How diversified are you really with cap weighted foreign markets?

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CULater
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How diversified are you really with cap weighted foreign markets?

Post by CULater » Tue Jan 09, 2018 11:35 pm

Table shows how heavily concentrated foreign cap-weighted markets are in just a few companies. Holding a foreign cap weighted index fund doesn't give you as much diversification as you thought. Only U.S. and Japan have less than 44% weighting in the top 10 holdings.

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Re: How diversified are you really with cap weighted foreign markets?

Post by kosomoto » Tue Jan 09, 2018 11:39 pm

So buy a small cap international fund? If this is an issue it's easy to solve.

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Re: How diversified are you really with cap weighted foreign markets?

Post by drk » Tue Jan 09, 2018 11:43 pm

Right. Don't buy country-specific products just because they're offered and "cheap." This is a non sequitur vis-à-vis Total International Stock Market or Total World, though.

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Re: How diversified are you really with cap weighted foreign markets?

Post by grabiner » Tue Jan 09, 2018 11:58 pm

What matters is the diversification of your portfolio as a whole. A UK cap-weighted fund isn't well diversified, with 44% of the money in ten stocks. But if you hold Vanguard Total International, then 5% of your money is in those ten stocks, and 8.6% of your money is in the ten largest stocks in the whole fund. And if Vanguard Total International is 30% of your portfolio, then only 2.6% of your money is in the ten largest foreign stocks (and 10% is in the ten largest US stocks if Total Stock Market is the other 70%).
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Re: How diversified are you really with cap weighted foreign markets?

Post by MnD » Wed Jan 10, 2018 12:53 am

So as a investor that mirrors total world on the equity side (70 equity /30 fixed income), an approximation of my individual "big swiss" single stock stake in ultra non-diversified Switzerland as a % of my portfolio is:
70% (my share of equity versus other) X 2.6% (Swiss share of total world) X 70% (concentration of top 10 stocks in swiss market) X 10% (average position of each top 10 stock in swiss market) = 0.127%

Shoot - I might as well invest everything is swiss bitcoin!

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Re: How diversified are you really with cap weighted foreign markets?

Post by TD2626 » Wed Jan 10, 2018 1:15 am

drk wrote:
Tue Jan 09, 2018 11:43 pm
Right. Don't buy country-specific products just because they're offered and "cheap." This is a non sequitur vis-à-vis Total International Stock Market or Total World, though.
Good point - these are not the kinds of buy and hold funds that would likely be held by Bogleheads, in my opinion. Why would one want to hold a dozen or more individual country funds whey one can just get total world or total international? It creates excess complexity and likely isn't worth the hassle. So that leaves these single country funds as mostly useful for speculation, which in my opinion is basically gambling and not investing and isn't responsible. (Of course, having a one country fund for a country that is the home country to overweight it for, say, reducing currency risk may be reasonable so long as there's still substantial international).
grabiner wrote:
Tue Jan 09, 2018 11:58 pm
What matters is the diversification of your portfolio as a whole. A UK cap-weighted fund isn't well diversified, with 44% of the money in ten stocks. But if you hold Vanguard Total International, then 5% of your money is in those ten stocks, and 8.6% of your money is in the ten largest stocks in the whole fund. And if Vanguard Total International is 30% of your portfolio, then only 2.6% of your money is in the ten largest foreign stocks (and 10% is in the ten largest US stocks if Total Stock Market is the other 70%).
Good point. This is why broad international diversification is so important in my opinion. Also - it's worth noting that portfolios that are, say, 60% stock funds and 40% bond funds may have a relatively large % of the stock portfolio in the largest handful of stocks, but it would have a smaller % of the overall portfolio since the stock portfolio is only part of the overall portfolio.

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Re: How diversified are you really with cap weighted foreign markets?

Post by SimpleGift » Wed Jan 10, 2018 1:34 am

CULater wrote:
Tue Jan 09, 2018 11:35 pm
Holding a foreign cap weighted index fund doesn't give you as much diversification as you thought.
Your post and thread title should be edited to read: "How diversified are you with single-country, cap-weighted foreign markets?" Beyond the U.S. market, why would a U.S. investor limit themselves to a single-country index fund or ETF, except as a speculation?
Vanguard's Total International Stock Index has over 6,200 stocks from 45 countries — which is plenty of diversification for anyone.
Last edited by SimpleGift on Wed Jan 10, 2018 1:45 am, edited 1 time in total.
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Re: How diversified are you really with cap weighted foreign markets?

Post by Thesaints » Wed Jan 10, 2018 1:42 am

A cap weighted portfolio is maximally diversified. Any non cap weighted portfolio can be seen as the sum of a cap weighted portfolio (valued less than the total capital), plus a number of bets in individual companies.

A simple example can clarify the concept. Let’s take the simplest possible index, composed of only two stocks. According to cap weight stock A makes up 90% of the index and stock B the remaining 10%.
According to the OP, I believe, a cap weighted investment in the index would be less diversified than an equal weight investment.
We can easily show that this is not true.
A cap weighted $100 investment in the index would have $90 invested in stock A and $10 in stock B.
An equal weighted investment has $50 in stock A and 50 in stock B. We can express this allocation also as $50 in stock A and $5.56 in stock B, plus $44.44 in stock B.
The first part of this allocation, for a total of $55.56 replicates the cap weighted allocation. We can take it out of the picture, since it is the same for both methods.
We are left with comparing the diversification of
$40 in stock A + $4.44 in stock B (cap weighted allocation)
vs.
$44.44 in stock B (equal weighted allocation))
QED

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Re: How diversified are you really with cap weighted foreign markets?

Post by Ditchwitch » Wed Jan 10, 2018 1:54 am

Thesaints wrote:
Wed Jan 10, 2018 1:42 am
A cap weighted portfolio is maximally diversified. Any non cap weighted portfolio can be seen as the sum of a cap weighted portfolio (valued less than the total capital), plus a number of bets in individual companies.

A simple example can clarify the concept. Let’s take the simplest possible index, composed of only two stocks. According to cap weight stock A makes up 90% of the index and stock B the remaining 10%.
According to the OP, I believe, a cap weighted investment in the index would be less diversified than an equal weight investment.
We can easily show that this is not true.
A cap weighted $100 investment in the index would have $90 invested in stock A and $10 in stock B.
An equal weighted investment has $50 in stock A and 50 in stock B. We can express this allocation also as $50 in stock A and $5.56 in stock B, plus $44.44 in stock B.
The first part of this allocation, for a total of $55.56 replicates the cap weighted allocation. We can take it out of the picture, since it is the same for both methods.
We are left with comparing the diversification of
$40 in stock A + $4.44 in stock B (cap weighted allocation)
vs.
$44.44 in stock B (equal weighted allocation))
QED
Nice way to clarify!
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Re: How diversified are you really with cap weighted foreign markets?

Post by ResearchMed » Wed Jan 10, 2018 4:02 am

SimpleGift wrote:
Wed Jan 10, 2018 1:34 am
CULater wrote:
Tue Jan 09, 2018 11:35 pm
Holding a foreign cap weighted index fund doesn't give you as much diversification as you thought.
Your post and thread title should be edited to read: "How diversified are you with single-country, cap-weighted foreign markets?" Beyond the U.S. market, why would a U.S. investor limit themselves to a single-country index fund or ETF, except as a speculation?
Vanguard's Total International Stock Index has over 6,200 stocks from 45 countries — which is plenty of diversification for anyone.
Are there supposed to be some sort of horizontal and vertical scales?
If not, then why are the displays two dimensional? Why aren't they just listed, with the percentage next to each country?
And why are some squares, some rectangles (some of which are horizontal, some vertical)?

I'm not quite following the visual.

Thanks.

RM
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Re: How diversified are you really with cap weighted foreign markets?

Post by Thesaints » Wed Jan 10, 2018 4:08 am

Area is proportional to cap weight.

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Re: How diversified are you really with cap weighted foreign markets?

Post by ResearchMed » Wed Jan 10, 2018 4:26 am

Thesaints wrote:
Wed Jan 10, 2018 4:08 am
Area is proportional to cap weight.
Right, but why the different shapes and vertical/horizontal placement?

RM
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Re: How diversified are you really with cap weighted foreign markets?

Post by BeBH65 » Wed Jan 10, 2018 4:36 am

ResearchMed wrote:
Wed Jan 10, 2018 4:26 am
Thesaints wrote:
Wed Jan 10, 2018 4:08 am
Area is proportional to cap weight.
Right, but why the different shapes and vertical/horizontal placement?

RM
Compare it with a geographic map of the world.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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Re: How diversified are you really with cap weighted foreign markets?

Post by ResearchMed » Wed Jan 10, 2018 4:38 am

duplicate
Last edited by ResearchMed on Wed Jan 10, 2018 4:41 am, edited 1 time in total.
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Re: How diversified are you really with cap weighted foreign markets?

Post by ResearchMed » Wed Jan 10, 2018 4:39 am

BeBH65 wrote:
Wed Jan 10, 2018 4:36 am
ResearchMed wrote:
Wed Jan 10, 2018 4:26 am
Thesaints wrote:
Wed Jan 10, 2018 4:08 am
Area is proportional to cap weight.
Right, but why the different shapes and vertical/horizontal placement?

RM
Compare it with a geographic map of the world.
Ah! Thanks!
I was focusing on it as a graph, trying to figure out each axis :oops:
(and it could have been... with longitude/latitude, but I didn't catch that.)

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Re: How diversified are you really with cap weighted foreign markets?

Post by CULater » Wed Jan 10, 2018 9:55 am

Samsung has risen around 55 percent for 2017 and this holding accounts for more than 25 percent of EWY. When this fund fell 13 percent in 2015, a big reason was that Samsung was down 7 percent.
What’s striking about these statistics is not only that these countries have concentrated holdings but that those holdings are often in very few sectors. For example, the Canadian ETF has 64 percent of its holdings in just two sectors (financials and energy). It’s even worse in Russia, where 71 percent of stocks are in financials and energy. China has 64 percent in technology and financials.
If your international fund holds S. Korea, that part is basically an investment in Samsung, which is similar for many other countries. Samsung is the 4th largest holding in VEU. Many country holdings are concentrated in just one or two economic sectors. In other words, many geographic regions in international ex-U.S. are represented largely by one or just few companies in one or few sectors.

It could be the case that international cap-weight ends up with certain sectors concentrated in certain countries. For example, Samsung is the 4th largest holding in VEU which indicates that the technology weight in VEU is biased toward S. Korea. I would guess that the energy weight in VEU is concentrated in one or two countries, as well as the weighting of financials. I've not seen a breakdown for international that shows the country weighting of economic sectors. That might be informative.
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Re: How diversified are you really with cap weighted foreign markets?

Post by jhfenton » Wed Jan 10, 2018 10:00 am

kosomoto wrote:
Tue Jan 09, 2018 11:39 pm
So buy a small cap international fund? If this is an issue it's easy to solve.
drk wrote:
Tue Jan 09, 2018 11:43 pm
Right. Don't buy country-specific products just because they're offered and "cheap." This is a non sequitur vis-à-vis Total International Stock Market or Total World, though.
+2

We're 50% international, but none of it is large-cap developed. We own VSS/VFSVX and separate emerging markets. Both provide better diversification for U.S. equities than large-cap developed.

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Re: How diversified are you really with cap weighted foreign markets?

Post by asif408 » Wed Jan 10, 2018 10:12 am

AFAIK, it's not common for most Bogleheads to own single country stocks. An even those of us, such as myself, who do hold them don't hold large amounts. I have a slight tilt towards certain countries based on valuations, but the overwhelming majority of my portfolio is in the most boring total market funds you can find, which I think is how most here invest.

And considering that, at least anecdotally, the majority of investors here have over 50% of their investment in US stocks, sector concentration is not a major issue of concern; the bigger issue is country concentration. So I think you focus is not one that is applicable to a large number of Bogleheads.

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Re: How diversified are you really with cap weighted foreign markets?

Post by Whakamole » Wed Jan 10, 2018 11:22 am

Using M* we can see how diversified a total international fund like VTIAX is.

http://portfolios.morningstar.com/fund/ ... ture=en-US

The largest holding as of 11/30 is Tencent; it's 1.09% of the fund. Nestle is 1.06%. The top ten holdings are 7.63%. This is half of what we see for VTSAX (about 16%.)

We can also look at sector makeup of VTIAX here: http://portfolios.morningstar.com/fund/ ... ture=en-US

Unsurprisingly, it is fairly well diversified across sectors, with financials being the #1 sector by far at 21%.

I think we can see from this that you can avoid the risk of a specific country's market not being well-diversified by buying a total international market index, or even the total world index.

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Re: How diversified are you really with cap weighted foreign markets?

Post by CULater » Wed Jan 10, 2018 11:59 am

Looks like Samsung has about a 1% weight in VEU, and Technology has about 10% weight. Roughly, about 10% of the Tech weight in international is represented by one company and by one country. About 9% is represented by Taiwan Semiconductor. Two companies and two Asian countries account for nearly 20% of the Tech weighting in international. Three British energy companies comprise 1.85% of VEU and the energy sector weight is 7%. Consequently 26.4% of the energy weight in foreign is attributable to one country and 3 companies domiciled in that country. These are two sectors that tend to be concentrated in few companies and few countries in the international ex-U.S. cap weighted index.
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Re: How diversified are you really with cap weighted foreign markets?

Post by SimpleGift » Wed Jan 10, 2018 1:11 pm

CULater wrote:
Wed Jan 10, 2018 11:59 am
These are two sectors that tend to be concentrated in few companies and few countries in the international ex-U.S. cap weighted index.
Not sure the point you're trying to make in this thread. Yes, single-country funds are often concentrated in a few companies and industry sectors. Individual sectors internationally can be similarly concentrated. Thus U.S. investors should avoid investing in single-country and sector funds, and instead focus on broadly-diversified international index funds.

But further, one of the portfolio advantages of international stocks for U.S. investors is that there are many global industry sectors that are not well represented in an all-U.S. equity portfolio (chart below) — and one can gain exposure to these industry sectors by adding a broadly-diversified international stock fund. Best to own the whole global haystack, whatever its country and sector peculiarities.
  • Image
(Apologies for the out-of-date chart, but MSCI hasn't updated it in several years, as best I know.)
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Re: How diversified are you really with cap weighted foreign markets?

Post by randomguy » Wed Jan 10, 2018 1:47 pm

CULater wrote:
Wed Jan 10, 2018 11:59 am
Looks like Samsung has about a 1% weight in VEU, and Technology has about 10% weight. Roughly, about 10% of the Tech weight in international is represented by one company and by one country. About 9% is represented by Taiwan Semiconductor. Two companies and two Asian countries account for nearly 20% of the Tech weighting in international. Three British energy companies comprise 1.85% of VEU and the energy sector weight is 7%. Consequently 26.4% of the energy weight in foreign is attributable to one country and 3 companies domiciled in that country. These are two sectors that tend to be concentrated in few companies and few countries in the international ex-U.S. cap weighted index.
Is the US any different? We have 1 company that is 3% of the market and 14% of its sector. And obviously just 1 country:)

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Re: How diversified are you really with cap weighted foreign markets?

Post by Doc » Wed Jan 10, 2018 1:58 pm

jhfenton wrote:
Wed Jan 10, 2018 10:00 am
We're 50% international, but none of it is large-cap developed. We own VSS/VFSVX and separate emerging markets. Both provide better diversification for U.S. equities than large-cap developed.
While we don't have the same percentages we follow the same philosophy. Large cap domestic and large cap foreign are mostly global companies all fishing in the same pond. Any diversification you get is due mostly to currency rates assuming your fund doesn't hedge to the $US.
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Re: How diversified are you really with cap weighted foreign markets?

Post by ray.james » Wed Jan 10, 2018 2:23 pm

Thesaints wrote:
Wed Jan 10, 2018 1:42 am
A cap weighted portfolio is maximally diversified. Any non cap weighted portfolio can be seen as the sum of a cap weighted portfolio (valued less than the total capital), plus a number of bets in individual companies.

A simple example can clarify the concept. Let’s take the simplest possible index, composed of only two stocks. According to cap weight stock A makes up 90% of the index and stock B the remaining 10%.
According to the OP, I believe, a cap weighted investment in the index would be less diversified than an equal weight investment.
We can easily show that this is not true.
A cap weighted $100 investment in the index would have $90 invested in stock A and $10 in stock B.
An equal weighted investment has $50 in stock A and 50 in stock B. We can express this allocation also as $50 in stock A and $5.56 in stock B, plus $44.44 in stock B.
The first part of this allocation, for a total of $55.56 replicates the cap weighted allocation. We can take it out of the picture, since it is the same for both methods.
We are left with comparing the diversification of
$40 in stock A + $4.44 in stock B (cap weighted allocation)
vs.
$44.44 in stock B (equal weighted allocation))
QED
Very smart way to put it. It does explain the risk difference very clearly(Hope folks do not correlate that with returns :wink: ).

I tilt to 1-2 deep value countries but even that is under 5% of my portfolio. I do not know why I do that. May be just the itch.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

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Re: How diversified are you really with cap weighted foreign markets?

Post by TropikThunder » Wed Jan 10, 2018 6:53 pm

CULater wrote:
Wed Jan 10, 2018 11:59 am
Looks like Samsung has about a 1% weight in VEU, and Technology has about 10% weight. Roughly, about 10% of the Tech weight in international is represented by one company and by one country. About 9% is represented by Taiwan Semiconductor. Two companies and two Asian countries account for nearly 20% of the Tech weighting in international. Three British energy companies comprise 1.85% of VEU and the energy sector weight is 7%. Consequently 26.4% of the energy weight in foreign is attributable to one country and 3 companies domiciled in that country. These are two sectors that tend to be concentrated in few companies and few countries in the international ex-U.S. cap weighted index.
This isn't unique to Int'l investing:
  • - Apple is 2.9% of VTSAX, and Tech is 20.48% meaning 14.2% of Tech weight in TSM is represented by one company.
    • - 5 companies account for 52.4% of Tech in TSM
  • - J&J is 1.36% of VTSAX, and Healthcare is 13.69%, meaning 9.9% of Healthcare in TSM is represented by one company.
    • - 3 companies account for 21.5% of Healthcare in TSM
  • - JP Morgan Chase is 1.33% of VTSAX, and Financials is 16.64%, meaning 8.0% of Financials in TSM is represented by one company.
    • - 5 companies account for 28.5% of Financials in TSM
  • - Exxon Mobil is 1.28% of VTSAX, and Energy is 5.53%, meaning 23.1% of Energy in TSM is represented by one company.
    • - 2 companies account for 38.0% of Energy in TSM
What you're highlighting as alarming lack of diversity in Int'l is even more true domestically. And besides, what would you do differently? Avoid Int'l completely? That would make lack of diversification worse, not better.

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Re: How diversified are you really with cap weighted foreign markets?

Post by CULater » Wed Jan 10, 2018 7:13 pm

TropikThunder wrote:
Wed Jan 10, 2018 6:53 pm
CULater wrote:
Wed Jan 10, 2018 11:59 am
Looks like Samsung has about a 1% weight in VEU, and Technology has about 10% weight. Roughly, about 10% of the Tech weight in international is represented by one company and by one country. About 9% is represented by Taiwan Semiconductor. Two companies and two Asian countries account for nearly 20% of the Tech weighting in international. Three British energy companies comprise 1.85% of VEU and the energy sector weight is 7%. Consequently 26.4% of the energy weight in foreign is attributable to one country and 3 companies domiciled in that country. These are two sectors that tend to be concentrated in few companies and few countries in the international ex-U.S. cap weighted index.
This isn't unique to Int'l investing:
  • - Apple is 2.9% of VTSAX, and Tech is 20.48% meaning 14.2% of Tech weight in TSM is represented by one company.
    • - 5 companies account for 52.4% of Tech in TSM
  • - J&J is 1.36% of VTSAX, and Healthcare is 13.69%, meaning 9.9% of Healthcare in TSM is represented by one company.
    • - 3 companies account for 21.5% of Healthcare in TSM
  • - JP Morgan Chase is 1.33% of VTSAX, and Financials is 16.64%, meaning 8.0% of Financials in TSM is represented by one company.
    • - 5 companies account for 28.5% of Financials in TSM
  • - Exxon Mobil is 1.28% of VTSAX, and Energy is 5.53%, meaning 23.1% of Energy in TSM is represented by one company.
    • - 2 companies account for 38.0% of Energy in TSM
What you're highlighting as alarming lack of diversity in Int'l is even more true domestically. And besides, what would you do differently? Avoid Int'l completely? That would make lack of diversification worse, not better.
So..... what you are pointing out is that the U.S. total market cap-weighted index is shockingly undiversified too, yes? You buy the haystack and then find out that it's only a few straws in there that are accounting for most of it.
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Re: How diversified are you really with cap weighted foreign markets?

Post by TropikThunder » Wed Jan 10, 2018 7:27 pm

CULater wrote:
Wed Jan 10, 2018 7:13 pm
So..... what you are pointing out is that the U.S. total market cap-weighted index is shockingly undiversified too, yes? You buy the haystack and then find out that it's only a few straws in there that are accounting for most of it.
So what would you do instead? Pick individual stocks? SCV tilt?

Plus, I'm buying the next FAANG's while they're small, and I'll let the market sort it out.

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Re: How diversified are you really with cap weighted foreign markets?

Post by danielc » Wed Jan 10, 2018 7:50 pm

ray.james wrote:
Wed Jan 10, 2018 2:23 pm
Thesaints wrote:
Wed Jan 10, 2018 1:42 am
A cap weighted portfolio is maximally diversified...
Very smart way to put it. It does explain the risk difference very clearly(Hope folks do not correlate that with returns :wink: ).
No. The argument flawed. Diversification has nothing to do with what Thesaints wrote. Diversification only comes from the lack of perfect correlation between returns of different companies. There are several advantages to market-cap weights and some of them (not all) even have to do with diversification. But a maximally diversified portfolio is one that minimizes volatility for a given return, and in general, the market cap weights don't do that.

Consider an example of 3 companies: A, B, C. Companies A and B have perfectly correlated returns, and company C is perfectly uncorrelated. In this scenario, there is absolutely no benefit in splitting money between A and B, and 100% of the diversification (i.e. reduction in volatility / aka. increase in risk-adjusted return) comes from diversification with C.

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Re: How diversified are you really with cap weighted foreign markets?

Post by jalbert » Wed Jan 10, 2018 7:51 pm

CULater wrote:
Tue Jan 09, 2018 11:35 pm
Table shows how heavily concentrated foreign cap-weighted markets are in just a few companies. Holding a foreign cap weighted index fund doesn't give you as much diversification as you thought. Only U.S. and Japan have less than 44% weighting in the top 10 holdings.

Image

http://awealthofcommonsense.com/2018/01 ... is-unique/
It is true that a single country equity index is not diversified for many countries. The diversification of a developed market or total non-US equity index fund arises from diversification across many countries.

For VTMGX (cap-weighted all-cap developed market index fund) the 10 largest holdings are 9.7% of the fund. This is more diversified than a total US equity index: about 17% of VTSAX is concentrated in the top 10 holdings). VTIAX total int'l index fund is even more diversified than VTMGX.
Risk is not a guarantor of return.

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Re: How diversified are you really with cap weighted foreign markets?

Post by danielc » Wed Jan 10, 2018 7:53 pm

Thesaints wrote:
Wed Jan 10, 2018 1:42 am
A cap weighted portfolio is maximally diversified. Any non cap weighted portfolio can be seen as the sum of a cap weighted portfolio (valued less than the total capital), plus a number of bets in individual companies.
Market cap is NOT likely to be maximally diversified. Diversification is taking advantage of uncorrelated returns, and there is no reason why market cap would maximize that. Imagine a market made of two companies with vastly different sizes, but equal and uncorrelated returns. In this scenario, maximum diversification is to put an equal amount of money in each company. In this scenario, your standard deviation would be:

sigma_portfolio = sqrt( sigma_company_1^2 + sigma_company_2^2 )


Thesaints wrote:
Wed Jan 10, 2018 1:42 am
A simple example can clarify the concept. Let’s take the simplest possible index, composed of only two stocks. According to cap weight stock A makes up 90% of the index and stock B the remaining 10%.
According to the OP, I believe, a cap weighted investment in the index would be less diversified than an equal weight investment.
We can easily show that this is not true.
A cap weighted $100 investment in the index would have $90 invested in stock A and $10 in stock B.
An equal weighted investment has $50 in stock A and 50 in stock B. We can express this allocation also as $50 in stock A and $5.56 in stock B, plus $44.44 in stock B.
The first part of this allocation, for a total of $55.56 replicates the cap weighted allocation. We can take it out of the picture, since it is the same for both methods.
We are left with comparing the diversification of
$40 in stock A + $4.44 in stock B (cap weighted allocation)
vs.
$44.44 in stock B (equal weighted allocation))
QED
That's not how you prove diversification. You can just as easily express a market-cap portfolio as an equal-weight portfolio plus a single-company bet, and it still would mean nothing. You have to actually show that the volatility of the investment goes down without losing return, or that the return goes up without increasing volatility. This is about the correlation between investments. If the returns of the two companies had perfect correlation (r = 1.0) and equal returns it wouldn't matter how you allocated money between them; your diversification would still be zero.

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SimpleGift
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Re: How diversified are you really with cap weighted foreign markets?

Post by SimpleGift » Wed Jan 10, 2018 7:59 pm

CULater wrote:
Wed Jan 10, 2018 7:13 pm
So..... what you are pointing out is that the U.S. total market cap-weighted index is shockingly undiversified too, yes? You buy the haystack and then find out that it's only a few straws in there that are accounting for most of it.
This is crazy talk. These funds are far from un-diversified:
  • • Vanguard Total Stock Market Fund with 3,600 stocks, spread over 11 sectors, with the top 10 holding making up 17% of the fund.

    • Vanguard Total International Stock Market Fund with 6,200 stocks, spread over 45 countries and 11 sectors, with the top 10 holding making up 10% of the fund.
Suggesting that the largest-cap companies that make up the top holdings of these broad-market index funds represent any kind of unsystematic risk to investors is nuts. Can't see anything "shocking" about it.
Cordially, Todd

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Re: How diversified are you really with cap weighted foreign markets?

Post by staythecourse » Wed Jan 10, 2018 8:03 pm

jalbert wrote:
Wed Jan 10, 2018 7:51 pm
It is true that a single country equity index is not diversified for many countries. The diversification of a developed market or total non-US equity index fund arises from diversification across many countries.

For VTMGX (cap-weighted all-cap developed market index fund) the 10 largest holdings are 9.7% of the fund. This is more diversified than a total US equity index: about 17% of VTSAX is concentrated in the top 10 holdings). VTIAX total int'l index fund is even more diversified than VTMGX.
I'm confused about this thread as I think the quote above to which I believe makes sense makes the argument that one should NOT be 100% in US equities for the same reason one should NOT be "betting" on one single country. Does it somehow make it okay since it is U.S.?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: How diversified are you really with cap weighted foreign markets?

Post by jalbert » Thu Jan 11, 2018 4:13 am

I'm confused about this thread as I think the quote above to which I believe makes sense makes the argument that one should NOT be 100% in US equities for the same reason one should NOT be "betting" on one single country. Does it somehow make it okay since it is U.S.?
The original posting was about diversification within a fund with respect to excess concentration in individual stocks or sectors.
Risk is not a guarantor of return.

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Re: How diversified are you really with cap weighted foreign markets?

Post by hilink73 » Thu Jan 11, 2018 3:53 pm

asif408 wrote:
Wed Jan 10, 2018 10:12 am
AFAIK, it's not common for most Bogleheads to own single country stocks.
Like the not so few only have US stocks and defend that because Bogle and Buffett deem that acceptable?
Reasonig that the past performance doesn't look to bad for US stocks? Past performance, future perfomance?
Sometimes, I really like this place. :)

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Re: How diversified are you really with cap weighted foreign markets?

Post by asif408 » Thu Jan 11, 2018 4:09 pm

hilink73 wrote:
Thu Jan 11, 2018 3:53 pm
asif408 wrote:
Wed Jan 10, 2018 10:12 am
AFAIK, it's not common for most Bogleheads to own single country stocks.
Like the not so few only have US stocks and defend that because Bogle and Buffett deem that acceptable?
Reasonig that the past performance doesn't look to bad for US stocks? Past performance, future perfomance?
Sometimes, I really like this place. :)
Laughing at my obvious oversight! :D I was thinking foreign single country stocks/funds when I made that comment, but you're right, there are quite a few only US investors here. I should amend to say ".....to own single country stocks/funds other than the US".

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Re: How diversified are you really with cap weighted foreign markets?

Post by Epsilon Delta » Thu Jan 11, 2018 4:35 pm

SimpleGift wrote:
Wed Jan 10, 2018 1:34 am
Vanguard's Total International Stock Index has over 6,200 stocks from 45 countries — which is plenty of diversification for anyone.
Anyone else look at that map and ask "what the heck is wrong with Canada?". It's twice the size of Germany, or France, or China, yet all four are supposed to be 3%.

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Re: How diversified are you really with cap weighted foreign markets?

Post by garlandwhizzer » Thu Jan 11, 2018 7:09 pm

I believe that cap weighted total international exposure does offer diversification value to a US portfolio but that the addition of small-mid cap INTL increases diversification and also probably increases expected long term returns. Cap weighted funds slant heavily toward mega-cap and LC. These firms, whether they are in US or DM or to a lesser extent EM, tend to be global in reach, deriving their revenues from cross-border global markets just as US LC does. Small cap INTL derive more of their revenues, not from exports to other countries, but from their local markets of origin. Having revenues tied to a host of local markets offers more diversification. In EM in particular getting more exposure to rapidly growing local economies with SC exposure may offer benefits.

Garland Whizzer

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Re: How diversified are you really with cap weighted foreign markets?

Post by Ditchwitch » Thu Jan 11, 2018 8:03 pm

garlandwhizzer wrote:
Thu Jan 11, 2018 7:09 pm
I believe that cap weighted total international exposure does offer diversification value to a US portfolio but that the addition of small-mid cap INTL increases diversification and also probably increases expected long term returns. Cap weighted funds slant heavily toward mega-cap and LC. These firms, whether they are in US or DM or to a lesser extent EM, tend to be global in reach, deriving their revenues from cross-border global markets just as US LC does. Small cap INTL derive more of their revenues, not from exports to other countries, but from their local markets of origin. Having revenues tied to a host of local markets offers more diversification. In EM in particular getting more exposure to rapidly growing local economies with SC exposure may offer benefits.

Garland Whizzer
It doesn't look like there's so many countries on the map in the first place...take indices from each of those countries and prorate companies based on the total country weighting, e.g. use a US Total Market Index x 0.54, Canada Index x 0.06 etc, Japan Index x 0.08 ... that should lead to more companies and different sectors being included from each country.
“Anyone who has never made a mistake has never tried anything new.” | ― Albert Einstein

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