With such strong performance in stocks as of late, it is easy for investors to begin questioning the need for diversification within their portfolios. Recent headlines have even popularized the passing of the fifth year of the current equity bull market that began on March 9, 2009. Over that time the S&P 500 Index has increased over 200%. With such strong and long lasting positive performance, why would anyone want to own any asset other than equities?
A look at the chart below provides a strong argument. The middle section depicts a crowd sentiment poll that currently shows an extreme level of optimism for the S&P 500, which is a clear bearish signal. In fact, over the last 20 years, when sentiment has increased to such levels, equities have tended to have a negative return moving forward. When volatility is again introduced into the markets, those using bonds and other asset classes to diversify their holdings will be positioned to outperform the bandwagoners that went all in on stocks.