Why Diversify? Because Market Leadership Continually Changes.

Perhaps nothing illustrates the need for an asset allocation plan better than Asset Class Return tables. The historic performance figures for various asset classes are ranked in tables below, based on year-by-year annual total returns. The best performing asset class per year is listed at the top of each column. Of course, past performance does not guarantee future returns.

Diversification really is the key to a successful investment plan. True diversification is then achieved by determining the appropriate allocation to each individual asset class. A quick review of the various asset groups in Tables 1 & 2 reveals constant change in market leadership over the 15-year test period. An index that is “Hot” one year may find itself at or close to the bottom of the list the following year. Identifying key classes is the first step in creating a well-balanced portfolio. The goal, however, is mixing asset classes together to create a stable and truly diversified portfolio.

Table 1: Annual Returns of Key Asset Classes 1994 - 2001

Table 2: Annual Returns of Key Asset Classes 2002 - 2009 (Feb.)

Key:

Conclusion:

All markets and by nature investment products can run hot and cold. Take for example Stocks (i.e. NASDAQ) which led the way in 1999, outperforming all markets, posted a net gain of over 85%. The following year, in 2000, it fell by almost 40% by years end. On the flip side those markets that are down one year can make substantial gains the next. Take for example Bonds (i.e. Lehman Brother Bond Index) which was down almost 1% in 1999, rallied in 2000, to top the list with a gain of almost 12%. Two markets, over the same time span, generated very different results. A portfolio with an appropriate weighting in multiple markets is the true key to diversification.

These tables clearly show that asset classes rotate from year to year. To take advantage of the strong returns of each year’s “leader,” it is important to develop a well-balanced portfolio with investments across all asset classes. Each asset class plays an import part of the portfolio whether its a stock index (aggressive, "blue chip" or international oriented) to one that includes bonds, commodities and managed futures. Each asset class can add a level of diversification in the correct mixture. Contact Talon Eight to discuss how our alternative investment products can potentially improve your investment portfolio.

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