Spreading the Wealth
Generally, the spectrum of diversified assets includes cash, domestic and international stocks and bonds, real estate, and alternative investments such as commodities, private equity, and hedge funds. Assets that may be risky by themselves can lower portfolio risk when used as part of a broadly diversified portfolio, “as long as you make sure you diversify by holding non-correlated assets,â€ McKissack says–that is, asset classes that don’t move in the same direction at the same time.
In a year when a supposedly safe asset such as long-term government bonds loses heavily, riskier assets, such as emerging market stocks, tech stocks, and junk bonds, can excel and help to mitigate the loss. For instance, after the 2008 financial crisis, economies in countries like China, India, and Brazil looked very attractive. Emerging market funds grew in total assets under management on average 39% per year from 2001 to 2011, according to the research firm Morningstar. Despite some losses during this period, at the end of 2010 there was $22 billion invested in emerging market mutual funds. Had you invested $10,000 in, for example, the Forward Emerging Markets Institutional Fund from 2002 to 2012, your money would have grown to more than $35,000. On the flip side, investors who loaded up on bank stocks saw an average return in 2008 of -30.4%.
“Diversification should include exposure to large-cap, small-cap, value stocks, growth stocks, etc.,â€ says Grant, “but also a mix of individual companies or mutual funds in a variety of industries, like financial services, consumer products, pharmaceuticals, energy, etc.â€
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