mlewis wrote:I hope I don't offend anybody, but I have wondered for a while about something I heard Allen say in a boglehead expert panel session video I watched online.
If I remember correctly, the panel was talking about international allocation. Rick Ferri said something like how he split Euro/Pacific 50/50, and Allen said how he just groups it together into one fund.
This sort of baffled me. I know that different people come down differently on the S+D debate. But to my knowledge their is good evidence that splitting up your international allocation a bit has a good chance to boost returns.
Here's a link to a discussion from last August where Rick explains why he splits Europe/Pacific 50/50, with several comments from posters for and against the approach: viewtopic.php?f=10&t=94976
I'm not personally a fan of Rick Ferri's splitting of Europe/Pacific. First, this leaves out Canada (his personal and perhaps his model portfolio has some allocation to small cap international, which may include Canada, but certainly, he leaves out the large caps). Canada is developed, so it doesn't show up in the Emerging Markets allocation, and it comprises about 7.5% of the Total International Index (which means it is almost 10% of developed international equities).
Second, I'm unconvinced by Rick's arguments for the split. The Developed Market Index has historically tracked something close to the EAFE index (developed international), which itself is roughly 60% Europe and 40% Pacific. So Rick's split overweights Pacific slightly, and underweights Europe. His method would be expected to outperform anytime Pacific outperforms Europe. Likewise, anytime Europe outperforms Pacific, the "lumper" method of just holding Europe and Pacific in market weights will outperform. This is true ANYTIME you overweight a subset of a larger asset class. Think 50/50 splits of TSM ex-Enron / Enron (TSM would outperform) or TSM ex-Apple / Apple (the 50/50 split would outperform). Whenever an overweighted part outperforms, so will your portfolio. And vice versa.
I don't think Rick's approach is a grave sin against investing or anything of the sort. I just think it adds needless complexity that is as likely to outperform as it is to underperform.
Don't assume I know what I'm talking about.