Monday, June 14, 2021

Diversification and Asset Classes by Economic Strata

 Let me start by saying I am just writing for my own clarification. This is not advice. I'm not qualified really to handle my own investments, never mind advice anyone else. For clarity, get your advice from a professional.  This is just me noodling.

The foundation of investment strategy is diversification both within and between asset classes. It's not finding hot investments, that's gambling. Investing for non-professionals is best done (per Swanson and tons of other smart investment advisors) by picking the right diversification strategy and then some low cost well run index funds (Swanson swears by non-profit investment mutual funds but he wrote prior to the super low cost index funds)

Simple: for people with some wealth. Let's say $100,000 to $1,000,000.  The truism for these people is to balance equity and debt. If you are younger and saving long term, tilt heavily towards equities. Maybe 80%. Maybe more.  Inside the equity pool, focus on index funds.  Get a selection of obvious ones perhaps mostly the US equity market (S&P500, perhaps VOO) and a smaller percentage in global developed (EAFE: non-North America public equities) or emerging (don't have an example).  The S&P index fund probably has all the diversification you could need. If you'd like you can subdivide the sectors; Example, you can distinguish between growth investing and value investing (what index vs what index) but I'm not sure there are great index funds that make creating this distinction worthwhile. For debt, it's tricky in the modern world since T bills pay basically nothing.  And while everyone agrees that in the future, there will be an interest rate, the problem with holding T bills now is that as the interest rate reinstates itself, the value of existing T bills will shrink. So, is there any value at this point in holding debt? Why not simply a money market fund?

Complicated. People with more wealth and who want to generate enough cash to live on. Retirees. $1 - $5M in total portfolio savings including IRAs and 401Ks. This is a huge group. Boomers largely watched fixed income retirement plans disappear (in the 70s-2000) to be replaced with 401Ks and IRAs so retirement became largely self financed, not counting social security which helps but for professionals with a certain life-style, it's not nearly enough.. This means that there are tons of couples who have millions in retirement savings and are trying to figure out if they can live on that. Many would like to live off the income from these savings so that they can pass it on to their children. For these people, how should they be invested. How should these people think about diversification?

Wealthy People. A third category would be people who have enough wealth (over $5M right up to 10x that) so they can invest in some number of totally illiquid investments with a longer term perspective with higher risk/return ratios.  How should they think about diversification across asset classes on criteria such as:

-    liquid vs illiquid
-    debt vs equity
-    domestic vs international vs emerging
   real estate vs corporate
-    sectors such as agriculture, tech, etc
   growth vs value
-    income vs growth

Related points for these people are tax and estate planning.
There are some pretty good articles that I can find on the first category, a few on the second, but I can't find a single good article on this third category in terms of diversification strategy.

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