Diversification is an essential tool available to investors. It enables them to capture broad market forces while reducing the uncompensated risk associated with individual securities. We have constructed strategies that seek to draw heavily upon this philosophy.We believe successful investing means not only capturing reliable sources of expected return but managing diversifiable risks and other risks that do not increase expected returns. Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, speculating in areas like interest rate movements, and relying solely on information from third-party analysts or rating services. To all these, diversification is an essential tool available to investors. While it does not eliminate the risk of market loss, diversification does help eliminate the random fortunes of individual securities and positions your portfolio to capture the returns of broad economic forces.
Dimensional's strategies diversify not only in the amount of securities they hold but in the range of capital markets they explore and develop. In this way, strategies are designed to focus on the factors that drive investment returns while reducing excess and undesirable risk.
The S&P data are provided by Standard & Poor's Index Services Group. MSCI data copyright MSCI 2012, all rights reserved. Results represent past performance and do not predict future performance.
Fixed income investors also benefit from diversification among government and corporate issuers and across global yield curves. The illustration below features a US government bond index and a world government bond index hedged to USD. Adding global issuers to a US bond index substantially reduced overall volatility while the average returns were similar.
Citigroup bond indices copyright 2012 by Citigroup.
Results represent past performance and do not predict future performance.
Standard deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution.
Diversification does not eliminate the risk of market loss.