At Flat Fee Portfolios we believe broad diversification is a prerequisite for any portfolio’s long-term success. Dividing assets across various asset classes can help manage the overall volatility of a portfolio, as well as potentially increase expected returns. Different asset classes have a variety of risk and return characteristics, as well as imperfect correlations, meaning that they do not all move in the same direction at the same time.
Favorable environments for some asset classes may be less favorable for others. It is impossible to predict with any certainty which asset classes will be the best, or worst, performers in the future. Broad diversification helps investors avoid this folly. Investors who broadly diversify will never have all their eggs in the winning basket, but they’ll never have all of them in the losing basket either.
Regularly rebalancing a diversified portfolio back to the target allocation helps reduce risk by systematically selling assets that have appreciated, and may be overvalued, as well as purchasing assets that have underperformed, and may well be undervalued.