In the real world, few investors buy all available asset classes. They pick and choose. Some asset classes are better than others. So, enlightened investors will be constantly on the lookout for new asset classes to help spread the risk or increase rates of return. What makes a great asset class? I get warm and fuzzy feelings for a new asset class when it has both desirable risk and reward characteristics, and a low correlation to other asset classes I already hold in my portfolio.
Of course, an asset class investor will insist on selecting investments with the lowest possible tracking error to each of our desired asset classes. Because they can be designed to replicate almost any asset class of traded securities, mutual funds (especially no-load index funds) can be ideal building blocks for asset class investing. Properly employed, mutual funds level the playing field for the retail investor. Using an appropriate combination you can build a portfolio as effective and sophisticated as the largest institutions.
