northeastag said:
AggiEE said:
txaggieacct85 said:
billydean05 said:
Way low on international and way to heavy in growth and small cap/midcap.
so he should invest in Chinese companies?
International is 75% developed markets comprising of Europe and Japan by market Cap. 25% or so are in Emerging markets.
Chinese companies in a global allocation is less than 5% of the portfolio.
The US represents only 25% of global GDP, it would not be wise to allocate 100% of your portfolio to it exclusively as it has gone through some very bad and prolonged periods of performance. That's the point of diversification, since you don't know in advance of when those sorts of events will happen.
I got the same question on global exposure. I've been hearing that I need a healthy amount of it from FA for a long long time. But I am beginning to think that a person needs to be a great timer to make it pay. My global exposure really hasn't done squat in comparison to the US for decades. EM equities are pretty volatile, and EU growth is so slow and devoid of tech giants that it's hard to envision a ripping market there either. But I probably just chose poorly.
You don't need to be a great timer. You just need to stay invested with an asset allocation strategy. Part of diversification is knowing that certain parts of your portfolio will do poorly during certain periods of time. If you looked under the hood of individual stocks in an S&P 500 fund, you'd find the same phenomenon.
Here's a great article that explains many reasons why US markets have done better than Global markets:
https://www.aqr.com/Insights/Research/Journal-Article/International-Diversification-Still-Not-Crazy-after-All-These-YearsSummary: The vast majority of US outperformance is due to an increase in valuations from 1990 to today. ExUS had the opposite, it started with high valuations in 1990 and has seen a decrease in valuations. In other words, it wasn't fundamentally better performance that drove most of the better returns. You cannot expect changes in valuation to persist.
From 1950-2010, US vs exUS returns were roughly even with eachother. It's only been since 2010-2021 that US had significantly better performance. The opposite has happened, it just hasn't been recent; exUS had significantly better returns in the stagflation era of the 1970s and into the 80s. exUS also did better, with EM doing enormously better in the period from 2000-2012.
But the outperformance tends to come in short bursts - if you're not there for the ride, you will miss out. This is true of ANY investment style including the S&P 500. A globally diversified investor saw 10% returns annualized the past decade - even despite poor exUS performance. That's an acceptable outcome. I would rather take two decades of near 8% annualized growth than 0% one decade and 15% the next. So that's why I include international (with a large dose of EM) and also include Small Cap Value in my portfolio.
