Investors with diversified portfolios that weren’t overweight equities in the last 10 years missed out as stocks rallied to new highs following the 2008 financial crisis. Those kind of warped returns might make some clients feel diversification is an oversold concept. But that would be a mistake, said Robert Boyda, the head of global asset allocation at Hancock Asset Management. It’s important they understand that diversification is still relevant, and perhaps even more important now.
Boyda and other panelists at the annual conference said investors shouldn’t question diversification and need to stay the course on the road to their long-term goals.
Boyda pointed out that had investors kept an allotted portion of their portfolios in Treasurys heading into the 2008 crisis, instead of overweighting equities as many had, they would have been in a position to rebalance in 2009 and buy equities at a steep discount. In other words, the biggest value with diversification wasn’t that it failed to mitigate portfolios from losing value during a market downturn, it was that it didn’t give investors enough “dry powder” to put into the market during the fallout, he said.
A diversified portfolio gives investors flexibility to make those types of changes, said Tracie McMillion, the head of Global Asset Allocation Strategy at Wells Fargo Investment Institute.
In the case of fixed income, McMillion said the concept works not just for an overall portfolio of equities and fixed income, but even within the fixed income asset class, diversifying across both sovereign and corporate debt as well as across investment and non-investment grade bonds.
Bradley Vogt, an equity portfolio manager at Capital Group, reminded the audience that the crisis was an “unprecedented” market event in both “scale and ubiquity,” and indeed, previously held notions of non-correlation between asset classes did not hold up in 2008. Regardless, the benefits of diversification on portfolios when the market rebounded should not be lost.
Panelist Anne Lester, portfolio manager and head of retirement solutions at JPMorgan Asset Management, said that while the financial crisis left some investors distrustful of diversification, they need to keep the faith for better long-term outcomes. The financial services industry has “trained” investors to be more active by bombarding them with information and data in real time. As a result, some investors are going so far as to trade target date funds based on current market situations, according to Lester, a purpose they clearly were not designed for.
In other words, the lesson of the financial crisis was not that diversification failed investors. It enabled them to climb back.