Friendly Reminder: Diversification Works

Doug Short with a visual reminder of why “diversification” means more than owning a few dozen stocks.

The blue and red lines are US and international stock indices.  The green line is the “total bond” index.

Here’s Doug:

Yesterday I posted an updated pair of charts showing the danger of overconfidence in equity diversification as an investment risk-management strategy. Here is a simpler illustration of the value of holding a fixed income allocation and increasing that allocation as retirement approaches, especially if you’re counting on your nest egg to fund non-discretionary retirement expenses.

Of course, if your other sources of income — Social Security pensions, and that bequest from Aunt Susan — will cover all your needs, then no need to fret over a decade or two of portfolio pain. Otherwise, it makes sense to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets. This will help, as we pointed out previously, to reduce the odds that a market implosion in retirement has you dining on cat food.

See more great charts on dshort.com >

 

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