Asset Allocation: Fundamentals: Historical Asset Class Performance
Which asset classes should you choose?
Allocating your assets among stocks, bonds, and cash can be advantageous, but it is only a start. Which types of these assets should you choose? The question highlights a classic investment problem: predicting the best-performing asset class from year to year is virtually impossible, as demonstrated in the table below.
Uncertain financial markets can be answered with diversification.
Diversification — the process of spreading investments across multiple asset classes — can improve your portfolio's ability to endure volatile markets. With a diversified portfolio, your assets are less affected by short-term market swings than by a single asset-class investment.
This table demonstrates how various asset classes have performed on an annual basis from 1998 through 2012. As you can see, the best-performing asset classes change dramatically from year to year. The "diversified portfolio" box shows that a more prudent approach involves spreading your investment across multiple asset classes, which helps to mitigate investment risk.
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