• About us
    • Who we are
    • Mission
  • Contacts
  • English
    • Português (Portuguese (Portugal))
    • Español (Spanish)
    • Français (French)
  • Login
Investorpolis
[xyz-ips snippet="Banners-Publicitarios"]
No Result
View All Result
No Result
View All Result
Investorpolis
No Result
View All Result
Home Investing Series Guide

How to diversify investments in major asset subclasses?

19 de January, 2020
in Investing Series Guide, IV. Efficient Diversification
Reading Time: 6 mins read
0 0
0
Share on FacebookShare on Twitter

For a complete and efficient diversification we must move from the 2 major asset classes – stocks and bonds – to their main sub-asset classes

To make a complete and efficient diversification is to optimize the investment portfolio expected return to a chosen level of risk by combining the main sub-asset subclasses

It is impossible to predict the performance of assets classes and sub-asset classes even in the short term (reminder)

From assets classes combinations to sub-asset classes combinations

To make a complete and efficient diversification is to optimize the investment portfolio expected return to a chosen level of risk by combining the main sub-asset classes

After deciding on the allocation between savings accounts and investments, and among the main classes of assets, Stocks and Bonds, it is worth going further to make a more complete efficient diversification.

The reasons are the same as before. On one hand, do not put all the eggs in the same basket, and on the other hand, the unpredictability of asset classes returns even in the short term.

The theoretical basis lies in optimizing the trade-off between expected return and risk, looking for combinations of subclasses that increase return for a given level of risk or vice versa (reduce the risk for a given return). 

It is only worth extending and advancing diversification through the increase in combinations of asset subclasses to the extent that a significant improvement in the trade-off between return and risk is promoted.

When this does not happen, the additional complexity and costs associated with increasing subclasses do not compensate. 

We can define multiple sub-asset classes according to multiple criteria. The main sub-asset classes, validated by theoretical studies of investment diversification and those most used by investment management professionals, are as follows:

  1. Stocks: geography (region or country) and the companies’ market capitalization or market size (small, medium and large);
  2. Bonds: geography (region or country), the nature or type of the issuer (governments or companies) and credit quality or credit risk rating (investment or speculative grade);
  3. Alternatives: real estate, commodities (or natural resources), gold, hedge funds and private equity.

This is the current and modern way of allocating assets in wealth management, which contrasts with the traditional model used until the 1990s.

Imagem relacionada

Source: Schwab Intelligent Portfolios™ Asset Allocation White Paper, Charles Schwab

It is impossible to predict the performance of assets classes and sub-asset classes even in the short term (reminder)

Savings or cash are very short-term placements with zero or even real-negative yields and with immediate liquidity.

Investments in stocks and bonds are investments for terms longer than 2 years and provide much higher average rates of return but they are subject to possible losses arising from market fluctuations.

The main stocks sub-asset classes are geography (region or country) and the companies’ size (small, medium and large).

The main bonds sub-asset classes are also geography (region or country), the nature or type and credit quality or credit rating of the issuer.     

The chart below (also known as Callan Periodic Table of Investment Returns) highlights the annual performance of 9 of the main sub-asset classes over a 20-year period between 2000 and 2019, including: 4 stock market indexes, Large Cap Equity (S&P 500), Small Cap Equity (Russell 2000), Developed ex-US Equity (MSCI World ex-US), Emerging Market Equity (MSCI Emerging Markets); 3 bond market indexes, US Fixed Income (Barclays US Aggregate Bond Index), High Yield (Barclays US High Yield Index) and Global ex-US Fixed Income (Barclays Global Aggregate non-US Bond Index); Real Estate (Footsie EPRA);  Cash Equivalents (3-month US Treasury bills).

Assets with good performance in some years end up performing poorly in the following years: this is the effect of market cycles (periods of boom and “bust”); e.g. real estate, emerging markets, etc.

There isn’t a superior asset even in a short period of 17 years.

It is very difficult to predict the behaviour of asset classes even in the short term.

https://www.standard.com/eforms/13499.pdf

https://www.callan.com/uploads/2020/06/e085e47ea3e911f88ce21aaf5855cbb1/periodic-table-collection.pdf

From assets classes combinations to sub-asset classes combinations

The first level of diversification is to allocate by the 2 large asset classes, choosing the combination of expected return and risk between stocks and bonds more appropriate to the investment term and the investor’s risk profile.

The following chart shows the combinations between shares (S&P 500) and bonds (U.S. government debt to 10 years) for the 40-year period between 1970 and 2017.

The second level of diversification is to do the same, but for the main sub-asset classes.

In general terms, the main asset classes and sub-asset classes are positioned as follows in terms of returns and risk.

The following graph indicates the annualised returns and risk of each of the sub-asset classes represented for the 20-year period between 1998 and 2017.

The combinations in the lower left corner of the chart, which have associated lower risk, consist mostly of bonds sub-asset classes, while those in the upper right corner, which is associated with the highest risk, are fundamentally stock sub-asset classes.   

Previous Post

To invest well we need reason to take over emotion

Next Post

Diversify is spreading investments to manage risk of bad choices

Investadmin

Investadmin

Related Posts

Asset allocation by economic cycles, and the importance of age in asset allocation
Investing Series Guide

Asset allocation by economic cycles, and the importance of age in asset allocation

11 de August, 2024
The 4 Financial Asset Allocation Strategies Used by Individual Investors
Investing Series Guide

The 4 Financial Asset Allocation Strategies Used by Individual Investors

11 de August, 2024
Investing in Secular Stocks Series: Part 4.3 – Relationship between ROIC and the PER and PEG market multiples
Investing Series Guide

Investing in Secular Stocks Series: Part 4.3 – Relationship between ROIC and the PER and PEG market multiples

4 de July, 2024
Investing in Secular Stocks Series: Part 4.2 – The Importance of ROIC in Fundamental Valuation
Investing Series Guide

Investing in Secular Stocks Series: Part 4.2 – The Importance of ROIC in Fundamental Valuation

4 de July, 2024
Investing in index funds or products: The S&P 500 Equal-Weight, as an alternative to the S&P 500
Investing Series Guide

Investing in index funds or products: The S&P 500 Equal-Weight, as an alternative to the S&P 500

20 de June, 2024
Individual investors have a too short time horizon, and this short-sightedness comes at a high cost
Investing Series Guide

Individual investors have a too short time horizon, and this short-sightedness comes at a high cost

14 de June, 2024
Next Post

Diversify is spreading investments to manage risk of bad choices

Leave a Reply

Your email address will not be published. Required fields are marked *

Trending

Effects of Trump’s Trade Tariffs on Financial Investments Series: P1 – Framework

Effects of Trump’s Trade Tariffs on Financial Investments Series: P1 – Framework

8 de May, 2025
Series Investments in the Artificial Intelligence Cycle: Part 2 – The main branches of AI

Series Investments in the Artificial Intelligence Cycle: Part 2 – The main branches of AI

29 de April, 2025
2Q25 Financial Markets Outlook: Zombieconomics, or the monumental cost of Trump’s astronomical reciprocal tariffs

2Q25 Financial Markets Outlook: Zombieconomics, or the monumental cost of Trump’s astronomical reciprocal tariffs

4 de April, 2025
Thematic Investments Series: Part 3. What are the main megatrends?

Thematic Investments Series: Part 3. What are the main megatrends?

28 de March, 2025
Investorpolis

We developed this blog because we believe that only a small learning effort is needed to make a big change in the decisions and results of our investments and financial assets.

Main categories

  • Investing Series Guide
  • Wealth and Investing
  • Retirement & Savings
  • Tools
  • More

Newsletter

Sign to our mailing list to receive updates direct to your inbox!

*We don’t spam

  • Privacy Policy
  • Cookie Policy
  • Contacts

© 2021 - Investorpolis / Powered by Delta Soluções

  • pt-pt Português
  • fr Français
  • es Español
  • en English
  • Home
  • Investing Series Guide
    • I. Goal Based Investing
    • II. Compounding & Inflation
    • III. Assets Risks & Returns
    • IV. Efficient Diversification
    • IX. Sustainable Investing and ESG
    • V. The Investor
    • VI. Assets and Investments
    • VII. Index Funds
    • VIII. Successful Investing
    • X. Kits and Tips
    • XI. Other Topics
  • Retirement & Savings
    • Retirement
    • Savings
  • Wealth and Investing
    • Investing
    • Wealth
  • Tools
    • Calculators
    • Publications
    • Sites and apps
  • More
    • Best of
    • Reviews
    • Snapshots
    • Others
  • About us
    • Who we are
    • Mission
  • Login
  • Cart

© 2021 - Investorpolis / Powered by Delta Soluções

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
Cookie configurationCookie PolicyAcceptReject
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Necessary
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
SAVE & ACCEPT

Add New Playlist

Are you sure want to unlock this post?
Unlock left : 0
Are you sure want to cancel subscription?