On Mar 9, 7:14 pm, Simon Templar <thesa...[at]nospam.hotmail.com> wrote:

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You did not say how you determined weights in large vs. small caps or
foreign developed vs. emerging markets -- one approach is to use
weights that produced good risk-adjusted returns over a long
historical period. I'd be wary of fixing weights by industry, because
the importance of various industries in the economy and especially in
the stock market
will vary over time. For example, I'd guess that U.S. automakers and
auto parts suppliers were once a much bigger part of the U.S. stock
market than they are now, but since their share of corporate profits
has fallen (to put it mildly), and their relative market cap has
fallen accordingly, an investor probably SHOULD have a lower weight in
them. On the flip side, health care is a bigger part of the economy
and stock market than it was 50 years ago and should have a higher
weight.

If one wants to allocate by industry and allow for varying weights,
one could estimate covariances and expected returns and find the
"optimal" portfolio. As has been discussed here before, whether one
can estimate these quantities accurately enough to create portfolios
that do better than cap-weighted indices is debatable.

Recently there has been research on "fundamental indexing" (FI) of
stocks using weights based on earnings, dividends, revenues, and other
measures, instead of market capitalization. ETFs using FI exist, for
example from WisdomTree. An investor could apply FI himself at the
sector level using (for example) the sector IShares for the S&P 500.

On Mar 9, 7:14 pm, Simon Templar <thesa...[at]nospam.hotmail.com> wrote:
- quote -

A portfolio x ray would tell you what the finer grained holding are.

It has value- if you find that your domestic LC and SC plus your
internations LC and SC all invest in tech, you might be 30% tech, and
that might be too much risk for you (even though you THOUGHT you were
more diversified.

X-No-Archive: yes

Hello,

I have a question about fine-grained asset allocation. Here's the situation.
For better or worse, I subscribe to the efficient market theory.
I know it's not a panacea, but having a balanced portfolio invested
in index funds and ETF's has worked well for me.

Now, I tend to asset allocate at a higher level. e.g
1. A% in Domestic Equity = x% in US Large Cap + y% in US Small Cap,
2. B% in International Equity = j% in International Developed + k% in International Emerging,

etc. You get the picture.

For each of these categories, I tend to have concentrated holdings in a core index or mutual fund that is
representative of that asset class.

However, I do not take the asset allocation down to a further level of detail, to slice and dice all the
various sectors.If I was doing it, the above breakdown might look like this.

1. A% in Domestic Equity = a% in US Financials + b% in US Healthcare + c% in US Energy + d%...
2. B% in International Equity = g% in W Europe + h% in E Europe + i% in Middle East + j%...


So my question is: is such a fine-grained level of asset allocation worth it? Does it really buy you
anything in terms of risk-adjusted returns? What's the differential between the coarse-grained and
fine-grained models?

Thanks for your comments.

Simon