Diversification still works

At a glance:

• Diversification is key in maintaining a portfolio built for long-term success.
• Machine learning allows us to test core investment principles such as the fundamental role of bonds in a well-diversified portfolio.

Diversifying your portfolio is one of the most important things you can do to manage investment risk. Bonds are commonly used to help provide diversification and reduce risk against stock market dips. But with factors like market volatility and low interest rates that could rise, some may ask: Should bonds always play a role?

Diversification: The basics

It’s well known that implementing a diversified portfolio can be an essential way to manage risk. Having a balance of lower-risk assets (like bonds) and higher-risk assets (like stocks) allows your portfolio to grow while also providing a cushion against market volatility. Stocks typically provide higher returns than bonds over longer periods, but bonds can provide more stability when the market faces a downturn.

With interest rates at historic lows, investors may be wondering how bonds will perform when rates have seemingly nowhere to go but up. In this environment, why hold bonds at all? In addition to the wealth of existing evidence, our machine learning analysis helps provide the answer.