I’m in complete agreement that those (and costs, actually) are far and away the most important things to discuss. But I don’t think I’d agree that they’re the only things worth discussing.

And by blog post #337….

Thanks for contributing your thoughts. I don’t think we disagree here actually. Or at least, not very much.

There’s no debating that equities took a beating in 2008–small caps, large caps, value, growth…everything. In absolute crisis situations like we experienced at the end of ’08, no amount of diversifying among stocks will save you (regardless of how you define “diversification” among those stocks).

And, while I’d add U.S. Treasury debt to your mention of cash and short-term CDs, I agree with your general idea: Don’t look to stocks for any degree of safety in a crisis.

That said, just because something doesn’t protect you in a crisis doesn’t mean it has no value whatsoever, does it? It seems to me that there’s a value in smoothing out the ride in other years (if, in fact, overweighting small-cap or value stocks can help to achieve that goal).

Let me first say that I really, really, respect your work and for those of you that don’t know Mike and I agree on a lot of things and have a relationship that allows for open conversation on those things we disagree on.

With that said:

Really how much did any of this help in 2008?

If the primary focus of diversification among equity asset classes is to lower volatility it failed right at the time we needed it most.

The only way to really lower volatility (if you even consider this an appropriate way to measure risk for a real person) is to have more of your money in cash or very short term CD’s. I know they pay next to nothing, BUT they are actually going to provide a cushion when you need it rather than a theory of a cushion that doesn’t actually work when you need it.

It sounds like you’re exactly right with the hang-up being a difference in terminology. (Very similar to what’s going on with the disagreement when some people call a Total Stock Market + Total Bond Market portfolio “diversified,” while others would say it isn’t.)

So let’s say my investment portfolio had a total stock market fund, a large growth fund, a midcap value fund, and a smallcap biotech fund. My entire investment portfolio is made up of just one asset class: stocks.

And of course, a quick Google search has Morningstar addressing this very discussion: http://news.morningstar.com/articlenet/article.aspx?id=104364&_QSBPA=Y&wmcsection=assetmix1

I should have just Googled to begin with!

I’d agree that Swedroe is talking about “asset class diversification.” Provided with the quote’s context, it’s explicitly clear that’s what he’s discussing.

I’d argue, however, that asset class diversification is what Roth is discussing as well. The quote comes immediately after a discussion of Morningstar style boxes and is followed with the statement that “it’s impossible to add a second U.S. stock fund that would improve diversification as it would only begin to overweight one of the style boxes or industry sectors.”

Roth seems to be talking about diversifying within a stock portfolio. Swedroe says a Total Market Stock Fund isn’t great in terms of “asset class diversification”. I think most investors would understand asset classes to be stocks, bonds, real estate, commodities, etc. Obviously, a total stock market index fund wouldn’t include anything but stocks.

Of course, I don’t have the book in front of me. Maybe in context, Swedroe meant only different kinds of stocks.

In a market-weighted index, you may have some allocation to small company stocks or agricultural stocks, say, but they may be dwarfed by the money in Exxon and other energy companies (for instance – I haven’t checked the US indices).

Tracking an equal-weighted index would give you more diversification, I think, in the terms you’re discussing, at the cost of the risk of diverging from the commonplace market-weighted approach.