As we enter the third decade of the third millennium of the Common Era, the stocks of large U.S. companies stand triumphant. As shown in the chart above, indexes which track big domestic equities outperformed all other major market sectors in 2019 and finished the last decade with a strong annualized return of 13%. During this period, the reality and the possibility of advances in computer hardware and software boosted the returns of the largest U.S. technology companies beyond their competition.
We hope the good fortune of these corporations can continue, but even throughout this past serendipitous stretch for the S&P 500, the two charts presented here show the potential value of portfolio diversification and the possible vulnerability of concentrated holdings. During the years 2010 to 2019, 8 different market sectors led in yearly returns with no sector outpacing the field in consecutive years. No diversified portfolio is ever going to beat the best performing sector in a calendar year, but it will participate in each sector’s gains no matter how unexpected those returns are.
The final two columns of the last chart also illustrate the benefits of diversification. The “Decade’s Volatility” shows the standard deviation of the decade’s yearly returns. The higher the value, the greater the dispersion in returns for a given sector over the last ten years. Gains are always good, but as an investor’s time horizon shrinks, wild swings in returns can be devastating. A diversified portfolio can dampen the effect of fluctuations in the fastest-moving sectors.
Looming in the distance beyond the view of this current decade-long bull market is the next major downturn. During the Great Recession in 2008, all major equity sectors suffered massive declines. It is in years like this that the value of possessing “safe haven” assets like U.S. Treasuries can be appreciated. Diversified portfolios mitigate the losses felt in these normally solid sectors.
Finally, the one persistent weak performer in the decade past was commodities, those basic staples that fuel us and the things we build. In the early 2000s, China underwent a period of massive economic growth and urbanization, helping to increase commodity prices. However, the pace of expansion in large emerging markets slowed down in the last decade, reducing the global demand for raw materials. And commodities’ traditional value as a hedge against inflation was severely subdued last decade as the pressure of inflationary prices never materialized. We’ll see if this sector can ever be a hot commodity again.