It’s great to see Lloyds Banking Group (LSE: LLOY) shares up 25% so far in 2025. That would already have turned £10,000 invested at the start of the year into £12,500 today.

We’re seeing a 31% gain over five years, which would take £10,000 up to £13,100. Oh, plus five years of dividends. But even five years is still a short time for long-term Foolish investors. What does the long term say?

Two decades

Let’s take ourselves back 20 years to 2005. Before Covid, Brexit, PPI mis-selling… and even before the 2008 banking crisis.

At the end of February 2005, Lloyds shares were selling at 318p. At the time of writing, we’re looking at a price of 68p. That’s a 79% fall, which would have reduced £10,000 to just £2,100. Ouch! What can we learn? I think quite a lot, and it’s by no means all bad.

Thanks to dividends, our actual losses wouldn’t have been that high. No, Lloyds paid out a total of 141p per share over that period. So we could be sitting on a total value per share today of 209p.

That’s still a loss of 34%, which would leave our £10,000 worth £6,600. It’s still not great. But it’s not the wipeout we might expect from the second-biggest FTSE sector crash I can remember. The dot com crash was the biggest.

Diversification wins

It also shows the importance of diversification. Over that same two-decade period, the FTSE 100 is up 75%. Add around the same again in dividends, and it’s enough to take an intital £10,000 up to £25,000. That includes Lloyds and the other banks. And it also covers a period from Ocotber 2007 to February 2021 when the Footsie posted a zero overall rise.

Stock market investors have been through a high-risk 20 years. But look how well we could still have come out of it had we been well diversified.

Diversification can be tricky when we’re getting started. I bought some Barclays shares in 2007 just before the big crash. If it hadn’t been part of a diversified ISA, I could have quickly lost three-quarters of my money.

One way to reduce the risk would be to go for something like the iShares Core FTSE 100 UCITS ETF. That’s an exchange-traded fund that tracks the FTSE 100. Over 20 years something like that can closely match the index, less a small annual charge. We get maximum FTSE 100 diversification from just one buy.

Investment trusts

I like investment trusts too, and I have a couple, including City of London Investment Trust. It doesn’t try to track the market, but instead goes for a range of dividend-paying UK stocks. Again, it offers a package of diversification. And it’s raised its dividend for 58 years in a row.

I have one core takeaway from this look back on the past 20 years of Lloyds shares. Even someone buying Lloyds at such an apparently disastrous time could still have done well had it been part of a diversified strategy.