Reflecting on the last 2 years, many can argue that we have not needed diversification across portfolios. After all, when US Large Cap equities give back-to-back 25% return years, it can be difficult to see the value in all the other aspects that make up a well-diversified portfolio.
Although equities often contribute most of the return in a portfolio (not always the case), they also appear to contribute to most of the risk and volatility as well. A well-diversified portfolio will capture strong returns of the best assets classes in a given year but will also spread the risk out so that the portfolio as a whole will not be as volatile.
Source: Bloomberg, Apollo Chief Economist
If we think back to 2022, when the Federal Reserve was raising interest rates, equities as a whole were selling off providing a lot of downside volatility to portfolios. U.S. Large Cap Growth stocks ended 2022 down over -30% for the year. Other areas of the portfolio provided much-needed diversification. U.S. Large Cap Value stocks suffered much less, down a little more than -7%. Bonds and International Equities outperformed U.S. Large Cap Growth that year and allocations outside of the traditional 60/40 stocks and bonds portfolio, such as real assets, provided strong relative returns with muted volatility (some real asset exposures were even positive for the year, outperforming U.S. Large Cap Growth Equities by as much as 30%!).
We are no longer in 2022, and the benefits of diversification can feel like a thing of the past. The best performing asset classes change most years and although U.S. Large Cap Growth has been in the spotlight, we must not look solely into that asset class for future growth in our portfolios. We continue to invest in other asset classes because we believe in diversification in our client portfolios. Year-to-date (as of 2/20/2025), International Developed Equities, U.S. Mid-Caps, and Value as a style are some of the strongest performers. Fixed Income continues to pay out higher coupons with yields sitting at levels higher than we have experienced over the last 5 years. All asset classes are not perfectly uncorrelated with each other, but when combined into a well-diversified portfolio, your experience should be much smoother.
When the S&P 500 is having a strong year, you may be tempted to ask your advisor why your portfolio is not performing in line. Remember that diversified portfolios are set up in a way to get you where you want to go in the long-term but without the rollercoaster of a ride that equities can provide by themselves. If you would like to learn more about how diversification is pivotal to long-term success, please contact us at [email protected].
About Schneider Downs Wealth Management
Schneider Downs Wealth Management has been providing investment and retirement services since 2000. Although our service platforms continue to evolve, commitment to our clients remains our first priority. Our service is tailored to your individualized goals but built on the fundamental principles of our practice: fiduciary guidance, fee transparency and goal-based decision making. To learn more, visit our dedicated Wealth Management page.
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
