Even in extreme market conditions, diversification across asset classes remains a “free lunch” for investors, according to research from Morningstar Indexes.
In a new report, the firm examined the performance of bond and equity market indexes during the Covid-19 crisis — finding that diversification continued to work.
While equities markets around the world plunged with the onset of the crisis, bonds acted as a safe haven for investors.
“The Morningstar Canada Core Bond Index actually gained more than 1.7% in the first quarter of 2020,” the report noted.
Conversely, in the first quarter of 2021, with rates rising as the economic recovery gained strength, fixed-income assets suffered.
“Canada core bonds saw an unusually steep quarterly loss of 5%, and their global counterparts also plummeted,” the report said.
Yet these losses in bond markets “were more than offset by strong gains for equities,” the report said.
“Diversification has often been called the only free lunch in investing,” the report noted, as building a portfolio with uncorrelated assets can produce better risk-adjusted returns over the long term.
This proved true in the latest market crisis, the report said. “When the pandemic came around, bonds also did their job. They diversified equity market risk, damped volatility, and preserved capital.”
“Spreading one’s bets is typically a good strategy, particularly in Canada due to its relatively narrow sector representation and small percentage of global market capitalization,” said Dan Lefkovitz, strategist at Morningstar Indexes, in a release.