Stock asset allocation for non-US investors

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Ambox globe content.svg This article contains details specific to non-US investors. It does not apply to United States (US) investors, or to US citizens and US permanent residents (green card holders) living outside the US.

Stock asset allocation for non-US investors looks at how a non-US investor might decide on their asset allocation within stocks.

When deciding on their stock allocation, every investor needs to make a number of decisions:

  • What regional allocation will I adhere to?
  • Do I want global diversification?
  • Do I overweight one region?
  • Do I overweight my region and introduce a home-bias?

Worldwide or overweighting a region/country

One of the Boglehead principles is to diversify. The principle mentions that rather than trying to pick the specific securities or sub-asset classes of the market that will outperform in the future, Bogleheads buy funds that are widely diversified, or even approximate the whole market.

Owning the whole worldwide stock market

Owning the whole worldwide stock market seems to implement the diversify principle the most closely. It would mean to own large cap, mid cap and small cap stocks of the developed and emerging markets, covering about 98% of the worldwide stock market.

  • Sometimes a simpler portfolio is warranted as, unfortunately, owning the whole worldwide stock market might require a complex and more expensive portfolio of multiple funds. Hence :
    • focus on large cap and mid cap stocks of the developed markets only: covers about 75% of the worldwide stock market[citation needed]
    • focus on large cap and mid cap stocks of the developed and emerging markets: covers about 85%-90% of the worldwide stock market and might be achieved with one or two funds.[citation needed]

Home bias

Home bias is the overweight of your country or region in your asset allocation: See: Home country bias from finiki, and Equity home bias puzzle from Wikipedia.

Overweighting the US market

Many US based Bogleheads overweight the US stock market.[citation needed] This might also be a strategy for the non-US investors[citation needed]

Studies

Forum member Siamond wrote a series of articles on the Boglehead blog finpage.blog named investing in the world where he poses the question: Could one simply invest in the world, using global stocks and global bonds? And if this proves unsatisfying, is there a proper middle ground between domestic and global allocations?

  • Part 1[1] studies a fairly extreme position of investing 100% in the world (global stocks and global bonds).
The outcome proved surprisingly diverse, due to very distinct (and hard to predict without hindsight) patterns in inflation and exchange rates in the various countries being investigated. The author concluded by the desire to look at more balanced asset allocations, involving domestic equities as well as global equities.
  • Part 2[2] explores the opposite position of exclusively investing with domestic assets. The article focuses on the historical returns from 16 developed countries, looking from the perspective of a local investor, and assuming a strong home country bias to begin with (i.e. solely using domestic stocks and domestic bonds).
The study concludes that a fully domestic investment can deliver fairly good results, as anybody having invested in the US or Canada knows. It can even deliver very impressive results as Swedish citizens experienced in the past decades. But it can also put local investors in devastating situations, with decades-long drawdowns for both stocks and bonds (in real terms), and ruin even the most conservative retirement plans, as Spain, Italy and Japan investors went through.
  • Part 3[3] seeks a middle ground and looks at more diversified portfolios mixing domestic and global investments in the various countries of the study. It looks at the mitigation mixing domestic and global can bring to the countries having fared the worst, but also consequences for countries having fared better.
Generally speaking, a broad exposure to global stocks (while still keeping a tilt towards the domestic market and without introducing any such globalization on the bonds side) seemed a fairly solid approach, reducing the risk of large underperformance by being in a ‘loser’ country.

The author believes that this study makes a convincing case to seek a fairly high exposure to global (or international) equities, while keeping a significant tilt towards domestic equities.

Variations on Boglehead investing

Next to the mainstream Boglehead stock allocation there are a few often practiced variations on Bogleheads investing discussed on the forum.

  • Adding and overweighting of REITs;
  • Adding more asset classes to a portfolio: gold, commodities, ... various sub-asset classes of bonds;
  • Tilt to value and small cap;
  • Slicing and dicing the market and overweighting some of the slices.

Within the US context several studies investigate the benefits and drawbacks of these variations. It is unclear if the conclusions that have been drawn for the US can be extrapolated to the worldwide investing.

Notes


References

See also

External links