I have had this question from clients a lot lately – as the S&P 500 and other large stock indices have gone up. The answer is always the same.
A globally diversified portfolio is made up of multiple, non-correlating, asset classes by definition. Adding multiple asset classes to a portfolio, even those with higher degrees of risk such as Small, Value, and Emerging Markets, actually lowers the overall risk (Standard Deviation) of that portfolio.
Larry Swedroe, Director of Research for BAM Alliance, has written an in-depth article on this subject entitled: Tracking Error Regret is the Enemy of Investors
You can check out Larry’s article about ‘Tracking Error’ below: