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Diversification White paper
September 28, 2022

The Power of Diversification

Investment Committee

2022 has been a stark reminder that investing is ultimately a difficult exercise, which requires a great deal of patience, emotional objectivity, and discipline to achieve long-term success. And while the barrage of market headlines and day-to-day price swings may leave investors searching for answers, there are a few timeless principles that the JNBA Investment Committee believes are foundational to delivering desired investment outcomes – tax efficiency, low costs, and most importantly, diversification.

In fact, many professional investors and academic experts have called diversification the only “free lunch” in investing because, up to a point, the greater the number of different types of securities held, the more likely an investor can lower the volatility of a portfolio without materially impacting the outlook for its long-term return – particularly when paired with a disciplined rebalancing process. The rebalancing process underscores the point that preserving purchasing power is the responsibility of the overall portfolio rather than its individual components. As such, the JNBA Investment Committee reviews investment portfolios at least every 10 business days and strives to make timely adjustments to incorporate our changing views on different asset classes.

Diversified Across Asset Classes

The primary decision regarding how much of the portfolio to allocate between stocks, bonds, and cash is largely responsible for the performance of a portfolio. JNBA focuses on broad asset allocation among the primary asset classes of stocks, bonds, inflation hedges (e.g., real assets), and cash, but diversification within sub-asset classes is also incredibly important. Choosing between U.S. or non-U.S. investments, allocating among large-cap, mid-cap, or small-cap stocks, or leaning into growth or value investment styles are all examples of decisions that will be responsible for the nuances within a diversified portfolio’s return stream over time. Over long-term time horizons, most sub-asset classes tend to perform in line with their broad asset class. Over short periods, however, there can be sharp differences which offer opportunities to create value.

As you can see in the image below (“the periodic table of returns”), a properly diversified portfolio tends to fare very well over time. While riskier approaches such as the typical “all or none” strategy may outperform from time to time, diversification is far more steadfast and is accompanied by a propensity to secure gains which help investors compound their wealth over time. The source of this success lies in avoiding large losses that require heroic gains to return to breakeven, as a 20% loss requires a 25% gain to return to breakeven, and a 50% loss requires a 100% gain.

Diversified Within Asset Classes

In addition to asset and sub-asset classes, the JNBA Investment Committee prefers to use diversified vehicles for investing, which might include either mutual funds or exchange traded funds, otherwise known as ETFs. This is because the chance of buying a winning stock has a very low probability of success, according to a seminal study by Hendrik Bessembinder at Arizona State University. His groundbreaking 2017 whitepaper revealed that most stocks underperform treasury bills, and just 86 stocks of the hundreds available have accounted for half the total wealth created by the entire universe of companies over the past 90 years. In short, very few investors have the talent or insight to bet on just one or a handful of investments and become multimillionaires.

Within the fixed income universe, history shows that bonds have typically delivered positive returns after adjusting for inflation. Most investors familiar with risk-adjusted returns understand that while bonds typically tend to muffle portfolio returns, they simultaneously reduce risk by a greater extent, which makes them a valuable companion to stocks within a diversified portfolio. This concept is even more true when investors require periodic liquidity or are looking to temper the volatility of stocks that emerges with some degree of regularity.

  • Within fixed income, diversification includes adding credit instruments or nontraditional strategies that are either trying to capture moves, in yield curves outside the U.S. or not directly tied to a yield curve at all. Strategies such as these are more favorable for investors who tend to hold more conservative portfolios with greater allocations to bonds since so much of their returns are dependent on changes in interest rates.
  • For equity-oriented investors, we prefer to hold higher-quality fixed income that is less likely to be impacted by concerns over the strength of their issuers when a recession occurs, since it is in those environments that stocks are most often under pressure and these portfolios have the bulk of their assets in stocks.

In addition to using various types of stocks and bonds, we believe investors looking to construct robust portfolios should also consider adding exposure to real assets such as natural resource producers or real estate investment trusts – both of which offer the valuable characteristics of durable income backed by hard assets, diversification, and inflation protection.

The Magic Behind Successful Investing

As financial historian Peter Bernstein once noted, diversification of risk matters not just defensively, but also because it helps maximize returns and exposes investors to additional opportunities that they may have otherwise missed. In this sense, diversification is not only a conservation strategy, but also a growth strategy (or strategic decision), because the next windfall might come from a surprising place. Influential financial thought leader Charles Ellis once remarked that large losses are forever – in investing, in teenage driving, and in fidelity. If you avoid large losses with a strong defense, the winnings will have every opportunity to take care of themselves. Oftentimes, large losses are caused by taking too much risk.

In summary, successful investors attempt to achieve higher returns for a given level of risk, and diversification is a powerful and time-tested tool to balance the potential risk and returns of various types of investments. For long-term planning, a strategy emphasizing a diversified basket of assets with historically higher real returns may produce growth sufficient for protection from inflation and provide meaningful growth of purchasing power so that an investment portfolio can fund current and future goals.

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by JNBA Financial Advisors, LLC (“JNBA”), or any non-investment related content, will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. JNBA is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from JNBA. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at The scope of the services to be provided depends upon the needs and requests of the client and the terms of the engagement. Please Remember: If you are a JNBA client, please contact JNBA, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.

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