Although there are more simple investment strategies, many investors have more startup funds to contribute and need broader diversification to minimize risk (see the budgeting-help.com article on “Simple Diversification Strategies”). Additionally, you may have already used the simpler strategies, and are ready to take a different approach that may provide greater returns. You may also be tired of going on autopilot with your investments, especially if it means you get safe, but nonetheless lower returns.

Here are a few strategies that provide broader diversification through investments in more asset classes, and may require some activity on your part. Though it may increase risk, you may obtain greater returns.

The 25% Strategy

Based on Roger Gibson’s work tracking diversified investment portfolios over 30 years, this strategy concentrates investment funds equally in four different asset types:

• US Stocks from the Standard and Poors 500 Index (S&P 500)
• Foreign Stocks from the Europe, Austrailia and Far East Index (EAFE)
• Real Estate Investment Trusts from the National Association of Real Estate Investment Trusts Equity Index (REITS)
• Commodities from the Goldman Sachs Commodity Index

The main tenet of the strategy is that each asset class will respond differently to and within the market. For instance, if S&P 500 Stock values are down, it may be that REITS have increased. The relationship between different asset classes offers counterbalancing, so that there is an average of return that may be expected.

Additionally, it is expected that new monies gained using the strategy are to be rebalanced (redistributed equally among asset classes) at least once a year.

The Yale Approach

David Swenson, portfolio manager at Yale University, and well-respected among money managers both within and outside of academia, has averaged a 16% return on investment over the past 21 years. During 2006, Swenson managed a 23% return on Yale’s investments, greatly increasing its endowment.

Swenson’s investment style is varied, with capital in numerous asset classes. In the least, it is more diverse than most university portfolios. He considers having allocations in stocks and bonds, but also real estate, timber, energy and others will greatly diminish risk while garnering greater returns.
Recently, he started offering his diversification strategy to consumers so that they maximize their returns and limit losses due to fees from mutual fund investments. It includes investments made in the following proportions:

• 15% US Treasury Inflation-Protected Securities
• 15% US Treasury Bonds
• 20% Real Estate
• 5% Emerging Market Equity
• 30% Domestic Equity
• 15% Foreign Developed Equity

Swenson does not suggest shying away from mutual funds altogether, but instead investing with a non-profit mutual fund family. Additionally, you will want to rebalance your portfolio often to take advantage of potential growth in different asset classes.

Keep in mind that no investments are insured are guaranteed, and there are no strategies that will always ensure returns on investment. Additionally, everyone has a certain level of risk tolerance that will affect their decision making. If you are unsure, you can talk to investment professionals for advice on your investment goals.

References

Richard Jenkins. Start Investing With $100

Chris Arnold. Your Money