Asset Classes: How Many Should I Own?

Ken Appel in Italy

Ken Appel in Italy

With much recent attention given to answering the money managers most perplexing question, what percent of the portfolio should be invested in each asset class, the whole idea of how many asset classes to include in a portfolio has been neglected.  William Bernstein answers the question this way.  “You might as well ask the meaning of life.  About all one can say is, more than three.”  The major three would be equities, bonds, and cash.  However, that does not provide a well-diversified portfolio.

Many of the ITA Wealth Management Portfolios hold as many as 18 asset classes (including cash) if one breaks the U.S. Equities market into the “Big Nine.” More and more, I’ve been using the “Big Seven” as I no longer hold Mid- or Small-Cap Blend asset classes.  If I were to answer the above question I would recommend between seven (7) and nine (9) asset classes at a minimum.  Here are my recommendations.

  • U.S. Equities (VTI)
  • Developed International Markets (VEA)
  • Emerging Markets (VWO)
  • Domestic REITs (VNQ)
  • International REITs (RWX)
  • Commodities (DBC)
  • Domestic Bonds & Treasuries (BIV or BND)
  • International Bonds (BWX or PCY)
  • Cash (SHY)

Precious metals can be considered a separate asset class or be included under the commodities umbrella.  My two least favorite asset classes are commodities (DBC) and precious metals or gold (GLD).  Neither throw off any dividends and I prefer to hold ETFs that generate income.

For each asset class I keep a particularly ETF in mind.  For example, VNQ is my domestic real estate ETF of choice.  When it comes to assigning ETFs to the “Big Seven” U.S. Equities, I use the following: VTI, VTV, VOE, VBR, VUG, VOT, and VBK.

For my dividend generating ETFs I will include VIG, VYM, DVY, and IDV.  When constructing your portfolio, be sure to check out the latest ETF rankings as I include that data table with nearly every portfolio review.  This way you can see which of the critical ETFs are performing above or below SHY, our cutoff ETF.

Comments

    • says

      David,

      EMCB is certainly an option and it has a better performance record over the last two years compared to PCY and BWX. None of the three are really equivalent ETFs. I’ve never settled on an ETF that exactly fits International Bonds. This is one asset class one can eliminate if one wishes to simplify a portfolio. Commodities and gold are the other two one could easily eliminate.

      Lowell

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