Does an asset class allocation of less than 5% make sense?

In allocating the asset classes in a portfolio, many “experts” recommend that to keep things simple, it does not make sense to sub-divide the portfolio into anything less than 5%. The usual cited reason is that it complicates the portfolio with very little increase in benefit.

For example, if an asset class has an allocation of 2.5%, even if it were to gain 20%, its overall impact on the portfolio is going to be only 0.5%.

Recently, this question came up on the Bogleheads’ forum Why allocate less than 5% to anything? Roy crunched some numbers for illustration:

Since 1972: 100% S&P 500:
CAGR 9.26%
Standard Dev 18.59%

Since 1972: 97.5% S&P 500 and 2.5% CCFs:
CAGR 9.35%
Standard Dev 18.17%

Since 1972: 95% S&P 500 and 2.5% CCFs and 2.5% REITs:
CAGR 9.43%
Standard Dev 17.97%

There appears to have supporters on each sides. Yet, the resident experts both seemed to be OK with the idea of less than 5% allocations:

Larry Swedroe has about 3% in CCFs in his personal portfolio and Rick Ferri suggests only 2% or so in microcap.

For me personally, my current minimum allocation is 4%. Larry sums up this issue with the following statement:

It is not an issue of doing much, if the cost is effectively zero if it adds anything it should be done.

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