The chart above looks at the annual returns on the S&P 500 and a more globally diversified index portfolio for the 11 years between 2000 and 2010. The S&P was barely positive on a cumulative basis over this period, and continuing to hold US large cap stocks as a component of a diversified portfolio was difficult. The diversified index outperformed the S&P 500 in 9 of the 11 years and by over 8% per year. Imagine having all of your money in the S&P 500 and "staying the course"? I can't either.
Fast forward to the last six years, and the S&P 500 has returned to respectability. Non-US stocks have lagged, and domestic small-cap and value stocks have only performed about as well as the S&P 500. In 4 of the last six years, the S&P 500 has outperformed a more diversified portfolio. Predictably, we're hearing investors claim that the multi-national nature of US companies means that they're acceptable diversified by themselves and that holding additional asset classes is unnecessary. Of course, this is just a convenient narrative to justify the urge to chase performance.
The lesson? Investing is always hard. Either a prominent part of your diversified portfolio is severely lagging, or diversification itself seems to have failed relative to one shining component of your portfolio. But because we cannot predict which type of market we'll experience next, it makes the most sense to stay diversified and maintain realistic and humble expectations.
Past performance is not a guarantee of future results. Mutual fund performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.