One chart tells the diversification story and the risk of allocation mistakes

This single chart shows which asset classes have been up or down over the last twenty years. It clearly shows the value of diversification with the diverse portfolio having returns that are in the middle of the pack as would be expected through any combination of assets. You cannot go wrong with have a basket of asset classes.

That is not the only point of looking at this. Rather the focus is what happens at the extremes and what is the dispersion of returns. Look at the last years. There was a difference of over 40% between the best and the worst asset class. There have been periods when the difference is only half that, but there have also been periods when the difference was over 50%. This will be more likely when we have market downturns. Commodities is one of the asset classes which moves from the top to the bottom most frequently.

Mking the wrong decsision on asset allocation can be very costly. Making the right one will provide significant rewards.  Determining how to make allocation tilts can lead to significant rewards when the cost of money management is signicantly less than the cost of making even a 10% allocation mistake.