US/world 50/50, or rebalance according to market cap?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
boomdeyada
Posts: 38
Joined: Tue Sep 08, 2015 6:09 pm

US/world 50/50, or rebalance according to market cap?

Postby boomdeyada » Fri Sep 11, 2015 12:05 am

I'm an Aussie investor so I have no home bias towards the US. For the international equities allocation, I'm trying to decide between:

50% US, 50% world total ex US (fixed split)

or

US / world total, rebalanced based on market cap

My time horizon is 25 years.

Valuethinker
Posts: 31206
Joined: Fri May 11, 2007 11:07 am

Re: US/world 50/50, or rebalance according to market cap?

Postby Valuethinker » Fri Sep 11, 2015 2:49 am

You should base on market cap and rebalance.

However, 50/50 is close to the current split of the US/ other developed (55/45 from memory-- Apple has a lot to answer for! ;-)). Main thing missing there would be Emerging Markets. And small caps that may not be in the index tracked.

Dude2
Posts: 571
Joined: Fri Jun 08, 2007 3:40 pm

Re: US/world 50/50, or rebalance according to market cap?

Postby Dude2 » Fri Sep 11, 2015 7:18 am

Is Total World (VTWSX) or some equivalent available? This balances all by itself based on market cap, and it does have the small cap exposure and emerging market exposure

...the FTSE Global All Cap Index, a free-float-adjusted, market-capitalization-weighted index designed to measure the market performance of large-, mid-, and small-capitalization stocks of companies located around the world. The index includes approximately 7,400 stocks of companies located in 47 countries, including both developed and emerging markets.


As a US investor, regardless of the fact that the US comprises about 50% of the global market, I still do not just buy this fund exclusively because I am not looking for global market cap. All things being equal, everybody in the world could buy this one stock index fund, but there are issues with currency fluctuations and how cheaply a fund appears from my perspective. International funds are more expensive.

boomdeyada
Posts: 38
Joined: Tue Sep 08, 2015 6:09 pm

Re: US/world 50/50, or rebalance according to market cap?

Postby boomdeyada » Fri Sep 11, 2015 11:17 am

Dude2 wrote:Is Total World (VTWSX) or some equivalent available? This balances all by itself based on market cap, and it does have the small cap exposure and emerging market exposure

...the FTSE Global All Cap Index, a free-float-adjusted, market-capitalization-weighted index designed to measure the market performance of large-, mid-, and small-capitalization stocks of companies located around the world. The index includes approximately 7,400 stocks of companies located in 47 countries, including both developed and emerging markets.


As a US investor, regardless of the fact that the US comprises about 50% of the global market, I still do not just buy this fund exclusively because I am not looking for global market cap. All things being equal, everybody in the world could buy this one stock index fund, but there are issues with currency fluctuations and how cheaply a fund appears from my perspective. International funds are more expensive.


Unfortunately, VTWSX is not available on the ASX. I am considering getting a US brokerage account.

I get what you mean! I'm considering the current split right now:

40% US Total Market
33% World ex US Total

20% AU ASX 300
7% Gold <-- tail risk hedge, especially considering how ASX is mostly financials

effectively, that's 55% US and 45% world. Does a fixed allocation like that seem reasonable?

Thank you!

Dude2
Posts: 571
Joined: Fri Jun 08, 2007 3:40 pm

Re: US/world 50/50, or rebalance according to market cap?

Postby Dude2 » Fri Sep 11, 2015 2:09 pm

Just another guy on the Internet here, so please take what I say with a grain of salt. We here in the US typically allocate from 20-40% of our equities to International. Yes, some do go higher, and some go lower. I have 70% of my assets in my home country. You are going with 20%?

If you have the time, give this a read. It isn't exactly light reading. :( The role of home bias in global asset allocation decisions

We explore home bias in four developed markets: the United States, the United Kingdom, Australia, and Canada.


My take on this is that you'd have to decide what your international allocation should be. Your question is more about overweighting the US. The Boglehead approach is to use market cap weight.

Also, it wouldn't have to be Vanguard Total World, just pointing out that anything that follows the "FTSE Global All Cap Index" would be very Boglehead.

There are many very interesting discussions about gold if you type that into the Bogleheads search field.

User avatar
JoMoney
Posts: 3967
Joined: Tue Jul 23, 2013 5:31 am

Re: US/world 50/50, or rebalance according to market cap?

Postby JoMoney » Fri Sep 11, 2015 6:48 pm

The advantage of holding a market-cap weighted portfolio is that rebalancing shouldn't be necessary, the portfolio should adjust on it's own as the market-caps change without needing to do anything.
I wouldn't worry too much about a few percent one way or another, 50/50 or world market-cap is pretty close. These allocation differences that are so frequently harped about on here are usually trivial, and almost certainly not something where anyone can predict in advance what will be "optimal" in the future.
Find a reasonable balance that you're comfortable with and isn't taking risks you don't understand, focus on your own ability to earn and save income, avoid unnecessary fees and expenses, "stay the course".
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

boomdeyada
Posts: 38
Joined: Tue Sep 08, 2015 6:09 pm

Re: US/world 50/50, or rebalance according to market cap?

Postby boomdeyada » Fri Sep 11, 2015 9:56 pm

Dude2 wrote:Just another guy on the Internet here, so please take what I say with a grain of salt. We here in the US typically allocate from 20-40% of our equities to International. Yes, some do go higher, and some go lower. I have 70% of my assets in my home country. You are going with 20%?


The Vanguard paper you read indeed encourages Australians to deviate from significant home bias :)

"in general, U.S. investors may have some justification for
marginal home bias, but investors in Australia and Canada might consider
increasing their allocations to foreign securities"

In the US, the top 5 stocks account for 10.21% of total capitalisation.

In AU, the top 1 stock accounts for 12.06% of the total capitalisation. The top 5 stocks account for 38.54%. Four of these top 5 stocks are banks.

When most stock market returns are delivered by companies in the financial industry, it starts looking like a "house of cards" to me where catastrophic financial collapses combined with decreased reliance on fossil fuels could stand to wipe 70-80% off the ASX 200.

I think the concentration risks of going with a higher AU allocation are just too great.

bh7
Posts: 210
Joined: Fri Aug 28, 2015 12:16 pm

Re: US/world 50/50, or rebalance according to market cap?

Postby bh7 » Sat Sep 12, 2015 12:09 am

In theory, cap weight would be ideal. It's just more work to maintain, for some people. If you can lookup the cap weight every time you rebalance, and calculate the shares, then it's better.

On the other hand , US index funds have lower costs and less tax losses, so they may return a premium over ex-US.

On the third hand, this expected premium may already be embedded in the US's higher PE ratio, so maybe the market has already priced US and international stocks correctly.

cjking
Posts: 1708
Joined: Mon Jun 30, 2008 4:30 am

Re: US/world 50/50, or rebalance according to market cap?

Postby cjking » Sat Sep 12, 2015 4:23 am

Just get a world tracker. That must be the easiest option. If you want to you can adjust your home/international split to take account of any overlap, though I doubt it will make much difference whether you do or not.

Though as I care about valuations, I'd consider 100% a world-ex-us fund (i.e. shun US equities completely.) Based on published PE10 data, I reckon world-ex-US has a 2.3% higher smoothed earnings yield at the moment. It's 6.4% versus 4.1% for the US.

Valuation data here:-
http://www.starcapital.de/research/stockmarketvaluation

Dude2
Posts: 571
Joined: Fri Jun 08, 2007 3:40 pm

Re: US/world 50/50, or rebalance according to market cap?

Postby Dude2 » Sat Sep 12, 2015 5:38 am

boomdeyada wrote:The Vanguard paper you read indeed encourages Australians to deviate from significant home bias :)

Yes, that paper totally justifies your position. Not sure what the "correct" international allocation number is from your perspective, but it looks like they are saying it lingers somewhere between 50-100%?
boomdeyada wrote:When most stock market returns are delivered by companies in the financial industry, it starts looking like a "house of cards" to me where catastrophic financial collapses combined with decreased reliance on fossil fuels could stand to wipe 70-80% off the ASX 200.

I totally get that. I feel that way about stocks in general sometimes.

jcgsing13
Posts: 4
Joined: Sun Sep 13, 2015 12:05 am

Re: US/world 50/50, or rebalance according to market cap?

Postby jcgsing13 » Sun Sep 13, 2015 4:35 am

MSCI world via ETF's would get you close to target. 58% US, 42% ROW. ACWI is the US listed ETF and LSE listed is IWDA.L (iShares). It has only 2.6% weighted to Australia but you could get to your target via a 100% AUS allocated fund/ETF.

Ma15
Posts: 45
Joined: Tue May 12, 2015 1:21 am
Location: Australia

Re: US/world 50/50, or rebalance according to market cap?

Postby Ma15 » Sun Sep 13, 2015 10:20 pm

.....
Last edited by Ma15 on Sun Apr 03, 2016 4:26 am, edited 1 time in total.

Ma15
Posts: 45
Joined: Tue May 12, 2015 1:21 am
Location: Australia

Re: US/world 50/50, or rebalance according to market cap?

Postby Ma15 » Sun Apr 03, 2016 4:23 am

.....

User avatar
bertilak
Posts: 5242
Joined: Tue Aug 02, 2011 5:23 pm
Location: East of the Pecos, West of the Mississippi

Re: US/world 50/50, or rebalance according to market cap?

Postby bertilak » Sun Apr 03, 2016 11:42 am

Seems to me, if you invest at a market cap ratio then it will stay that way without any action on your part.
I have a strong moral sense - by my standards. | -- Rex Stout

herpfinance
Posts: 142
Joined: Tue Nov 18, 2014 4:52 pm
Location: Denmark

Re: US/world 50/50, or rebalance according to market cap?

Postby herpfinance » Sun Apr 03, 2016 12:02 pm

jcgsing13 wrote:MSCI world via ETF's would get you close to target. 58% US, 42% ROW. ACWI is the US listed ETF and LSE listed is IWDA.L (iShares). It has only 2.6% weighted to Australia but you could get to your target via a 100% AUS allocated fund/ETF.


As a non-US investor, this is along the lines of what I do. I hold funds replicating MSCI World and MSCI Emerging Markets IMI indices. Then, I only need to decide on the DM / EM split and not care about any other weighting. This way I am only missing developed small caps, but I do not consider their inclusion worth the extra complexity and cost - exposure can be obtained with SPDR® MSCI World Small Cap UCITS ETF, but the TER is 0.45%.

If I had access to Vanguard FTSE All-World UCITS ETF (VWRL), I would most likely hold that fund instead. Global equity exposure in a single fund, however you do not get small cap exposure.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

User avatar
nisiprius
Advisory Board
Posts: 32966
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: US/world 50/50, or rebalance according to market cap?

Postby nisiprius » Sun Apr 03, 2016 12:45 pm

If you are matching the world market cap, there is no need to rebalance. That's one of the virtues of matching the market cap. (Which I don't personally do but never mind).

In the roundest of rough round numbers, let's say the total capitalization of the world's stock markets is USD $70 trillion and that it is about 50% U.S., so $35 trillion U.S. and $35 trillion ex-US.

Let's say you buy $35,000 worth of a U.S. stock index fund and $35,000 worth of a global-ex-US stock index fund.

Now let's say U.S. drops to $20 trillion and the rest of the world grows to $40 trillion. Your fund holding are now worth $20,000 and $40,000, respectively. Meaning you are now only 33% U.S. and 67% global ex-US. And... that's exactly the same proportion as in the total of the global markets.

(There could conceivably be a second order effect due to currency value fluctuations so that might not be strictly true. However, if you actually set rebalancing bands I doubt that it would ever hit them).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
siamond
Posts: 2844
Joined: Mon May 28, 2012 5:50 am

Re: US/world 50/50, or rebalance according to market cap?

Postby siamond » Sun Apr 03, 2016 1:33 pm

I'll go a little bit against the flow here. My equities are 50/50 (US/world). Not market-cap, mind you, 50/50, period. And it will stay that way for a long time. I was taking this approach for simplicity, then reading some rebalancing literature from Dr Bernstein made me realize that I might get a bit of a rebalancing bonus as well, by NOT tracking market weights too closely. Cool.
http://www.efficientfrontier.com/ef/996/rebal.htm

PS. it seems likely that over the coming few decades, the rest of the world might grow faster than the US (notably due to emerging countries), then the 50/50 choice will make me overweight the US as I grow older, and that is perfectly fine. Click here for a possible forecast and related discussion. This kind of change usually happens slower than predicted, but I can definitely see some of it unfolding in my lifetime.

Dirghatamas
Posts: 397
Joined: Fri Jan 01, 2016 6:18 pm

Re: US/world 50/50, or rebalance according to market cap?

Postby Dirghatamas » Sun Apr 03, 2016 1:48 pm

nisiprius wrote:If you are matching the world market cap, there is no need to rebalance. That's one of the virtues of matching the market cap. (Which I don't personally do but never mind).


Just a minor nit pick. You DO need to rebalance even in this case. This is not an academic question but a practical one. I have invested this way (global, passive, 100% stocks, cap weighted) for 23 years and so just to inform, that I do this "rebalance" every year to bring my portfolio back to "global cap weight". The rest of my post is super nerdy and end difference is small, but there you go :happy

Till the recent availability of "world stock" mutual funds or ETF e.g. from Vanguard, one needed at least two mutual funds e.g. US stocks and International Stocks to form a world stock portfolio. Even after the availability of world stock ETF and mutual funds, their expense ratio is still markedly higher than a global cap weighted portfolio formed by two funds. The reason is simply scale..most people, unlike me, overweight home countries so the AUM of world stocks mutual fund/ETF is still puny compared to the US and International funds, leading to a much higher ER. Hopefully cost will drop in future but it is still rather expensive.

Anyway, back to the topic, why would you need rebalancing? I invest every month by the (then current) global cap % and never sell. Even after that, by the end of each year, there is a tiny drift which I need to "rebalance" with my yearly bonus. It comes from many small sources. There is a slight difference in ER between US and International, which causes long term slight drift. More important is dividend reinvestment. If US and International companies paid roughly the same % in dividends, then making dividends reinvested would lead to parity and no portfolio drift. Unfortunately they don't. US companies return more money through buybacks (less dividends) while international companies return more through dividends. If you simply reinvest dividends in their respective funds, then by year end, the result will be SLIGHTLY different from implementing this through a single "world stock" fund that would reinvest in the whole market regardless of which company/country paid the dividends. There is a subtle difference in the two cases. It is a matter of opinion, which one is "right", but the fact is the outcome is slightly different. Lastly is the issue of foreign taxes on dividends and qualified vs. non qualified dividends, which again are different in ratios.

The net-net of all this is that if you are quantitatively obsessed (comes with being an engineer I suppose), you will find slight portfolio drift due to all these minor things. Does it matter? Not really but we are discussing minute nuances.."rebalancing" annually by my yearly bonus contribution keeps the portfolio tracking global market cap.

User avatar
galeno
Posts: 1003
Joined: Fri Dec 21, 2007 12:06 pm
Location: Alajuela, Costa Rica

Re: US/world 50/50, or rebalance according to market cap?

Postby galeno » Mon Apr 04, 2016 10:18 am

You should find a broker which will allow you to buy and hold VWRD. The only USA domiciled broker which allows this is Interactive Brokers. You should be able to find a branch in Australia.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 2.8%. TER = 0.5%. Port Yield = 2.0%. Term = 35 yr. FI Duration = 6.2 yr. Portfolio survival probability = 100%.

User avatar
Lieutenant.Columbo
Posts: 838
Joined: Sat Sep 05, 2015 9:20 pm
Location: 30th Parallel North

Re: US/world 50/50, or rebalance according to market cap?

Postby Lieutenant.Columbo » Thu Apr 20, 2017 8:00 pm

Edit: I'm restarting this Topic from where it was left off one year ago now
siamond wrote:...My equities are 50/50 (US/world). Not market-cap, mind you, 50/50, period. And it will stay that way for a long time. I was taking this approach for simplicity, then reading some rebalancing literature from Dr Bernstein made me realize that I might get a bit of a rebalancing bonus as well, by NOT tracking market weights too closely. Cool.
http://www.efficientfrontier.com/ef/996/rebal.htm

PS. it seems likely that over the coming few decades, the rest of the world might grow faster than the US (notably due to emerging countries), then the 50/50 choice will make me overweight the US as I grow older, and that is perfectly fine. Click here for a possible forecast and related discussion. This kind of change usually happens slower than predicted, but I can definitely see some of it unfolding in my lifetime.
siamond,
are you suggesting here that if one decided today to invest according to the market cap (say your 50% USA-50% Ex-USA example), one is better off by sticking to the original market cap ratio rather than update the portfolio's ratio as/when the market cap changes significantly?
Thank you.
Last edited by Lieutenant.Columbo on Fri Apr 21, 2017 4:13 am, edited 1 time in total.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

User avatar
siamond
Posts: 2844
Joined: Mon May 28, 2012 5:50 am

Re: US/world 50/50, or rebalance according to market cap?

Postby siamond » Thu Apr 20, 2017 8:12 pm

Lieutenant.Columbo wrote:siamond,
are you suggesting here that if one decided today to invest according to the market cap (say your 50% USA-50% Ex-USA example), one is better off by sticking to the original market cap ratio rather than update the portfolio's ratio as/when the market cap changes significantly?
Thank you.

Well, this is what Dr Bernstein suggested in the write-up that I quoted. I didn't try to verify this assertion myself. I suspect the bonus (if any) would be pretty small, but hey, this matches my strategy, so I'll take any bonus, even small!

User avatar
Lieutenant.Columbo
Posts: 838
Joined: Sat Sep 05, 2015 9:20 pm
Location: 30th Parallel North

Re: US/world 50/50, or rebalance according to market cap?

Postby Lieutenant.Columbo » Thu Apr 20, 2017 8:16 pm

siamond wrote:
Lieutenant.Columbo wrote:siamond,
are you suggesting here that if one decided today to invest according to the market cap (say your 50% USA-50% Ex-USA example), one is better off by sticking to the original market cap ratio rather than update the portfolio's ratio as/when the market cap changes significantly?
Thank you.

Well, this is what Dr Bernstein suggested in the write-up that I quoted. I didn't try to verify this assertion myself. I suspect the bonus (if any) would be pretty small, but hey, this matches my strategy, so I'll take any bonus, even small!
thank you, siamond.
I understand you strategy is to stick to 50/50 regardless.
I guess my question was more: if one wanted to set up the portfolio according to the market cap, should one stick to (stay the course with) the US/Ex-US actual ratio from when the plan was set? or update the portfolio's ratio as the actual market ratio changes?
Thanks.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

User avatar
siamond
Posts: 2844
Joined: Mon May 28, 2012 5:50 am

Re: US/world 50/50, or rebalance according to market cap?

Postby siamond » Thu Apr 20, 2017 8:24 pm

Lieutenant.Columbo wrote:I guess my question was more: if one wanted to set up the portfolio according to the market cap, should one stick to (stay the course with) the US/Ex-US actual ratio from when the plan was set? or update the portfolio's ratio as the actual market ratio changes?

I strongly suspect either plan would work fine, and wouldn't end up that different at the end. As long as you stick to the plan, whatever it is. But again, I didn't do a thorough study in this respect.

User avatar
jhfenton
Posts: 1746
Joined: Sat Feb 07, 2015 11:17 am
Location: Ohio

Re: US/world 50/50, or rebalance according to market cap?

Postby jhfenton » Thu Apr 20, 2017 9:37 pm

siamond wrote:I'll go a little bit against the flow here. My equities are 50/50 (US/world). Not market-cap, mind you, 50/50, period. And it will stay that way for a long time. I was taking this approach for simplicity, then reading some rebalancing literature from Dr Bernstein made me realize that I might get a bit of a rebalancing bonus as well, by NOT tracking market weights too closely. Cool.
http://www.efficientfrontier.com/ef/996/rebal.htm

PS. it seems likely that over the coming few decades, the rest of the world might grow faster than the US (notably due to emerging countries), then the 50/50 choice will make me overweight the US as I grow older, and that is perfectly fine. Click here for a possible forecast and related discussion. This kind of change usually happens slower than predicted, but I can definitely see some of it unfolding in my lifetime.

This is exactly what i do, and for essentially the same reasons. (I also tilt small and value in the U.S. and small and EM in the international, so I'd have to rebalance regardless, since neither my U.S. nor my international is strictly cap-weighted.)

Valuethinker
Posts: 31206
Joined: Fri May 11, 2007 11:07 am

Re: US/world 50/50, or rebalance according to market cap?

Postby Valuethinker » Fri Apr 21, 2017 2:38 am

Lieutenant.Columbo wrote:
siamond wrote:...My equities are 50/50 (US/world). Not market-cap, mind you, 50/50, period. And it will stay that way for a long time. I was taking this approach for simplicity, then reading some rebalancing literature from Dr Bernstein made me realize that I might get a bit of a rebalancing bonus as well, by NOT tracking market weights too closely. Cool.
http://www.efficientfrontier.com/ef/996/rebal.htm

PS. it seems likely that over the coming few decades, the rest of the world might grow faster than the US (notably due to emerging countries), then the 50/50 choice will make me overweight the US as I grow older, and that is perfectly fine. Click here for a possible forecast and related discussion. This kind of change usually happens slower than predicted, but I can definitely see some of it unfolding in my lifetime.
siamond,
are you suggesting here that if one decided today to invest according to the market cap (say your 50% USA-50% Ex-USA example), one is better off by sticking to the original market cap ratio rather than update the portfolio's ratio as/when the market cap changes significantly?
Thank you.


Note restart to thread from 2015/16.


Return to “Investing - Help with Personal Investments”

Who is online

Users browsing this forum: Emilyjane and 38 guests