Diversification can smooth the ride

Good returns offset poor returns

A much better strategy than attempting to time the market is to diversify your money across a range of asset classes. By placing your money in a number of asset classes, good returns received from one investment can offset the bad performance of another over particular periods.

Diversification

Diversification is like having a balanced diet. You wouldn’t eat steak every day for breakfast, lunch and dinner because you would be missing out on the benefits of other food groups. See our guide to ‘Why diversification is so important’ for more on the benefits of diversification.

The figure below shows the three-year returns of different asset classes since 1995, and the difference between the best and worst performing asset classes.

It shows that even when the returns of most asset classes are negative, the difference between the best and worst is still substantial.

The benefits of diversification are clear
Cumulative 3-year return of each growth asset class since 1995

Source: Datastream, Mercer, IRESS. As at 31 December 2010. Emerging markets (local currency) cumulative 3-year return to 1995 not available.