A common perception over recent years is that diversification no longer serves an investor well. Seemingly markets rise and fall in lock step as do the underlying companies.
2011 provided us with a reminder that markets and indeed companies are not as correlated as we might think. The US was one of the strongest markets all be it just getting into positive territory when factoring in dividends - S&P500 2.1%. Whereas the ASX200 had a relatively poor year falling 10.5% after including dividends.
(NB - If we take into account currency movements the S&P500 in Australian dollar terms did not do quite as well but still better than the ASX500.)
Within the top 25 Australian companies (by market capitalisation) there were quite varying returns over the past 12 months. The Morningstar site this morning shows that Telstra has been the standout with a return of over 30%. Whilst at the other end Fortescue has been weak falling just under 30%. Who would have thought this 12 months a go??
Weston Wellington from Dimensional Fund Advisors in the US, digs a ittle deeper into the data to show that there were also big differences between company returns over ethere.
The clear message is that the benefits to be gained from diversification are not dead.
Weston's article follows. Well worth a read.