Updated: Oct 11, 2019
Last week I was making some investment recommendations for a new clients financial plan. Their current portfolio was holding almost entirely US large cap stocks and I was introducing the idea of diversification.
The client understood that keeping "all your eggs in one basket" isn't the best strategy, but was still caught-up on the incredible performance of their account over the past 10 years, especially compared to the portfolio I was recommending.
Let me share with you what I explained to them.
The US stock market (S&P 500) has experienced one of the greatest performing decades in history (second only to 1990-2000) with annualized returns of 14.09% (dividends reinvested) from July 2009 to July 2019. In fact, 2009 to 2019, the market had the most ever "new all-time highs" with 359. That's a new all time-time high every 12.2 days!
For context, if the client had $100,000 account in July 2009, their balance was now $373,600.
The globally diversified portfolio I was recommending had annualized returns of 10.01% over that same period and would have accumulated an account balance of only $259,600.
Tough sell, I know... But not really!
Lets take a quick look at what these exact same portfolios would have done, just 10 years prior. From July 1999 to July 2009, you were sandwiched between the Tech Bubble and The Great Recession - two terrible US market meltdowns.
The S&P 500 had annualized returns of -1.55% over this period. An account balance would've gone from $100,000 to $85,500 over this period.
Whereas, my recommend diversified portfolio would have had annualized returns of 2.61% and accumulated a balance of $129,300.
Much easier sell, buuut which portfolio did better over both 10 year periods combine? Glad you asked!
July 1999 to July 2019 Annualized Returns:
S&P 500 (Dividends reinvested): 5.96% with account value of $318,00
Diversified Portfolio (Dividends reinvested): 6.24% with account value of $335,500
Diversity for the win!
My Sincere Advice
Even if the returns were worse, I'd still recommend holding a globally diversified investment portfolio because the truth is that nobody knows what the markets are going to do with any type of certain. Period.
Therefore, we need to BUILD WEALTH by investing in portfolios that weather ALL storms and then focus on the things we CAN control!