If we compare investment returns over the first two decades of the 21st century, the results tend to reinforce our views on the benefits of diversification and investing in known drivers of expected higher returns.* It has been demonstrated historically that returns can vary significantly from one period to another. We believe that ensuring portfolios are broadly diversified is an effective way to help smooth out volatility and generate a more consistent result over the long term. Focusing on known, evidence-based drivers of return can also be effective in increasing the likelihood of positive outcomes over a long-term horizon. We believe if you base an investment strategy on these principles, and stick to it, the potential for achieving your objectives may increase.
Over the first decade of the new century, the S&P 500, generally considered a broad measure of the US stock market, delivered poor returns. Investors in large cap US stocks were disappointed, while those who diversified globally or looked at other market segments such as small caps enjoyed better results. The next nine years saw a drastically different story. US large caps came roaring back and delivered stellar returns while the previous outperformers booked disappointing results. Cumulative performance over the 2000-2019 period makes the benefits of diversification clear, according to Dimensional Fund Advisors.