard deviation than any of these asset classes alone.
- This research study conducted by Morgan Stanley proved the combination of multiple uncorrelated asset classes in a portfolio actually increases returns and decreases volatility (standard deviation).
- The intelligent selection of uncorrelated asset classes in a portfolio can, therefore, increase returns while smoothing out the ups and down (standard deviations) that cause unwanted volatility.
Click to view: Benefits of Multiple Asset Class Diversification (1972-1997)
Source: © Roger C. Gibson, 1998; Morgan Stanley Capital International; Used with permission. © 1998 Ibbotson Associates Inc. All rights reserved. (Certain portions of this work were derived from copyrighted works of Roger G. Ibbotson and Rex A. Sinquefeld) Copyright © (1998) by National Association of Real Estate Investment Trusts®. NAREIT® data is reprinted with permission. Statements, calculations, or charts made by the author which use NAREIT® data have not been approved, verified, or endorsed by NAREIT®; GSCI® performance data used with permission of Goldman, Sachs & Co
Click to view: Correlation of Price Movements
Source: Zephyr Style ADVISOR, SsgA Advisor Consulting Services Research October 1984 through September 2004.