[rsliu]

"Thus, for investors who are neither high net worth nor financially sophisticated, index investing with periodic rebalancing of a sensibly diversified portfolio w/ minimized internal correlations, is clearly the best long term strategy if you believe that US and global asset classes will continue their inexorable climb as they have for the past 100 years."

This is wrong. Let's say you follow Vanguard's standard advice and get a 70/30 stock bond allocation mix, and then just buy their index funds. First of all, even though you've 'diversified', your risk exposure still primarily comes from equities. This stems from the fact that equities are more volatile than bonds, which, when combined with the fact that most of your exposure is in equities, leads your portfolio to be highly correlated with the stock market. You can mitigate this problem by changing your allocation in favor of bonds, but that reduces your returns.

So how do you solve this problem? Leverage. To really capture the benefit of diversification, you'd want to lever up the risk share of your bond allocation until you have the same risk from bonds as you do from stock (assuming that asset classes have similar sharpe ratios, this should mean you've levered the returns of your bond allocation up to equities returs as well). So now, instead of buying 70/30, you're buying something like 50/100. With this allocation, you'd expect roughly the same returns as if you were just 100% invested in equities, but with a significant reduction in risk because bonds and stocks aren't 100% correlated.

Unfortunately you can't do this because our government doesn't allow you to lever your portfolio.