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Investing For Upside—Without Much Downside

Over the past 20 years, which investment portfolio has produced the most gain for the least pain? You may well be surprised.

There are few pieces of parental advice better than “Don’t touch.” And the same words that prevent children from grabbing a hot stove or damaging the Mona Lisa are generally good counsel for grownups investing for retirement. That said, eventually, we do have to draw down from our IRAs and 401(k)s—and that moment may come when market conditions aren’t ideal. Which brings up an important question: What investment has the best long-term returns with the least downside in any given year? The answer: a diversified portfolio (see details in the caption at right). Over the past 20 years, owning such a mélange of stocks and bonds would have produced roughly 90% of the total return of an S&P 500 fund but with dramatically less risk in any single year. In only one year (2008) did the diversified portfolio shown lose more than a tenth of its value; the S&P did three times.

A version of this article appears in the xxx, 2018 issue of Fortune magazine with the headline, “Diversity Pays Off.”


NOTE: CASH: S&P U.S. Treasury Bill 0-3 month index; DIVERSIFIED PORTFOLIO: 35% in the BBG Barclays U.S. aggregate bond index, 10% in the MSCI EAFE index, 10% in the Russell 2000 index, 22.5% in the Russell 1000 growth index, and 22.5% in the Russell 1000 value index; FIXED INCOME: BBG Barclays U.S. aggregate bond index; INTERNATIONAL: MSCI EAFE index; LARGE-CAP CORE: S&P 500 index; LARGE-CAP GROWTH: Russell 1000 growth index; LARGE-CAP VALUE: Russell 1000 value index; SMALL CAP: Russell 2000 index