Background
- Historical performance may serve as a useful guide for investors, but markets frequently trade on factors outside of fundamental valuations for long periods of time.
Potential benefits of diversification and rebalancing
- Regularly rebalancing a portfolio can add value.
- Because each asset class has unique risk, return, and correlation characteristics, a diversified allocation has the potential to provide more consistent returns with lower volatility.
- Attempting to reduce downside volatility can be critical to long-term performance, as it can allow a portfolio to recover more quickly after a crisis event.
- It is important to recognize that the more a portfolio loses in a downturn, the longer it takes to recoup those losses.
- Diversification has tended to reduce the time it takes to break even from a downside event.
Dangers of market timing
- Missing even a handful of days when the market achieves its best gains can dramatically reduce returns.
- Exiting the market after a bad day could be costly. The stock market’s best days have often been preceded by the worst days.
- We do not advocate market timing, but we do believe that modest tactical shifts have the potential to take advantage of short-term investment opportunities or help mitigate short-term risks.