Back to basics: Diversification works

As turmoil gripped markets in the first quarter, a somewhat forgotten investment mantra re-emerged: “diversification matters.” For the first time in several years, U.S. stocks are struggling while foreign stocks are outperforming, with the S&P 500 returning -4.28% and international developed stocks and emerging stocks returning +6.37% and +2.97% in Q1, respectively.

Compared to foreign names, U.S. stocks have been richly priced for the last several years as the U.S. economy continued to grow while the rest of the world stagnated by comparison. The U.S. also appeared well-situated to take advantage of the growth in AI adoption (both on the sales side and the investment side).

However, a combination of economic policy uncertainty out of the White House, along with potential tailwinds abroad (such as the possible end of the war in Ukraine and the Chinese government making a serious effort to stimulate their own economy), has led to one of the largest periods of foreign stock outperformance over U.S. stocks in years.

It has been a strong reminder that no single asset class moves up against its peers forever. While it can be tempting to dump “losers” and double down on “winners,” doing so can leave one’s portfolio overly susceptible to concentration risk when things turn.

Diversification is not only beneficial within the world’s equity markets but also through the incorporation of very different asset classes.  Year-to-date—especially during the recent volatility—bonds, private equity, and private credit performed well as stocks tumbled.

At Westmount, we spend a tremendous amount of effort sourcing investments that we believe can earn an attractive return, even when stocks are struggling. These benefits have been readily apparent year-to-date in our clients’ portfolios.