In 2008 – 09 diversification did not work at all. What would’ve worked was asset allocation. Beebower & Brison stated that asset allocation determined portfolio return variation 94% of the time. Second, notice that they said nothing about diversification. How does diversification fit into the process of investing?
- Once the proper asset allocation is set due to Investment Policy Statement (ISP) development the next phase is sub-asset class diversification.
- Is there a minimum or maximum to the number of sub asset classes? Yes, there is and it is somewhere between 12 & 20 (maximum). And again, the number of mutual funds and exchange traded funds, stocks, bonds, and cash should be truly diversified with virtually no overlap.
- This sub-asset class diversification spans both personal and retirement accounts. Though this seems complicated, it is the most inclusive way of proceeding and most effective way of arriving at true diversification.
- Going deeper, in your personal and joint accounts you may put the growthier investments; while in the retirement accounts the more income and dividend-oriented investments can exist. So, the equity exposure is in the accounts outside the retirement accounts. For example, large cap growth in personal accounts and dividend payers, fixed income and cash in retirement, by and large. Real Estate Investment Trusts (REITs) would mostly go into the retirement accounts.
- What about all the target date funds in your 401k? Probably no choice but the 401k exclusively. Use these target date funds sparingly as they are truly problematic.
- Finally, using a trusted advisor for this process is suggested. The advisor, at least a CFP practioner, is regulatorily obliged to be objective, diligent, complete, and ethically bound to your best interest. In our opinion, using a robo or broker is not suitable for the degree of precision required.