Home>News & Resources>Wealth Management Insights Blog>Insights and Commentary>Diversification


Investment Diversification

Within the broad universe of investments, there are different asset classes or types of investments.  This chart is a twenty-year snapshot of asset class returns (%) from 1994 – 2013.  The best performing asset classes are listed from the top down to the worst at the bottom.   As you can see, no two years are the same and the top-performing asset classes vary from year to year.  So how do you successfully predict year after year which will be the best and which will be worst?  We do not believe it can be done – at least not consistently – so we are advocates of diversification.  A well-diversified portfolio has exposure to several asset classes.  While by definition it will likely never be the top performer, it will also likely never be the worst, as evidenced by the diversified portfolio shown below in white.

AssetClassReturns-03 (1)

Rebalancing and Market Sensitivity Example

This graph illustrates the concept that investing can be counter-intuitive. Within a diversified portfolio, there are investments representing different asset classes that help stabilize growth during market fluctuations. In this hypothetical example, as the value of Investment “B”, represented by the blue line, dips below the median line, an opportunity to buy low may exist. On the other hand, as Investment “A”, represented by the gold line, peaks above the median line, consideration may be given to selling high and rebalancing the portfolio overall.


LPL Financial Research

Written by: LPL Financial Research

The LPL Financial Research team provides you with actionable, unbiased investment advice. We offer sophisticated, quality advice that evolves with the shifting investment landscape. We recognize the critical role that timely, independent, objective research plays in the day to day.