Putting 2020 into Perspective: Diversification May Work Better than You Think

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US recessions are typically accompanied by declines in stock market returns and, of course, 2020 has been no exception. We are once again reminded that investing is not easy leaving many investors to wonder how best to achieve what they really want — to avoid portfolio risk while seeking portfolio return. The potential benefits of diversification, first codified by Harry Markowitz who remarked “diversification is the only free lunch in investing,” has been called into question in recent years with comments like “diversification fails when needed most,” suggesting diversification lacks effectiveness especially during turbulent markets. With this year’s ongoing market volatility, it seems worthwhile to review the evidence. We’ll see that a globally diversified portfolio can be both effective and efficient.

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