A masterclass in diversification

Dec 28th, 2020 | By | Category: Alternatives / Multi-Asset

By Daniel Prince, Head of iShares product consulting for BlackRock’s US Wealth Advisory Business and US Head of iShares Core ETFs.

Daniel Prince

Daniel Prince.

Diversification is the practice of spreading risk and assets across sectors, industries, and companies. This cornerstone investment principle was born in the 1950s, helped spur the advent of index mutual funds in the 1970s, then drove the rise of index-tracking ETFs starting in the 1990s.

Index funds give all investors simple and low-cost access to diversified investment strategies and, in recent decades, helped individuals move from owning individual stocks, which bring with them unique and concentrated risks, to increasingly global strategies spanning stocks, bonds and more.

Take iShares Core ETFs as an example, which allow investors to build a low-cost, diversified portfolio with as little as one fund.

So, what did diversification and index funds do for investors this year?

Spreading the risk around

Benefits of diversification were apparent at the single-stock level. Investors were whipsawed by a steep, early-year decline tied to COVID, then a sharp rebound in US stocks, which climbed to new highs after Election Day. Through the end of November, the US stock market returned 16% but had been down for the year by as much as 32% in March.

Despite solid year-to-date gains of US stock indexes, the majority of single stocks fell. Only 47% of the constituents within the US stock market advanced, meaning the flip of a coin would have given investors a higher probability of getting it right. And stocks that fell, fell hard. Among the 53% of US stocks that declined this year, the average decline was 26%. In other words, if buying single stocks, it could have been easy to be a loser in a winning market.

Source: BlackRock.

Winners and losers

In an unpredictable year, the market leaderboard was filled with winners and losers for reasons that were unthinkable 12 months ago. Zoom Video Communications, operator of the now ubiquitous video conference software, surged more than 500%, giving the company a market capitalization larger than blue chips such as General Electric. Square, the payments company, jumped more than 200% on accelerated demand for cashless transactions.

On the flip side, relatively sound business models were delivered sudden shocks that impacted their stock performance. Shares of Simon Property Group, a developer and manager of shopping and entertainment properties, have slumped in the double-digits. Carnival, the cruise ship operator, likewise saw a severe decline in consumer demand and steep price declines.

The point is that successfully timing the market with individual securities — buying and selling at just the right times — is difficult even for the most experienced investor. Some index ETFs can hold the whole market, a strategy that helps shield investors from sharp declines of a few stocks. We recently conducted an analysis for professional investors that explains how broad, index-based strategies have helped investors pursue competitive performance over the long term.

Diversifying beyond stocks

Diversifying across many stocks is a good start, but most portfolios ought to be diversified across asset classes given all stocks have some sensitivity to common economic factors. Such asset allocations have everything to do with an investor’s goals, timeline, and risk tolerance, but in all cases iShares Core ETFs can help here as well. They seek to track widely recognized stock and bond market indexes, like the S&P Total Market Index (broad US equities) and Bloomberg Barclays US Aggregate Bond Index (broad US bonds), helping investors to track these markets at the center of their portfolio.

Consider the classic “60/40” portfolio, a blend of stocks and bonds that is commonly used as a proxy for the average person’s investment mix. This year, the mix would have worked well amid extraordinary volatility. Through November, a 60/40 blend of the S&P Total Market Index and the Bloomberg Barclays US Aggregate Bond Index would have gained 12.3% with less volatility than owning equities alone (see below).

Source: BlackRock.

Reupping on rebalancing

Beyond the sting of losing when single stocks fall hard, there is a risk that losses drive long-term investors away from their financial plan. And while it’s understandably uncomfortable to experience market declines, hasty decisions to exit the market — however briefly — can prove costly.

One potential solution is to “rebalance” portfolios at regular intervals to ensure that changes in the portfolio’s asset allocation are intentional. Consider that, after sharp stock declines amid COVID in the first quarter of 2020, as shown above, a 60/40 investor would have ended March with a mix closer to 50/50 — an even split between stocks and bonds.

With hindsight, that meant investors were less exposed to stocks than their tolerance suggested and were, therefore, less well-positioned to ride the broader market higher throughout the remainder of 2020. An investor who rebalanced back to 60/40 at the end of March 2020 could have added an additional 2 percentage points of performance by year-end merely by re-aligning allocations with one’s goals.

To be sure, it’s not always easy to rebalance in the face of uncertainty. That’s why iShares Core ETFs also offer asset allocation ETFs (comprised of individual iShares Core ETFs) that are designed to automatically rebalance for investors based on a specific level of risk.

Summing it up

Diversification helps investors to navigate fast-changing markets and stay the course to pursue their financial goals. This year offered a masterclass in how diversification through index-based ETFs could have helped the average investor avoid losing in a winning, albeit volatile, market. iShares Core ETFs can help investors diversify at both the stock and portfolio levels, and when rebalancing at regular intervals.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)


Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses, which may be obtained by visiting the iShares Fund and BlackRock Fund prospectus pages. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Diversification and asset allocation may not protect against market risk or loss of principal.

Specific companies or issuers are mentioned for educational purposes only and should not be deemed as a recommendation to buy or sell any securities. Any companies mentioned do not necessarily represent current or future holdings of any BlackRock products. For actual fund holdings, please visit the respective fund product pages.

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.

Index performance does not represent actual Fund performance. For actual fund performance, please visit www.iShares.com or www.blackrock.com.

Buying and selling shares of ETFs may result in brokerage commissions.

This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making an investment decision.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Barclays, Bloomberg Finance L.P., BlackRock Index Services, LLC, Cohen & Steers Capital Management, Inc., European Public Real Estate Association (“EPRA® ”), FTSE International Limited (“FTSE”), ICE Data Services, LLC, India Index Services & Products Limited, JPMorgan Chase & Co., Japan Exchange Group, MSCI Inc., Markit Indices Limited, Morningstar, Inc., The NASDAQ OMX Group, Inc., National Association of Real Estate Investment Trusts (“NAREIT”), New York Stock Exchange, Inc., Russell or S&P Dow Jones Indices LLC. None of these companies make any representation regarding the advisability of investing in the Funds. With the exception of BlackRock Index Services, LLC, who is an affiliate, BlackRock Investments, LLC is not affiliated with the companies listed above.

Neither FTSE nor NAREIT makes any warranty regarding the FTSE NAREIT Equity REITS Index, FTSE NAREIT All Residential Capped Index or FTSE NAREIT All Mortgage Capped Index; all rights vest in NAREIT. Neither FTSE nor NAREIT makes any warranty regarding the FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index or FTSE EPRA/NAREIT Global REIT Index; all rights vest in FTSE, NAREIT and EPRA.“FTSE®” is a trademark of London Stock Exchange Group companies and is used by FTSE under license.

© 2021 BlackRock, Inc. All rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, BUILD ON BLACKROCK, ALADDIN, iSHARES, iBONDS, FACTORSELECT, iTHINKING, iSHARES CONNECT, FUND FRENZY, LIFEPATH, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, BUILT FOR THESE TIMES, the iShares Core Graphic, CoRI and the CoRI logo are trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Tags: , , , , , , , , ,

Leave a Comment