Using Index Funds For Diversification

Jun. 23, 2022 11:42 AM ETITOT, AOA, AOM, AOK, AOR
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Summary

  • Diversification helps investors to navigate fast-changing markets and stay the course to pursue their financial goals.
  • Recent stock market volatility has proven why diversification is important and can help reduce risk in portfolios.
  • Despite this wild ride, over the last five years, patient investors have been rewarded as U.S. stock indexes have risen over 80%.

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Edwin Tan/E+ via Getty Images

By Daniel Prince, CFA

Three Takeaways

  1. Recent stock market volatility has proven why diversification is important and can help reduce risk in portfolios.
  2. Index funds can help all investors diversify at the single-stock and portfolio
Doughnut chart showing the percentage of U.S. stocks that have gone up vs. down in value over the last five years (through 5/31/2022).

Doughnut chart showing the percentage of U.S. stocks that have gone up vs. down in value over the last five years (through 5/31/2022). (Morningstar as of 5/31/2022. Market return is represented by the S&P US Total Market Index, using cumulative total return which assumes the reinvestment of dividends. Past performance is not indicative of future results. Indexes are unmanaged and one cannot invest directly in an index.)

Bar charts showing the YTD (through 5/31/2022) and calendar year returns of U.S. technology stocks and U.S. energy stocks relative to the U.S. stock market.

Bar charts showing the YTD (through 5/31/2022) and calendar year returns of U.S. technology stocks and U.S. energy stocks relative to the U.S. stock market. Positive numbers indicate outperformance while negative numbers indicate underperformance. During the time period measured, energy was the worst performing sector in four of the last five years but is outperforming the market by 70.8% in 2022 through the end of May. (Morningstar as of 5/31/2022. U.S. stock market represented by the S&P 1500 index, Technology represented by the S&P 1500 Information Technology index and Energy represented by the S&P 1500 Energy index. Using total return which assumes the reinvestment of dividends. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results)

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