Stock prices have been rising for more than six years. Are you prepared if they start to fall? No one knows, of course, when that will happen – but historically it always has. Maybe stock prices will continue rising short term, but being prepared for a potential drop by diversifying your portfolio with alternative investments could help prevent major losses.
As noted in part 1, the impact of asset allocation on volatility and returns has been widely debated, but a landmark study showed that diversifying among a variety of asset classes and keeping a steady allocation by rebalancing accounted for 93.6% of the variation in the quarterly returns of the 91 large U.S. pension funds included in the study for the period 1974 to 1983.