A Recent report from JP Morgan outlines once again for the patient investor, that diversification The current bull market has not been kind to asset allocation, and following the post-election run in equity markets, some investors are wondering: is diversification still worth it? Frankly, this is a fair question to ask – as of February, the S&P 500 had outperformed an asset allocation portfolio* by 54.7% on a cumulative five-year basis, a statistic that is sure to sting investors who might already feel that they have missed out on the full potential of this bull market. 

Importantly, this is not the first time that the broad equity market has outperformed a diversified portfolio, and it surely won’t be the last. However, investors should not fall into the trap of chasing performance, and in this case, abandoning diversification in pursuit of greater returns from asset classes that have “worked.” Instead, they should ask themselves another question:

After periods of asset allocation underperformance, what happens next? As the chart below shows, when the S&P 500 has outperformed a diversified portfolio over a trailing five-year period, the following five years typically result in an underperformance relative to the diversified portfolio of roughly 4.4% per year. This should help to assuage some concern and make a strong case for asset allocation: underperformance won’t be persistent, and typically reverses itself to the diversified investor’s benefit. As a result, if history is any guide, investors should remain patient, avoid emotional biases and stick to a plan.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results.  Diversification and asset allocation do not ensure a profit or protect against a loss.  Any opinions are those of the Thomas Fleishel and not necessarily those of Raymond James.
 
* 60/40 S&P/Barclays AGG
https://am.jpmorgan.com/blob-gim/1383280029130/83456/weekly_market_recap.pdf