Diversification
Successful investing means not only capturing risks that generate expected return but reducing risks that do not. Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, and speculating on "information" from rating services. To all these, diversification is the antidote. It washes away the random fortunes of individual stocks and positions your portfolio to capture the returns of broad economic forces.
For many investors, the S&P 500 represents the first equity asset class in a diversified portfolio. Although the S&P 500 Index is diversified in large US companies, investors can benefit further by adding components. Take, for example, a portfolio that holds just US stocks (S&P 500 Index), a portfolio that holds just Japanese stocks (MSCI Japan Index), and a portfolio that holds both. The diversified portfolio has not only provided higher historical return than either alone, but it has done so with fewer negative quarters.
Dimensional diversifies not only in the amount of securities it holds (thousands) but in the range of capital market strategies it explores and develops. In this way, investors focus on the factors that drive investment returns and reduce excess and undesirable risk.
| The Benefits of Diversification |
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| Quarterly data: 1970-2005, rebalanced quarterly. |
| The S&P data are provided by Standard & Poor's Index Services Group. MSCI data copyright MSCI 2006, all rights reserved. |
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Results represent past performance and do not predict future performance. |
This is the power of diversification: the whole is greater than the sum of its parts.