Scott Burns of Assetbuilder has a new article that shows the benefit of diversifying your portfolio beyond the often-cited S&P 500 index fund that you probably have in your 401(k) plan. During the recent financial crisis, nearly every asset class involving stocks crashed. Large cap stocks, small cap stocks, REITs, international stocks.
From January 2000 to December 2009, the total return (not annualized) of the S&P 500 was negative 9.67%. That means money that you invested in the S&P 500 in 2000 was worth about 10% less an entire decade later. This is the so-called “lost decade” that numerous media articles have focused on.
Well, if you’ve been following this blog since 2004 or many other similar ones, you would have also read about research and historical data that advises you to diversify your investments across some other asset classes. Here are the total returns of other asset classes during that same 10-year period:
* Domestic large cap value stocks returned 53.7 percent
* Domestic small cap value stocks returned 139.5 percent
* REITs returned 170.9 percent
* Large cap international stocks returned 15.1 percent
* International large cap value stocks returned 90.7 percent
* Emerging markets stocks gained 147.8 percent
* Domestic micro-cap stocks, domestic small cap value, international small cap value, emerging markets value stocks, and emerging markets small cap stocks all enjoyed enormous gains. Emerging markets value stocks, for instance, returned 266.7 percent.
The S&P 500 is a good proxy for large-cap stocks in the US, but it doesn’t necessarily make your portfolio complete. Adding other asset classes that zig when others zag can help. Below is a summary of my target allocation, with further details here.
This is not a blanket recommendation for everyone, just an example of what I’m invested in to provide a nudge to read some more.
By Jonathan Ping | Investing | 6/6/11, 5:00am