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Why Diversification Pays in Rising Markets, Too

Broad and deep diversification is a prudent investment approach, no matter the market environment.

In last month's column, I explained--and showed graphically--the superiority of a portfolio designed to broadly and deeply diversify risk compared with two less well-diversified portfolios. That superiority stemmed, in part, from the notion that the well-diversified portfolio would be expected (but not guaranteed) to fall less in value in a market downturn than its two less diversified brethren.

However, my purpose in writing the column did not include disclosing the composition of the featured portfolios during any particular part of the momentous 17-month downturn in the stock market in 2007-2009. Portfolio A was simply a 60/40 allocation, while the values of the two other portfolios were based on feedback from many plan participants who I had counseled face-to-face during that stressful period of time. I didn't want a focus on the portfolio investments to the detriment of the big picture I was attempting to portray.