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Using Diversification to Help Manage Risk and Return

Among its potential benefits, diversification is likely to generate more consistent returns.

Tracie McMillion, CFA, Head of Global Asset Allocation Strategy

Chris Haverland, CFA, Global Asset Allocation Strategist

Sameer Samana, CFA , Senior Global Market Strategist

Veronica Willis, Investment Strategy Analyst

Key Takeaways

Despite growing uncertainty surrounding trade, geopolitics, and the global economy throughout 2019, all major asset classes posted positive returns. U.S. large-cap equity was the best performing asset class, followed closely by mid- and small-cap stocks.

  • Investing only in the top-performing asset class each year would likely generate the best returns, however, such a feat is extremely difficult, if not impossible, to do consistently, even for seasoned investors.
  • Because forecasting market performance is challenging, we believe it's important to hold a diversified portfolio, even though it will produce a lower return than if you were able to pick the best performer in any given year.
  • Among its potential benefits, diversification is likely to generate more consistent returns. As a result, over the long term, a diversified portfolio may increase more in value than one that produces more volatile returns, which is the likely result of being concentrated in a single asset class. Of course, diversification does not guarantee investment returns or eliminate risk of loss.