Why You May Not Be Beating the Market Right Now
Even if it's not matching the S&P 500's recent heady returns, a well-diversified portfolio is still your best bet in the long run.

That the stock market hit new highs in July, less than six months following one of the worst market declines in a while, was surprising to most investors. The market shook off the Brexit vote like it was just an annoying fly, and it continues to charge through discouraging economic news and increasing global strife as if they didn't matter. So, it was inevitable that we began hearing from some clients wondering why their portfolios are underperforming Standard & Poor's 500-stock index, which is up more than 18% from its February low, as of July 27.
The inconvenient truth is that diversification is the reason behind their underperformance. It's inconvenient because these are the same clients to whom we have been incessantly preaching the virtues of diversification as the absolute key to positive long-term returns. It is times like these, however, when diversification is bound to disappoint.
Why Diversification Has to Disappoint Sometimes
The challenge for diversified, all-stock portfolios is this recent stock market surge has been narrowly concentrated in domestic, blue chip stocks, as it has been with the stock market rally of the last few years. So, if your portfolio is diversified among several different stock asset classes (i.e., small cap, international, emerging market, etc.), it is not likely going to achieve S&P 500-like performance. In fact, with an optimally diversified portfolio, you are likely to be disappointed with at least a third to as much as half of your portfolio at any particular time.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
It is also times like these, however, when you need to step back and take a long view of the stock market to remind yourself what diversification has helped you achieve in the past and what it is expected to achieve in the future. It is easy to view the market in hindsight and second-guess your strategy; it's not so easy to see and plan for what lies ahead. Diversification is recognition of that uncertainty, and it liberates us from the pressure of having to always be right. Diversification allows us to be vaguely right all of the time, while never being completely wrong. When considered in the long view, and with so much at stake, that's a winning proposition.
You Can't Invest With Hindsight
Consider the performances of S&P 500 stocks and emerging-markets stocks over the past decade. Investors with a diversified stock portfolio may complain that four out of the last five years, emerging market stocks, as measured by the MSCI Emerging Markets index, were a serious drag on S&P 500 stocks. During that period, the MSCI index averaged a negative 4% return, while the S&P 500 averaged about 13%. However, between 2004 and 2010, S&P 500 stocks, which averaged about 6%, were an even bigger drag on emerging-markets stocks, which averaged 25%.
The reality is a diversified portfolio captured the outperformance of both markets in their best years, while smoothing out the risk and volatility of both markets in their worst years. The purpose of a broadly diversified portfolio is to capture the returns of all of the sectors over time but with less volatility at any one time. It is also important to note that, over time, passively managed portfolios of stocks have outperformed actively managed portfolios that rely on market timing and individual stock selection.
Diversification Means Never Having to Say You're Sorry
The incessant noise and information overload we experience every day, which, by the way, can only impact short-term outcomes, does more to distort our reality of the long-view than provide us with any sort of advantage. When applied with discipline and patience, a thoughtfully conceived diversification strategy enables investors to ignore the noise and focus instead on their long-term objectives, which aren't impacted by what the stock market does in the first six months of the year.
By taking a step back to view your portfolio as a whole, and not by its parts, you get a much clearer investment perspective and a reminder of some of the fundamental truths of investing:
- the markets are random—it's impossible to time the market with any degree of consistency;
- risk and returns are related—adding higher-risk elements to your portfolio improves long-term performance, but they are mitigated through diversification;
- and over the long term, a diversified portfolio will yield higher returns while minimizing the risk of any single investment or market segment.
As an investor you need to ask yourself: Would you rather be mildly disappointed that a portion of your portfolio underperformed another, or massively disappointed that you guessed completely wrong by investing in a single market segment at the wrong time?
Craig Slayen is a principal at Cypress Partners., a financial planning and investment management firm in the San Francisco Bay Area.
Pete Woodring, a partner with Cypress Partners, contributed to this article.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Craig Slayen is a principal at Cypress Partners., a financial planning and investment management firm in the San Francisco Bay Area.
The firm believes that the key determinant to long term financial success is based around three concepts: sound planning, prudent investing, and an awareness of the behavioral traps that can kill portfolio returns.
Craig is the author of Successful Investing for Female CEO's, published by Charles Pinot. He is a graduate of UC Berkeley.
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)
State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
Want To Retire at 55? See If You Can Answer These Five Questions
Who said you can’t retire at 55? If you say yes to these questions, you may be on your way to an early retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on Retirement
While some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for Retirement
Saving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial Expert
Health care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?
Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest Rates
As speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial Professional
Winning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your Wallet
Interest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your Investments
Don't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.