one MEEN Ag said:
AggiEE said:
20% US Total Stock Market
20% US Small Cap Value
20% International Total Stock Market
20% Developed International Small Cap Value
20% Emerging Markets Value
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Represents:
40% US, 60% International
40% Cap Weight, 60% Value
I believe in global diversification and diversification of risk premia (factor based investing). Also concerned with high valuations in the US total stock market portending lower future returns relative to other asset classes. Hence a large tilt towards Value and International. Served me well over the years, there's many viable long term strategies, so YMMV based on belief and preference.
Since you offered this up I'm just going to respond here instead of make a general post. 60% of your portfolio is going to get crushed long term. Of the 20% that is US total market, you only capture about a 1-2% growth rate from the whole stock exchange becoming more efficient with tech rollout.
Why diversify so heavily? And why when you diversify do you think going international is the answer?
Over the past 20 years we've seen:
-An absolute increase in correlation between asset classes ups and downs. So going international or small doesn't save you from downturns.
-Basically no growth outside of inflation in emerging markets.
My general points are:
-Betting on third world countries to do the basics right is fighting cultural problems more money can't cure. They are 3rd world for a reason and corruption and incompetence will always hold them back.
-Big international stocks that are not represented in american stock exchanges are generally dinosaurs that exist as jobs programs first. Their governments don't let them win either. Look at the UK demanding a one time windfall of the OG industry the second they make some money.
-Small caps vs large caps in the US stock exchange doesn't reflect the recent capabilities of large companies to scale technology. Any small cap becoming large cap you can capture in the S&P500 ETF.
A huge majority of your portfolio is going to miss the biggest economic drivers of the next generation: AI rollout and increasing value and growth through technology
I don't believe that the S&P500 with starting CAPE of 40 has higher expected returns than international or value stocks. The value spread is essentially near dot com levels, a period where the S&P500 went nowhere for 13 years but Value compounded at 10% annually.
There's this misconception that investment returns require technology stocks (or insert trendy stock sector of the day) to perform well. In a relatively efficient market this should not be the case; your investment returns are based relative to priced expectations. If everyone knows AI is the future and rapidly prices that growth into stocks, then it confers no real advantage to investing in specifically AI or technology stocks in the long term. The market creates a handicap with higher discount rates to companies with riskier or more uncertain cash flows, and adds a risk premium into these prices because why else would anyone buy them if it was so certain that only large cap US technology stocks perform the best? As the mentioned previously, they don't always perform the best.
People often confuse the US outperformance of international stocks since 1990 as being based on fundamentals, but that's largely not the case at all. Over 80% is explained by revaluation. US stocks were cheap in 1990 with a CAPE around 15, International were expensive at around 40. Now in 2025 that tables are reversed. Instead of Japanese manufacturing being the narrative of the day in 1990, it's US large cap AI and tech.
From 2000-2015, darling dot com companies like Microsoft and CISCO had profitability growth that dwarfed the rest of the S&P, and yet their stocks massively underperformed the index? Why was that? Because the price you paid for that growth was too high and the lofty expectations of even higher profitability growth did not materialize
In fact, there's a historical Value premium into excess of the market that is partially explained by risk, there is no "Growth" premium.
The benefits of global diversification aren't measured on a daily correlation basis. It's the long term covariance that matters the most. I don't globally diversify to protect against a short term downturn, I globally invest to meet my investment objectives over long horizons and spreading my bets is more likely to achieve that goal.
Emerging markets has much higher projected growth than developed markets, as they have a widening middle class and significantly higher total population. They are part of the market, and so I invest in them. They are not all dinosaur industries, they are widely represented in technology and manufacturing.
The S&P500 by definition does not capture the rotation from Small Cap to Lage Cap. By the time it enters the index, it's already large. A small cap value fund, however captures the rotation of a company becoming Growth until it is sold and captures that historical premium for the rotation of Value to Growth.
I believe the largest beneficiary of AI will be the non-tech components of industry that now have more efficient operations. So you do not need to bet specifically just on AI stocks to capture whatever benefits materialize from that space. In fact, if all this capital spend by big tech is ultimately commoditized, you could have a situation where tech is actually (in aggregate) the loser in AI from an investment standpoint.
My portfolio suits my personal tastes and situation. My human capital and social security represent a high amount of US based concentration, and as a hedge I prefer to hold more international stocks. It's also a tilt towards assets with higher expected returns.
However, over long horizons my expectations are modest, with premiums over the US market of roughly 1% annualized or less. A person that invests only in US large caps in comparison is likely to do fine, but they are also subject to poor periods like 1967-1982 or 2000-2013, so such a person better prepare for a holding period of three decades or more. A more diversified investor is less likely to encounter very long periods that do not match inflation.
As with a lot of things in investing, there's not a "right or wrong" answer here. I believe all stock asset classes should do well over the long term. Whether that's someone who is 100% S&P500 or 100% Emerging Markets Value. The data tends to bear this out. Success will be defined by your ability to stay invested and keep yourself composed.
