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Because to some extent the asset classes are uncorrelated. This is the basis of Modern Portfolio Theory, and the reason you don't just dump everything into the
by domdip 11y ago
Because to some extent the asset classes are uncorrelated. This is the basis of Modern Portfolio Theory, and the reason you don't just dump everything into the highest-return class (e.g., stocks).
For a simplified model, check out Kelly gambling
https://en.wikipedia.org/wiki/Kelly_criterion https://en.wikipedia.org/wiki/Kelly_criterion
- hchenji 11y agoInteresting, I did not know about that. So with that logic, shouldn't Betterment with its 12 asset classes and 0.15% fees for >$100k invested be more optimal?
- domdip 11y agoMaybe. More asset classes shouldn't hurt, although at some point they may not help much (new ones may be highly correlated to some combination of the previous ones) and lower fees are nice. For bigger portfolios WF's single-stock approach may add enough value to compensate for these. I'm sure both companies have simulations proving they're better...