Financial Stocks Lag as Investors Seek Diversification Opportunities

Financial stocks have underperformed the broader market over the past year. The S&P 500 Index Fund, which includes top financial stocks like Berkshire Hathaway and JPMorgan Chase, is a popular investment option due to its diversification benefits.

However, some analysts believe that now may not be the best time to invest in financials, as interest rates have been raised, increasing borrowing costs and potentially hampering lending. Additionally, high stock valuations make a correction or downturn more likely, which would negatively impact investment management firms and brokerages.

To diversify beyond large-caps and financials, investors should consider including small-cap and mid-cap stocks, value stocks, and international investments in their portfolios. Vanguard projects that value stocks will be the best-performing asset class over the next 10 years, with an average annualized return of 6.4% to 8.4%. Small-caps are expected to return 4.7% to 6.7%, while international ex-US stocks are targeted for a 4.5% to 6.5% annualized 10-year return.