The best way to assure better long term results is to diversify among differing asset classes including domestic and foreign stocks as well as fixed income. Many of our clients are familiar with the Individual Asset Class Returns Chart (click here to view) that we update annually. The most recent update through year end 2010 reveals several interesting observations which merit discussion.

The chart details asset class returns for 9 separate categories as well as 2 additional diversified portfolio categories (60% stocks and 40% fixed income along with 100% stocks). With 38 years of data it is worth noting that the net annual return for the 60/40 diversified portfolio is 9.88% which is just above the return for the S&P 500 of 9.81% per year. This means that diversification across various asset categories has provided the same or better return (with only 60% allocated to equities) than the 500 largest U.S. stocks. A "head to head" comparison of the S&P 500 and the 100% stock diversified portfolio is even more telling with the diversified portfolio providing a 12.04% return.

We have used this chart for 15 years or so and the message has always been the same. The diversified portfolios have never been the best performer for a single year nor have they ever been the worst. Every single asset category (except U.S. Large Value) has multiple years of best and worst performance. There is no discernable pattern thus the futility of trying to guess which category may do well in any given year.  In essence, diversification has allowed for both smoother, steadier returns and ultimately higher returns than a large stock portfolio.

Trying to invest in the best performing category has also proven difficult. In

several instances (the most recent being REIT stocks in 2006/2007), the best asset category one year was the worst the following year. Owning all of the asset classes regardless of the near term outlook has proven to be a winning strategy.

Our role is to help our clients put good ideas to work. The quality of these ideas has been proven in practice.