Does market-cap have TOO much US?

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lnp
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Does market-cap have TOO much US?

Post by lnp »

Do you think the market-cap global portfolio has too much US? (60% of MSCI ACWI)

Image

Arguments for keeping market-cap:
-Does this really matter now when our world has become so globalized?
-If markets are very efficient, then 60% to the US is close to optimal.

Arguments for less US than market-cap:
-US is really expensive price-to-earnings compared to other countries
-60% in one country is simply TOO much

About me:
I live in Denmark, so my human capital is tied to Denmark (Europe), and maybe I’ll work in the technology sector.

Should I invest less than market-cap in the US?
Do you have any good ressources talking about this? (Ben Felix hasn’t made a video…)
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Re: Does market-cap have TOO much US?

Post by rai »

Apple makes 67% of its earnings outside of US. I’ll wager Microsoft, Amazon, Google does likewise.
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Re: Does market-cap have TOO much US?

Post by Robot Monster »

That's the question posed in an Economist article, "Should investors diversify away from America? Even global indices are still heavily exposed to the country" link

The article comes to the conclusion that:
A good investment rule, then, might be to allocate a third of an equity portfolio to American stocks, a third to an index of stocks listed in other rich countries and a third to emerging-market shares.
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Re: Does market-cap have TOO much US?

Post by MarkRoulo »

larsnyborgpedersen wrote: Wed Dec 01, 2021 11:57 am Do you think the market-cap global portfolio has too much US? (60% of MSCI ACWI)

Image

Arguments for keeping market-cap:
-Does this really matter now when our world has become so globalized?
-If markets are very efficient, then 60% to the US is close to optimal.

Arguments for less US than market-cap:
-US is really expensive price-to-earnings compared to other countries
-60% in one country is simply TOO much

About me:
I live in Denmark, so my human capital is tied to Denmark (Europe), and maybe I’ll work in the technology sector.

Should I invest less than market-cap in the US?
Do you have any good ressources talking about this? (Ben Felix hasn’t made a video…)
For folks in the EU (and maybe even the UK and other EU peripheral countries such as Switzerland) I think you should probably think of your human capital tied to Europe rather than to a specific country. This is much like Americans thinking in terms of the US economy rather than specific state economies (though, obviously, the local economy matters, too). You can move from Denmark to Germany if you need to. And I don't expect Denmark to diverge too wildly from the EU as a whole.

There are lots of edge cases, of course. Greece has done extra poorly over the last 10 years. But techies in Greece could leave, much like techies in a US state can leave if the state has a long-term poor economy.

I think it can make sense to over-invest in companies that do their accounting in the currency that you use. If the Australian stock market goes up in Aussie dollar terms, but down in my currency, the returns for me are losses. An Australian would see gains and even if the Aussie dollar dropped against world currencies, the results for an Australian might still be positive in terms of Australian spending.

So over-weighting Europe might make sense for you.

Which means that you need to underweight something and the US is a pretty good candidate.

I don't see a problem with a European holding 40% US stocks rather than a world portfolio of 60%. I also didn't see a problem with US investors not holding 50% of their portfolio in Japanese stocks in 1990.

But you'll find that world-cap vs tilt-towards-home (or, for Americans, sometimes invest only at home) is an ongoing topic at Bogleheads. You won't find a consensus.
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Re: Does market-cap have TOO much US?

Post by Marseille07 »

I don't understand the question. Market-cap global portfolio is what it is.

It never has too much or too little of US. If you were holding market-cap global and want to diverge from that, you need to have a very good reason to do so.
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Re: Does market-cap have TOO much US?

Post by TurtleBeatsHare »

It depends on how you define “too much” and at a minimum the percentages above would need adjustment to reflect that equity market exposure is not synonymous to exposure to the domestic economy because of foreign revenue. I tend to think market capitalization free float should be the default position, in part because I haven’t seen a better alternative, but the world is very long on the US equity market and the dollar and might be weighted heavily towards the US relative to its GDP and growth rate and massive fiscal insolvency at the federal level over the next 50/100 years of revenue v expenses. Similar, the world is likely underweight on China—but again its difficult to fix that issue because half or more of the Chinese equity market is inaccessible to foreign investment and because the Chinese equity market reflects a smaller proportion of Chinese economic activity due to a relative preference for bond funding and SOEs and currency devaluation.
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Re: Does market-cap have TOO much US?

Post by Laurizas »

MarkRoulo wrote: Wed Dec 01, 2021 12:43 pm So over-weighting Europe might make sense for you.
Which means that you need to underweight something and the US is a pretty good candidate.
I don't see a problem with a European holding 40% US stocks rather than a world portfolio of 60%.
I think it's contrary, too much eggs in one basket. If one's job, future pension and real estate is tied with Europe, he already has enough exposure to this region and should underweight Europe and over-weight other regions.
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Re: Does market-cap have TOO much US?

Post by lnp »

Marseille07 wrote: Wed Dec 01, 2021 12:51 pm I don't understand the question. Market-cap global portfolio is what it is.

It never has too much or too little of US. If you were holding market-cap global and want to diverge from that, you need to have a very good reason to do so.
But why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
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Re: Does market-cap have TOO much US?

Post by Marseille07 »

larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 am
Marseille07 wrote: Wed Dec 01, 2021 12:51 pm I don't understand the question. Market-cap global portfolio is what it is.

It never has too much or too little of US. If you were holding market-cap global and want to diverge from that, you need to have a very good reason to do so.
But why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
Because it is simple - it is what it is.

Anything else introduces subjective judgment. For example, GDP - are you talking about nominal or PPP? Measure Eurozone's GDP in USD? Things like that.
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Re: Does market-cap have TOO much US?

Post by willthrill81 »

Marseille07 wrote: Thu Dec 02, 2021 10:47 am
larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 am
Marseille07 wrote: Wed Dec 01, 2021 12:51 pm I don't understand the question. Market-cap global portfolio is what it is.

It never has too much or too little of US. If you were holding market-cap global and want to diverge from that, you need to have a very good reason to do so.
But why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
Because it is simple - it is what it is.

Anything else introduces subjective judgment. For example, GDP - are you talking about nominal or PPP? Measure Eurozone's GDP in USD? Things like that.
I personally believe that every allocation, including market cap weighting, involves subjective judgment. There are certainly good arguments in favor of market cap weighting, but there are arguments in favor of other allocation methods. Weighing the pros and cons of the various methods is inherently subjective.
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Re: Does market-cap have TOO much US?

Post by UpperNwGuy »

Marseille07 wrote: Wed Dec 01, 2021 12:51 pm I don't understand the question. Market-cap global portfolio is what it is.

It never has too much or too little of US. If you were holding market-cap global and want to diverge from that, you need to have a very good reason to do so.
And that's a fact.
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Re: Does market-cap have TOO much US?

Post by Marseille07 »

willthrill81 wrote: Thu Dec 02, 2021 10:51 am I personally believe that every allocation, including market cap weighting, involves subjective judgment. There are certainly good arguments in favor of market cap weighting, but there are arguments in favor of other allocation methods. Weighing the pros and cons of the various methods is inherently subjective.
Choosing to invest in market cap weighting involves subjective judgment. The market cap weighting itself does not, since it literally is what it is.
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Re: Does market-cap have TOO much US?

Post by willthrill81 »

Marseille07 wrote: Thu Dec 02, 2021 10:56 am
willthrill81 wrote: Thu Dec 02, 2021 10:51 am I personally believe that every allocation, including market cap weighting, involves subjective judgment. There are certainly good arguments in favor of market cap weighting, but there are arguments in favor of other allocation methods. Weighing the pros and cons of the various methods is inherently subjective.
Choosing to invest in market cap weighting involves subjective judgment. The market cap weighting itself does not, since it literally is what it is.
Correct.
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Re: Does market-cap have TOO much US?

Post by YRT70 »

larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 am But why is market-cap the standard?
It's the most passive, cheapest and lowest turnover strategy.
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Re: Does market-cap have TOO much US?

Post by nisiprius »

larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 amBut why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
1) Because the market itself is cap-weighted. The market value of all AAPL stock (almost $3 trillion) is the market capitalization of Apple. The market value of all Henry Schein stock (almost $10 billion) is the market capitalization of Henry Schein. Imprecisely one can say that the market keeps 3000X as much money in Apple stock as it does in Henry Schein stock.

2) Because of financial economics theory which says that, under a pack of assumptions of course, the market portfolio--the collection of all of the securities trading frictionlessly by rational investors within a single market--has the highest risk-adjusted return. So does a portfolio that matches the percentage composition of the market portfolio. That's the theoretical basis of why it is the standard.

It's not arbitrary. If the assumptions are wrong it won't be the optimum, and if the way risk-adjusted return is measured is not what you want to optimize, it won't be the optimum for you, but it is not arbitrary. The Leaning Tower of Pisa may be superior to a gravity-aligned tower for some purpose, but it is not arbitrary to say "a plumbline is vertical and the Leaning Tower is tilted," and not the other way around.

Equal weighting is arbitrary. It always depends on subjective definitions of the things to be weighted. Even something as simple as "equal-weighted S&P 500" runs into this problem. Five of the S&P 500 companies have two share classes of stock; the biggest is Alphabet, which issues two share classes, GOOG and GOOGL. Does equal-weighting mean you put 1/500th into every company, thus 1/500th in AAPL but only 1/1000th in GOOG? OR does it mean you put 1/505th into every stock, and thus 1/505th in Apple but 2/505ths in Alphabet?

A much more important problem is that under cap-weighting, a practical portfolio can be a decent representative sample. A (cap-weighted) S&P 500 fund holds 80% of the market by cap weight, so it is a decent proxy for the whole market. The S&P 1500 covers over 90%. But there are roughly 4,200 stocks in the market, so an equal-weighted S&P 500 fund is missing 7/8ths of the equal-weighted market and can't be a good representative sample. An equal-weighted S&P 1500 would be unfeasible, and would still be only 36% of the equal-weighted market.

3) I've never tried to dig it out and read it so I'm not sure exactly what his rationale was, but for index construction, a rationale behind cap-weighting was laid out in 1922 by Irving Fisher in a book called The Making of Index Numbers, and it was accepted and became a tradition. It was used by the Cowles Commission in their monumental volume Common-Stock Indexes, 1871-1937, which is almost certainly the source for any stock data you find that goes back "to 1871,"; by Standard and later S&P in their indexes; and in 1957 for the construction of the S&P 500 index.
Last edited by nisiprius on Thu Dec 02, 2021 11:16 am, edited 6 times in total.
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Re: Does market-cap have TOO much US?

Post by lnp »

Marseille07 wrote: Thu Dec 02, 2021 10:47 am
larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 am
Marseille07 wrote: Wed Dec 01, 2021 12:51 pm I don't understand the question. Market-cap global portfolio is what it is.

It never has too much or too little of US. If you were holding market-cap global and want to diverge from that, you need to have a very good reason to do so.
But why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
Because it is simple - it is what it is.

Anything else introduces subjective judgment. For example, GDP - are you talking about nominal or PPP? Measure Eurozone's GDP in USD? Things like that.
Equal weighting is as simple as market-cap. For example instead of market-cap the 500 biggest companies, you can equal weight them. In both cases you've only made the decision to chose the 500 biggest companies, instead of for example 1000 or 2000.

Just because something is simple, doesn't mean it's the most likely to have the best risk-adjusted returns.
I don't want simple. I want better risk-adjusted returns.
Why should market-cap give me the best risk-adjusted returns? (Except for the lower transaction costs perhaps)
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Re: Does market-cap have TOO much US?

Post by Marseille07 »

larsnyborgpedersen wrote: Thu Dec 02, 2021 11:04 am Equal weighting is as simple as market-cap. For example instead of market-cap the 500 biggest companies, you can equal weight them. In both cases you've only made the decision to chose the 500 biggest companies, instead of for example 1000 or 2000.

Just because something is simple, doesn't mean it's the most likely to have the best risk-adjusted returns.
I don't want simple. I want better risk-adjusted returns.
Why should market-cap give me the best risk-adjusted returns? (Except for the lower transaction costs perhaps)
Oh, well I just learned your objective which wasn't mentioned until now.

Improving risk-adjusted returns isn't so easy (crafting great-looking backtests is easy). I would think adding bonds would improve your risk-adjusted returns better than fiddling with market cap vs equal weight of stocks though.
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Re: Does market-cap have TOO much US?

Post by Tom_T »

Isn't the point of choosing market cap to get the total market return?
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Re: Does market-cap have TOO much US?

Post by nisiprius »

larsnyborgpedersen wrote: Thu Dec 02, 2021 11:04 amEqual weighting is as simple as market-cap. For example instead of market-cap the 500 biggest companies, you can equal weight them. In both cases you've only made the decision to chose the 500 biggest companies, instead of for example 1000 or 2000.
That's not equal weighting, that literally putting infinitely more weight on 500 companies and infinitely less weight on 3,700 of them.
I don't want simple. I want better risk-adjusted returns.
Why should market-cap give me the best risk-adjusted returns?
Because of financial economics theory, which of course may not be correct.

Also, pragmatically, it's not a huge difference and I wouldn't be surprised to see relative fluctuations, but the cap-weighted SPDR S&P 500 ETF, SPY, has had higher risk-adjusted return than the Invesco Equal-Weighted S&P 500 ETF, RSP.

Source

Image

Once upon a time there was a "Russell 2000 Equal-Weighted ETF," EQWS, which did poorly and was liquidated.
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Re: Does market-cap have TOO much US?

Post by lnp »

Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
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Re: Does market-cap have TOO much US?

Post by lnp »

YRT70 wrote: Thu Dec 02, 2021 11:00 am
larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 am But why is market-cap the standard?
It's the most passive, cheapest and lowest turnover strategy.
How is it more passive if investing in an ETF anyway? I could just invest in a risk-parity ETF instead of total market fund?
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Re: Does market-cap have TOO much US?

Post by lnp »

nisiprius wrote: Thu Dec 02, 2021 11:00 am
larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 amBut why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
1) Because the market itself is cap-weighted. The market value of all AAPL stock (almost $3 trillion) is the market capitalization of Apple. The market value of all Henry Schein stock (almost $10 billion) is the market capitalization of Henry Schein. Imprecisely one can say that the market keeps 3000X as much money in Apple stock as it does in Henry Schein stock.

2) Because of financial economics theory which says that, under a pack of assumptions of course, the market portfolio--the collection of all of the securities trading frictionlessly by rational investors within a single market--has the highest risk-adjusted return. So does a portfolio that matches the percentage composition of the market portfolio. That's the theoretical basis of why it is the standard.

It's not arbitrary. If the assumptions are wrong it won't be the optimum, and if the way risk-adjusted return is measured is not what you want to optimize, it won't be the optimum for you, but it is not arbitrary. The Leaning Tower of Pisa may be superior to a gravity-aligned tower for some purpose, but it is not arbitrary to say "a plumbline is vertical and the Leaning Tower is tilted," and not the other way around.

Equal weighting is arbitrary. It always depends on subjective definitions of the things to be weighted. Even something as simple as "equal-weighted S&P 500" runs into this problem. Five of the S&P 500 companies have two share classes of stock; the biggest is Alphabet, which issues two share classes, GOOG and GOOGL. Does equal-weighting mean you put 1/500th into every company, thus 1/500th in AAPL but only 1/1000th in GOOG? OR does it mean you put 1/505th into every stock, and thus 1/505th in Apple but 2/505ths in Alphabet?

A much more important problem is that under cap-weighting, a practical portfolio can be a decent representative sample. A (cap-weighted) S&P 500 fund holds 80% of the market by cap weight, so it is a decent proxy for the whole market. The S&P 1500 covers over 90%. But there are roughly 4,200 stocks in the market, so an equal-weighted S&P 500 fund is missing 7/8ths of the equal-weighted market and can't be a good representative sample. An equal-weighted S&P 1500 would be unfeasible, and would still be only 36% of the equal-weighted market.

3) I've never tried to dig it out and read it so I'm not sure exactly what his rationale was, but for index construction, a rationale behind cap-weighting was laid out in 1922 by Irving Fisher in a book called The Making of Index Numbers, and it was accepted and became a tradition. It was used by the Cowles Commission in their monumental volume Common-Stock Indexes, 1871-1937, which is almost certainly the source for any stock data you find that goes back "to 1871,"; by Standard and later S&P in their indexes; and in 1957 for the construction of the S&P 500 index.
It may not be a good representant of the equal-weighted market, but it may still be better. (I'm not saying it is, but just that it could be better, even though it's a worse representation)
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Re: Does market-cap have TOO much US?

Post by Tom_T »

larsnyborgpedersen wrote: Fri Dec 03, 2021 4:50 am
Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
So you want to beat the market. Hasn't that been the goal of an army of well-compensated managers for decades?
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Re: Does market-cap have TOO much US?

Post by RubyTuesday »

larsnyborgpedersen wrote: Fri Dec 03, 2021 4:58 am
nisiprius wrote: Thu Dec 02, 2021 11:00 am
larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 amBut why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
1) Because the market itself is cap-weighted. The market value of all AAPL stock (almost $3 trillion) is the market capitalization of Apple. The market value of all Henry Schein stock (almost $10 billion) is the market capitalization of Henry Schein. Imprecisely one can say that the market keeps 3000X as much money in Apple stock as it does in Henry Schein stock.

2) Because of financial economics theory which says that, under a pack of assumptions of course, the market portfolio--the collection of all of the securities trading frictionlessly by rational investors within a single market--has the highest risk-adjusted return. So does a portfolio that matches the percentage composition of the market portfolio. That's the theoretical basis of why it is the standard.

It's not arbitrary. If the assumptions are wrong it won't be the optimum, and if the way risk-adjusted return is measured is not what you want to optimize, it won't be the optimum for you, but it is not arbitrary. The Leaning Tower of Pisa may be superior to a gravity-aligned tower for some purpose, but it is not arbitrary to say "a plumbline is vertical and the Leaning Tower is tilted," and not the other way around.

Equal weighting is arbitrary. It always depends on subjective definitions of the things to be weighted. Even something as simple as "equal-weighted S&P 500" runs into this problem. Five of the S&P 500 companies have two share classes of stock; the biggest is Alphabet, which issues two share classes, GOOG and GOOGL. Does equal-weighting mean you put 1/500th into every company, thus 1/500th in AAPL but only 1/1000th in GOOG? OR does it mean you put 1/505th into every stock, and thus 1/505th in Apple but 2/505ths in Alphabet?

A much more important problem is that under cap-weighting, a practical portfolio can be a decent representative sample. A (cap-weighted) S&P 500 fund holds 80% of the market by cap weight, so it is a decent proxy for the whole market. The S&P 1500 covers over 90%. But there are roughly 4,200 stocks in the market, so an equal-weighted S&P 500 fund is missing 7/8ths of the equal-weighted market and can't be a good representative sample. An equal-weighted S&P 1500 would be unfeasible, and would still be only 36% of the equal-weighted market.

3) I've never tried to dig it out and read it so I'm not sure exactly what his rationale was, but for index construction, a rationale behind cap-weighting was laid out in 1922 by Irving Fisher in a book called The Making of Index Numbers, and it was accepted and became a tradition. It was used by the Cowles Commission in their monumental volume Common-Stock Indexes, 1871-1937, which is almost certainly the source for any stock data you find that goes back "to 1871,"; by Standard and later S&P in their indexes; and in 1957 for the construction of the S&P 500 index.
It may not be a good representant of the equal-weighted market, but it may still be better. (I'm not saying it is, but just that it could be better, even though it's a worse representation)
Better in what sense? Certainly not in a risk-adjusted sense.

If you really want to explore this, you probably need to read more on Sharpe ratios, risk-adjusted returns, and Modern Portfolio Theory. It’s important to understand the underlying assumptions. Or better yet, search user Nisiprius’ posts for very enlightening posts on risk-adjusted returns
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Re: Does market-cap have TOO much US?

Post by minimalistmarc »

Robot Monster wrote: Wed Dec 01, 2021 12:18 pm That's the question posed in an Economist article, "Should investors diversify away from America? Even global indices are still heavily exposed to the country" link

The article comes to the conclusion that:
A good investment rule, then, might be to allocate a third of an equity portfolio to American stocks, a third to an index of stocks listed in other rich countries and a third to emerging-market shares.
Is it just be or does that seem like a suboptimal investment rule.

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Re: Does market-cap have TOO much US?

Post by minimalistmarc »

YRT70 wrote: Thu Dec 02, 2021 11:00 am
larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 am But why is market-cap the standard?
It's the most passive, cheapest and lowest turnover strategy.
And you can just buy one ETF/fund to market cap weight the planet.
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Re: Does market-cap have TOO much US?

Post by sycamore »

Tom_T wrote: Fri Dec 03, 2021 5:16 am
larsnyborgpedersen wrote: Fri Dec 03, 2021 4:50 am
Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
So you want to beat the market. Hasn't that been the goal of an army of well-compensated managers for decades?
+1

larsnyborgpedersen no one's going to stop you from trying to get a better return. (I try myself, for a part of my portfolio.) The main thing is that's not enough to say "I want better returns" and just go from there. The burden is on you to justify why your approach will do better in the future, and why the risk(s) you're taking will lead to better risk-adjusted returns. Think of all the investment strategies/approaches the finance industry has productized: equal weighting, fundamental weighting, factor-based, 200 day SMA/trend-based, Growth at a Reasonable Price, Core and Explore, blah blah blah. Investigate whether they've consistently beaten the market-cap total stock market index. They all have their shortcomings (as does total market). So pick your approach but be sure about otherwise you might find yourself being swayed by the latest craze to come along.
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Re: Does market-cap have TOO much US?

Post by peskypesky »

How can a global market cap not include the world's second largest economy?
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Re: Does market-cap have TOO much US?

Post by whodidntante »

I do 50/50. I'm an American who plans to live as an international nomad after the work is done.
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Re: Does market-cap have TOO much US?

Post by peskypesky »

whodidntante wrote: Fri Dec 03, 2021 8:55 am I'm an American who plans to live as an international nomad after the work is done.
That's my plan too. Or...was.

I retired early at 53 in 2019, and was planning to spend the rest of my 50s travelling the world, being a digital nomad, before choosing a place to settle down.

Then....covid. Ugh.
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Re: Does market-cap have TOO much US?

Post by whodidntante »

peskypesky wrote: Fri Dec 03, 2021 8:59 am
whodidntante wrote: Fri Dec 03, 2021 8:55 am I'm an American who plans to live as an international nomad after the work is done.
That's my plan too. Or...was.

I retired early at 53 in 2019, and was planning to spend the rest of my 50s travelling the world, being a digital nomad, before choosing a place to settle down.

Then....covid. Ugh.
Ha! Foreign travel is still possible, at least to many destinations. It's definitely more of a maze of restrictions now.
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Re: Does market-cap have TOO much US?

Post by Ferdinand2014 »

larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 am
Marseille07 wrote: Wed Dec 01, 2021 12:51 pm I don't understand the question. Market-cap global portfolio is what it is.

It never has too much or too little of US. If you were holding market-cap global and want to diverge from that, you need to have a very good reason to do so.
But why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
Market cap is by definition the market. It is the actual weightings of the companies. Any other position is an active decision to not hold what the collective market of millions of investors believe the value of all publicly traded corporations should be. It’s not right or wrong. It’s simply the fact. It also generally has the lowest cost for owning stocks because market cap will have the lowest turnover and lowest expenses. There are many reasons however, to not be market cap: tax or foreign investment restriction laws, currency you plan to live in, risk aversion to say emerging economies, social or governance beliefs that all don’t necessarily imply you think your smarter than the collective market or trying to ‘beat’ the market.
Last edited by Ferdinand2014 on Fri Dec 03, 2021 10:09 am, edited 2 times in total.
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Re: Does market-cap have TOO much US?

Post by Marseille07 »

larsnyborgpedersen wrote: Fri Dec 03, 2021 4:58 am It may not be a good representant of the equal-weighted market, but it may still be better. (I'm not saying it is, but just that it could be better, even though it's a worse representation)
Sure, you can try whatever you want. Nobody is stopping you from doing that.

Changing weighting isn't even the only option to try outperforming. Lots of investors try all kinds of stuff.
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Re: Does market-cap have TOO much US?

Post by Ferdinand2014 »

peskypesky wrote: Fri Dec 03, 2021 8:52 am How can a global market cap not include the world's second largest economy?

Market cap indices implicitly require the ability for participants to have adequate free float and investable stocks for foreigners. If an investor is locked out, it can’t be included in market cap.
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Re: Does market-cap have TOO much US?

Post by seajay »

rai wrote: Wed Dec 01, 2021 12:00 pm Apple makes 67% of its earnings outside of US. I’ll wager Microsoft, Amazon, Google does likewise.
A factor is that many firms hedge their foreign currency exposure back into domestic (domicile) currency. The UK's largest 100 stocks source 70%+ of earnings from foreign, but still endured downside when the domestic currency/circumstances faltered (Brexit).

1969 US failed stock 4% SWR saw no such failure for UK 1969 start date. Similarly UK 1907 4% SWR failure saw no such failure for the US. 50/50 of both (currency diversification) is generally better than either alone as concentration risk is a major risk.
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Re: Does market-cap have TOO much US?

Post by willthrill81 »

larsnyborgpedersen wrote: Thu Dec 02, 2021 11:04 am I don't want simple. I want better risk-adjusted returns.
Then I urge you to read up on factor investing. There are countless threads about it here.
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Re: Does market-cap have TOO much US?

Post by JBTX »

Too much is subjective. I will say given US is so high I am not market weight international. It seems a reasonable compromise to me.
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Re: Does market-cap have TOO much US?

Post by arcticpineapplecorp. »

the US market cap changes over time:

Image

higher in the 50s-60s, lower in the 90s, etc.

this will change again over time. If you own the total world stock market you don't have to worry about anything because you automatically adjust along with the global market.
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Re: Does market-cap have TOO much US?

Post by lnp »

Tom_T wrote: Fri Dec 03, 2021 5:16 am
larsnyborgpedersen wrote: Fri Dec 03, 2021 4:50 am
Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
So you want to beat the market. Hasn't that been the goal of an army of well-compensated managers for decades?
They've been trying to get better risk adjusted returns. I just want higher returns for more risk (same risk adjusted returns)
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Re: Does market-cap have TOO much US?

Post by Tom_T »

larsnyborgpedersen wrote: Sat Dec 04, 2021 6:17 am
Tom_T wrote: Fri Dec 03, 2021 5:16 am
larsnyborgpedersen wrote: Fri Dec 03, 2021 4:50 am
Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
So you want to beat the market. Hasn't that been the goal of an army of well-compensated managers for decades?
They've been trying to get better risk adjusted returns. I just want higher returns for more risk (same risk adjusted returns)
Well, there are many ways to possibly get higher returns for more risk. :)
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Re: Does market-cap have TOO much US?

Post by sycamore »

larsnyborgpedersen wrote: Sat Dec 04, 2021 6:17 am
Tom_T wrote: Fri Dec 03, 2021 5:16 am
larsnyborgpedersen wrote: Fri Dec 03, 2021 4:50 am
Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
So you want to beat the market. Hasn't that been the goal of an army of well-compensated managers for decades?
They've been trying to get better risk adjusted returns. I just want higher returns for more risk (same risk adjusted returns)
Risk -- which risk? In terms of "risk adjusted returns," risk usually means volatility or standard deviation of returns as that's something that can be measured.
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Re: Does market-cap have TOO much US?

Post by UpperNwGuy »

larsnyborgpedersen wrote: Sat Dec 04, 2021 6:17 am
Tom_T wrote: Fri Dec 03, 2021 5:16 am
larsnyborgpedersen wrote: Fri Dec 03, 2021 4:50 am
Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
So you want to beat the market. Hasn't that been the goal of an army of well-compensated managers for decades?
They've been trying to get better risk adjusted returns. I just want higher returns for more risk (same risk adjusted returns)
How do you plan to accomplish that?
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Re: Does market-cap have TOO much US?

Post by nisiprius »

larsnyborgpedersen wrote: Sat Dec 04, 2021 6:17 am...They've been trying to get better risk adjusted returns. I just want higher returns for more risk (same risk adjusted returns)...
Unless you mis-spoke and said the opposite of what you meant, or are just stirring the pot, you are confusing me. Upthread you said:
I want better risk-adjusted returns.
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Re: Does market-cap have TOO much US?

Post by vanbogle59 »

larsnyborgpedersen wrote: Sat Dec 04, 2021 6:17 am They've been trying to get better risk adjusted returns. I just want higher returns for more risk (same risk adjusted returns)

"I just want higher returns" - LOL. Me too.
"higher returns for more risk" - You only control one of those variables. You can choose to increase your risk. The returns may are may not behave according to your plan.
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Re: Does market-cap have TOO much US?

Post by Dave55 »

larsnyborgpedersen wrote: Fri Dec 03, 2021 4:50 am
Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
You can get a better return than the market, but you won't be able to get a better return consistently. Even choosing a fund that has beaten the market for the past 5 years does not mean that the fund will continue to out perform. And if Murphy's law applies, the moment you invest in that fund is the moment is begins to underperform.

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Re: Does market-cap have TOO much US?

Post by jeffyscott »

larsnyborgpedersen wrote: Thu Dec 02, 2021 10:36 am
Marseille07 wrote: Wed Dec 01, 2021 12:51 pm I don't understand the question. Market-cap global portfolio is what it is.

It never has too much or too little of US. If you were holding market-cap global and want to diverge from that, you need to have a very good reason to do so.
But why is market-cap the standard?
Why not equal weight or base it on fundamentals or GDP or something else?
If you did weight by GDP, it looks like US would be about 25%. As you are European, maybe that's a reasonable way to come up with a weighting for US?

Few of the Americans on here saying "market cap is the way to go", actually market cap the world. Though it's getting easier for more of us to do so. I went to 50/50 many years ago, when that was slightly under weighting the rest of the world, now (still at 50/50) I am over weighting what we USians call "International stocks", with the US at a ridiculous 60% of world market cap. So I guess we have now achieved the point where the Vanguard target retirement funds actually are market weighting the world.

Even fewer market cap weight their allocations between stocks and bonds, if they did they would be about 50/50, unless that's changed.
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Re: Does market-cap have TOO much US?

Post by Tom_T »

The definition of "market cap" seems to be all over the place in this thread.
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Re: Does market-cap have TOO much US?

Post by UpperNwGuy »

Tom_T wrote: Sun Dec 05, 2021 6:37 am The definition of "market cap" seems to be all over the place in this thread.
I see only two definitions expressed in this thread: market cap for US and market cap for world. What other definitions are you seeing?
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Re: Does market-cap have TOO much US?

Post by rich126 »

Right now my mind is elsewhere to figure out the details but I"m sure someone more interested can figure it out.

This is from an article posted in 2015
https://www.marketwatch.com/story/heres ... 2015-08-12
Some readers have noted that China looks unusually small — that’s because the methodology here is to use MSCI’s numbers. The index provider still keeps out the so-called A-shares from inclusion in its indexes, for reasons including capital mobility. Were the A-shares included, even after the rout in that country, the market cap of China would swell by tenfold.
In good times you want the weighting, in bad times you want it to tilt to the better performing markets. Pretty hard/impossible to do that.
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Re: Does market-cap have TOO much US?

Post by lnp »

UpperNwGuy wrote: Sat Dec 04, 2021 6:52 am
larsnyborgpedersen wrote: Sat Dec 04, 2021 6:17 am
Tom_T wrote: Fri Dec 03, 2021 5:16 am
larsnyborgpedersen wrote: Fri Dec 03, 2021 4:50 am
Tom_T wrote: Thu Dec 02, 2021 11:14 am Isn't the point of choosing market cap to get the total market return?
But why is it important to get the total market return? Why not get a better return instead? (if possible)
So you want to beat the market. Hasn't that been the goal of an army of well-compensated managers for decades?
They've been trying to get better risk adjusted returns. I just want higher returns for more risk (same risk adjusted returns)
How do you plan to accomplish that?
Investing more in emerging markets and factor products (small value)
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