Fixed Global Allocation For US Investor

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
invest2bfree
Posts: 68
Joined: Sun Jan 12, 2020 9:44 am

Fixed Global Allocation For US Investor

Post by invest2bfree »

Hi everyone,

Iam a big fan of eliminating home country bias.

The conundrum I find myself is the home country which I'm in is US and it is so successful that it is having unhealthy influence on total world index etf like VT. Now it is close to 60% and Iam thinking of eliminating this home country bias by having a fixed allocation.

Example of having an allocation like 40% USA, 30% Developed and 30% Emerging Markets. Enforce such allocation going forwards, this allocation is based on average allocation over many years and propensity of emerging markets like China to have a bigger role.

Do you think it is advisable or is it better to follow cap weighted index etf like VT and let the market sort it out?

Thanks,
invest
User avatar
Taylor Larimore
Advisory Board
Posts: 29946
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Fixed Global Allocation For US Investor

Post by Taylor Larimore »

invest2bfree wrote: Sat Oct 17, 2020 1:52 pm Hi everyone,

Iam a big fan of eliminating home country bias.

The conundrum I find myself is the home country which I'm in is US and it is so successful that it is having unhealthy influence on total world index etf like VT. Now it is close to 60% and Iam thinking of eliminating this home country bias by having a fixed allocation.

Example of having an allocation like 40% USA, 30% Developed and 30% Emerging Markets. Enforce such allocation going forwards, this allocation is based on average allocation over many years and propensity of emerging markets like China to have a bigger role.

Do you think it is advisable or is it better to follow cap weighted index etf like VT and let the market sort it out?

Thanks,
invest
invest2bfree:

I faced the same dilemma of home country bias when I designed The Three-Fund Portfolio nearly 20 years ago. This link explains my international stocks solution (20% of equity):

viewtopic.php?t=196956

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Limit international holdings to no more than one-fifth of the equity portfolio."
"Simplicity is the master key to financial success." -- Jack Bogle
JBTX
Posts: 6958
Joined: Wed Jul 26, 2017 12:46 pm

Re: Fixed Global Allocation For US Investor

Post by JBTX »

invest2bfree wrote: Sat Oct 17, 2020 1:52 pm Hi everyone,

Iam a big fan of eliminating home country bias.

The conundrum I find myself is the home country which I'm in is US and it is so successful that it is having unhealthy influence on total world index etf like VT. Now it is close to 60% and Iam thinking of eliminating this home country bias by having a fixed allocation.

Example of having an allocation like 40% USA, 30% Developed and 30% Emerging Markets. Enforce such allocation going forwards, this allocation is based on average allocation over many years and propensity of emerging markets like China to have a bigger role.

Do you think it is advisable or is it better to follow cap weighted index etf like VT and let the market sort it out?

Thanks,
invest
It's an interesting question, and there isn't going to be a definitive answer. If you are a true passive investor, you go with market weights. If you like to speculate on mean reversion or diversify your outcomes then you could rationalize overweighting international.

I have seen studies that seem to indicate that modest home country overweight often gives the optimum risk/return outcome, presumably due to avoiding currency risk.

I'm about 1/3 international. I'd like to be closer to market weight.
Topic Author
invest2bfree
Posts: 68
Joined: Sun Jan 12, 2020 9:44 am

Re: Fixed Global Allocation For US Investor

Post by invest2bfree »

JBTX wrote: Sat Oct 17, 2020 5:04 pm
invest2bfree wrote: Sat Oct 17, 2020 1:52 pm Hi everyone,

Iam a big fan of eliminating home country bias.

The conundrum I find myself is the home country which I'm in is US and it is so successful that it is having unhealthy influence on total world index etf like VT. Now it is close to 60% and Iam thinking of eliminating this home country bias by having a fixed allocation.

Example of having an allocation like 40% USA, 30% Developed and 30% Emerging Markets. Enforce such allocation going forwards, this allocation is based on average allocation over many years and propensity of emerging markets like China to have a bigger role.

Do you think it is advisable or is it better to follow cap weighted index etf like VT and let the market sort it out?

Thanks,
invest
It's an interesting question, and there isn't going to be a definitive answer. If you are a true passive investor, you go with market weights. If you like to speculate on mean reversion or diversify your outcomes then you could rationalize overweighting international.

I have seen studies that seem to indicate that modest home country overweight often gives the optimum risk/return outcome, presumably due to avoiding currency risk.

I'm about 1/3 international. I'd like to be closer to market weight.
Great post, Iam too scratching my head.
Iam leaning towards VT and just call it a day. At least even if I underperform then I can just blame it on the market. If I underperform by having a fixed allocation then I will constantly second guess myself.

Also Iam at a stage of my life where I do not need to accumulate, but I cannot afford to make stupid mistake.
absolute zero
Posts: 492
Joined: Thu Dec 29, 2016 4:59 pm

Re: Fixed Global Allocation For US Investor

Post by absolute zero »

You are not using the term “home country bias” in the way that most in the investment community do. Typically home country bias is referred to holding more than global market cap weight in an investors home country. So if you hold VT, and US stocks sore in the coming years and you find yourself with 70% US stocks, you would *still* not have a home country bias.

That being said, there is nothing wrong with underweighting US stocks and overweighting EM. Personally I’d be fine overweighting EM slightly, but you’re proposing a pretty healthy overweight. Just be prepared for a more volatile portfolio. I’d suggest you stick with VT, but if you’re convinced that you will be able to stick with your portfolio for decades then go for it.
absolute zero
Posts: 492
Joined: Thu Dec 29, 2016 4:59 pm

Re: Fixed Global Allocation For US Investor

Post by absolute zero »

I saw your follow up post where you said you are leaning towards VT. I would say if an investor is deciding between your two portfolios, unless they had extremely strong conviction then they should go with the more moderate (and less atypical) portfolio which is of course VT.
User avatar
pokebowl
Posts: 382
Joined: Sat Dec 17, 2016 7:22 pm
Location: The Orion Spur of the Milky Way galaxy.

Re: Fixed Global Allocation For US Investor

Post by pokebowl »

invest2bfree wrote: Sat Oct 17, 2020 1:52 pm
Do you think it is advisable or is it better to follow cap weighted index etf like VT and let the market sort it out?

I am close to FIRE myself, however a large majority of my portfolio follows VT. I personally see no issues with this strategy, if US out performs as it has, VT or VT-like holdings will tilt toward US, and vice versa. I would just caveat you ensure if you do this strategy, you attack your taxable account a little differently than just using VT/VTWAX as a set it and forget it fund. You'll be better severed, tax wise to break it up into its core components in taxable, but in IRA space, VT is a perfect fund to use. :beer
ivgrivchuck
Posts: 162
Joined: Sun Sep 27, 2020 6:20 pm

Re: Fixed Global Allocation For US Investor

Post by ivgrivchuck »

I am 55/45 VTI/VXUS following roughly the market caps. This is perhaps the simplest tax-efficient set up.

I admit though that some home country bias might be optimal from risk management perspective and tax efficiency perspective (qualified dividends), so I consider 70/30 to be the neutral choice.
44% VTI | 36% VXUS | 10% I-bonds | 10% EE-bonds
Post Reply