Diversification and Amazingly Bad Investor Returns

J.P. Morgan produces dozens of terrific slides every quarter that recap issues in macroeconomics and investing. Here are a couple of slides that reinforce some of our favorite themes.

The top chart on the above slide shows how similarly stock and bond portfolios have performed versus an all S&P 500 portfolio since the '07 downturn.

The bottom chart has the most eye popping statistics. The average investor over the last 20 years has earned just a 2.5% annualized return. That's almost identical to inflation! The main culprits are chasing past performance, high fees, and buying high and selling low.

Meanwhile, $1 million at 8.7% annualized over 20 years would have turned into $5.3 million. That's not due to an exotic, super-sophisticated strategy; merely one that is diversified and disciplined. And $1 million at 2.5% annualized would have become $1.6 million, a difference of $3.7 million. Multipled by millions of investors and that's an incredible amount left on the table.

The slide above illustrates how diversification produces more predictable expected returns. A 50/50 allocation over 1-, 5-, 10-, and 20-year rolling periods has a smaller range of results than for stocks or bonds. Meanwhile, the floor is higher than that for stocks through all periods and even higher than that for bonds for rolling 5- and 10-year periods.

One of the best value-adds of an adviser is delivering information that can help you combat natural behavioral biases. As the first slide showed, there is real money at stake.