Recently, there was an important article by Carl Richards writing for the Blog, “Bucks,” in The New York Times. The article bears repeating. Equity investment results in the period between 2000 and 2010 were not so grim if investors prudently followed the wisdom of diversifying their portfolio.

In this article, Mr. Richards outlines the performance of a broadly diversified portfolio of equity investments consisting of five asset classes:

  • Large stocks (the S&P 500)
  • Small stocks (the Russell 2000 index)
  • Real estate stocks (the Dow Jones U.S. REIT index)
  • International stocks (MSCE EAFE Index)
  • Emerging market stocks (MSCI Emerging Markets Index)

This portfolio produced an annualized return with dividends reinvested of 8.35% over the 10 year period. This assumes no rebalancing and no rethinking, especially in the bad years. 

Prudent investors might suggest that most investment portfolios should include a mix of bonds. If we assume the same equity portfolio and combine it with a 40% bond portfolio, the return over the ten years 2000 – 2010 was 7.83%.

Surprised? I suggest most people are surprised. What are the principals at work here? You need to diversify your portfolio. You need to resist the temptation to buy high and sell low. You need to recognize that there are great investment opportunities outside the S&P 500.