Why Does the model invest in ETFs, INSTEAD of individual stocks or individual bonds?

Based on numerous studies, roughly 90% of variances in portfolio performance can be attributed to allocation choices between major asset classes, such as stocks and bonds. Roughly 10% of the value added is dependent upon individual stock or bond selection. Therefore, the best way to add value is to focus on our allocation to asset classes, sectors, regions of the globe, countries, etc.

According to Ibbotson Associates, research has estimated that asset allocation accounts for 91.5 percent of the variation between returns on different portfolios.

ETFs are efficient investment vehicles that allow us to focus on “investment buckets”. The allocation between buckets is what matters most, not individual stock or security selection.


Anecdotally, you did not need to pick a winning technology stock during the dot-com boom to make money; technology ETFs and indexes did quite well. Conversely, after the dot-com bust, stock selection would not have helped much since almost all technology stocks experienced traumatic declines.