Anyone has a memorization technique to share regarding the 5 criteria for specifying asset classes?
Assets within an asset class should be relatively homogeneous
Asset classes should be mutually exclusive
Asset classes should be diversifying
The asset classes as a group should make up a preponderance of world investable wealth
The asset class should have the capacity to absorb a significant fraction of the investor’s portfolio without seriously affecting the portfolio’s liquidity
HOMOGENEOUS : (within the same AC), investments are pretty similar in term of Risk / Return profile, nature of investment etc.
2.MUTUALLY EXCLUSIVE : If you invest in A you can’t obtain the same Risk / Return profile of investing B;
DIVERSIFYING : There should be low correlation among Asset Classes
I think the first three conditions above have to be respected while creating the population of your potential investments while you implement your SAA. Any lack of these three and you might risk of not achieving effective diversification and ultimately higher returns (not 101% sure on this last point though).
THE ASSET CLASSES AS A GROUP should make up e.g. 95% of investable wealth means when you have finished defining the available asset classes globally there are no more investable assets left i.e. you have well defined the existing investable options ( you have an “EXHAUSTIVE” definition of the group of asset classes)
The asset class should have minimum impact on ptf liquitiy …means that you can rebalance your portfolio among the defined asset classes w/o incurring in massive transaction costs…it means once again that the Asset Classes as a GROUP is rather functional and serve your objective (or at least it doesn’t impede) of diversifying properly your ptf.
The 4th and the 5th in my eyes are peculiarities of the asset classes taken as a whole in a general. I don’t think these two points would be ever recalled while building up your AA.
That’s how I recall them, only my thoughts though,
Personally this is one of the lists that I don’t seem to have a problem remembering, but if I HAD to think of an anagram to remember them I would go for something like:
HELDM - pronounced “Held 'em” as in “Held Them” - if they fit the criteria below then you “hold them” in your portflio as an asset class. A little tenuous, but there you go…as long as you can remember the link.
And I would list it out as follows:
H - Homogenous
E - Exhaustive (same as “make up preponderance of world wealth” - if they are “exhaustive” they include everything)