ActiveAllocator.com now incorporates over 50 asset sub-classes to precisely map your funds and securities holdings. This allows for much better allocation decisions. Of course we do not suggest that an investor should include all asset classes in their allocation. Many of the asset classes have significant overlaps and some classes are subsets of other classes. For example, U.S. large cap value is a subset of U.S. large cap, which is a subset of U.S. Equity, which is a subset of Equity. Since some investors have preference for certain regions, (e.g. U.S. over Japan), certain market caps (e.g. small-cap over large-cap), or certain styles (e.g. value over growth), the inclusions of subsets give investors the flexibility to target specific types of assets they prefer to invest in.
Overall, we recommend that an investor specify 6 to 15 asset classes in making asset allocation decisions. If the allocation includes more than 15 asset classes, many of these classes will have allocations below 5% of the total portfolio value. Such small allocations have little impact on the overall portfolio’s performance. Besides, the large number of asset classes also requires investors to estimate more expected returns, risks, and correlations as well as set more minimum and maximum constraints. The estimation errors of all these inputs may lead to a worse portfolio in practice. On the other hand, allocation with fewer than 6 asset classes my not provide sufficient diversification as the final portfolio is often concentrated in two or three asset classes.