We’ve said it before and we’ll likely say it again: Investment risks and expected rewards are related, but disciplined diversification helps us reduce the risks.
Our friends at Dimensional Fund Advisors recently released an important report supporting this point.
In their report, they took a look at four sources of expected returns found in many evidence-based investment portfolios (market, size, value, and profitability).
Using U.S. stock market data stretching back more than 50 years, they found that, about half the time, one of the four premiums delivered negative returns for any rolling ten-year period across that time frame.
That sounds risky, doesn’t it? But consider this: Across the same time frame, at least one of the premiums delivered positive returns during every single 10-year rolling period. In fact, far more often than not, two of them delivered positive returns during each 10-year period. The premiums existed, they observed, but they “do not move in lockstep.”
Check out Dimensional’s report to see the data for yourself. It offers a strong, continued vote for depending on steadfast diversification across multiple risk premiums to help you manage your risks in pursuit of your expected rewards.