In the final video in our 7-part series, Kevin Barr, Head of SEI's Investment Management Unit, and Jim Smigiel, SEI's Chief Investment Officer, discuss our longstanding belief that a well-diversified portfolio can maximize an investor's odds of achieving their financial goals. They go beyond the philosophy of our asset allocation approach and talk about the practical realities of owning a well-diversified portfolio.
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Kevin Barr - Hi, I'm Kevin Barr. Head of SEI's Investment Management Unit. At the start of this video series, we began to explore SEI's longstanding belief that a well-diversified portfolio can maximize an investor's odds of achieving their financial goals. Throughout each segment, Jim Smigiel, SEI's chief investment officer, has provided a transparent look at our reasons for maintaining this view. Today, I've asked him to go beyond this philosophy of our asset allocation approach and talk about the practical realities of owning a well-diversified portfolio.
Jim Smigiel - Thanks Kevin. Let's go back to where we began our conversation. I explained that the true value of a diversified portfolio is rarely immediately apparent because by their nature, diversified portfolios are never a 100% composed of the best performing asset class in any given period. Even over what feels like a long time horizon, diversified portfolios can trail more concentrated ones, especially when you have the benefit of hindsight. We need to look no further than the most recent and the longest running equity bull market to witness this very fact. The decade long bull market that ended in March, 2020 was concentrated in one region and one sector. The largest companies in the United States outperformed small-cap and all international stocks by significant margins over the last 10 years. In fact, over 200% cumulatively based on the performance of a small number of mega-cap technology names. It could just obviously have been a decade long bull market in something else.
Kevin Barr - Yet many investors dream of owning the best performing stock or at least the best performing asset classes.
Jim Smigiel - That's right. History tells us however that they are unlikely to realize that dream consistently over any meaningful period of time. No one has ever successfully picked the best performing stock or asset classes for years on end, especially not over the course of decades long investment horizon. Given how difficult it is to time these things and how significant the downside can be, when you get things wrong, the odds of achieving investing goals dramatically diminish when the focus is primarily on catching the latest market star,
Kevin Barr - But still people are drawn to outperformance.
Jim Smigiel - Absolutely. And it's important for investors to understand that the goal of diversification is exactly that, to help improve expected future performance, understanding that the rear view mirror is not a helpful guide for future expectations. And when we don't have the benefit of a crystal ball or the ability to predict the future perfectly, diversification can give us the best chance of achieving financial success regardless of which economic or market environment emerges at any given time. It's a nuance and perspective that we believe is crucial in order to help maximize the odds of investing success.
Kevin Barr - At a time in history when instant gratification is the norm and the world in the stock market moves at the speed of a tweet, that level of patience can be challenging for many investors to embrace.
Jim Smigiel - That's right. It certainly can be. And thankfully diversification is at least in our view the most effective antidote for chasing temporary performance or making all or nothing bets. While allocating to a wide range of asset types may not result in a portfolio that rides the wave of every fad, it should leave investors with a portfolio that is well-prepared to withstand a range of market environments.
Kevin Barr - So Jim, what does that mean from the standpoint of an investor's portfolio?
Jim Smigiel - When we think about diversification, we try to identify the major sources of risk. Our goal is not only to understand those risks but to manage them actively by balancing across them as much as possible. Spreading our risk around as much as we can, can help minimize the chance of the portfolio losing significant value due to one concentrated risk exposure that doesn't work out as planned. It's a long-term approach to investing that we believe serves investors well.
Kevin Barr - Thanks Jim. I think this wraps up our perspective and our series. Thank you.
Jim Smigiel - Thank you.
- MSCI EAFE Index (Net): The MSCI EAFE Index is an unmanaged, market-capitalization-weighted equity index that represents the developed world outside North America.
- Russell 2000 Index: The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
- S&P 500 Index: The Standard & Poor's (S&P) 500 Index is an unmanaged, market-weighted index that consists of 500 of the largest publicly-traded U.S. companies and is considered representative of the broad U.S. stock market.
The information contained herein is for general and educational information purposes only and is not intended to constitute legal, tax, accounting, securities, research or investment advice regarding the Strategies or any security in particular, nor an opinion regarding the appropriateness of any investment. This information should not be construed as a recommendation to purchase or sell a security, derivative or futures contract. You should not act or rely on the information contained herein without obtaining specific legal, tax, accounting and investment advice from an investment professional. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.
Diversification does not ensure a profit or guarantee against a loss.
There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from difference in generally accepted accounting principles or from economic or political instability in other nations.
Narrowly focused investments and smaller companies typically exhibit higher volatility.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company (SEI).