A masterclass in diversification
Three takeaways
- Recent stock market volatility has proven why portfolio diversification is important for investors.
- ETFs can offer investors diversification by giving them access to potentially hundreds of securities, sometimes even thousands, in a single purchase.
- Investors can consider using multi-asset ETFs to build a low cost, diversified portfolio as they pursue their long-term investing goals.
There's wisdom in diversification
Diversification is the practice of not holding all your eggs in one basket, thereby owning a mix of stocks and securities with different characteristics. This cornerstone investment principle was born in the 1950s, helped spur the advent of index mutual funds in the 1970s, then drove the rise of index-tracking exchange traded funds (ETFs) starting in the 1990s.1
ETFs give investors simple and low-cost access to diversified investment strategies and has helped individual and professional investors move from solely owning individual stocks to providing affordable access to global strategies spanning stocks, bonds and more.
So, what has diversification and ETFs done for investors recently?
Spreading the risk around through diversification
Over the last few years investors have been whipsawed by unprecedented market events. Steep market declines tied to COVID-19 were followed by a sharp rebound in U.S. stocks, only to give way to sticky inflation and divergent signals in macro data.
Despite this wild ride, over the last five years, patient investors have been rewarded as the U.S. stock market has risen over 70%2 But, while the market has gone up, not all stocks have been a good investment. 46% of U.S. stocks declined during that same period, meaning investors picking stocks from the broad market had a greater than one out of three chances of selecting a loser. And many of the stocks that fell, fell hard. Among the U.S. stocks that declined over the last five years, the average drop was 51%.2 In other words, half of stocks lost half their value. For investors buying single stocks, it could have been easy to be a loser in a winning market.
Keeping an eye on the long-term
The point is that successfully timing the market with individual securities or even whole sectors — buying and selling at just the right times — is difficult even for the most experienced investor.
Diversification helps investors to navigate fast-changing markets and stay the course to pursue their financial goals. And some index ETFs can hold virtually the whole market in a single fund, a strategy which can help investors avoid sharp declines of a few single stocks or when certain asset classes (like equities) take a hit.
Depending on your financial goals, a global multi-asset ETF could be a simple cost-effective solution to help diversify a portfolio. As an example, IGRO (iShares High Growth ESG ETF) and IBAL (iShares Balanced ESG ETF) provide investors a choice of two ready built portfolios designed to invest with simplicity. Each portfolio provides Investors exposure to a diversified portfolio of global stocks and bonds with over 7,000 securities in a single trade.
FOOTNOTE
Diversification and asset allocation may not fully protect you from market risk.
1 See Harry Markowitz’s 1952 thesis, Portfolio Selection, available at www.jstor.org/stable/2975974.
2 U.S. stock market as measured by the S&P Total Market Index. Morningstar (covering period 5 years to 31 July 2023).
iShares High Growth ESG ETF (IGRO): This product is likely to be appropriate for a consumer who is seeking capital growth and/or income distribution, using the product for a whole portfolio solution or less, with a minimum investment timeframe of 5 years, and with a medium to high risk/return profile.
iShares Balanced ESG ETF (IBAL): This product is likely to be appropriate for a consumer who is seeking capital growth, capital preservation and/or income distribution, using the product for a whole portfolio solution or less, with a minimum investment timeframe of 5 years, and with a medium to high risk/return profile.
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