Young EU investor long term portfolio feedback

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celerity
Posts: 24
Joined: Thu Nov 22, 2018 9:29 pm

Young EU investor long term portfolio feedback

Post by celerity » Mon Dec 03, 2018 6:10 pm

Hi Bogleheads!

I'm a 28 yo Swedish investor saving for the long run (retirement etc.). My portfolio:

Fund: 100% MSCI World index (60% USA 40% EAFE)
AA: 100/0

I only have one fund. Is that all right? I try to keep it simple. Some questions:

a) Do I need emerging markets? The cheapest EM fund here is 0.34% TER while MSCI World is 0.10%
b) What about small cap? There’s talk about SC premium, specifically SCV. I do have the option to buy a fund which tracks MSCI World Small Cap (although it’s pretty expensive at 0.66%). There are also Russell 2000 and MSCI Europe Small Cap funds (both 0.30%). Are these indexes any good?
c) Home bias. How much, if any? Currently I have none but some have suggested up to 1/3.

Thanks in advance,
celerity

DJN
Posts: 162
Joined: Mon Nov 20, 2017 12:30 am

Re: Young EU investor long term portfolio feedback

Post by DJN » Tue Dec 04, 2018 12:01 am

Hi,
I don't know if you have investigated Wiki yet but if not have a look at these insights and you are sure to gain some extra information and guidance. (There is not a specific section on Sweden at this time). The Europe section suggests some fund combinations which suit the BH style.
https://www.bogleheads.org/wiki/EU_investing
I believe that Sweden has some homegrown funds which are specific to your pension industry.
You might consider what your best asset allocation strategy is, I would be uncomfortable with 100% stocks but some say different. It depends on how you think you might react with say a 20-50% drop in the value of your stock allocation? Anyway best to go through the whole BH investment planning process and come up with your own plan.
One more thing to consider is your current location and your tax position.
good luck,
DJN

Valuethinker
Posts: 36640
Joined: Fri May 11, 2007 11:07 am

Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Tue Dec 04, 2018 5:00 am

celerity wrote:
Mon Dec 03, 2018 6:10 pm
Hi Bogleheads!

I'm a 28 yo Swedish investor saving for the long run (retirement etc.). My portfolio:

Fund: 100% MSCI World index (60% USA 40% EAFE)
AA: 100/0

I only have one fund. Is that all right? I try to keep it simple. Some questions:

a) Do I need emerging markets? The cheapest EM fund here is 0.34% TER while MSCI World is 0.10%
b) What about small cap? There’s talk about SC premium, specifically SCV. I do have the option to buy a fund which tracks MSCI World Small Cap (although it’s pretty expensive at 0.66%). There are also Russell 2000 and MSCI Europe Small Cap funds (both 0.30%). Are these indexes any good?
c) Home bias. How much, if any? Currently I have none but some have suggested up to 1/3.

Thanks in advance,
celerity
c). I would advise against any home bias. The Swedish stock market is quite small, and your work income and any housing equity are tightly linked to the Swedish economy and the Swedish kronor.

(the stats say Stockholm is also having a housing bubble as bad as Toronto, Vancouver, Sydney, Melbourne, Auckland - which is saying something).

I would say:

(a)
- you should have Emerging Markets - between 10% and 20% of your equities. The stock market capitalizations of those countries are far below their weighting in global GDP and I expect (some) of that gap to close

(b)
- I don't tilt towards small cap (UK based) however there is a case for it. The small cap effect seems to come and go - long periods when SC underperforms the market as a whole

- you could, for the time being, stick with the global fund rather than complicating the picture with other equity funds

- I think you should hold bonds. In fact I would go so far as to say any investor should hold 20% in bonds (you want a global investment grade government bond fund, if there is one*). Because the correlation with stocks is less than 1.0, the impact on total returns is relatively small (assuming rebalancing) but, conversely, the impact on volatility is significant.

In the depths of a bear market when you have lost 30-50% of your equity portfolio, it will be very comforting to hold bonds and may help to prevent you panicking out of equities. It will also give you ammunition for rebalancing.

Bear markets come in many flavours:

- 2008-09 which was a short and brutal crash then recovery due to strong policy action by Central Banks (as opposed to the 1929-1932 period where they fought each other)

- May 2000- March 2003 - long, punctuated by sharp rallies then further declines. The slow grinding away of hope

- Japan - 1990-date - loss of c. 2/3rds of value, no sign of recovery as yet

- 1970s - there were bear markets & rallies, meanwhile inflation ate away at returns

- SE Asia Crash 1997 - collapse of one market, spreads to others, takes years to recover

Sweden and Norway for example had banking-property lending crashes in the early 1990s which were the perfect example of that type of economic disruption. However Sweden has a lot of large exporting companies, so the fall in the SKR made that less painful. The banking system had to be restructured into "good bank" which was floated off and "bad bank" which was wound down by the government - in 2007-08 the UK government conducted its rationalization of Northern Rock on that Scandinavian model.

You really don't know how well you will stick to your plan until you have survived a bear market.

* since Swedish government bonds are essentially risk free from default, Swedish government bonds would provide a reasonable alternative. Your equity portfolio will immunize you against exchange rate risk, pretty much.

celerity
Posts: 24
Joined: Thu Nov 22, 2018 9:29 pm

Re: Young EU investor long term portfolio feedback

Post by celerity » Tue Dec 04, 2018 1:27 pm

DJN wrote:
Tue Dec 04, 2018 12:01 am
Hi,
I don't know if you have investigated Wiki yet but if not have a look at these insights and you are sure to gain some extra information and guidance. (There is not a specific section on Sweden at this time). The Europe section suggests some fund combinations which suit the BH style.
https://www.bogleheads.org/wiki/EU_investing
I believe that Sweden has some homegrown funds which are specific to your pension industry.
You might consider what your best asset allocation strategy is, I would be uncomfortable with 100% stocks but some say different. It depends on how you think you might react with say a 20-50% drop in the value of your stock allocation? Anyway best to go through the whole BH investment planning process and come up with your own plan.
One more thing to consider is your current location and your tax position.
good luck,
DJN
Thanks for the reply! Unfortunately, I didn't find the Wiki EU-entry very useful. I think I'm fine with a 50% drop, however.

celerity
Posts: 24
Joined: Thu Nov 22, 2018 9:29 pm

Re: Young EU investor long term portfolio feedback

Post by celerity » Tue Dec 04, 2018 1:30 pm

Valuethinker wrote:
Tue Dec 04, 2018 5:00 am
c). I would advise against any home bias. The Swedish stock market is quite small, and your work income and any housing equity are tightly linked to the Swedish economy and the Swedish kronor.

(the stats say Stockholm is also having a housing bubble as bad as Toronto, Vancouver, Sydney, Melbourne, Auckland - which is saying something).
Thanks for the feedback!

Do you think the exchange rate would even-out in the long run? Because that's usually the main argument in favour of home bias.

AFAIK there are no indications of a bubble. No "buy to sell" trend. The prices largely reflect the failed housing policy of the previous governments. It's a supply/demand issue.

https://larseosvensson.se/2014/01/14/ek ... anslation/
- I think you should hold bonds. In fact I would go so far as to say any investor should hold 20% in bonds (you want a global investment grade government bond fund, if there is one*). Because the correlation with stocks is less than 1.0, the impact on total returns is relatively small (assuming rebalancing) but, conversely, the impact on volatility is significant.

In the depths of a bear market when you have lost 30-50% of your equity portfolio, it will be very comforting to hold bonds and may help to prevent you panicking out of equities. It will also give you ammunition for rebalancing.

Bear markets come in many flavours:

- 2008-09 which was a short and brutal crash then recovery due to strong policy action by Central Banks (as opposed to the 1929-1932 period where they fought each other)

- May 2000- March 2003 - long, punctuated by sharp rallies then further declines. The slow grinding away of hope

- Japan - 1990-date - loss of c. 2/3rds of value, no sign of recovery as yet

- 1970s - there were bear markets & rallies, meanwhile inflation ate away at returns

- SE Asia Crash 1997 - collapse of one market, spreads to others, takes years to recover

Sweden and Norway for example had banking-property lending crashes in the early 1990s which were the perfect example of that type of economic disruption. However Sweden has a lot of large exporting companies, so the fall in the SKR made that less painful. The banking system had to be restructured into "good bank" which was floated off and "bad bank" which was wound down by the government - in 2007-08 the UK government conducted its rationalization of Northern Rock on that Scandinavian model.

You really don't know how well you will stick to your plan until you have survived a bear market.

* since Swedish government bonds are essentially risk free from default, Swedish government bonds would provide a reasonable alternative. Your equity portfolio will immunize you against exchange rate risk, pretty much.
I'm not sure I find the 20% bond argument convincing. That's way to much! Very conservative. I'm not planning to buy any bonds until I'm 40. The average bear market is like 2 years or something. My worst case scenario is -50% drop and 10 years of recovery. But I'm saving monthly and won't need the money until I retire so I see no need for bonds. Bonds are also very expensive because of QE and low interest rates.

I think your point regarding the lost years 2000-2003 (2007?) is a very good one though. EM actually performed really well here while USA+EAFE did not. Perhaps EM is good for diversification?

asset_chaos
Posts: 1402
Joined: Tue Feb 27, 2007 6:13 pm
Location: Melbourne

Re: Young EU investor long term portfolio feedback

Post by asset_chaos » Tue Dec 04, 2018 8:33 pm

celerity wrote:
Mon Dec 03, 2018 6:10 pm
I'm a 28 yo Swedish investor saving for the long run (retirement etc.). My portfolio:
Good job starting early on saving, investing, and learning.
Fund: 100% MSCI World index (60% USA 40% EAFE)
AA: 100/0
I only have one fund. Is that all right? I try to keep it simple. Some questions:
One fund is fine. Everything should be as simple as required, but not simpler, to paraphrase Einstein. However, I'll suggest another fund below.
a) Do I need emerging markets? The cheapest EM fund here is 0.34% TER while MSCI World is 0.10%
Need is hard to know. Emerging markets are around 10% of global stocks. I prefer to have them, if I have a global fund available, even if it's a few basis points more expensive. But are they so essential as to devote 10% of my stock allocation to an extra fund? That'll have to be up to you.
b) What about small cap? There’s talk about SC premium, specifically SCV. I do have the option to buy a fund which tracks MSCI World Small Cap (although it’s pretty expensive at 0.66%). There are also Russell 2000 and MSCI Europe Small Cap funds (both 0.30%). Are these indexes any good?
To tilt to these stock factors, I think you need a high degree of conviction of the evidence of factor premiums, the ability to take the extra risk (the extra return is not free), and a high degree of conviction that the premiums will both persist into the future and manifest over your investing timeline. Tilting is not necessary. From what you've written, I don't sense a high enough degree of conviction on your part to make factor investing worthwhile for you at this time. But again, it's not me that has to be convinced, it's you.
c) Home bias. How much, if any? Currently I have none but some have suggested up to 1/3.
As Sweden is approx 1% of global stocks, 30% of your stocks would be a lot. If it's really important to you to be able to stick with you investing plan, perhaps consider no more than 10%. And note how easily simplicity slips into complexity. Carving out 10% for emerging markets, 10% for small cap, and 10% for home bias, you're suddenly at four funds---and counting.

However, with that said, I'll argue that adding a bond fund would be worthwhile. Even if you think you don't want bonds today, you'll get older and will want bonds. It's better to experience, rather than read about, the different reactions of stocks and bonds to various market conditions. That's why I advocate 10 or 20% bonds, even for the young. If you can get a Swedish government bond fund or a global bond fund hedged into krona, that'll also substitute somewhat for home bias because more of your total portfolio will be denominated in your home currency. And I think these things should be viewed on a total portfolio basis, rather than looking at pieces of the portfolio in isolation.

Good luck on your investing adventure.
Regards, | | Guy

andrew99999
Posts: 108
Joined: Fri Jul 13, 2018 8:14 pm

Re: Young EU investor long term portfolio feedback

Post by andrew99999 » Tue Dec 04, 2018 9:04 pm

Good answer so far.

For me

1. I think no bonds are fine while your total portfolio is under say 20% of your target retirement goal.

2. You don't "need" emerging and small caps, but it is more diversified and it is best practice to hold as much as you can, and even one is better than neither, but I still prefer both.

3. Home bias

Currency risk is very important when you get closer to retirement for drawing down. Currency risk is similar to SOR risk but they can compound each other and really ruin you if you are unlucky.

I decide how much currency before determining my allocation.
When nearing retirement, I plan to go with about 60% in home currency and the rest international.
What this means is that, if I had 40% in bonds, then I would need to make up another 20% in either global currency-hedged or home based equities. The rest in global unhedged.

I think that for up to around 20% or 25% of total equities, it's probably not going to be terrible to go for home country bias because in a bad local economic down turn you are likely to lose not more than about 10% or 12.5% of your total equities portfolio, but at the same time you have limited your currency upside so my thinking is why bother, and far more importantly is that you have gone from a massively diversified portfolio throughout all the markets in a 46 countries to 1, which is the reason I choose to just go with currency-hedged for the portion of my portfolio that I want to fit into my local currency. But honestly I don't think it matters that much as long as you keep it to no more than around 20% or 25% of your portfolio. Any more than that and I think you are playing with fire by opening yourself up to concentration risk of being in one market when there is just no need to.

Valuethinker
Posts: 36640
Joined: Fri May 11, 2007 11:07 am

Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Wed Dec 05, 2018 4:18 am

celerity wrote:
Tue Dec 04, 2018 1:30 pm
Valuethinker wrote:
Tue Dec 04, 2018 5:00 am
c). I would advise against any home bias. The Swedish stock market is quite small, and your work income and any housing equity are tightly linked to the Swedish economy and the Swedish kronor.

(the stats say Stockholm is also having a housing bubble as bad as Toronto, Vancouver, Sydney, Melbourne, Auckland - which is saying something).
Thanks for the feedback!

Do you think the exchange rate would even-out in the long run? Because that's usually the main argument in favour of home bias.

AFAIK there are no indications of a bubble. No "buy to sell" trend. The prices largely reflect the failed housing policy of the previous governments. It's a supply/demand issue.

https://larseosvensson.se/2014/01/14/ek ... anslation/
I will need to read that. It was from the various Economist magazine housing price over/ undervalued cities chart. Relative to incomes or rents, Stockholm looked very extended.

The Anglo-Saxon experience is that these things may start as a supply-demand imbalance. But they rapidly become a financial problem. Rising asset prices allows greater leverage allows higher purchase prices allows rising house prices allows higher leverage. Houses become a financial asset not just a place for living and the fundamentals (as measured by price to rent or price to income) become increasingly detached from reality. That's the mechanism of every property (commercial or residential) crash.

On the exchange rate that argument is used (by me, among others) for making an unhedged equity investment in foreign markets - no currency hedging. As you get closer to retirement that argument probably weakens. Bonds generally you should hedge back into your currency of future consumption.

I have never heard of it being used to justify overweighting your home market. If you look at the Swedish market e.g. https://www.ishares.com/us/products/239 ... sweden-etf then 7.5% of your money is on *one bank*. Very concentrated bet on the success of a small group of companies. If you put 1/3rd of your portfolio into Sweden then you have put 2.5% of your total portfolio in one bank, and it's not JP Morgan or HSBC (ie the world's largest).

The academic literature is unambiguous that home country bias is an error - loses you diversification benefits. Unless there are very significant tax benefits in investing in domestic stocks then those of us who live in relatively small country markets (UK in my case) should avoid it.
- I think you should hold bonds. In fact I would go so far as to say any investor should hold 20% in bonds (you want a global investment grade government bond fund, if there is one*). Because the correlation with stocks is less than 1.0, the impact on total returns is relatively small (assuming rebalancing) but, conversely, the impact on volatility is significant.

In the depths of a bear market when you have lost 30-50% of your equity portfolio, it will be very comforting to hold bonds and may help to prevent you panicking out of equities. It will also give you ammunition for rebalancing.

Bear markets come in many flavours:

- 2008-09 which was a short and brutal crash then recovery due to strong policy action by Central Banks (as opposed to the 1929-1932 period where they fought each other)

- May 2000- March 2003 - long, punctuated by sharp rallies then further declines. The slow grinding away of hope

- Japan - 1990-date - loss of c. 2/3rds of value, no sign of recovery as yet

- 1970s - there were bear markets & rallies, meanwhile inflation ate away at returns

- SE Asia Crash 1997 - collapse of one market, spreads to others, takes years to recover

Sweden and Norway for example had banking-property lending crashes in the early 1990s which were the perfect example of that type of economic disruption. However Sweden has a lot of large exporting companies, so the fall in the SKR made that less painful. The banking system had to be restructured into "good bank" which was floated off and "bad bank" which was wound down by the government - in 2007-08 the UK government conducted its rationalization of Northern Rock on that Scandinavian model.

You really don't know how well you will stick to your plan until you have survived a bear market.

* since Swedish government bonds are essentially risk free from default, Swedish government bonds would provide a reasonable alternative. Your equity portfolio will immunize you against exchange rate risk, pretty much.
I'm not sure I find the 20% bond argument convincing. That's way to much! Very conservative. I'm not planning to buy any bonds until I'm 40. The average bear market is like 2 years or something. My worst case scenario is -50% drop and 10 years of recovery. But I'm saving monthly and won't need the money until I retire so I see no need for bonds. Bonds are also very expensive because of QE and low interest rates.

I think your point regarding the lost years 2000-2003 (2007?) is a very good one though. EM actually performed really well here while USA+EAFE did not. Perhaps EM is good for diversification?
You cannot, generally, hide from equity risk by buying other equities. EM may have done well (so did value stocks) but we were in a bear market. But markets are too closely correlated, particularly in a crash. Risk is fundamentally about the split between equities v. low risk assets (chiefly bonds). The rest is just noise. Nisiprius has made that point (for US markets) many times with his charts.

If markets go down 40%, but your EM only goes down 30%, it's not going to feel that good.

"average bear market" is not really meaningful. If you read people like Mandelbrot (everyone should read Mandelbrot - The Misbehaviour of Markets) it's a persuasive argument that financial markets show fractal returns. Thus previous periods don't tell you a lot about future periods -- there's not a stable distribution with a known mean and variance underlying. "It always recovered" is less meaningful when we contemplate 1929-late 1940s (some people try to dodge that one by noting that "markets had recovered by 1934" - omitting that they promptly went right back down again), 1968-1980, Japan 1990-present.

St Petersburg or Budapest in 1913 did not "always recover". In other words, our data has strong survivor bias -- we only track the markets that did recover. If you look at the times to recovery of some of the bad bear markets, you can see that it can be quite a long time. It's quite something to say start investing at 30 and see your money falling away each month, and hold your nerve on that to age 42 (and in 1980, when the Dow finally got back above 1000, it was not at all obvious that it would not look backwards from 1981).

Note on the Dimson Marsh Staunton data (Credit Suisse, you can download a summary) then you can find national markets that did a lot, lot worse and took a long time to recover. The world in the 20th century was not the US market only.

If you think "20% is way too much" then you have yet to experience your first bear market. Depending on how you measure it, I am on my 3rd - and I think the 4th will be just as gut-wrenching (actually, in 2008-09 I just froze, didn't rebalance, didn't do anything: I am hoping to never again live through the fear that the financial system will just cease to exist in its current form). The Crash of 1987 (minus 25% in *one day*) was also an experience I hope not to repeat (but I imagine that I will). Conversely, in retrospect "stocks were on sale" if I'd only had some additional money to invest.

I was *not* paying any attention to investing when the UK went through its mid 1970s bear market. In the course of 18 months, adjusted for inflation, the UK stock market fell over 80% in real terms. Fingers crossed I shall never do so - however September-October 2008 had precisely that feel of the beginning of such. Adam Tooze has written an excellent new history of the time - and the absolutely critical role of the US Fed in lending dollars to European banks to fund their Eurodollar deposits. Had the US Central Bank taken a more America-first type of view, we could have had a 1930s level of crisis in European banking. If the problems in the Italian banking system crystallize, then we may yet. Unicredit (one of the stronger banks) issued bonds at 8% yield just recently. So it's borrowing money at 8% to lend it to other people at say 4% - there's a problem with a business model that looks like that.

I don't have the figures to hand, but you will find the 80%/20% portfolio has very similar performance to the 100% portfolio over a 30 year period, say. And the volatility will be significantly less. That's the benefit of diversification.

My thought is you will not consider this point, seriously, until the next bear market. Recency bias is at work - you didn't experience the last bear market (or the one before that; or the 1990 one (which was pretty depressing albeit mild - but of course in Scandinavia it was a lot worse); very few of us experienced the 1970s bear market directly).
Last edited by Valuethinker on Wed Dec 05, 2018 6:28 am, edited 4 times in total.

Valuethinker
Posts: 36640
Joined: Fri May 11, 2007 11:07 am

Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Wed Dec 05, 2018 5:47 am

andrew99999 wrote:
Tue Dec 04, 2018 9:04 pm
Good answer so far.

For me

1. I think no bonds are fine while your total portfolio is under say 20% of your target retirement goal.
Think about volatility though. No bonds maximizes volatility. Historic data says it has only a small impact on returns to be 20% bonds v. 0% bonds.
2. You don't "need" emerging and small caps, but it is more diversified and it is best practice to hold as much as you can, and even one is better than neither, but I still prefer both.

3. Home bias

Currency risk is very important when you get closer to retirement for drawing down. Currency risk is similar to SOR risk but they can compound each other and really ruin you if you are unlucky.

I decide how much currency before determining my allocation.
When nearing retirement, I plan to go with about 60% in home currency and the rest international.
What this means is that, if I had 40% in bonds, then I would need to make up another 20% in either global currency-hedged or home based equities. The rest in global unhedged.
We need to separate out here currency exposure from equity exposure. The above is about currency risk.

There's nothing wrong with holding a global govt bond fund (hedged into SKr) or a global equity fund (hedged). That hedges out the currency volatility but leaves one with maximum diversification.
I think that for up to around 20% or 25% of total equities, it's probably not going to be terrible to go for home country bias because in a bad local economic down turn you are likely to lose not more than about 10% or 12.5% of your total equities portfolio, but at the same time you have limited your currency upside so my thinking is why bother, and far more importantly is that you have gone from a massively diversified portfolio throughout all the markets in a 46 countries to 1, which is the reason I choose to just go with currency-hedged for the portion of my portfolio that I want to fit into my local currency.
That's all fine - you properly make the distinction.

Why put 7.5% of one chunk of your equity portfolio in *one company*, a Swedish bank? And in total portfolio terms why have as much in a Swedish bank as in Apple or Microsoft or Google or Amazon?
But honestly I don't think it matters that much as long as you keep it to no more than around 20% or 25% of your portfolio. Any more than that and I think you are playing with fire by opening yourself up to concentration risk of being in one market when there is just no need to.
[/quote]

Sweden is a tiny market in world terms (as you point out) and OP will have his/ her labour income (job) and housing wealth (if any) directly exposed to the Swedish economy. Why then "double up" on Swedish risk?

(I am Canadian. The Swedish stock market is heavily weighted towards financials and industrials, limited technology etc. Granted, like Switzerland, there are some leading international companies HQ'd in Sweden (and that's without IKEA ;-)). The Canadian market is roughly 40% financials and 40% natural resource stocks (the Australian is similar with less oil & gas and more mining). So I can see the problems with home country bias).

andrew99999
Posts: 108
Joined: Fri Jul 13, 2018 8:14 pm

Re: Young EU investor long term portfolio feedback

Post by andrew99999 » Wed Dec 05, 2018 6:36 am

Valuethinker wrote:
Wed Dec 05, 2018 5:47 am
Think about volatility though. No bonds maximizes volatility. Historic data says it has only a small impact on returns to be 20% bonds v. 0% bonds.
I agree that 20% bonds has a very good trade off for reward vs cost, and over not only 1 year and 5 years, but even 10 years, the difference in cost to the return is minimal, but when someone has a much longer horizon such as someone with less than 20% to their target, these differences do compound in a significant way. I think if someone particularly has a need for lowering volatility at these amounts, education on the stock market may be more helpful that bonds. The 10% Vanguard funds would be my max starting point and none seem equally reasonable.
Valuethinker wrote:
Wed Dec 05, 2018 5:47 am
Why put 7.5% of one chunk of your equity portfolio in *one company*, a Swedish bank? And in total portfolio terms why have as much in a Swedish bank as in Apple or Microsoft or Google or Amazon?

Sweden is a tiny market in world terms (as you point out) and OP will have his/ her labour income (job) and housing wealth (if any) directly exposed to the Swedish economy. Why then "double up" on Swedish risk?

(I am Canadian. The Swedish stock market is heavily weighted towards financials and industrials, limited technology etc. Granted, like Switzerland, there are some leading international companies HQ'd in Sweden (and that's without IKEA ;-)). The Canadian market is roughly 40% financials and 40% natural resource stocks (the Australian is similar with less oil & gas and more mining). So I can see the problems with home country bias).
Yes I agree with you which is shy I said that I prefer to stick with an all-world portfolio and just currency-hedged more as I near retirement, but I also don't see it being a particularly big problem to keep 20-25% in their own developed market. 7.5% of a 20-25% home allocation comes to 1.5-1.75% of their money in one company. It isn't 7.5% of their entire portfolio. I really don't consider the risk to be a high as you think it is. As I said, in a major recession if it drops 50%, his portfolio takes a hit of 10-12.5%, and that is the unlikely event of a particularly nasty recession. They also save on the cost of currency hedging. I get what you are saying and I am with you, i just don't think it is as big of a deal as you think it is, and the real problem is for those going with over 25% of their portfolio with many at 75-100% which is frighteningly common around the world.

Valuethinker
Posts: 36640
Joined: Fri May 11, 2007 11:07 am

Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Wed Dec 05, 2018 8:50 am

andrew99999 wrote:
Wed Dec 05, 2018 6:36 am
Valuethinker wrote:
Wed Dec 05, 2018 5:47 am
Think about volatility though. No bonds maximizes volatility. Historic data says it has only a small impact on returns to be 20% bonds v. 0% bonds.
I agree that 20% bonds has a very good trade off for reward vs cost, and over not only 1 year and 5 years, but even 10 years, the difference in cost to the return is minimal, but when someone has a much longer horizon such as someone with less than 20% to their target, these differences do compound in a significant way. I think if someone particularly has a need for lowering volatility at these amounts, education on the stock market may be more helpful that bonds. The 10% Vanguard funds would be my max starting point and none seem equally reasonable.
I don't have any numbers to hand, but what I saw on a 30 year view going from 80% to 100% was a very small improvement in returns (on an annualized basis - geometric average) vs. quite a small increase in return?
Valuethinker wrote:
Wed Dec 05, 2018 5:47 am
Why put 7.5% of one chunk of your equity portfolio in *one company*, a Swedish bank? And in total portfolio terms why have as much in a Swedish bank as in Apple or Microsoft or Google or Amazon?

Sweden is a tiny market in world terms (as you point out) and OP will have his/ her labour income (job) and housing wealth (if any) directly exposed to the Swedish economy. Why then "double up" on Swedish risk?

(I am Canadian. The Swedish stock market is heavily weighted towards financials and industrials, limited technology etc. Granted, like Switzerland, there are some leading international companies HQ'd in Sweden (and that's without IKEA ;-)). The Canadian market is roughly 40% financials and 40% natural resource stocks (the Australian is similar with less oil & gas and more mining). So I can see the problems with home country bias).
Yes I agree with you which is shy I said that I prefer to stick with an all-world portfolio and just currency-hedged more as I near retirement, but I also don't see it being a particularly big problem to keep 20-25% in their own developed market. 7.5% of a 20-25% home allocation comes to 1.5-1.75% of their money in one company. It isn't 7.5% of their entire portfolio.
Just to add to that, it's about 25% in Swedish banks. So that would be 6-7% of the portfolio (just eyeballing the top 20 holdings). Banks are much more likely to go down together than industrials, say and for a country much more correlated with the domestic economy.
I really don't consider the risk to be a high as you think it is. As I said, in a major recession if it drops 50%, his portfolio takes a hit of 10-12.5%, and that is the unlikely event of a particularly nasty recession. They also save on the cost of currency hedging. I get what you are saying and I am with you, i just don't think it is as big of a deal as you think it is, and the real problem is for those going with over 25% of their portfolio with many at 75-100% which is frighteningly common around the world.
I was trying to illustrate the unintentional risks that this approach creates. And I cannot really see why anyone would do this. Plus it adds hassle in terms of rebalancing (and, if capital gains taxes are payble, in terms of tax arising from that rebalancing).

If you are say 60% in UK equities (which is c. 8% of world markets, so a markedly smaller overweighting at least in ratio terms) then you have c. 6% of your entire portfolio in *one* stock (Shell). And 25%-ish in 10 companies.

A portfolio which is 60% UK equities 20% international equities and 20% cash & fixed income is not at all uncommon. In fact that was the UK pension fund standard in the late 1990s (since then fixed income has risen massively, and so have alternative assets (private equity, real estate, hedge funds primarily).

andrew99999
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Re: Young EU investor long term portfolio feedback

Post by andrew99999 » Wed Dec 05, 2018 9:55 am

Valuethinker wrote:
Wed Dec 05, 2018 8:50 am
I was trying to illustrate the unintentional risks that this approach creates. And I cannot really see why anyone would do this.
International equities introduce currency risk.

Even if we go with your often mentioned idea that all these other currencies (AUD, SGD, CAD) are linked to the USD, there are still massive fluctuations, in fact I don't even see how you can consider them linked at all with the level of long term fluctuation. As an example, the AUD went from 0.5 USD in 2000 and more than doubled over the next 11 years, and now almost 2 decades later is still 1.5x higher. This is an uncompensated risk that you have compounded onto market risk. If you are drawing down from the start of that and you hit a bad patch for SOR risk, instead of going from drawing down 4% to 8%, you can end up drawing down 16% per year.

There are 2 ways to deal with currency risk. One is to have a home bias of equities in your own country or the other is a hedged international allocation.
A home bias removes upside currency risk but reduces diversification introducing concentration risk.
A currency-hedged international fund removes upside currency risk, but has a cost of hedging. The last post I read on this showed about a 1% hit per annum for the cost of this, where 1% out of a total return of 10% mean you've lost around 1/10th of your yearly earnings which is substantial. I admit I did not check further on this. On top of this some countries get tax advantages for home country investment.

Both ways have downsides. I believe this is why Vanguard Australia's diversified all-in-one funds go with a mix of Australian equities, currency hedged international equities and international unhedged equities, as a way to blance currency upside risk, currency downside risk, diversification, tax benefits, and cost of hedging. It is a balancing act for competing risks and costs to mitigate them.

We will have to agree to disagree on this. I stand by my opinion that for even a concentrated market, provided it is a developed country, it is a reasonable choice to go for up to about 20 or 25% in home country equities allocation It is not my choice either, but I think it's a valid choice and IMO without the amount of risk you appear to consider it to have due to the total amount of the portfolio.


Edit: I'm frustrated with the way it came off as though I said that it is justified because Vanguard does it. The fact that any person or institution does something is not any kind of proof or argument affirming an opinion or idea. My point was that it is not so simple and it is a balancing act between multiple risks and costs associated with mitigating those risks, and this was one example where they all options were used in varying proportions as a way to balance those multiple risks and costs.

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Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Wed Dec 05, 2018 10:24 am

andrew99999 wrote:
Wed Dec 05, 2018 9:55 am
Valuethinker wrote:
Wed Dec 05, 2018 8:50 am
I was trying to illustrate the unintentional risks that this approach creates. And I cannot really see why anyone would do this.
International equities introduce currency risk.

Even if we go with your often mentioned idea that all these other currencies (AUD, SGD, CAD) are linked to the USD, there are still massive fluctuations, in fact I don't even see how you can consider them linked at all with the level of long term fluctuation. As an example, the AUD went from 0.5 USD in 2000 and more than doubled over the next 11 years, and now almost 2 decades later is still 1.5x higher.
In the case of the Australian and Canadian markets there is a negative correlation with the USD. A rise in the CAD relative to USD lowers the profits of Canadian natural resource companies (almost all companies in fact - the banks have significant USD earnings as well). They don't hedge that fully (they will do on a transactional basis, or on a balance sheet basis (offset the impact of movements of XR on gearing ie match the currency of their debts and their assets in similar proportions)). It would be too expensive to hedge it long term except by opening up operations in other currency areas (hence BMW and Toyota building car plants in America).

If you are Australia based, and the AUD falls, the earnings of the Australian natural resources sector rise.

We saw this with the Brexit vote. The London FTSE is heavily international in orientation - 60-70% of profits. The -10% fall in Sterling in the course of a couple of hours was then compensated for by a marking up of the market over the next few days of 6-7% (it might have been even more than that in gross terms, because the Brexit vote precipitated a political crisis of which would have put further downward pressure on the market although the interest rate cut (of 0.25%) would presumably have benefited it).

When the GBP falls, given I have at least an average (or above average) propensity to consume imports and to travel outside the UK, I take a direct hit against my buying power from my labour income, and on my home equity. I will also take that hit against state pension income, private pension income and other benefits in retirement (inflation indexing will partly compensate for that).

An international equity portfolio is a way of hedging some of that exposure. For those of us who live in small, very open economies, that matters a lot.

With OP, it will be the EUR probably more than the USD.

Vanguard had a piece on different countries & the degree to which international diversification reduced volatility, what was the optimal level - it does depend on your stock market. The correlation between the US and Canadian markets is quite high so the benefits were reduced (but I keep thinking "Apple" - I am not sure what happens when you have one sector, the tech sector, which is a blazing outperformer and one of the 2 markets just has almost no exposure*).

* In 2000, Nortel was 25% of the Canadian stock market, and there was JDS Uniphase as well. Thus Canada "benefited" from a much higher correlation with the US market as it went down (;-)), and in Nortel's case all the way to bankruptcy ;-).

This is an uncompensated risk that you have compounded onto market risk. If you are drawing down from the start of that and you hit a bad patch for SOR risk, instead of going from drawing down 4% to 8%, you can end up drawing down 16% per year.

SOR? My google is out. Did you mean SEK?

I agree it is all about time horizon. If you are getting within 10 years of retirement, it starts to become a significant risk.

There are 2 ways to deal with currency risk. One is to have a home bias of equities in your own country or the other is a hedged international allocation.
See above. Your home equity market pays dividends in your home currency (normally). But the underlying FX exposure can be significant.
A home bias removes upside currency risk but reduces diversification introducing concentration risk.
A currency-hedged international fund removes upside currency risk, but has a cost of hedging. The last post I read on this showed about a 1% hit per annum for the cost of this, where 1% out of a total return of 10% mean you've lost around 1/10th of your yearly earnings which is substantial. I admit I did not check further on this. On top of this some countries get tax advantages for home country investment.
I've never seen it quantified (cost of hedging). That would make currency hedged bond funds almost impossible to hedge -- the return cost would be too great? Or is it that bond funds, because you can exactly model the cash flows, are much cheaper to hedge?
Both ways have downsides. I believe this is why Vanguard Australia's diversified all-in-one funds go with a mix of Australian equities, currency hedged international equities and international unhedged equities, as a way to blance currency upside risk, currency downside risk, diversification, tax benefits, and cost of hedging. It is a balancing act for competing risks and costs to mitigate them.
My understanding was the dominant feature in Australia is the tax imputation system on domestic stocks which has a considerable impact. On the other hand, I think someone linked a reference which suggested that the yields of Australian stocks have simply adjusted to remove much of the advantage for domestic investors.

The Australian domestic index is very undiversified - mirror of Canada. No more technology (even less?) than Canada.

Sweden might be better because you have a world-leading pharmaceutical company, a world-leading retailer (H&M I think is listed) and some big name industrial companies. You even have a major tech company (Ericsson) if not a particularly distinguished one.
We will have to agree to disagree on this. I stand by my opinion that for even a concentrated market, provided it is a developed country, it is a reasonable choice to go for up to about 20 or 25% in home country equities allocation It is not my choice either, but I think it's a valid choice and IMO without the amount of risk you appear to consider it to have due to the total amount of the portfolio.
I think the solution is empirical studies. But I suspect that depending on which country and which time period, you could "prove" it either way ;-).

I am not sure what the academic literature says on this. I suspect it comes back to marginal propensity to consume in foreign currencies *when you need the money*. Which is a hard call (GDP share of imports might proxy it).

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Re: Young EU investor long term portfolio feedback

Post by andrew99999 » Wed Dec 05, 2018 11:00 am

It's late here so I will try to be brief.

Yes there is some natural currency hedging for countries that export a lot, in particular Australia/Canada with the resources. I would be surprised if this was enough go with 100% of equities in unhedged international though, but yes you may well have a point that it reduces the huge currency fluctuation that occurred over the last 2 decades. I don't know how to quantify this and it seems far too risky to just assume this will be the case going forward. I would be interested to see some information on this but since I would need it to be over multiple periods of time and I am not sure how easy or possible it would be to get it over one time, this is a problem.

Regarding the Vanguard piece about different countries, yes I saw that and a good paper. One problem for me is that they mentioned for Australia that hedging equities increased annual volatility in equities, but my issue is sequence of longer term currency movements, not movement in a single year, so this point did not seem right for the specific reason I would be looking for currency hedging, which is to mitigate longer term movements.

SOR risk = Sequence Of Return risk.
Combine that with sequence of currency risk and it is like finding yourself in a "rip" at the beach and all of a sudden you are 3km out to sea trying to survive.

I wish I had looked more into the cost of hedging, but I did not. It is entirely possible that it is actually very cheap nowadays. I don't know about the cost of currency-hedging on bonds though.

Yes you are right that part of the Australian situation is the tax credits, and that they are they are now around half priced in so not as useful as it appears on the surface.

I think we may have gotten a little off track and apologies to OP.
I think that unless one is within about 10 years from retirement, then no home bias is necessary in equities.
In my opinion, if you are 20 years from retirement and under 20% of target amount saved, then 0 or 10% in bonds are both ok and more than that is just cheating yourself. Shorter periods (10yrs and under) benefit more in risk to return from a lower AA where compounding is a smaller factor over that period.
As you near retirement, you will need to adjust your AA of both bonds and currency proportion to mitigate risks when human capital is near depletion and you move towards drawing down, but you have loads of time until then.

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Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Wed Dec 05, 2018 11:09 am

https://scholar.harvard.edu/files/kenfr ... ptimal.pdf

PP 9-10 has the PPP argument re FX hedging of equity portfolios - it depends on time horizon. A long enough time horizon and the currency effects should be a wash - no hedging necessary.

Can't copy and paste from the pdf

Concludes optimal hedge ratio is not above 30% (ie 30% FX exposure hedged).

Anyways that's one data point - have only skimmed the paper.

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Re: Young EU investor long term portfolio feedback

Post by Jeff Albertson » Wed Dec 05, 2018 12:00 pm

Valuethinker wrote:
Wed Dec 05, 2018 4:18 am
Adam Tooze has written an excellent new history of the time - and the absolutely critical role of the US Fed in lending dollars to European banks to fund their Eurodollar deposits. Had the US Central Bank taken a more America-first type of view, we could have had a 1930s level of crisis in European banking. If the problems in the Italian banking system crystallize, then we may yet. Unicredit (one of the stronger banks) issued bonds at 8% yield just recently. So it's borrowing money at 8% to lend it to other people at say 4% - there's a problem with a business model that looks like that.
Prof Tooze has a lengthy opinion piece in today's NY Times on the Italian budget problems.
https://www.nytimes.com/2018/12/05/opin ... risis.html

celerity
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Re: Young EU investor long term portfolio feedback

Post by celerity » Wed Dec 05, 2018 2:26 pm

asset_chaos wrote:
Tue Dec 04, 2018 8:33 pm
Good job starting early on saving, investing, and learning.
Thanks! :)
To tilt to these stock factors, I think you need a high degree of conviction of the evidence of factor premiums, the ability to take the extra risk (the extra return is not free), and a high degree of conviction that the premiums will both persist into the future and manifest over your investing timeline. Tilting is not necessary. From what you've written, I don't sense a high enough degree of conviction on your part to make factor investing worthwhile for you at this time. But again, it's not me that has to be convinced, it's you.
I think there's evidence for SCV. Not sure about SCB. Unfortunately, I only have MSCI World Small Cap and Russell 2000. Both indexes are blend, I believe. How do you motivate your own tilting and how much do you tilt?

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Re: Young EU investor long term portfolio feedback

Post by celerity » Wed Dec 05, 2018 2:26 pm

andrew99999 wrote:
Tue Dec 04, 2018 9:04 pm
Currency risk is very important when you get closer to retirement for drawing down. Currency risk is similar to SOR risk but they can compound each other and really ruin you if you are unlucky.

I decide how much currency before determining my allocation.
When nearing retirement, I plan to go with about 60% in home currency and the rest international.
What this means is that, if I had 40% in bonds, then I would need to make up another 20% in either global currency-hedged or home based equities. The rest in global unhedged.

I think that for up to around 20% or 25% of total equities, it's probably not going to be terrible to go for home country bias because in a bad local economic down turn you are likely to lose not more than about 10% or 12.5% of your total equities portfolio, but at the same time you have limited your currency upside so my thinking is why bother, and far more importantly is that you have gone from a massively diversified portfolio throughout all the markets in a 46 countries to 1, which is the reason I choose to just go with currency-hedged for the portion of my portfolio that I want to fit into my local currency. But honestly I don't think it matters that much as long as you keep it to no more than around 20% or 25% of your portfolio. Any more than that and I think you are playing with fire by opening yourself up to concentration risk of being in one market when there is just no need to.
Not sure I understand, wouldn't it be easier to buy bonds in home currency (SEK) while keeping stocks international? As they say:

Stocks = to earn money
Bonds = keep the money you've earned

As for domestic stocks, how about this:

1) Save in international stocks only
2) When Swedish stock market crashes, sell some international stocks
3) Buy Swedish stocks when they're cheap

celerity
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Re: Young EU investor long term portfolio feedback

Post by celerity » Wed Dec 05, 2018 2:28 pm

Valuethinker wrote:
Wed Dec 05, 2018 4:18 am
You cannot, generally, hide from equity risk by buying other equities. EM may have done well (so did value stocks) but we were in a bear market. But markets are too closely correlated, particularly in a crash. Risk is fundamentally about the split between equities v. low risk assets (chiefly bonds). The rest is just noise. Nisiprius has made that point (for US markets) many times with his charts.

If markets go down 40%, but your EM only goes down 30%, it's not going to feel that good.

"average bear market" is not really meaningful. If you read people like Mandelbrot (everyone should read Mandelbrot - The Misbehaviour of Markets) it's a persuasive argument that financial markets show fractal returns. Thus previous periods don't tell you a lot about future periods -- there's not a stable distribution with a known mean and variance underlying. "It always recovered" is less meaningful when we contemplate 1929-late 1940s (some people try to dodge that one by noting that "markets had recovered by 1934" - omitting that they promptly went right back down again), 1968-1980, Japan 1990-present.

St Petersburg or Budapest in 1913 did not "always recover". In other words, our data has strong survivor bias -- we only track the markets that did recover. If you look at the times to recovery of some of the bad bear markets, you can see that it can be quite a long time. It's quite something to say start investing at 30 and see your money falling away each month, and hold your nerve on that to age 42 (and in 1980, when the Dow finally got back above 1000, it was not at all obvious that it would not look backwards from 1981).

Note on the Dimson Marsh Staunton data (Credit Suisse, you can download a summary) then you can find national markets that did a lot, lot worse and took a long time to recover. The world in the 20th century was not the US market only.

If you think "20% is way too much" then you have yet to experience your first bear market. Depending on how you measure it, I am on my 3rd - and I think the 4th will be just as gut-wrenching (actually, in 2008-09 I just froze, didn't rebalance, didn't do anything: I am hoping to never again live through the fear that the financial system will just cease to exist in its current form). The Crash of 1987 (minus 25% in *one day*) was also an experience I hope not to repeat (but I imagine that I will). Conversely, in retrospect "stocks were on sale" if I'd only had some additional money to invest.

I was *not* paying any attention to investing when the UK went through its mid 1970s bear market. In the course of 18 months, adjusted for inflation, the UK stock market fell over 80% in real terms. Fingers crossed I shall never do so - however September-October 2008 had precisely that feel of the beginning of such. Adam Tooze has written an excellent new history of the time - and the absolutely critical role of the US Fed in lending dollars to European banks to fund their Eurodollar deposits. Had the US Central Bank taken a more America-first type of view, we could have had a 1930s level of crisis in European banking. If the problems in the Italian banking system crystallize, then we may yet. Unicredit (one of the stronger banks) issued bonds at 8% yield just recently. So it's borrowing money at 8% to lend it to other people at say 4% - there's a problem with a business model that looks like that.
Markets go up and down. That's what they do. What concerns me is stock STAGNATION, like the 2000-2007 period. Almost a lost decade. Ideally, I'd like my stocks to return 7% annually on average. I did some backtesting and concluded MSCI World returned about 0% that period while MSCI EM about 80%. That's a huge difference. EM long term performance looks less correlated, but perhaps someone white better analytic skills than me could confirm this.

In short, it's not the noise that worries me but strategic threats. Btw, here's an interesting slide regarding bull/bear:
https://www.ftportfolios.com/Common/Con ... 8ff9bfe12d
I don't have the figures to hand, but you will find the 80%/20% portfolio has very similar performance to the 100% portfolio over a 30 year period, say. And the volatility will be significantly less. That's the benefit of diversification.

My thought is you will not consider this point, seriously, until the next bear market. Recency bias is at work - you didn't experience the last bear market (or the one before that; or the 1990 one (which was pretty depressing albeit mild - but of course in Scandinavia it was a lot worse); very few of us experienced the 1970s bear market directly).
I'd like to read such study! My logic is very simple: Most economists agree it's stock for the long run. I'm in my accumulation phase, therefore I don't need bonds.

If bonds, however, did return something like 5-6% annually I'd consider them. Today Swedish long term bonds returns 1% nominal or -1% real (Swedish Central Bank has negative interest rate). I lose money.

Furthermore, these 20% aren't going to make me feel any better if the remaining 80% goes bonkers tomorrow. Bonds my have r=-0.5 or something but I'm going to lose more money preparing for a bear market than during the bear market itself.

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Re: Young EU investor long term portfolio feedback

Post by celerity » Wed Dec 05, 2018 2:34 pm

andrew99999 wrote:
Wed Dec 05, 2018 11:00 am
I think we may have gotten a little off track and apologies to OP.
I think that unless one is within about 10 years from retirement, then no home bias is necessary in equities.
In my opinion, if you are 20 years from retirement and under 20% of target amount saved, then 0 or 10% in bonds are both ok and more than that is just cheating yourself. Shorter periods (10yrs and under) benefit more in risk to return from a lower AA where compounding is a smaller factor over that period.
As you near retirement, you will need to adjust your AA of both bonds and currency proportion to mitigate risks when human capital is near depletion and you move towards drawing down, but you have loads of time until then.
No need to, I actually enjoy reading your discussion :)

Regarding the bold, shouldn't it be exactly the other way around? The closer to retirement, the less home bias? Otherwise you'll end up with serious concentration risk at a time when you can least afford it. For example:

US stock market crashes = Swedish will crash too
Swedish stock market crashes = no one cares

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Re: Young EU investor long term portfolio feedback

Post by Hyperborea » Wed Dec 05, 2018 5:20 pm

celerity wrote:
Wed Dec 05, 2018 2:28 pm
Valuethinker wrote:
Wed Dec 05, 2018 4:18 am
I don't have the figures to hand, but you will find the 80%/20% portfolio has very similar performance to the 100% portfolio over a 30 year period, say. And the volatility will be significantly less. That's the benefit of diversification.
I'd like to read such study! My logic is very simple: Most economists agree it's stock for the long run. I'm in my accumulation phase, therefore I don't need bonds.

If bonds, however, did return something like 5-6% annually I'd consider them. Today Swedish long term bonds returns 1% nominal or -1% real (Swedish Central Bank has negative interest rate). I lose money.

Furthermore, these 20% aren't going to make me feel any better if the remaining 80% goes bonkers tomorrow. Bonds my have r=-0.5 or something but I'm going to lose more money preparing for a bear market than during the bear market itself.
The problem is that most of these comparisons of equity/bond portfolio allocations use the last 30-40 years to draw these conclusions. Well, interest has declined over that time period from the high teens to almost zero in some countries. The resulting bull market in bonds can't be repeated. Interest rates can't decline another 15%. We have started to see some increase in the rates. That may stall and even reverse some with what appears to be a trade war induced recession that is coming but again they can't drop another 15%.

Using Portfolio Visualizer, a portfolio of 80% Total US Stock Market / 20% US Long Treasury over the time period of 1978 to present had 10% lower balance than one that was 100% Total US Stock Market (Short Term Treasury did far worse). So, even with this incredible bond bull market the 80/20 portfolio couldn't beat or keep pace with an 100/0 portfolio. Without that tail wind the 80/20 portfolio is likely to do even worse over the next 40 years.

If you have a decent enough emergency fund combined with the social safety net of Sweden then you should probably be financially and physically fine to weather any reasonable downturn that wouldn't also destroy any bond holdings as well. The question is whether you would be psychologically fine to do so. That's something that's hard to know in advance but nobody knows better than yourself and it's not something anybody on the board can answer for you.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

celerity
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Re: Young EU investor long term portfolio feedback

Post by celerity » Wed Dec 05, 2018 6:24 pm

Hyperborea wrote:
Wed Dec 05, 2018 5:20 pm
The problem is that most of these comparisons of equity/bond portfolio allocations use the last 30-40 years to draw these conclusions. Well, interest has declined over that time period from the high teens to almost zero in some countries. The resulting bull market in bonds can't be repeated. Interest rates can't decline another 15%. We have started to see some increase in the rates. That may stall and even reverse some with what appears to be a trade war induced recession that is coming but again they can't drop another 15%.

Using Portfolio Visualizer, a portfolio of 80% Total US Stock Market / 20% US Long Treasury over the time period of 1978 to present had 10% lower balance than one that was 100% Total US Stock Market (Short Term Treasury did far worse). So, even with this incredible bond bull market the 80/20 portfolio couldn't beat or keep pace with an 100/0 portfolio. Without that tail wind the 80/20 portfolio is likely to do even worse over the next 40 years.

If you have a decent enough emergency fund combined with the social safety net of Sweden then you should probably be financially and physically fine to weather any reasonable downturn that wouldn't also destroy any bond holdings as well. The question is whether you would be psychologically fine to do so. That's something that's hard to know in advance but nobody knows better than yourself and it's not something anybody on the board can answer for you.
Yes, US and Europe are recovering from a liquidity trap. Bonds are extremely expensive because central banks are buying tons of them (short and long term, i.e. QE). Swedish 10 Y is currently at 0.48%. Unless you're looking for a safe place to park your money or think central banks will cut interest rates further, bonds are NOT a good investment right now.

I suppose this leaves us with the question how to diversify a portfolio without using bonds. One would presume a global index fund provides maximum diversification, but I'm not sure it does.

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Re: Young EU investor long term portfolio feedback

Post by andrew99999 » Wed Dec 05, 2018 9:44 pm

celerity wrote:
Wed Dec 05, 2018 2:26 pm
Not sure I understand, wouldn't it be easier to buy bonds in home currency (SEK) while keeping stocks international? As they say:

Stocks = to earn money
Bonds = keep the money you've earned

As for domestic stocks, how about this:

1) Save in international stocks only
2) When Swedish stock market crashes, sell some international stocks
3) Buy Swedish stocks when they're cheap
Well, it's not as simple that bonds are to keep the money you've earned. If you plan to retire at 40, you will need 50 years of savings in bonds to "keep the money you've earned". You have to take some risk with some (a lot) of the money you have earned to make sure you have the ability to spend down from it while over a long period still have the capital to keep drawing from. Your idea might work for someone retiring at 65 with 25 years of expenses, but it doesn't really fit for someone retiring younger.

Since your requirements will be largely linked to the currency you spend in, I'd think you want a chunk of your money in your home currency (either by hedging a global portfolio or by having home based equities), so that if your currency doubles as my home currency did between 2000 and 2011, the value of a global equities allocation did not have to face a 50% headwind.

As a young retiree, my plan is to retire on a 60/40 portfolio and glide back "up" to a more permanent 70/30 AA over 10 years, and having only 30% of my assets in my home country in retirement simply because that is my AA adds quite a lot of uncompensated currency risk when drawing down. In a nutshell, I am not comfortable with the AA determining my currency exposure risk.

celerity wrote:
Wed Dec 05, 2018 2:34 pm
andrew99999 wrote:
Wed Dec 05, 2018 11:00 am
I think we may have gotten a little off track and apologies to OP.
I think that unless one is within about 10 years from retirement, then no home bias is necessary in equities.
In my opinion, if you are 20 years from retirement and under 20% of target amount saved, then 0 or 10% in bonds are both ok and more than that is just cheating yourself. Shorter periods (10yrs and under) benefit more in risk to return from a lower AA where compounding is a smaller factor over that period.
As you near retirement, you will need to adjust your AA of both bonds and currency proportion to mitigate risks when human capital is near depletion and you move towards drawing down, but you have loads of time until then.
No need to, I actually enjoy reading your discussion :)

Regarding the bold, shouldn't it be exactly the other way around? The closer to retirement, the less home bias? Otherwise you'll end up with serious concentration risk at a time when you can least afford it. For example:

US stock market crashes = Swedish will crash too
Swedish stock market crashes = no one cares

Sorry I should have been more clear. I was talking about currency "upside" risk, which is the risk where your home currency rises vs the rest and if you have global portfolio then your portfolio drops relative to your spending currency. There is another risk which is currency "downside" risk where your currency drops vs the rest and the risk is if you have everything in your own currency and you missed out on some currency diversification in your portfolio.
Yes you need to balance both of these.

If you have all of your assets in your home currency, you face no upside risk but you face downside risk, and if you have all your money in global currency, you face no downside risk but you face upside risk.

So the question then becomes, how much risk is reasonable?
I have no data on this.
I think half is probably ok, but it is not based on anything. In that case you still face risks, but you have 2 risks each with a smaller magnitude instead of just one risk with a bigger magnitude.
My gut says that I want a little more in home currency since that is what I spend in, so I would like 50-70% in home currency when drawing down, but again that is not based on any data.

The problem comes back to how much currency upside risk do you want when you are drawing down?
Just becuase someone wants 30% in bonds doesn't make sense to me that this should determine their currency risk also.

asset_chaos
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Re: Young EU investor long term portfolio feedback

Post by asset_chaos » Thu Dec 06, 2018 2:30 am

celerity wrote:
Wed Dec 05, 2018 2:26 pm
asset_chaos wrote:
Tue Dec 04, 2018 8:33 pm
To tilt to these stock factors, I think you need a high degree of conviction of the evidence of factor premiums, the ability to take the extra risk (the extra return is not free), and a high degree of conviction that the premiums will both persist into the future and manifest over your investing timeline. Tilting is not necessary. From what you've written, I don't sense a high enough degree of conviction on your part to make factor investing worthwhile for you at this time. But again, it's not me that has to be convinced, it's you.
I think there's evidence for SCV. Not sure about SCB. Unfortunately, I only have MSCI World Small Cap and Russell 2000. Both indexes are blend, I believe. How do you motivate your own tilting and how much do you tilt?
Although consensus may be too strong a word for a social science, I believe the modern academic consensus on factor investing is that premia exist because some sets of stocks do worse than the general market during bad times or have their bad times for different reasons than the general market. Therefore those people or institutions, who are most people, exposed or sensitive to those risks want to avoid those sets of stocks. The much smaller group of people or institutions whose circumstances do not make them sensitive to those risks can and do hold these riskier stocks and collect a premium. I think this book http://www.oxfordscholarship.com/view/1 ... 0199959327 more or less exemplifies this view. In this view it's like insurance where risks are transferred to those best able to bear them in exchange for a premium, but an insurance exchange that occurs spontaneously and without people really understanding what's happening---until, of course, brilliant financial economists explained it all.--) There is also a more succinct paper by a Fed governor but I can't find the link or remember the title right now. The key point of this view is that most of us neither can nor should take factor bets because most of us are exposed to these risks and won't like the outcome when the risk shows up.

With that rather long-winded prologue, I have a bit of small value because I had a secure, relatively high paying job that meant I was pretty much insulated from all stock market risks. Bad times as defined by bad stock market conditions of any type did not effect my family's lifestyle. I decided I could bear the risk and collect the premium. I did that for over 20 years and overall it's worked out for a little more return and concomitant increase in risk. But for the last 10 years the small value premium has been zero or a little negative. And that's the way it's not like regular insurance: you don't get the premiums like clockwork; they're spasmodic. So, it's not enough to be convinced that there is evidence of factor premiums. You also have to be convinced that your risk sensitivity is sufficiently different from the typical investor's that when the extra risks show up in bad times, you'll be unaffected. In hindsight it is perhaps unsurprising that risk and return are still entwined, even if here in a non-obvious way.
Regards, | | Guy

Valuethinker
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Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Thu Dec 06, 2018 5:41 am

celerity wrote:
Wed Dec 05, 2018 2:28 pm
Valuethinker wrote:
Wed Dec 05, 2018 4:18 am
You cannot, generally, hide from equity risk by buying other equities. EM may .
Markets go up and down. That's what they do. What concerns me is stock STAGNATION, like the 2000-2007 period.
Very sensitive to your endpoints. What that actually was markets reaching an extreme of valuation not seen since 1929, a long bear market, then a fairly tepid recovery. Then, another plunge.

It's like saying markets stagnated 1928-1934. Say what? The whole period 1929-1941 was a bear market, just punctuated by rallies (as it always is).

I would not call 2000-07 STAGNATION. Rather it was a bumpy ride - there was plenty of volatility and a bear market.
Almost a lost decade. Ideally, I'd like my stocks to return 7% annually on average. I did some backtesting and concluded MSCI World returned about 0% that period while MSCI EM about 80%. That's a huge difference. EM long term performance looks less correlated, but perhaps someone white better analytic skills than me could confirm this.
If you start your EM in 1993, or 1996, you get a very different picture than if you start it in 1995 (after the Mexico Crash) or 1999 (after the SE Asia Crash and the 1998 Russian default).

EM will not diversify much equity risk at least compared to bonds. Some. But it's not that great a diversifier. 2008-09 showed that. And correlations have increased over time.
In short, it's not the noise that worries me but strategic threats. Btw, here's an interesting slide regarding bull/bear:
https://www.ftportfolios.com/Common/Con ... 8ff9bfe12d
I shall consider that later. -
I don't have the figures to hand, but you will find the 80%/20% portfolio has very similar performance to the 100% portfolio over a 30 year period, say. And the volatility will be significantly less. That's the benefit of diversification.

My thought is you will not consider this point, seriously, until the next bear market. Recency bias is at work - you didn't experience the last bear market (or the one before that; or the 1990 one (which was pretty depressing albeit mild - but of course in Scandinavia it was a lot worse); very few of us experienced the 1970s bear market directly).
I'd like to read such study! My logic is very simple: Most economists agree it's stock for the long run. I'm in my accumulation phase, therefore I don't need bonds.
And yet financial economics also believes in diversification - the gain from going to 100% equities is paid for by much higher volatility.
If bonds, however, did return something like 5-6% annually I'd consider them. Today Swedish long term bonds returns 1% nominal or -1% real (Swedish Central Bank has negative interest rate). I lose money.

Furthermore, these 20% aren't going to make me feel any better if the remaining 80% goes bonkers tomorrow. Bonds my have r=-0.5 or something but I'm going to lose more money preparing for a bear market than during the bear market itself.
I'd feel happier if we were having this discussion in the middle of a bear market ;-).

I accept the point about monetary policy and low real interest rates in the "shadow Eurozone" (to coin a term). That would simply make me hold ST bonds i.e. in the expectation that interest rates would eventually rise. Or inflation linked bonds depending on the estimated real yields.

I can only say you will only really know your reaction to volatility when you experience it. I was 100% equities (albeit with large cash reserves) going into the 2008 Crash. I froze in the headlights - stopped investing, just stopped looking at valuation. I have now reached an age (late 50s) where running through that gamble again is much less attractive.

Generally 100% equity threads around here are a sign of a late stage of a bull market - the past month may have shaken those off, for a while.
Last edited by Valuethinker on Thu Dec 06, 2018 5:55 am, edited 2 times in total.

Valuethinker
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Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Thu Dec 06, 2018 5:45 am

Hyperborea wrote:
Wed Dec 05, 2018 5:20 pm
celerity wrote:
Wed Dec 05, 2018 2:28 pm
Valuethinker wrote:
Wed Dec 05, 2018 4:18 am
I don't have the figures to hand, but you will find the 80%/20% portfolio has very similar performance to the 100% portfolio over a 30 year period, say. And the volatility will be significantly less. That's the benefit of diversification.
I'd like to read such study! My logic is very simple: Most economists agree it's stock for the long run. I'm in my accumulation phase, therefore I don't need bonds.

If bonds, however, did return something like 5-6% annually I'd consider them. Today Swedish long term bonds returns 1% nominal or -1% real (Swedish Central Bank has negative interest rate). I lose money.

Furthermore, these 20% aren't going to make me feel any better if the remaining 80% goes bonkers tomorrow. Bonds my have r=-0.5 or something but I'm going to lose more money preparing for a bear market than during the bear market itself.
The problem is that most of these comparisons of equity/bond portfolio allocations use the last 30-40 years to draw these conclusions. Well, interest has declined over that time period from the high teens to almost zero in some countries. The resulting bull market in bonds can't be repeated. Interest rates can't decline another 15%. We have started to see some increase in the rates. That may stall and even reverse some with what appears to be a trade war induced recession that is coming but again they can't drop another 15%.
However your implicit assumption in the above is that the equity party will continue - whereas in fact part of what drove the equity market was the bond market. If equities have lower returns than bonds in the next 30-40 years then that won't look so good. (in truth I think that very unlikely, but that's a guess that we are not in a Japan situation; however I could certainly see it on a 10 year view).
Using Portfolio Visualizer, a portfolio of 80% Total US Stock Market / 20% US Long Treasury over the time period of 1978 to present had 10% lower balance than one that was 100% Total US Stock Market (Short Term Treasury did far worse). So, even with this incredible bond bull market the 80/20 portfolio couldn't beat or keep pace with an 100/0 portfolio. Without that tail wind the 80/20 portfolio is likely to do even worse over the next 40 years.

If you have a decent enough emergency fund combined with the social safety net of Sweden then you should probably be financially and physically fine to weather any reasonable downturn that wouldn't also destroy any bond holdings as well. The question is whether you would be psychologically fine to do so. That's something that's hard to know in advance but nobody knows better than yourself and it's not something anybody on the board can answer for you.
The points about safety nets are fair.

However taking an average over a 38 year bull market in equities (as well as bonds) probably does not give us a good understanding of the probabilities. And those fluctuations in equity values look very small on a graph taken at that level of zoom, but they did not feel minor when one experienced them: 30-50% drops in equity portfolio values.

celerity
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Re: Young EU investor long term portfolio feedback

Post by celerity » Thu Dec 06, 2018 5:36 pm

andrew99999 wrote:
Wed Dec 05, 2018 9:44 pm
Sorry I should have been more clear. I was talking about currency "upside" risk, which is the risk where your home currency rises vs the rest and if you have global portfolio then your portfolio drops relative to your spending currency. There is another risk which is currency "downside" risk where your currency drops vs the rest and the risk is if you have everything in your own currency and you missed out on some currency diversification in your portfolio.
Yes you need to balance both of these.

If you have all of your assets in your home currency, you face no upside risk but you face downside risk, and if you have all your money in global currency, you face no downside risk but you face upside risk.

So the question then becomes, how much risk is reasonable?
I have no data on this.
I think half is probably ok, but it is not based on anything. In that case you still face risks, but you have 2 risks each with a smaller magnitude instead of just one risk with a bigger magnitude.
My gut says that I want a little more in home currency since that is what I spend in, so I would like 50-70% in home currency when drawing down, but again that is not based on any data.

The problem comes back to how much currency upside risk do you want when you are drawing down?
Just becuase someone wants 30% in bonds doesn't make sense to me that this should determine their currency risk also.
I think most people would say 50% domestic stocks would be too much (unless it's US). Pros and cons of home bias can be summed up as:

+ No currency risk. You earn and spend the money in the same currency.
- Concentration risk. Home stock market may crash for domestic reasons (housing bubble etc.)
- Underperformance risk. A form of stock picking on global level. There's no guarantee Swedish stock market will perform better than the World average.

I would say 20-25% domestic stocks is reasonable.

celerity
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Re: Young EU investor long term portfolio feedback

Post by celerity » Thu Dec 06, 2018 5:38 pm

Valuethinker wrote:
Thu Dec 06, 2018 5:41 am
I'd feel happier if we were having this discussion in the middle of a bear market ;-).
:beer
EM will not diversify much equity risk at least compared to bonds. Some. But it's not that great a diversifier. 2008-09 showed that. And correlations have increased over time.
Do you have any actual evidence DM and EM have become more correlated?
I accept the point about monetary policy and low real interest rates in the "shadow Eurozone" (to coin a term). That would simply make me hold ST bonds i.e. in the expectation that interest rates would eventually rise. Or inflation linked bonds depending on the estimated real yields.

I can only say you will only really know your reaction to volatility when you experience it. I was 100% equities (albeit with large cash reserves) going into the 2008 Crash. I froze in the headlights - stopped investing, just stopped looking at valuation. I have now reached an age (late 50s) where running through that gamble again is much less attractive.

Generally 100% equity threads around here are a sign of a late stage of a bull market - the past month may have shaken those off, for a while.
Thanks for sharing your experience, it's been very helpful!

Valuethinker
Posts: 36640
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Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Thu Dec 06, 2018 6:42 pm

celerity wrote:
Thu Dec 06, 2018 5:38 pm
Valuethinker wrote:
Thu Dec 06, 2018 5:41 am
I'd feel happier if we were having this discussion in the middle of a bear market ;-).
:beer
EM will not diversify much equity risk at least compared to bonds. Some. But it's not that great a diversifier. 2008-09 showed that. And correlations have increased over time.
Do you have any actual evidence DM and EM have become more correlated?
Run the chart 2008 09 I think you will see pretty high correlation.

Remember you want diversification to work for you at the worst of times. It doesn't do you much good in a bull market you just want to have what is going up.

EM equities are not a big diversifier on an equity portfolio. Probably small cap value EM equities more so but I've never found a suitable fund.

I did buy an ishares EM dividend fund. It gets me away from the problem that 40 per cent of EM index is China. On a price to book the companies look very cheap: lots of Russia and other such healthy places. Proper contrarian investing ;-)

Of course it has done quite poorly the last 12 months;-).

I also look for an appropriate Frontier Markets fund. That really us taking a long view on demographic factors. Nigeria. Pakistan.

Just on bonds the UK 10 year is yielding 1.6 per cent and inflation is 3 per cent. So our real yields!are pretty close to yours.

I would not recommend you do this but I am more than 50 per cent in short term bonds.
I accept the point about monetary policy and low real interest rates in the "shadow Eurozone" (to coin a term). That would simply make me hold ST bonds i.e. in the expectation that interest rates would eventually rise. Or inflation linked bonds depending on the estimated real yields.

I can only say you will only really know your reaction to volatility when you experience it. I was 100% equities (albeit with large cash reserves) going into the 2008 Crash. I froze in the headlights - stopped investing, just stopped looking at valuation. I have now reached an age (late 50s) where running through that gamble again is much less attractive.

Generally 100% equity threads around here are a sign of a late stage of a bull market - the past month may have shaken those off, for a while.
Thanks for sharing your experience, it's been very helpful!
[/quote]

I am one of a thousand here like me. I don't really remember the decade plus long 1970s bear market.

I do remember October 19 1987 losing 25 per cent on one day. And 1990. And 2000 to 2003 which personally was the worst. And 2008 09 which was watching the world fall apart.

Sheepdog had a thread based on his diary over that last one. It's worth digging it out and rereading it.

andrew99999
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Re: Young EU investor long term portfolio feedback

Post by andrew99999 » Thu Dec 06, 2018 9:53 pm

celerity wrote:
Thu Dec 06, 2018 5:36 pm
andrew99999 wrote:
Wed Dec 05, 2018 9:44 pm
Sorry I should have been more clear. I was talking about currency "upside" risk, which is the risk where your home currency rises vs the rest and if you have global portfolio then your portfolio drops relative to your spending currency. There is another risk which is currency "downside" risk where your currency drops vs the rest and the risk is if you have everything in your own currency and you missed out on some currency diversification in your portfolio.
Yes you need to balance both of these.

If you have all of your assets in your home currency, you face no upside risk but you face downside risk, and if you have all your money in global currency, you face no downside risk but you face upside risk.

So the question then becomes, how much risk is reasonable?
I have no data on this.
I think half is probably ok, but it is not based on anything. In that case you still face risks, but you have 2 risks each with a smaller magnitude instead of just one risk with a bigger magnitude.
My gut says that I want a little more in home currency since that is what I spend in, so I would like 50-70% in home currency when drawing down, but again that is not based on any data.

The problem comes back to how much currency upside risk do you want when you are drawing down?
Just becuase someone wants 30% in bonds doesn't make sense to me that this should determine their currency risk also.
I think most people would say 50% domestic stocks would be too much (unless it's US). Pros and cons of home bias can be summed up as:

+ No currency risk. You earn and spend the money in the same currency.
- Concentration risk. Home stock market may crash for domestic reasons (housing bubble etc.)
- Underperformance risk. A form of stock picking on global level. There's no guarantee Swedish stock market will perform better than the World average.

I would say 20-25% domestic stocks is reasonable.
I said 50-70% of your total portfolio in "home currency", not in domestic stock. Apologies if I was unclear.
That 50-70% includes home currency based fixed income and the rest can be made up of domestic stock and/or currency-hedged international.

The point was to separate currency exposure from your AA of equities to fixed income because IMO there is no need to let your AA determine your currency risks.

If you had say a 60/40 portfolio then going by my own preference of 50-70% in "home currency", it would mean 10-30% in "home currency" based equities which would be made up of domestic stock and/or currency-hedged global equities. My own preference is currency-hedged global equities based my philosophy of not tilting due to accepting I don't know more than the market, but I agree with you that up to 20-25% in domestic stocks are reasonable too if one prefers that.

celerity
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Re: Young EU investor long term portfolio feedback

Post by celerity » Fri Dec 07, 2018 10:39 am

Valuethinker wrote:
Thu Dec 06, 2018 6:42 pm
Run the chart 2008 09 I think you will see pretty high correlation.

Remember you want diversification to work for you at the worst of times. It doesn't do you much good in a bull market you just want to have what is going up.

EM equities are not a big diversifier on an equity portfolio. Probably small cap value EM equities more so but I've never found a suitable fund.
No, no, no, that's not what I want. This article sums it up well:
Critics of international diversification observe that it does not protect investors against short-term market crashes because markets become more correlated during downturns. Although true, this observation misses the big picture. Common, short-term crashes can be painful, but long-term returns are far more important to wealth creation and destruction. We show that over the long term, markets do not tend to crash at the same time. This finding is no surprise because even though market panics can be important drivers of short-term returns, country-specific economic performance dominates over the long term.
Country-specific economic performance dominates long-term performance, explaining about 1 percent of quarterly returns and 39 percent of 15-year returns and rising quite linearly over time.
https://www.aqr.com/Insights/Research/J ... Eventually

celerity
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Re: Young EU investor long term portfolio feedback

Post by celerity » Fri Dec 07, 2018 10:49 am

This forum is very conservative. :shock:

I suspect more money has been lost @Bogleheads preparing for market crashes than during the crashes themselves.

ICH
Posts: 117
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Re: Young EU investor long term portfolio feedback

Post by ICH » Fri Dec 07, 2018 1:00 pm

celerity wrote:
Fri Dec 07, 2018 10:49 am
This forum is very conservative. :shock:

I suspect more money has been lost @Bogleheads preparing for market crashes than during the crashes themselves.
Hahaha, that's a good one.
I would say that one would tend to think and advise with a bias towards one's individual circumstances. Using the standard format for asking portfolio questions helps people to put the advice in context.
There's really good advice on this thread.

My opinion on the 3 questions on the OP: no, you don't need any of these.

One comment for the stated expense ratios: always take into account tax leakage.

My advise: add fixed income

Valuethinker
Posts: 36640
Joined: Fri May 11, 2007 11:07 am

Re: Young EU investor long term portfolio feedback

Post by Valuethinker » Fri Dec 07, 2018 6:43 pm

celerity wrote:
Fri Dec 07, 2018 10:39 am
Valuethinker wrote:
Thu Dec 06, 2018 6:42 pm
Run the chart 2008 09 I think you will see pretty high correlation.

Remember you want diversification to work for you at the worst of times. It doesn't do you much good in a bull market you just want to have what is going up.

EM equities are not a big diversifier on an equity portfolio. Probably small cap value EM equities more so but I've never found a suitable fund.
No, no, no, that's not what I want. This article sums it up well:
I understood you to say you wanted EM for diversification. I pointed out it will not do that for you.
Critics of international diversification observe that it does not protect investors against short-term market crashes because markets become more correlated during downturns. Although true, this observation misses the big picture. Common, short-term crashes can be painful, but long-term returns are far more important to wealth creation and destruction. We show that over the long term, markets do not tend to crash at the same time. This finding is no surprise because even though market panics can be important drivers of short-term returns, country-specific economic performance dominates over the long term.
Country-specific economic performance dominates long-term performance, explaining about 1 percent of quarterly returns and 39 percent of 15-year returns and rising quite linearly over time.
https://www.aqr.com/Insights/Research/J ... Eventually
[/quote]

I have not analysed what aqr says in any detail.

It's an interesting point although I cannot square it with US v China say in last 20 years. Let alone German stock market v UK.

There's nothing wrong with having EM exposure.

But it won't reduce portfolio volatility by much. In fact will probably increase it.

We are probably in the later stages of a bull market. It may simply be that you need to pursue 100 per cent equities and see how you feel 're the whole thing during the next bear market.

I would stay globally diversified. In the long run purchasing power parity should even out currency fluctuations. And the diversification on the Swedish economy should be welcome.

You will find here that we tend to like bonds. At least we don't like 100 per cent stocks much. Age might have something to do with that.

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