Previously, we highlighted research that concluded “portfolios with fewer stocks are more likely to underperform than portfolios with more stocks, because larger portfolios are more likely to include some of the relatively small number of stocks that elevate the average return.” But what about the volatility of a portfolio, does diversification help? Unsurprisingly, research supports this idea. Between 1991 and May 2016, the average volatility of returns for the S&P 500 was 15%, while the average volatility of the index’s components was 28%.[1] This potential reduction in volatility, combined with evidence that indicates a larger portfolio has a greater likelihood of outperformance, makes a broad, diversified portfolio a great option for retirement investors.
More is Better
So, what does it mean to be diversified? Well, in our typical stock portfolio we invest in over 10,000 investments across 40 different countries. That’s a lot more than just 500 US stocks like a simple S&P 500 index fund. By investing globally, we can expand our opportunity set to capture the returns of extreme winners, which according to the previous research leads to higher expected returns, as well as, providing more reliable outcomes overtime. To see how developed economies have performed over the last two decades you can click here->Which Country Will Outperform?
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[1] https://www.spglobal.com/spdji/en/documents/research/research-fooled-by-conviction.pdf
