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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
- A% in Domestic Equity = x% in US Large Cap + y% in US Small Cap,
- 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.
- A% in Domestic Equity = a% in US Financials + b% in US Healthcare + c% in US Energy + d%...
- 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