Тhings every investor should know about asset classes

The best single piece of advice I have for investors is deceptively simple: Diversify. But it's also deceptive, because it works only if you do it intelligently. Аsset-classes are the key to long-term success. Choose the right ones.

Here are 10 things every investor should know about asset classes:

Past performance - Every important asset class has a known, factual history of performance. Each one also has a future, which cannot be known. Don't forget that last bit.

Risk - Every asset class — in fact, every investment — involves risk, which is another term for uncertainty. This is where things get tricky, because there is no risk in the past, no uncertainty about how things turned out. It's essential to evaluate risks, because they can help us predict future losses.

Longer-term results from the past are likely to be a better guide to the future than shorter-term results. To use an extreme example, the performance of the U.S. stock market over the past 10 years is a better guide than whatever has happened to the Standard & Poor’s 500 Index during the most recent three hours of trading.

One asset class vs. all - Predicting the long-term performance of just one asset class is harder than predicting the performance of a group of them. Even when most sectors of the market are moving up or down, there's usually some outlier that's bucking the trend.

Best asset classes - You don't have to have luck or genius to choose the best asset classes. What you need is long-term past performance data identifying the asset classes with favorable performance and acceptable levels of risk.

Research - how to put those asset classes together into effective portfolios.

Luck - Despite the best research, the best strategy and the best execution, dumb luck can play a significant part in how these asset classes perform in the real world. For example: The best 40-year return for U.S. large-cap value stocks occurred from 1958 through 1997, when they compounded at 15.7%. A $5,000 annual investment would have produced an ending value of $10.8 million. The worst 40-year return for that asset class occurred from 1930 through 1969, with a compound return of 8.3% and an ending value of $1.4 million.

Get to know each asset class - To use just one example, when everything is doing well except emerging markets stocks, you may be tempted to dump them as dogs. In the short run, that might feel good, but in the long run it would probably be a mistake, because emerging markets stocks have huge long-term growth potential.