If an investor were looking to decrease long-term uncertainty and increase their long-term returns, that investor may develop an equity portfolio that would track the following indices:

12.5% S&P 500 Index
12.5% Russell 1000 Value Index
12.5% Russell 2000 Growth Index
12.5% Russell 2000 Value Index
20% MSCI World ex-USA Small Cap Index
20% MSCI World ex-USA Index
10% MSCI Emerging Markets Index

With this unique approach to diversification, two surprises emerge in the resulting data:

During the ten year period ending March 31, 2009, the S&P 500 had an annualized return of -3.00%, the EFAE Index had an annualized return of -0.47%, and the example portfolio mentioned above would have had an annualized return of 2.00%.

While it would seem that this portfolio is exposed to more “risky” investments (the international and emerging markets), most investors would be surprised to see that this is not true. The S&P 500, EAFE Index and the example portfolio all have very similar levels of volatility, which is how many investors measure risk. In the time period mentioned above, the annualized standard deviation (the measure of volatility) are as follows: S&P 500 = 15.80%; EAFE Index = 17.09%; Example Portfolio = 16.96%.

What does this mean? Well, if one invests for the future with a globally diversified portfolio, the investor should expect to see greater returns with essentially the same levels of risk.