Assets are stocks, bonds, and cash. According to the 1986 landmark study “Determinants of Portfolio Performance” (Brinson, Hood, Beebower), 93.6% of a portfolios return variability was due to asset allocation, not stock selection or market timing. There is still debate on whether asset allocation should be fixed over time (static asset allocation) or should change as markets evolve (dynamic asset allocation).
Investing in the stock asset class has changed over time, now the most tax efficient way to invest in stocks is through exchange traded funds (ETFs) or separately managed accounts (SMAs). SMAs have the added benefit of tax loss harvesting. So, how many stocks do you want in your ETF or SMA: 10, 30, 100, 500, 1000, or 5000. I believe somewhere between 100 and 500 is optimal. Most SMAs have less than 100 positions, so that leaves ETFs.
Should you diversify into international stocks? Not now. Investing in international stocks is more expensive and has higher risk.
SPY, the worlds largest ETF, tracks the S&P 500 index with the 500 largest companies in the US. If you believe, less is more, then investing in OEF gets you the largest 100 companies in the US. SMAs with 200 stock positions have recently entered the market.
The most important decision is the asset allocation ratio, not stock selection, not even the # of stocks, so I wouldn’t get hung up on which ETF to select.
Bonds lost some of their appeal as an asset class when they did not balance a portfolio in 2022 by going up when stocks went down. They went down in 2022 and many questioned the usefulness of traditional asset allocation models which advocated 70% bond allocation for a 70 year old investor.
The “average” investor should have an asset allocation ratio of 70/30 with 70% invested in stocks and 30% invested in bonds.
