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2019 Q4 Vital Signs: Diversification Means Always Having to Say You’re Sorry

Participating in the market’s gains while striving to limit losses on the downside is exactly what a well-diversified portfolio should aim to do—provide a smoother ride over the long term. Easier said than done. But, as the saying goes, diversification means always having to say you’re sorry.

“Participating” in rising markets is the polite way of saying underperforming.” And, “limiting losses” during major declines is not the same as eliminating them. Too often, people have unrealistic expectations about diversification. However, by participating in rising markets and limiting losses during declines, investors have a better chance of staying in their seats long enough to let the power of compounding work and to achieve their goals.

Image - Chart - 4Q19 Vital Signs - Main - Index vs Diversified Portfolio

1Source: Virtus Performance Analytics.

For Broader Diversification, Overcome Home Bias2
Percentage of global equity market

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2 ©2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See NDR disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo. Source: MSCI. International defined as MSCI World ex USA (1969-1987) and MSCI ACWI ex USA (1988-present).

  • By investing mostly in the U.S., we’re missing nearly half of what the world has to offer our portfolios.
  • It’s time to check your portfolio for home bias. Increasing your exposure to international stocks may help you enhance diversification, which has been shown to reduce risk over time. In addition, you may find attractive valuations overseas relative to the pricey U.S. stock market.

Performance of a Diversified Portfolio1 2019
 

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2019 was one for the record books. Many global asset classes posted double-digit returns.
 

  • U.S. equities delivered strong returns across the board. The S&P 500® Index was up 31.5%, the Russell Midcap® Index gained 30.5%, and the Russell 2000® rose 25.5%.
  • Foreign markets were also strong, with developed markets, as measured by the MSCI EAFE® Index (net), returning 22.0%, and the MSCI Emerging Markets Index (net) earning 18.4%.
  • Real estate, as measured by the FTSE Nareit Equity REITs Index, returned 26.0% for the year.
  • A supportive Federal Reserve helped U.S. bonds earn a return of 8.7%, while the more volatile high yield sector rewarded investors with a 14.3% gain.

ANNUALIZED RETURNS IN %, as of 12/31/2019

Image - Chart - 4Q19 Vital Signs - Diversified Portfolio as of 12-31-19

The Diversified Portfolio assumes the following weights: 20% in the S&P 500®, 10% in the Russell Midcap®, 5% in the Russell 2000®, 10% in the MSCI EAFE®, 5% in the MSCI EM, 5% in the MSCI ACWI Ex USA Small Mid Cap, 20% in the Bloomberg Barclays U.S. Aggregate, 5% in the Bloomberg Barclays U.S. Corporate High Yield Bond, 5% in the Credit Suisse Leveraged Loan, 5% in the Bloomberg Barclays U.S. Treasury Bill 1-3 Month, 5% in the Bloomberg Commodity, and 5% in the FTSE Nareit Equity REITs. Assumes annual rebalancing. Data represents total return for stated period. The Diversified Portfolio is not representative of any Virtus portfolio. Investors should consult their financial professional to identify suitable portfolio allocations. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio, or that diversification among different asset classes reduces risk.

Index Definitions—The S&P 500® Index is a free-float market-capitalization weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. The Russell Midcap® Index is a market capitalization-weighted index of medium-capitalization stocks of U.S. companies. The index is calculated on a total return basis with dividends reinvested. The Russell 2000® Index is a market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The MSCI EAFE® Index (net) is a free-float-adjusted market-capitalization weighted index that measures developed foreign market equity performance, excluding the U.S. and Canada. The index is calculated on a total return basis with net dividends reinvested. The MSCI Emerging Markets Index (net) is a free float-adjusted market capitalization-weighted index designed to measure equity market performance in the global emerging markets. The index is calculated on a total return basis with net dividends reinvested. The MSCI AC World Ex USA Small Mid Cap Index (net) is a free float-adjusted market capitalization-weighted index that measures mid- and small-cap performance across 22 of 23 Developed Market countries (excluding the U.S.) and 24 Emerging Markets countries. The index is calculated on a total return basis with net dividends reinvested. The Bloomberg Barclays U.S. Aggregate Bond Index measures the U.S. investment grade fixed rate bond market. The index is calculated on a total return basis. The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures fixed rate non-investment grade debt securities of U.S. corporations, calculated on a total return basis. The Credit Suisse Leveraged Loan Index is a market-weighted index that tracks the investable universe of the U.S. dollar denominated leveraged loans. The index is calculated on a total return basis. The Bloomberg Barclays U.S. Treasury Bill 1-3 Month Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non convertible. The Bloomberg Commodity Index is composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. The FTSE Nareit Equity REITs Index is a free-float market capitalization-weighted index measuring equity tax-qualified real estate investment trusts, which meet minimum size and liquidity criteria, that are listed on the New York Stock Exchange, the American Stock Exchange, and the NASDAQ National Market System. The index is calculated on a total return basis with dividends reinvested. The indexes are unmanaged, their returns do not reflect any fees, expenses, or sales charges, and they are not available for direct investment.

Past performance is not indicative of future results.

IMPORTANT RISK CONSIDERATIONS
Investing involves risks and the possible loss of principal. This report is based on the assumptions and analysis made and believed to be reasonable by the Adviser. However, no assurance can be given that the Adviser’s opinions or expectations will be correct. This report is intended for informational purposes only and should not be considered a recommendation or solicitation to purchase securities.

Not all products or marketing materials are available at all firms.
Not insured by FDIC/NCUSIF or any federal government agency. No bank guarantee. Not a deposit. May lose value.

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