Passive investing while ensuring good diversification has been my strategy for decades. But how do I define “diversification”? For me, it’s always been about paying attention to how much of my total portfolio was invested in each of five¹ asset classes and keeping them aligned with my targets:

• Cash or cash equivalents
• Bonds²
• Canadian Stocks
• US Stocks
• International Stocks³

I got this idea from my last financial advisor who provided me with a lovely Cerlox⁴ bound annual report showing me how hard they were working on my behalf⁵. The report included a pie chart of how my investments broke down. This is what that pie chart looks like in my portfolio this morning:

This pie chart has been my guiding principle: have a target percentage for each asset class in mind, and adjust your portfolio as needed to keep the percentages in line. This simple principle has been adopted by so-called asset allocation ETFs aka “all-in-ones” like (my personal favourites) XGRO⁶ and AOA⁷.

But are these even the right asset classes? Where are REITs⁸? Where’s precious metals? Where’s Bitcoin⁹? What’s your bond duration? Do you have enough exposure to high-growth geographies?

Short answer: just like I’m too lazy to pick stocks, I’m too lazy (and not smart enough) to pick a “winner” of a given asset class. The “periodic table” of investment returns by asset class is a must-read for DIY enthusiasts out there: https://themeasureofaplan.com/investment-returns-by-asset-class/ (go ahead, take a look, I’ll wait).

The folks at Measure of a Plan agree that trying to figure out the “hot” asset class is a very difficult task:

It’s no easy feat to pick the winner in a given year. The asset class rankings appear to be randomly tossed about over time, with the top performer in one year often falling down to the middle or bottom of the table in the next year.

https://themeasureofaplan.com/investment-returns-by-asset-class/

By keeping an eye on the pie chart, and shifting investments to align with my targets, I’m never at risk at being overweight in any one asset-class, and beaten-down asset-classes naturally get more funds to get the percentages right. It’s naturally causing “buy low, sell high” behaviour.

So: what about the asset classes I’m using? Are 5 asset classes too many? Too few? I don’t know. “Good enough” is sort of my philosophy in the spirit of trying to keep things simple.

The spreadsheet I’ve used to help me track my portfolio breakdown is found here. In future posts, I’ll talk a bit about how to make it work for you.

1. For a long time, “cash” was not part of the consideration. Leading up to retirement, I started to carry a 5% cash weighting to help cushion market swings. ↩︎
2. In years past, I did try to keep track of short-term versus mid-term versus long-term bonds. I gave up on that. ↩︎
3. In years past, I did try to keep track of developed markets versus emerging markets. I gave up on that. ↩︎
4. I had to look up how this was spelled. https://www.collinsdictionary.com/dictionary/english/cerlox ↩︎
5. The fact that this report looked the same as the reports generated by two other advisors led me to the conclusion that my hard working advisor was perhaps being assisted by commercial software. ↩︎
6. Overview of XGRO’s asset allocation strategy: https://www.blackrock.com/ca/investors/en/literature/product-brief/ishares-core-etf-portfolios-brochure-en.pdf ↩︎
7. Overview of AOA’s asset allocation strategy: https://www.ishares.com/us/literature/product-brief/ishares-core-esg-allocation-brief.pdf ↩︎
8. My first list of asset classes prepared circa 20 years ago did include REITs but I dropped that class, figuring (perhaps incorrectly) that the bond portion of the portfolio was good enough. Doing a bit of digging, I see that both AOA and XGRO hold REITs, and both consider them “equity” investments. ↩︎
9. It’s actually obligatory for any article on investing to mention one (or more) cryptocurrencies, and/or one (or more) meme stocks 😉 ↩︎