Some investors have seen minimal returns compared to the benchmark.
Diversification is essential, yet it comes with trade-offs. Investors are repeatedly urged to allocate portfolio assets across a variety of investment classes. This is fundamental; market shocks and month-to-month volatility may bring big losses to portfolios weighted too heavily in one or two classes.
—Kevin B. Perlberg, CFP®
Just as there is a potential upside to diversification, there is also a potential downside. It can expose a percentage of the portfolio to under performing sectors of the market. Last year, that kind of exposure affected the returns of some prudent investors.
Sometimes diversification hinders overall performance. The stock market has performed well of late, but very few portfolios have 100% allocation to stocks for sensible reasons. At times investors take a quick glance at stock index performance and forget that their return reflects the performance of multiple market segments. While the S&P 500 rose 11.39% in 2014 (13.69% with dividends), other asset classes saw minor returns or losses last year.1