I've read quite a bit about home bias, mostly in this forum, but also in other resources such as vanguard papers. Perhaps the paper that influenced me most in this regard is The role of home bias in global asset allocation decisions. Another useful resource has been the Canadian couch potato (specifically the Global couch potato), in that Canada is a small economy as well.
However, there is small, and there is very small, and I believe Israel falls in the latter category. In addition, there is the matter of considerable instability in our region.
I'm 30 years old (no debts, steady job), so in Bogle's age in bonds spirit I was thinking about the following allocation:
30% Israel total government bond index (about half of which is inflation-indexed)
20% TA-100 Index (the broadest local index I can invest in practically, this can be probably thought of as the equivalent of S&P 500)
30% Vanguard Total Stock Market ETF (VTI)
20% Vanguard FTSE All-World ex-US ETF (VEU)
***EDIT***
Following the advice below, my updated portfolio is now the following:
30% Israel total government bond index (about half of which is inflation-indexed)
10% TA-100 Index (the broadest local index I can invest in practically, this can be probably thought of as the equivalent of S&P 500)
30% Vanguard Total Stock Market ETF (VTI) [in tax-exempt account]
30% Vanguard Total International Stock ETF (VXUS) [in taxable account]
Some considerations:
1. I'm pondering if the Israeli government is reliable enough to be considered as risk-free as it is assumed in the portfolio above (it has been so far).
2. I've over-weighted US stocks over international due to lower commissions and better tax efficiency (it is my understanding that US-domiciled world funds are not tax efficient, and trading in EU markets is expensive and inconvenient here).
3. I don't want to complicate myself with tilting for now (harder rebalancing, higher fees, more transactions, etc. [we don't have commission free brokers here]).
4. I am aware of the possibility of international brokers (such as Interactive Brokers), however this considerably complicates my tax reports, incurs high wire fees, and generally complicates my financial life.
***EDIT***
Regarding global bonds, consider the following article by vanguard: Global fixed income - considerations for US investors
Assuming one can apply this finding to other countries (seems reasonable), it seems that an NIS (shekel) - hedged bond fund would be the way to go. Unfortunately, we don't have such an ETF (we have an ETN that does this [0.8% TER], but I steer clear of those). The paper also recommends 20%-40% global exposure in the bond allocation, so for a 70-30 portfolio that comes out to 6%-12% which doesn't seem that meaningful anyway. I did find one interestinf ETF in this regard, which tracks emerging market government bonds. Perhaps that should warrant allocation?Intuitively, if the components of international bond returns are imperfectly correlated with those of U.S. bond returns, it stands to reason that a diversification benefit should ensue: Overall portfolio volatility should be reduced. However, Figure 4 reflects the reality that any such correlation benefit is over whelmed by the sheer magnitude of the currency volatilities shown in Figure 3. In other words, the currency exposure inherent in international bonds dominates their volatility, negating any diversification benefits that might be expected otherwise.
Your advice will be greatly appreciated.
Thanks!