Why the S&P 500 Isn't Enough: Diversification by Geography and Size (Factor Investing)
Investing solely in the S&P 500 means betting 100% of your future on the 500 largest companies in a single country. While it has performed exceptionally well over the past decades, modern financial theory suggests that to maximize the risk-reward ratio, we must look at the entire world and companies of various sizes.
The 3-Pillar Portfolio: ACWI, Edge Size, and Small Caps
To achieve total diversification, at The Investor App we propose a structure based on three specific funds that cover the entire investable spectrum:
| Asset / Factor | ISIN | More Info |
|---|---|---|
| World (MSCI ACWI) The entire global market. |
IE00B44Z5B48 | View Details → |
| Edge Size (Mid Caps) Medium-sized companies. |
IE00BP3QZD73 | View Details → |
| Small Caps Small-sized companies. |
IE00BF4RFH31 | View Details → |
1. The Geographic Factor (ACWI)
The MSCI ACWI index allows you to own growth in the U.S., but also in Europe, Japan, and Emerging Markets. If the U.S. economy stagnates, your portfolio continues to capture profits from the rest of the planet.
2. The Size Factor: Mid and Small Caps
This is where the real potential lies. Mid-capitalization (**Mid Caps**) and small-capitalization (**Small Caps**) companies often possess greater agility for growth. By adding these two ETFs, you are capturing the "Size Premium"—a financial phenomenon where these companies tend to outperform large-caps over the long term due to their exponential expansion potential.
How Does This Affect Your Calculations?
Increasing exposure to mid and small-cap companies can raise the expected average return of your portfolio. An increase of just 1% or 2% annually thanks to these factors can result in a difference of tens of thousands of dollars after 20 years, thanks to the power of compound interest.