Why Diversification Matters Now

An aging bull market and increased volatility make diversification an important investment consideration. 

bull figurine and market charts
Mark Tosczak is an experienced business writer and marketing consultant based in North Carolina. Image by iStock

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Diversification is an investment method used to help manage risk. It does not ensure a profit or protect against a loss including in a declining market. All investing involves risk including the possible loss of principal.

Both stocks and bonds involve risk and their returns and risk levels can vary depending on prevailing market and economic conditions.  Bond prices fluctuate inversely to changes in interest rates. Alternative investments trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions.  Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the investor.

Asset Allocation Chart – Index Definitions

Commodities: The Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements.

Hedge Funds: The HFRI Fund Weighted Composite Index is a fund-weighted (equal-weighted) index designed to measure the total returns (net of fees) of the approximately 2,000 hedge funds that comprise the Index.

High Yield Fixed Income: The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

Investment Grade Fixed Income: The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.

Emerging Market Equity: The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure emerging markets equity performance.

U.S. Large Cap Equity: The S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market. Returns assume reinvestment of dividends and capital gain distributions.

Asset Class Risks
Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stocks may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to interest rate, credit/default, call, liquidity, inflation and other risks. Bond prices rise as interest rates fall. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Hedge funds trade in diverse complex strategies that are affected in different ways and at different times by changing market conditions. Strategies may, at times, be out of market favor for considerable periods with adverse consequences for the investor.

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