Reduces volatility
In normal market environments the various asset classes don’t move in the same direction at the same time. So, if stocks are going down, commodities may be going up. Maybe bonds may be going down less than stocks, so by being diversified among different asset groups it can reduce the fluctuations in the portfolio over time. This year, 2022 has been unusually volatile with almost all asset groups falling at a precipitous pace with the exception of commodities. However, having exposure to a variety of asset groups does reduce the volatility of returns over time
Reduces Risk
The old saying “don’t put all your eggs in one basket” applies to investing. Historically stocks outperform other asset groups such as bonds, commodities, and real estate. However, by spreading funds among various asset groups it reduces risk to being exposed to just one group. The notion is that if stocks are underperforming there be another group with strong performance to offset the weakness.
Risk-Adjusted Returns
Stocks historically have higher returns than bonds. However, stocks also carry higher risk than bonds. By having a broadly diversified portfolio of stocks, bonds, real estate investment trusts, commodities and international a portfolio spread risk more effectively over time.