I have talked before about diversifying your portfolio by targeting an asset allocation that is right for you. I also recommended a way to balance it across multiple accounts, with the goal of keeping as few funds in each account as you can. When you do this, each account by itself is** NOT** very diversified, and subject to a relatively large amount of volatility. However, if you take **ALL** of the accounts together, the overall volatility decreases without much sacrifice in the performance.

## Our Investment Portfolio

Above is a graph of all of my wife and my investment account's annual internal rate of return since inception (except for a RobinHood brokerage account in which I pick stocks for fun). At the far right is the annualized performance over the past six years. I determine the performance by calculating the internal rate of return (IRR) which is a dollar-weighted return of the investment. It is heavily influenced by the price at which I buy an investment which, in my opinion, is the only way I should calculate my return. It also includes dividends as part of my returns, which is not readily apparent if you just look at a fund or stock's price. For more on this topic, check out this article at Morningstar.

## Undiversified Portfolios Have High Volatility

I have listed out all of the accounts that my wife and I have in the chart above. If you scrutinize the performances of each account, you will notice a lot of variation. The most extreme example (confirmed by having the highest standard deviation) is probably my individual Roth 401(k) account. It has ranged from -3.5% to 29.1% annual returns with a **standard deviation of 13.5%!** In fact, when you take a look at the standard deviations of each of our accounts, they range from **6.4% - 13.5%**; however, the **median is 10.5% and the average 10.3%**. Now if I take the standard deviation across the yearly returns of all of our accounts combined, **it decreases to 8.5%!** Only ONE of the individual accounts had a lower standard deviation than that.

## Diversification Leads to Lower Volatility and Similar Returns

Of course we should also investigate whether the return is compromised as a result of reducing risk. The annualized returns ranged from 7.7% to 13.3% with a median of 10.6% and a mean of 10.5%. Here is my interpretation -- **at best I could get a 13.3% return if I put all my investments into the best asset, but I have no way of predicting which fund is the best.** By gambling on one fund, my expected value for return would be the median or mean of around 10.5%.

My true annualized return was 10.4%, which is essentially no different than the above scenario, with much less risk and volatility.

**I hope I have shown you that diversification into multiple asset classes will reduce variability and risk WITHOUT sacrificing performance!**