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The information on this site does not modify any insurance policy terms in any way. Diversification means owning a variety of assets that perform differently over time, but not too much of any one investment or type. In terms of stock, a diversified portfolio would contain or more different stocks across many industries. Even areas often touted for their diversification benefits--including REITs, smaller-cap stocks, lower-quality bonds, and some commodities--have often moved more in tandem with the broad U.
Overall, the rise in correlations across many major asset classes in illustrates the complexity involved in building a diversified portfolio. Not only are correlations constantly shifting, but they also often rise during periods of market volatility. Even so, the basic arguments in favor of portfolio diversification still hold. A diversified portfolio still reduced volatility and limited losses during the market downturn in early , albeit maybe not as much as investors would have hoped.
Diversification also looks better over longer periods: From through , for example, a diversified approach would have improved risk-adjusted returns as measured by the Sharpe ratio by about 0. Broadly diversified portfolios have also historically held up better during periods of rising interest rates or above-average inflation.
International stocks are a prime example. While they haven't improved returns or reduced risk when added to portfolio focused on U. Currency exposure is another important aspect of international diversification.
Now that the U. It's also important to look at asset class correlations in the context of overall market trends. Specifically, the past 20 years have been marked by declining interest rates and benign inflation. In a period of equity market weakness precipitated by rising yields, Treasuries and other high-quality bonds may be less reliable diversifiers, particularly given how low their yields are in absolute terms. For example, in the year period from to , as Treasury-bond yields rose sharply, Treasuries were less effective as equity diversifiers; they exhibited a modest positive correlation with stocks.
Even in a more challenging environment, assets such as cash, Treasuries, and gold have continued to provide valuable diversification benefits. While diversification doesn't work with every asset class in every market, it's still an important tool for improving risk-adjusted returns over the long haul. The performance data contained herein represents past performance which does not guarantee future results.
Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For performance information current to the most recent month end, please contact us. Market price returns are based on the prior-day closing market price, which is the average of the midpoint bid-ask prices at 4 p.
Market price returns do not represent the returns an investor would receive if shares were traded at other times. Returns include fees and applicable loads. Since Inception returns are provided for funds with less than 10 years of history and are as of the fund's inception date.
Before investing consider carefully the investment objectives, risks, and charges and expenses of the fund, including management fees, other expenses and special risks. This and other information may be found in each fund's prospectus or summary prospectus, if available. Always read the prospectus or summary prospectus carefully before you invest or send money.
Prospectuses can be obtained by contacting us. Expense Ratio — Gross Expense Ratio is the total annual operating expense before waivers or reimbursements from the fund's most recent prospectus. You should also review the fund's detailed annual fund operating expenses which are provided in the fund's prospectus. Banking products are provided by Bank of America, N. Merrill Lynch Life Agency Inc.
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