An asset class is a grouping of investments that possess similar characteristics (risk, return, taxation, geographical location, size, and many other characteristics)

Cash (bank checking, savings, and money market accounts or funds)

A lot of advertising is used to sell expensive investment strategies and investment products that underperform over the long term.

In contrast, ACADEMIC RESEARCH reveals the very, very few investment strategies that provide a high probability of higher returns, lower risk, or a combination of both.

Attempts to select individual securities that will outperform other individual securities. Often called "stock selection."

Attempts to move in and out of various asset classes, as expected future returns of the asset classes change. Often called "market timing" or "tactical asset allocation."

Passive investing: aims to capture market returns by using funds [generally, mutual funds or exchange-traded funds (ETFs)] that track an index. (See semi-strong form of EMH, discussed in another branch.)

An index is a list of securities. For example, the S&P 500 Index is a list of 500 of the largest U.S.-based corporations. The index is maintained by the Standard & Poor's Financial Services LLC. There are many, many different indexes (a.k.a. "indices"). [Both "indexes" and "indices" are accepted and widely utilized plurals of the noun index.]

Passive investing, on average, beats active investing. The major reason for this is the high costs incurred within most active investment strategies and products. Investing is a ZERO-SUM GAME.

Sub-asset classes may be created by different characteristics.

U.S. stocks vs. foreign developed markets vs. foreign emerging markets vs. foreign frontier markets

For example, stocks might be grouped by industry ("Technology" vs. "Consumer Products" vs. "Transportation" vs. "Energy" ... etc.)

Vanguard is the largest mutual fund company today. Vanguard is the largest provider of mutual funds and the second-largest provider of exchange-traded funds (ETFs) in the world after BlackRock's iShares.

In addition to mutual funds and ETFs, Vanguard offers brokerage services, variable and fixed annuities, educational account services, financial planning, asset management, and trust services.

Founder and former chairman John C. Bogle is credited with the creation of the first index fund available to individual investors and has been a proponent of and a major enabler of low-cost investing by individuals.

Vanguard is structured as a mutual company; it is owned by funds managed by the company, and is therefore owned by its customers. This effectively means that Vanguard is a "non-profit" company, which results in the ability to offer mutual funds and ETFs for very low fees.

Nearly all other mutual fund companies, other than Vanguard, are "for-profit." Some have low fees. Others have much higher fees.

A "pooled investment vehicle": investors "pool" their money together in a "fund" and receive "shares" of that fund. An investment manager invests the cash in a selection of "securities" (stocks, bonds, etc.)

LARGEST MUTUAL FUND / ETF PROVIDERS (JAN. 2020):

1. Black Rock Funds
2. Vanguard
3. Charles Schwab
4. JP Morgan
5. State Street Global Advisors
6. Fidelity
7. Bank of America / Merrill Lynch
8. BNY Mellon (Dreyfus)
9. PIMCO
10. Capital Group (American Funds)
    

Everyone should possess one: endowments, pension plans, individual investors

For individual investors, risk might properly be viewed as either: (1) a permanent loss of capital; or (2) the inability to meet the individual's lifetime financial goals.

MODERN PORTFOLIO THEORY: Combine two assets (or asset classes) that are not perfectly correlated to reduce risk (as measured by standard deviation) in an investment portfolio

The problem with The Larry Portfolio today (in 2020) is that bond yields are near historic lows. And, if interest rates rise significantly, intermediate term bond prices would fall (leading to portfolio losses).

The performance of The Larry Portfolio from 2000 through 2019 has not been that impressive. Why?

First, international stocks in general have underperformed the US in recent years. Keep in mind half of the equities slice in the Larry Portfolio is using ex-US stocks. We also shouldn’t expect stellar returns, as this is a bond-heavy portfolio from the beginning.

Secondly, the past decade also hasn’t been great for the Size and Value factors. I would argue this shouldn’t deter you from believing in them long-term. Small-caps have still crushed large-caps historically, and Value has beaten Growth historically. Moreover, we would expect negative factor premiums from time to time, even for extended time periods like the last decade.

Investors showed a strong preference for multi-factor over single-factor funds (such as "value" or "small cap" funds), in recent years.

Dimensional Funds Advisors has a long history of using multi-factor mutual funds, and in late 2020 launched multi-factor exchange-traded funds (ETFs) that are now available to individual investors (without the need to engage an investment advisor). DFA's "core equity" funds invest in nearly all publicly available stocks, with a heavy tilt toward value stocks and small cap stocks, while reducing some exposure to high-investment stocks and increasing exposure somewhat to high-profitability stocks.

Other funds use different factors, such as low-volatility and quality, and/or they don't possess as strong "tilts" to various factors.

With several hundred different mutual funds and ETFs undertaking multi-factor investing now (a huge development over the past 10 years), researchers are attempting to figure out which factors are likely to be the most robust in the future, and how factors can be combined into a single fund in the best manner.

Low-cost multi-factor funds are now available from Vanguard, iShares (Blackrock), and many other mutual fund and ETF providers today.

Unfortunately, with most 401(k) plans, there are few multi-factor mutual funds and ETFs available.

For a retiree, use a "layer-cake" approach:
20% to top layer - U.S. short-term government bond fund
20% to middle layer: SWAN ETF
60% to bottom layer: The four equity funds referred to above, 15% allocated to each.

For a person with 20 or more years until retirement, for funds devoted to retirement purposes:

• 20% DFA U.S. Core Equity Market ETF (DFAU)
  
  • 20% DFA US Targeted Value ETF (to be launched soon)
  • 20% DFA World ex-US Core Equity 2 Market ETF (to be launched soon)
    
    • 20% DFA Emerging Core Equity Market ETF (to be launched soon)
    • 20% SWAN ETF
      

Glide paths:
For funds devoted to retirement needs, the following glide path is suggested:

• Until 20 years from retirement: 80% equities; 20% SWAN ETF
• 1-20 years from retirement: 70% equities; 30% SWAN ETF
• In retirement: 60% equities; 20% SWAN ETF; 20% short-term U.S. government bond fund

NOTE: The recommendations above are for educational purposes only, and should not be construed as investment advice.

Tactical asset allocation is an active management portfolio strategy that shifts the percentage of assets held in various categories to take advantage of market pricing anomalies or strong market sectors. For example, the portfolio manager may be given the discretion to invest as little as 20% or up to 50% in U.S. stocks, as little as 20% or up to 50% in foreign stocks, and as little as 30% and up to 60% in fixed income stocks. Stated differently, tactical asset allocation as intentional market timing – taking over- and under-weight positions around the policy portfolio targets. Tactical mutual funds and ETFs are not preceded by a reputation for generating superior investment returns.

SAA: Very much accepted in the investment community. This is a portfolio strategy whereby the investor sets target allocations for various asset classes and rebalances the portfolio periodically. The target allocations are based on factors such as the investor's risk tolerance, time horizon, and investment objectives. Generally, the allocation to investment asset classes does not change in response to economic factors or market conditions, but only changes to reflect changes in the client's circumstances (such as reaching an older age, or inheriting money, or losing a job, or changing the time horizon until retirement).

Targeted Rebalancing is most often utilized by investment portfolio managers today, in large part due to the availability of software that aids in monitoring portfolios and in rebalancing. For example:

Target allocation for U.S. large cap stocks: 30%
    Lower limit for rebalancing: 30% x .8 = 24%
    Upper limit for rebalancing: 30% x 1.2 = 36%

The above technique - in which rebalancing occurs when an asset class deviates 20% or more from its target, is utilized by some investment advisors.

However, for the allocation to fixed income investments (if they are grouped together as one large asset class), often the rebalancing target is set as the target asset allocation (such as 50%), plus or minus 5% (e.g., 45% and 55% lower and upper limits, respectively).

Periodic Rebalancing: This occurs when the investor (or portfolio manager) rebalances the investment portfolio at particular intervals, such as quarterly or annually. Research supports rebalancing at quarterly or longer intervals, rather than daily or weekly.

(2) They generally do not provide a long-term rate of return higher than inflation; and

(3) They also have the potential of become positively correlated with other asset classes when you don’t want them to.
In fact, commodities are generally positively correlated with equities (except during the 1970’s, when stock prices fell while commodity prices – primarily oil prices – rose substantially).

2. Each asset class is expected to earn a return higher than the inflation rate over time.(BUT: THIS PROPOSITION DOES NOT HOLD UP IN A VERY LOW-INTEREST RATE ENVIRONMENT, AS SEEN FOR MUCH OF 2008-2020);

The scariest part of investing in stocks for individual investors is the risk of loss of one’s personal capital. William Bernstein, an author and investment adviser, explains the difference between two risk types:

“shallow risk,” a loss of real capital that recovers relatively quickly, say within several years; and

WEAK FORM: refutes "technical analysis" or "charting." Information derived from past prices cannot be utilized to discern trends that will outperform the market.

SEMI-STRONG FORM: In addition to refuting "technical analysis" (i.e., incorporating in the Semi-Strong Form of the EMH the Weak Form, also), the Semi-Strong Form of the EMH states that publicly available information (such as financial statements, announcements, etc.) cannot be utilized (via quantitative or qualitative analysis) to discern mispricings that outperform the market. If you believe in "passive investment management" - i.e., that "active management" (via the selection of individual securities that are mispriced, or by "timing" the market / tactical asset allocation), then you believe in the SEMI-STRONG FORM of the EMH.

STRONG FORM: Incorporates the other two forms, and goes on to state that in addition - private information (such as that which exists within the company) cannot be utilized to identify mispricing in the stock and thereby outperform the market. The Strong Form is NOT commonly accepted, as evidence exists from trades done by corporate officers and directors, as well as those charged with illegal insider trading activities, that private information can be so utilized.