[DcifrThs]

[ QUOTE ]
"since drawdowns (downswings) hurt your portfolio disproportionately, reducing their severity and frequency massively improves your portfolio's performance."

how do you do this without understanding the stock market? how do you know when to sell and when to buy? aren't most people better off buying and holding?

In my example, I was using a casual investor, not a professional.

[/ QUOTE ]

first, to be clear, i'm talking about only passive investors. i don't think any passive investor should stick all their money in 1 (or 2) asset class(es), no matter what that asset class is. secondly, i'm assuming that all the investors i'm speaking about are only buying and holding. no market timing etc.

now, higher risk adjusted returns means fewer and less severe drawdowns.

emerging markets have about a .3 risk adjusted return (sharpe ratio).

this means that for every unit of risk taken, 30% of a unit of return can be expected.

by diversifying, you can increase that sharpe ratio (for a casual investor) to about .45 or .5 (depending on what you have access to)

this means that you will have fewer drawdowns and less severe ones and thus a much higher portfolio efficiency and performance.

Barron