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Sin Ting So
16 May 2019
Head Of Client Experience at Endowus
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Quite simply, because the S&P 500 is only an American stock market index ie. This means that it is based on 500 large companies having common stock listed on the NYSE/NASDAQ.
Robo-advisors will look across different equity markets to allow for diversification.
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Tai Zhi
04 Mar 2019
Chief Investment Officer at Autowealth
Investing too narrowly, in this case the U.S. equity markets, is like putting all your eggs into one...
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Dear Anonymous,
Nobel prize-winning economist Markowitz called diversification âthe only free lunch in finance.â His theory is that if you hold a portfolio of investments that are not perfectly correlated, an investor can lower risk without sacrificing expected returns. Simply put, spreading your investments across asset classes and geographies gets you the same reward with less risk = free lunch! We think it's important to invest in a globally diversified portfolio rather than just in the S&P 500 Index , given how difficult it is to accurately predict the best (or wost) performing asset class or geographical region in a given year. Here's an interesting chart of past 10 years of returns along with the annualized 10 year results for various asset classes from A Wealth of Common Sense:
Diversification is not particularly exciting, but it reduces the risk of blow-ups due to any single investment. A diversified portfolio will always have a few investments that are not doing so well, a few that are average, and hopefully a few that do great. The thing is â this is random and beyond our control, but if we are diversified, on average we will do just fine. There will be times when you wonder why you didnât just put all your money in S&P 500 ETF (or Netflix shares), but the value of diversification needs to be judged over years.
Financial advisors such as Endowus can help advise you on how to create a diversified and holistic asset allocation portfolios appropriate for your investment goals, time horizon and risk tolerance. Each portfolio is selected as the result of a systematic portfolio optimization process that strives to deliver portfolios which maximise expected returns for each level of risk.