Diversification and Bear Markets Calculator
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Diversifying your assets among the three main asset classes – stocks, bonds and cash – is an effective way to deal with market risk. Trying to predict which asset class will be the best performing investment each year is difficult because each class responds differently to changes in the economy and investment marketplace. When the market in one asset class is declining, it is likely that another class is rising.
What History Tells Us
The average decline in the Canadian stock market during each of the eight bear markets since 1968 was 31.2%. By diversifying equally between stocks, bonds and cash, the average decline was reduced to 5.8%. This means your losses with a 100% stock portfolio were 25.4% greater, on average, than with a diversified portfolio.
This investment planning calculator illustrates how diversification would have protected your portfolio during any of the eight bear markets between 1968 and 2009. Compare the performance of a diversified portfolio to one made up of stocks only.
During the August 2000 to September 2002 bear market, stocks fell in value by 43.2% over this 25 month period. A $100,000 portfolio made up of stocks only, with no diversification, would have fallen to $56,800 at the bottom of the bear market.
A diversified portfolio made up of stocks, bonds and cash (1/3 invested in each), would have declined by 5.3% to a value of $94,713. By diversifying, the effect of the stock market decline was reduced by 37.9% or $37,913.