As financial author Larry Swedroe has sagely observed: “Diversification is like insurance. It’s insurance against having all your eggs in the wrong basket. And a strategy that involves buying insurance is working whether or not you collect on the policy.”
The fourth quarter recently ended (and 2014 in general) has provided us with an excellent illustration of what Swedroe is talking about. We saw a period when diversification was very much alive, well and working as planned … but in a way that is testing investor discipline.
Dimensional Fund Advisors’ Q4 2014 Quarterly Review shows us that wide differences were seen among returns from various asset classes, with U.S. stocks continuing upward while international and emerging stocks remained down. That’s diversification for you! The variance might tempt you to try to bulk up on past winners, especially when the most recent “winner” has been the familiar Red, White & Blue. But the broad view informs us that the past is no indication of future performance.
This means that you are still best served by remaining globally diversified instead of trying to time the market or chase past performance, no matter how stellar or close to home it may be. Take a look at the quarter in review and let us know if we can help you assess how to apply the information to your own investing.