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How to Achieve Higher Returns in Poor Performing Market Periods


This video shows investors that asset allocation still works even during poor performing market periods – if you’re properly diversified.

How to Achieve Higher Returns in Poor Performing Market Periods

In this video we’re going to demonstrate how asset allocation still works, even during poor performing market periods. 

A good example of a poor performing market period was a ten year period known as the Decade of Lost Returns.  The time period was from January 2000 to Dec 2009.   The period began with the “tech bubble” and ended with the 2008 “financial crisis”.  It was during this period that many investors have stated that “the value of their investment portfolio in 2009 was no greater than it had been in the year 2000”.  If you had a similar experience chances are your portfolio was too highly correlated to the S&P 500 Index or companies within the S&P 500 and you did not own other asset classes that could have provided diversification benefits.

The S&P 500 is known as a broad measure of the US stock market consisting of the largest 500 publicly traded companies in the US.   Between the periods of January 2000 to December 2009 it experienced an average annual rate of return of negative 1%.  While the S&P 500 invests in 500 companies, it’s still heavily concentrated in one asset class, US Large companies with a Growth tilt.  In other words, US Large Growth companies.

(See video)

Let’s begin by looking at the growth of $100,000, assuming you invested only in the S&P 500. Let’s call this Portfolio A.  During the period between January 2000 and December 2009, the 10 year annualized return of the S&P 500 was -0.95%.  So, $100,000 invested at the beginning of this period would have been worth about $91,000 at the end this period.

Next, let’s start to add some diversification to this portfolio. First, let’s add some International diversification in the form of large companies in International Developed, as well Emerging Markets.  If you had watched our video titled, “The Benefits of Investing Globally”, you may recall that the money invested in the US stock market makes up about half of the world’s total stock market capitalization with International Developed Markets and Emerging Markets making up roughly 51%.

Let’s create a second portfolio and call this Portfolio B which is allocated 50% to the S&P 500 and 50% to International large companies (including Emerging Markets).  You’ll notice that by diversifying globally your 10 Year annual return has increased from -0.95% to a positive 2.85% annually and $100,000 would have grown to 132,000 over this ten year period.

Let’s continue by adding more diversification.  So far, although our portfolio is diversified globally it is still mainly invested in Large Companies.  If you had watched our video called, “Achieving Higher Returns with Small Companies”, you would have remembered that over time Small Companies have produced, on average, higher returns than Large Companies not just in the US but also in International Developed and Emerging Markets.

So, let’s create a third portfolio called Portfolio C and let’s add some more diversification by allocating 50% to Small Cap companies in the US, International Developed and Emerging Markets.  Now our portfolio is not only diversified globally but also diversified by company size.  We see that now our average annual return has increased to 5.00% and $100,000 would have grown to $163,000.

But let’s not stop there.  Let’s continue to add more diversification, but this time let’s diversify by company price meaning Growth companies and Value companies.  If you had watched our video called, “Achieving Higher Returns with Value Companies”, you may recall that Value Companies, meaning companies with an under-valued stock price, tend to outperform Growth Companies which tend to be priced higher.  This occurs with US Large Companies, US Small Companies, International Developed Companies, as well as Emerging Markets.

So let’s create another portfolio called Portfolio D and this time let’s tilt our portfolio to Value Companies by including US Large and Small Value companies as well as International and Emerging Market Value Companies, so our portfolio is allocated to 70% Value Companies and 30% Growth Companies.  Here we see our 10 year average return has increased to 7.11% and $100,000 has nearly doubled, by growing to $199,000.

Finally, let’s add one more source of diversification which is an asset class that has a low correlation to the S&P 500.  That’s Real Estate, in the form of REITs, which stands for Real Estate Investment Trusts.  Let’s call this Portfolio E and let’s allocate 10% of the Portfolio to this asset class.  Notice now that our 10 year annualized return has increased to 7.7% and $100,000 has grown to $210,000.

Compare Portfolio A to our fully diversified Portfolio E.  This is the benefit of diversification and illustrates that asset allocation still works even during poor performing market periods. So remember, when it comes to investing asset allocation is the largest contributor to your portfolio’s performance!


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Asset Allocation