Diversification

We don't have the final total return numbers yet of different asset classes for June 30, 2013.  But we do know that US equity markets had a pretty good first six months of 2013 despite the contretemps that surrounded the past few weeks.  This is in sharp contrast to almost all other asset classes.  Fixed income's 2nd quarter was nothing to write home about as interest rates skyrocketed higher.  Gold and most commodities fell apart.  Foreign markets at best were flat and many ended up in bear market territory. 

It can be tempting to think in this kind of market that perhaps one is better off just concentrating on what's working like say US equities.  Think again!  The BlackRock chart above shows the longer term outperformance of diversification {the purple line} versus what many have seen as a traditionally diversified portfolio of 60% Stocks represented as the S&P 500 and 40% bonds represented by the Barclay's Credit Index {light blue}. 

BlackRock defines the assets that make up the purple line as follows: 12% S&P 500, 12% S&P MidCap 400, 12% S&P SmallCap 600, 12% MSCI EAFE, 12% MSCI Emerging Markets, 13.3% Barclays Credit Index, 13.3% Barclays US Treasury Index, 13.3% Barclays Capital High Yield Index.  

I think when the dust settles only the top three of these asset classes will have had positive returns for the first six months of the year.  Short term then this kind of allocation may have hurt practitioners of diversification.  Longer term it has been a superior approach.  

I'd also note that the other component of this kind of diversification approach is a process that also takes into account risk/reward perimeters.  The method above also leaves out cash which is a nice hedge in rocky environments. 

Link:  BlackRock:  Don't Settle With Your Diversification.

*Long ETFs related to the S&P 500 certain, MidCap ETFs and foreign markets in client and personal accounts.  Long certain credit ETFs in some individual client accounts.