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The power of diversification

Glenn Freeman  |  07 Sep 2017Text size  Decrease  Increase  |  

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If there were ever any doubts about the effectiveness of following a long-term, diversified investment strategy, this chart should help to address them.

 

Your $10,000 of capital invested in 1987 would have ballooned to more than $113,000, $115,000 and $146,000 in Aussie shares, bonds, and US shares, respectively, according to a 2017 index chart released by Vanguard.

Over this 30-year timeframe, these asset class indices have delivered per annum returns of 8.4 per cent, 8.5 per cent, and 9.4 per cent. While past performance is, of course, no guarantee of future returns, this demonstrates how broad diversification, a long-term perspective, and discipline can deliver the rewards of long-term growth in various markets.

 


chart

 

While investment markets evolve over time as the fortunes of individual companies, sectors, and regions rise and fall, this chart shows how broad diversification can smooth some of the inevitable bumps along the way.

The research behind the annual Vanguard Index Chart plots returns across key asset classes, showing persistent growth amid a shifting landscape across Australian shares, international shares, US shares, Australian bonds, listed property, and cash.

In addition to reaffirming the case for diversification as a way of helping mitigate market risk, it also highlights the role it plays in harnessing long-term growth of evolving financial markets, as growth industries form a larger slice of their respective markets, according to Robin Bowerman, Vanguard Australia's head of market strategy.

"While the majority of Australia's 10 largest listed companies have corporate history stretching back over a century, 50 per cent of the top US companies are much newer technology businesses, highlighting the vast difference between regional markets," Bowerman says.

"Having a diverse portfolio that captures market changes as they occur increases individual's chances of long-term investment success. Investors should think of their portfolios in terms of hundreds, or even thousands of companies across the globe, rather than being limited to a handful of companies in the local market."

In the context of Australia alone, the nation has had eight Prime Ministers and countless financial market events over the period under study.

"The chart serves as a visual reminder of the fundamental role diversification and discipline play over time and through varying market conditions. These are principles that apply to both active and index investments," Bowerman says.

This is the 17th iteration of Vanguard Index Chart, with each edition tracking the performance of major asset class indices over 30 years. During this time, it's served as an educational resource for investors, often in the hands of their advisers and other financial services professionals.

There is also an interactive version of the index chart available on Vanguard's website, which enables you to plot specific time periods and asset classes.

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Glenn Freeman is a Morningstar senior editor.

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