Diversifying into multiple asset classes reduces risk/volatility, but may also limit overall performance. Some argue that 2 asset classes, stocks and bonds, is enough diversification, while others believe more is better and recommend diversifying into other subclasses such as gold, commodities, real estate, and international markets. These other subclasses generally have higher expense ratios, which may reduce overall portfolio performance. There is no evidence that more is better.
Within the stock asset class, diversification again reduces risk/volatility and limits overall return, but here there is room for debate. Here the middle road seems to hold the most promise. A basket of 100 stocks has the highest annual return over 5 and 10 year periods. Most portfolio managers only hold 30-50 positions.
| Index Name | # of stocks | ETF Name | Symbol | Expense Ratio | 5-year return | 10-year return |
|---|---|---|---|---|---|---|
| Dow Jones Industrial Average | 30 | SPDR DJIA | DIA | 0.16% | 9.45% | 10.94% |
| S&P 100 | 100 | iShares S&P 100 | OEF | 0.20% | 14.47% | 13.01% |
| S&P 500 | 500 | SPDR S&P 500 | SPY | 0.09% | 13.09% | 12.30% |
| Wilshire 5000 | 5000 | Vanguard Total Stock Market | VTI | 0.02% | 12.34% | 11.77% |
| Fidelity US Large Cap Strategy | 200 | Separately Managed Account | NONE | 0.40% to 0.70% | 13.61 after fees | Inception 2019 |
