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b'As a financial advisor, at parties and social events, I am constantly regaled by stories of ten-baggers and stock picks that have awesomely outperformed the market and delivered fantastic returns \\u2026 but today I want to make the case for chasing mediocrity through diversification across asset classes \\xa0versus attempting to build a portfolio of equity winners, because the hunt for ten-baggers often leads to riskier investments and deep negative returns from time to time that do way more harm to your portfolio than small negative returns in a well-diversified portfolio.

I plan to use some data in my commentary today - and for that - I want to credit Craig Israelsen who wrote an article titled \\u201cAre Average Returns Enough for Clients?\\u201d for Financial-Planning.com.
Index vs. Diversified Portfolio
In his article, Craig compares annual returns from the S&P 500 index versus an equally-weighted portfolio of seven diversified asset classes over a 44 year period from 1970 to 2013. The diversified seven-asset portfolio consists of large-cap U.S. stocks, small-cap U.S. stocks, international stocks, commodities, real estate, U.S. bonds and cash. The S&P 500 index, as many of you well know, comprises of 500 large publicly-listed U.S. stocks, well-diversified across various industry sectors, but it\\u2019s essentially equities only.

The data Craig presented in the article showed that annual returns from the S&P 500 were better than the seven-asset portfolio 55% of the time, with the S&P 500 outperforming in 24 years over the 44-year analysis period \\u2013 with the S&P 500 sometimes way ahead of the seven-asset portfolio such as in 1998 - when the S&P 500 returned a magnificent 28.6% but the multi-asset portfolio was up only about 1%. Over the 24 years that the S&P was ahead, it beat the multi-asset portfolio by an average of 8.3% per year \\u2013 that\\u2019s a pretty massive margin.

But despite those 24 years of solid outperformance, the two portfolios delivered about the same average annual returns over the 44-year period, with the S&P up 10.4% annually and the multi-asset portfolio up 10.3%.
So what gives?
Turns out, the S&P had nine losing years versus five losing years for the multi-asset portfolio\\u2026 but the losing years for the S&P 500 were dramatically worse \\u2013 and the average negative return for the S&P 500 was 15.2% versus 8.7% for the multi-asset portfolio \\u2013 that\\u2019s a difference of 6.5% on average for nine of those 44 years \\u2013 and that erased almost all of its up year gains.

Now\\u2026 most of us would likely jump to the conclusion that 24 up years with an average outperformance of 8.3% would easily beat 9 down years of 6.5% annual underperformance\\u2026 but compounding works a little differently\\u2026 with negative returns damaging a portfolio way more disproportionately than positive returns\\u2026 and here\\u2019s a simple example.

If you start with a hundred dollars and lose 50%, you\\u2019re down to $50\\u2026 but to get back to $100, you need a gain of $50 on $50\\u2026 that\\u2019s a 100% gain to make up for a 50% loss\\u2026 so negative gains are much harder to dig out of... do you see that?

So even though the S&P 500 frequently outperformed the multi-asset portfolio, those gains were largely undermined by the frequency and magnitude of its negative returns\\u2026 and the multi-asset portfolio provided more-or-less the same long-run benefits of equities but avoided the deeper losses of the down years.
Features of a Multi-Asset Portfolio
Investors should also understand that a multi-asset portfolio will never outperform an individual asset class \\u2013 such as equities \\u2013 in any given year \\u2013 so you need to be comfortable with mediocrity and steady gains over flashy returns washed out by horrible years.

Now consider this, over the past 15 years \\u2013 which were fairly tumultuous for stocks - the S&P 500 delivered a 4.7% average annual return while the multi-asset portfolio was up almost 7%.

And while companies in the S&P 500 do business abroad, have commodity risk, interest rate risk,'