For investors living in the U.S., there are some who will argue that, because of the global earnings of domestic large cap stocks, that is diversification enough, and an S&P 500 index portfolio is adequate diversification.
There are others who suggest that a better approach is to own an “all-world” ETF, such as Vanguard’s Total World Stock (VT) or iShares MSCI All Country World Index Fund (ACWI).
For VT, the world breakdown is as follows . . .
North America 46%
Emerging Markets 15%
Pacific Rim 13%
If one was to try to improve on an “all-world” fund, it would make sense to accentuate the portfolio for the sake of diversification and potential increased returns by adding components of small and value to the specific regions around the globe.
These are some thoughts on beginning to build a global portfolio.
But we are not done yet. Next we’ll look at the benefits of global diversification.
Your standard asset allocation is very US centered.
Since I’m living in Europe and intend to stay there, I was wondering what kind of asset allocation you’d recommend.
Thanks for the question, Christian. In highlighting The Coffeehouse Investor with investors across the nation (and around the world!), a misunderstanding has evolved over the years regarding a “standard ” allocation.
This has come about in large part because of the significant attention drawn to a particular “60/40” Coffeehouse portfolio that includes domestic large cap, value, small cap, small value, U.S. REITS, and international sectors, in equal proportions.
I want to emphasize that the above referenced portfolio is only one example of an unlimited number of ways in which you can build a Coffeehouse portfolio.
To express this in a different way, the Coffeehouse isn’t about a “standard portfolio.” It is all about the three investment principles that will guide you in all types of markets, in all ages of life, to reach your financial goals.
Next we’ll take a closer look at market capitalization weights around the world, and then use this data to build a portfolio that makes sense for you.
Back in the late 1980s, while working as a bond broker at Smith Barney in downtown Seattle, my largest client called me up and requested that I wire a chunk of his money to a company called “Vanguard,” and instruct them to invest the proceeds in its S&P 500 fund.
That was my introduction to John Bogle and his crew at Vanguard.
Over the next ten years, a life that had been adrift in purpose and passion became singular in focus: Introduce to others the simple concept of capturing the market’s total return through low cost, passively managed index funds.
It continues to be an incredible journey, highlighted by the opportunity to, on a few occasions, personally meet and engage with Mr. Bogle himself.
In today’s Wall Street Journal, John Bogle pens an OP-ED piece sharing his reflections on the birth of the first retail index fund. He writes. . .
The idea that passive equity management could outpace active management—then the mutual fund industry’s universal strategy—was derogated and ridiculed. The fund, now called the Vanguard 500 Index Fund, was referred to as “Bogle’s Folly.” Yet today indexing has come to dominate the field. Over the past five years, index funds have accounted for 100% of all equity funds’ cash flows, with assets now totaling $2 trillion, one-fourth of all equity fund assets.
Remember, take a moment to pass on the philosophy to someone who can benefit from it as you have!
I’m sure you are inundated with this kind of news all of the time, but here is another example of “experts” picking stocks and active management. What are your thoughts?
I received the above e mail yesterday, and a link directing me to a “stock picking guru” at one of Wall Street’s brokerage firms.
In short, the article suggests that you are better off picking individual stocks in this volatile market than you are in trying to guess the market’s direction.
This is the type of stuff that investors become addicted to in following the stock market on a daily basis.
There is a complete disconnect between short term trading and long term investing. I struggle with it sometimes as well.
I am in the business of helping people reach their financial goals, and so I keep a fairly close eye on the movement of the market, even though it is largely irrelevant to the day-to-day planning issues I address with our clients at Soundmark Wealth Management.
The next time you are tempted by a Wall Street guru to get caught up in the stock of the day, remember, your goal isn’t to make a quick buck over the next month (with your serious money), your goal is to capture the market’s entire return over the next ten years.
It has been a wild and wooly time for the financial markets over the past three months, with the S&P 500 Index declining about 10% since June 1, 2011.
The reason I know it has declined about 10% since June 1 is because I crunched the numbers.
But, I didn’t need to crunch the numbers to know that the stock market was experiencing a normal correction. I knew because my Coffeehouse inbox started getting flooded with e mails from investors across the nations, screaming,
“Help! The sky is falling! What do I do now?”
(This summer was also gratifying, because we didn’t have 2 clients call us at Soundmark Wealth Management, expressing the same concerns.)
And so this morning I decided to crunch some more numbers, and discovered that over the past 12 months, from August 27, 2010, the same S&P 500 Index is UP about 11%.
So here we are, 12 months later, and you can look at the market in one of two ways . . .
You can run for cover because the sky fell on top of you this summer . . .
Or you can pat yourself on the back, and acknowledge that your allocation and commitment to common stocks again has outpaced the low returns on fixed income investments over the past 12 months.
It all depends on you, and how you look at life.