Put another way, compared with a 100% aggregate U.S. bond portfolio (with a 10-year standard deviation of 2.2% and 10-year annualized return of 5.78%), the jump in the multi-asset portfolio's standard deviation from 14.4% to 15.3% is insignificant. Standard deviation of both is way higher than 2.2%. In order to move the performance needle from a bond return of 5.78% to a multi-asset portfolio return of 8.93%, equity assets must be included - and doing so will increase the volatility of returns. So, the logic follows, if you're going to add equity to a portfolio, add a wide variety of asset classes - particularly classes that have significant performance potential.
Emerging market stock is like Tabasco sauce - too hot to consume by itself. But when added to a variety of other ingredients, it adds the right amount of spice. The raw heat of the Tabasco sauce is softened by many of the other ingredients without losing its impact. Emerging markets stock are clearly a great ingredient for a tangy portfolio.
Craig Israelsen, Ph.D., is an associate professor at Brigham Young University and the author of 7Twelve: A Diversified Investment Portfolio With a Plan.
