An analysis of professionally managed investment portfolios revealed to a team of Goldman strategists that “many investors are missing important potential sources of return as a result of putting too many of their “risk” eggs in one basket—U.S. equities.” This according to a recent article in Barron’s.
The article argues that many portfolios appear to be overlooking “potentially attractive” opportunities in emerging market, emerging market debt and small-cap equities (in Japan, Europe and other non-U.S. developed countries). It also underscores the distinction between risk allocation and asset allocation, stressing that a “large allocation to a few assets classes can lead to extreme concentrations of portfolio risk.”
The team tested their argument by comparing historical returns of portfolios that included the above-mentioned asset classes to those that didn’t. Their findings showed that, in each case, returns were higher when these assets classes were included in the portfolio. And, since the calculated returns include the last few years of U.S. equity outperformance, they believe their findings may be understated.
The article concludes that, given these study results as well as the tendency for investors to chase performance, diversification is an important strategy. “No trend lasts forever,” the article argues. “U.S. equities’ strong relative performance eventually will end.”