The [Negative] Short-Term Implications of Investment Portfolio Diversification

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Delving Deeper into Asset Allocation

By Lon Jefferies MBA CFP® CMP®

Lon JeffriesAsset allocation is one of the key factors contributing to long-term investment success.

When designing a portfolio that represents their risk tolerance, investors should be aware that a portfolio that is 50% stocks is likely to obtain approximately half of the gain when the market advances but suffer only half the loss when the market declines.

This general principle frequently holds true over extended investing cycles, but can waiver during shorter holding periods.

Case Model

For example, a fairly typical physician client of mine who has a 50% stock, 50% bond portfolio has obtained a return of 4.62% over the last 12 months, while the S&P 500 has obtained a return of 14.31% over the same time period (as of 10/30/14).

An investor expecting to obtain half the return of the index would anticipate a return of 7.15%, and by this measuring stick, has underperformed the market by over 2.50% during the last year.

What caused this differential?


The issue resides in how we define “the market.” In this example, we use the S&P 500 index as a measure for how the market as a whole is performing. As you may know, the S&P 500 (and the Dow Jones Industrial Average, for that matter) consists solely of large company U.S. stocks.

Of course, a diversified portfolio owns a mixture of large, mid, and small cap U.S. stocks, as well as international and emerging market equities. Consequently, comparing the performance of a basket of only large cap stocks to the performance of a diversified portfolio made up of a variety of different asset classes isn’t an apples-to-apples comparison.




Frequently, the diversified portfolio will outperform the non-diversified large cap index because several of the components of the diversified portfolio will obtain higher returns than those achieved by large cap holdings.

However, the past 12 months has been a case where a diversified portfolio underperformed the large cap index because large cap stocks were the best performing asset class over the time period. In fact, over the last twelve months, there has been a direct correlation between company size and stock performance (as of 10/30/14):

  • Large Cap Stocks (S&P 500): 14.92%
  • Mid Cap Stocks (Russell Mid Cap): 11.08%
  • Small Cap Stocks (Russell 2000): 4.45%
  • International Stocks (Dow Jones Developed Markets): -1.05%
  • Emerging Market Stocks (iShares MSCI Emerging Markets): -1.04%

Since large cap stocks were the best performing element of a diversified portfolio over the last 12 months, in retrospect, an investor would have obtained a superior return by owning only large cap stocks during the period as opposed to owning a diversified mix of different equities. Does this mean owning only large cap stocks rather than a diversified portfolio is the best investment approach going forward? Of course not.

Year after year, we don’t know which asset category will provide the best return and a diversified portfolio ensures we have exposure to each year’s big winner. Additionally, although large caps were this year’s winner, they could easily be next year’s big loser, and a diversified portfolio ensures we don’t have all our investment eggs in one basket.

Financial Planning MDs 2015

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™


Don’t be overly concerned if your diversified portfolio is underperforming a non-diversified benchmark over a short period of time. As always, long-term results should be more heavily weighted than short-term swings, and having a diversified portfolio is likely to maximize the probability of coming out ahead over an extended period.


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Product Details  Product Details

What is Financial Portfolio “DI-WORSIFICATION”

Versus Di-Versification

BUSINESS MANAGEMENT: The term “diworsification” was coined by legendary investor Peter Lynch in his book, One up on Wall Street, to describe the over-expansion of a company into new growth projects and businesses they do not fully understand and which do not align with the company’s core competencies.

See the source image

PORTFOLIO MANAGEMENT: The term diworsification has since grown to also refer to over-diversifying an investment portfolio in such a way that it reduces the overall risk-return characteristics.






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UPDATE: Markets, Twitter, Theranos and the ‘Pass-Through’ Tax Loophole

By Staff Reporters



  • Markets: The S&P climbed for its fourth-straight trading day, tying its best winning streak in 2022 (h/t chip and energy companies). But, at 8:30am ET today, with the release of the June jobs report, any sign of a recession will show up.
  • Elon Musk could take drastic action to back out of his $44 billion agreement to buy Twitter, according to the Washington Post. Apparently Musk’s team cannot verify the data on bots that were provided to them and therefore are looking to exit the agreement.
  • Former Theranos executive Sunny Balwani was convicted of defrauding investors and patients in his role as president and COO of the company.

Finally, under proposed IRS changes, individuals who make more than $400,000 annually and couples who make more than $500,000 will have to pay a 3.8% tax on earnings from their pass-through business income. Those revenues would be used to shore up the government-run Medicare healthcare program for the elderly. A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.



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FTC Scrutiny Results in Several Scrapped Hospital Deals



By Health Capital Consultants, LLC

FTC Scrutiny Results in Several Scrapped Hospital Deals

A series of Federal Trade Commission (FTC) challenges to hospital mergers and acquisitions in 2022 indicates heightened regulatory scrutiny of hospital deals. Perhaps emboldened by the July 2021 executive order that focused attention on antitrust enforcement of hospital consolidation, the agency has voted to challenge a number of transactions, which has lead hospitals to call off the deals rather than challenge the government.

This Health Capital Topics article reviews three of the largest transactions called off this year, two of which were announced in June. (Read more…) 



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