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  Successful Investing Requires Discipline: The Value of Diversification

History shows us that no one asset class has remained the top or bottom performer for long. Trying to time the market and pick the best performers is a risky strategy. Diversifying across a wide range of asset classes enables investors to spread their risk and potentially increase returns, helping smooth what might otherwise be a bumpy ride.

Annual Asset Class Returns (%)

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Importance of Diversification

Source: Wilshire CompassSM

The chart above shows the annual returns for 16 different asset classes over the last 10 years. No single asset class has stayed at the top or the bottom of the pack for a meaningful period of time. Varying economic and market conditions cause asset classes to perform well at different times, presenting challenges for investors who seek to pick just the top performers.

A well-diversified portfolio helps investors form a solid foundation on which to weather unpredictable markets. Diversification is the process of investing across a wide range of asset classes with the goal of smoothing performance and reducing portfolio risk.

The yellow box in the middle of the chart represents the performance of a “Diversified Portfolio” using a combination of indexes to illustrate the potential value of diversificaiton over the long term. During the 10 year period ending December 31, 2017, the annualized return for the Diversified Portfolio was 5.82%. The Diversified Portfolio has consistently remained in the middle of the pack during the 10 year period, never being the top performer, but never being the bottom performer either. 

The asset classes on in the chart above are represented by the following indices: 

  • Large Value: Wilshire U.S. Large Value IndexSM
  • Large Growth: Wilshire U.S. Large Growth IndexSM
  • Small Value: Wilshire U.S. Small Value IndexSM
  • Small Growth: Wilshire U.S. Small Growth IndexSM
  • U.S. Bonds: Bloomberg Barclays U.S. Aggregate Bond Index
  • High Yield: Bank of America Merrill Lynch – U.S. High Yield Index
  • Munis: Bloomberg Barclays Capital Municipal Bond Index
  • TIPS: Bloomberg Barclays Capital U.S. TIPS Index
  • U.S. Treasury: Bloomberg Barclays U.S. Treasury Index
  • Global Bonds: Bloomberg Barclays Capital Global Aggregate Bond Index
  • Pacific ex Japan: MSCI AC Pacific ex Japan Index
  • Europe ex UK: MSCI Europe ex UK Index
  • UK: MSCI United Kingdom Index
  • Emerging Markets: MSCI Emerging Markets Index
  • Global REITs: FTSE EPRA NAREIT Developed Index
  • Commodities: Bloomberg Commodity - Commodity Index (Total Return)
  • Diversified Portfolio: Domestic equity is represented by 35% Russell 3000 Index; international equity is represented by 15% MSCI EAFE Index, 4% MSCI - Emerging Markets Index, 4% FTSE EPRA/NAREIT - Developed Index; commodities is represented by 2% Bloomberg Commodity - Commodity Index; fixed income is represented by 28% Barclays U.S. Aggregate Index, 4% Barclays - U.S. TIPS Index, 4% Barclays - U.S. High Yield Index, 4% Citi - Non U.S. Govt Bond Index.

Important Information
There is no guarantee that these suggestions will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Diversification does not ensure a profit or protect against loss. 

This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice. Past performance is not indicative of future results. This material may include estimates, projections and other “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented. 

Information contained herein that has been obtained from third party sources is believed to be reliable. Wilshire Funds Management, a business unit of Wilshire Associates Incorporated, gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy in such information and for results obtained from its use. Statements concerning financial market trends are based on current market conditions, which will fluctuate. 

Copyright © 2018 Wilshire Associates Incorporated. All rights reserved.

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