For decades, investors have relied on diversification to build portfolios with a balance of risk and return potential that is appropriate for their individual needs. But during the stock market collapse between September 2008 and early March 2009, many market participants suffered significant losses—including many who held well-diversified portfolios. Although many investors stayed the course, others began questioning the value of spreading their investments among a wide variety of assets. Some even took an extreme approach by abandoning diversification altogether and shifted their assets to cash in order to prevent further losses.
In mid-March 2009, the stock market started an upward climb and the S&P 500® Index went on to gain 26.5% for the year, as of December 31, 2009.1 Many investors who maintained diversified portfolios subsequently made a lot of headway and earned back some of their losses—but those who moved out of the market and into cash missed out on the market upswing. Mesa Tucson Retirement Planner Jeff Vogan says "A new allocation idea is to diversify based on risk. "