Fees Eat Diversification's Lunch
16 Pages Posted: 28 Dec 2014 Last revised: 31 Mar 2016
Date Written: June 30, 2015
Diversification is often spoken of as the only free lunch in investing, yet we show that it is not free and is properly considered only in light of its costs. More-exotic asset classes typically come with a higher price tag. We show that fees on diversifying asset classes are high relative to their risk-adjusted diversification benefit. Because there is meaningful cross-sectional variation, fees need to be part of asset mix decisions and strategic asset allocation.
Keywords: investment fees, portfolio choice, asset allocation, diversification, endowment model
JEL Classification: G11, G23, I22, L30
Suggested Citation: Suggested Citation