Diversity in your portfolio

[Rich_by_the_Bay]

Is it good enough to diversify your domestic holdings into small growth, large growth, small value, large value, and REITs? (Let's assume you have internationals and bonds allocated in separate funds.)

Recent posts here and elsewhere suggest that these sectors are seen by some as acting less and less independently, and gaining more and more correlation among themselves in recent years.

Whaddya think? Still a good mix, or are you branching out seeking better diversification? ESRBob likes microcaps, others like commodities. Are my hopes for a simple stock portfolio just a fading dream -- hard to find a hybrid fund that meets the need?

 

[AltaRed]

From my perspective, I do not need home runs to enjoy a comfortable retirement. On that basis, base hits are good enough and thus I would not worry about slice and dicing very much. Nor do I see a need to actively manage my own portfolio.

If you are in a similar situation, a US Total Market Index ETF, together with some REIT, will do just fine for domestic equity component and an MSCI EAFE ETF would do just fine for International equity component.

If you don't like the market cap weighting of Total Market (some suggestion that large caps will continue to underperform), then split the domestic component equally between large cap, mid-cap and small-cap ETFs to counterbalance market cap, and forget about picking value over growth or vice versa.

It is my view that boutique ETFs are starting to emulate mutual funds slicing and dicing the market 15 different ways to promote sales.

 

[macdaddy]

A lot of folks around here are heavily invested in real estate. I'd be interested in a discussion on what other investments correlate least to the residential real estate markets. Maybe interest rate futures (since lower rates = increased RE prices). I'm not sure what else would count...

 

[brewer12345]

Rich, I think you still get some diversification benefit from the different "flavors" of US equity, just not as much as before. That goes for international stocks and commodities, too. The reality is that barriers to capital flows keep dropping, so things tend to move more in sync with each other. Not much you can do about it.

FWIW, firecalc, the Trinity study, etc. are all based on a far less diversified portfolio (usually S&P500 and bonds) than most of us have, so at least in thory, you should be "safer" than the studies and calculators indicate despite the fact the correlations have risen.

 

[unclemick]

Alas - correlations have a nasty habit of changing over time.

heh heh heh heh

 

[d]

cash is uncorrelated ...

 

[unclemick]

Cash means one thing to Unclemick2 sitting in Missouri - another to say Ben in Thailand. aka 'da provincial' American vs the non American expat.

I poo poo slice and dice all the time - BUT were I to relocate overseas - I'd be singing a different tune - diversification wise.

And depending on location - I tend to think my portfolio would adjust accordingly.

heh heh heh

 

[d]

were I to relocate overseas - I'd be singing a different tune

so true ... but isn't Rich_in_Tampa in Tampa?