Diversification has gotten a bad rap as of late. Over the last five years, due to the strong performance of US equities, a simple 60% US Stock / 40% US Bond portfolio would have been one of the best portfolio allocations—outperforming the majority of more diversified asset mixes, especially anything including an allocation to international stocks.
Increasing correlations between asset classes are often cited by those claiming that diversification is no longer helpful. That, coupled with the US market’s recent outperformance means many are questioning the need of going beyond this simple 60/40 portfolio.
The problem with this logic, though, is that what’s worked best recently won’t necessarily work best going forward—investing isn’t that easy. For several reasons, which we are about to see, building a diversified portfolio allocation may be more important now than ever.