Diversification across multiple asset classes is one of the most effective risk management tools available to investors, according to Manning & Napier.
Investors can reduce the risk of declines in their portfolio by including multiple asset classes, like U.S. large cap stocks, small cap stocks, international stocks, short-term fixed income, intermediate-term bonds and long-term bonds.
Diversification risk-proofs your portfolio because when stocks are down, domestic bond prices may rise and international equities may not react at all.
“When a portfolio includes broad exposure to multiple asset classes, it is less exposed to extreme market fluctuations because declines in one asset class may not be experienced by other asset classes, and quite possibly may be offset by gains in another asset class,” the report stated.
Manning & Napier gave a historical perspective on how different asset classes have reacted from 1984 to 2013. It is a sobering list, highlighting the historical declines that have taken place in all of the major asset classes except short-term fixed income.