No. of Recommendations: 5
Hi IP!
It's a good question: why not just invest in the expected highest returning asset class instead of diversifying. A few thoughts, some or all of which I know you have considered. :)
- You may expect 'US Stocks' to have the highest return, but you could be wrong. Valuations are fairly high now, and I know you say you'd wait until a downturn and then plonk it in, but in the meantime you are earning cash returns that are roughly equivalent to inflation, in general. What if they stay high for years and years, interest rates drop, and you miss out on huge moves in foreign/emerging stocks that you could have ridden?
- There is country-specific risk to any single country, including the US. William Bernstein points out that countries, even seemingly robust long-lived countries, have existential crises often enough that the risk should be considered in long term planning.
- You miss out on not only on the lower volatility of a diversified portfolio, but also the rebalancing bonus that an investor can sometimes harvest by automatically buying low and selling high when rebalancing every year or two.
- You may consider yourself immune, but high variance of a single asset class portfolio can trigger maladaptive responses in many people, like deciding 100% US stocks is inappropriate in the middle of a big crisis/stock crash, and selling low, locking in potentially significant losses. Part of the designing a portfolio for ease of ongoing maintenance by a child might include some diversification to ease that risk and give the manager 'something to do' in such a situation by re-balancing: buying low instead of selling low.
- Buffett seemingly agrees with you that US stocks are enough diversification, from comments he's made.
- IMO US Small Cap Value is historically the highest returning readily available asset class, and having a portfolio something like 40% S&P 500, 40% SCV, 20% short-intermediate bonds will probably return as much as the S&P 500 alone, with less variance, and you could probably sneak in 10% foreign for more diversification and lower variance without affecting return much as well.
