The case for diversification

How diversification helps investors stay ahead of inflation

The chart below illustrates how frequently equities, bonds and a range of multi-asset portfolios have beaten inflation since 1989 across different investment horizons. While equities have beaten inflation more frequently than bonds, combining the two has historically increased the likelihood of achieving returns above inflation across a range of holding periods.

For example, a portfolio invested 55% in equities and 45% in bonds beat inflation in 95% of rolling five-year periods. By comparison, equities beat inflation in 76% of rolling five-year periods, while bonds did so 81% of the time.

By combining different asset classes, you are less reliant on any single source of return. While diversification cannot eliminate risk or guarantee positive outcomes, it has historically improved the likelihood of achieving returns above inflation over medium to longer term investment horizons.

Figure 1. Likelihood of beating inflation over rolling periods

Rolling periods examine every possible one, five, 10 and 20-year investment period since 1989, rather than relying on a single start and end date.

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Past performance is not a reliable indicator of future performance. Capital at risk.