Biggest non diversified risk = US Country Risk?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Biggest non diversified risk = US Country Risk?

Post by LH »

Hello,

This post is clearly effected by recency bias to some extent, I dunno how much. I have long thought that country risk was big, so why not approximate World Market, and go 50/50 US foriegn, which I have done for past 2 plus years now. More so than most, and probably few have more.

Now, I am looking at the 50 percent US hard..... That 50 percent seems a pretty big number in a "diversified" portfolio considering country risk.

50 percent of ALL my retirement savings in ONE country? That seems a huge risk to me. Humans tend to ignore country risk, french invest in france, germans in germany, etc.

Its justified by World stock market of course.

But if things go way way wrong in the ONE country you are betting half your eggs on, you will pay a big big price, that one could diversify away...........

Why risk 50 percent in any ONE country?

comments appreciated,

LH
bigH
Posts: 957
Joined: Wed Mar 19, 2008 10:18 pm

Post by bigH »

LH,
Your fears are warranted, but if you believe in the market it is saying that 50% of capital in stock right now should be allocated in the US. If you buy both the US and international 50/50 the market will automatically adjust your allocations by foreign outperforming US. Now if you are talking about underweighting the US, thats a different story. I am about 60/40 International to US right now for my stock portion.
User avatar
Opponent Process
Posts: 5157
Joined: Tue Sep 18, 2007 9:19 pm

Post by Opponent Process »

it sometimes worries me too, but it is what it is. a big chunk of the global market cap exists here in the US, due to a combination of factors in the 20th century. but it's backward-looking. I think the best thing we can hope for is to maintain the status quo, steady and even balanced global growth. no more world wars (peace is the free market's best friend), etc...the US may erode over time or not. most likely world peace is not here, not to mention so-called "bubbles" (another thing you can only see in hindsight; was the 20th century US market a bubble?), and so weights will shift abruptly from time to time. but IMO market-weighted investing is the least risky way to go forward.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH »

also, like working for one company and owning thier stock, should one also consider that we work in ONE country, and own too much stock in the same ONE country???? It seems it would be an additive risk.

the ONE country tanks=we may lose our jobs AND our high one country stock percentage tanks as well.....
User avatar
tc101
Posts: 3416
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Post by tc101 »

In stocks I am about 55/45 US/foreign, in fixed income about 80/20 US/foreign. I keep my age-5 in fixed income and I am 59.

I don't think it makes much difference. The USA is such a huge part of the world economy that over the long run it will probably do about the same as the world economy. It couldn't hurt to go higher that 50% foreign though. Expenses are a little higher and taxes a little worse, but not a big deal one way or another.
. | The most important thing you should know about me is that I am not an expert.
Juan
Posts: 200
Joined: Mon Sep 15, 2008 10:04 am

Post by Juan »

US GDP was approximately $13.13 trillion in 2006.

Global GDP was approximately $46.66 trillion (2006).

So in terms of sheer new domestic production, the US is approximately 28.1% of the global economy. Goods produced in foreign countries for foreign countries, but by companies listed on US exchanges - don't count towards US GDP. The vast majority of companies in the S&P have major overseas operations.


Throw in the fact that (a) we've got a safer, more transparent financial/legal system than many places in the world that protects our property rights, (b) aversion to zero-sum, wildly volatile currency risk, and (c) global diversification doesn't offer that much protection anyway, since US/Global stocks are highly correlated, I don't think overweighting US stocks/bonds is a terrible idea.
bigH
Posts: 957
Joined: Wed Mar 19, 2008 10:18 pm

Post by bigH »

Juan wrote:US GDP was approximately $13.13 trillion in 2006.

Global GDP was approximately $46.66 trillion (2006).

So in terms of sheer new domestic production, the US is approximately 28.1% of the global economy. Goods produced in foreign countries for foreign countries, but by companies listed on US exchanges - don't count towards US GDP. The vast majority of companies in the S&P have major overseas operations.


Throw in the fact that (a) we've got a safer, more transparent financial/legal system than many places in the world that protects our property rights, (b) aversion to zero-sum, wildly volatile currency risk, and (c) global diversification doesn't offer that much protection anyway, since US/Global stocks are highly correlated, I don't think overweighting US stocks/bonds is a terrible idea.
Great post Juan.
peter71
Posts: 3770
Joined: Tue Jul 24, 2007 8:28 pm

Post by peter71 »

Hi LH,

I mostly agree with your basic concern. The US is an exceptional country in many ways but that could open up US-heavy investors to exceptional risks in the future. The point about all markets having been fairly closely correlated in the past also cuts both ways (i.e., if they're all correlated anyway why not diversify maximally?). Also, while I used to assume that the US market was the top-performing developed market of the 20th century, I believe it was actually 4th or 5th with Sweden being number one (the source on this was Elroy Dimson et al's research). Of course, if one believes in mean reversion I guess that means "avoid Sweden" :D

All best,
Pete
grumel
Posts: 1629
Joined: Fri Mar 30, 2007 1:38 am
Location: Germany

Post by grumel »

Juan wrote:
Throw in the fact that (a) we've got a safer, more transparent financial/legal system than many places in the world that protects our property rights,
Most of the world ex us stock market consists of countries with a far better regulation record than the US.
muck53
Posts: 212
Joined: Wed Feb 18, 2009 11:34 am

Post by muck53 »

grumel wrote:
Juan wrote:
Throw in the fact that (a) we've got a safer, more transparent financial/legal system than many places in the world that protects our property rights,
Most of the world ex us stock market consists of countries with a far better regulation record than the US.
grumel, I see you hail from Germany. I don't know whether I agree with you are not - precisely, but your outside view, I think is pertinent. My husband hails from Great Briton. The US media for the most part is so US focused, it is hard for us here, to get any idea what is going on in the rest of the world.

The story line has been since WW II, the US currency is stabler, the US regulatory system is superior --- the storyline out of CNBC for the past 6 months is the US is first into this mess, so will be the first out --- as near as I can tell, the Dow hasn't come out yet, but the rest of the world has.

Then if the US regulatory system is so superior - what about Enron, Worldcom, Madoff, AIG, mark-to-market accounting rule changes to favor good times, and then eased in bad times. It is hard for us here in the US to see beyond what the media is feeding us. And the media rarely gives us a glimpse beyond our borders.

The USA is restructuring, in business terms. Companies are raising capital not to grow, but to survive. In pure business terms - this is not what sensible folks invest in. Investment goes to growth.

I am 10% US / 90% International.

I as patriotic as the next guy, but for my retirement funds, they need to earn money, not support entire industries trying to dig themselves out of holes. I will be happy to buy my countries bonds, just as soon as they yield a return I perceive to be in both our favors - after all, that is the very definition of free market - willing buyer, willing seller. Currently, their yields are too low, for anything - even very short term at 6 months.

LH - yes, to me - 50% in US, was too much one country risk. I have never thought that before, but just look around you, and what do you see? America is restructuring, across many lines of industry - far too many for me to even name. They may need my capital, but it is not a good investment.
muck53
User avatar
Index Fan
Posts: 2582
Joined: Wed Mar 07, 2007 12:13 pm
Location: The great Midwest

Post by Index Fan »

I have a 50/50 split in US/international equity for single-country risk reasons and currency diversification, but I can see going to a world market weighting. Japan was the economic powerhouse of the world before their market crashed and never recovered 20 years ago, it is naive to think it could not happen here (as much as I like my country). Who would have thought that GM would be government-owned? Things can happen. And protecting your portfolio against a weak dollar / currency fluctuations is hard to do without international assets...the dollar and the US are both about single-country risk when you think about it.
"Optimum est pati quod emendare non possis." | -Seneca
User avatar
fluffyistaken
Posts: 1435
Joined: Fri Apr 04, 2008 1:32 pm

Post by fluffyistaken »

After the 40-50% US chunk the next two biggest countries in Total World are Japan and Britain with close to 10% each. For those who aren't comfortable with 40-50% in US, would they be comfortable with investing close to 20% of their equity money into two small, densely populated islands with large/growing public debts, few natural resources, and aging/barely growing population?

Might as well bet it all on Canada -- lots of resources, lots of water, lots of room to grow, and if all goes badly the global warming will turn it into new Florida!
muck53
Posts: 212
Joined: Wed Feb 18, 2009 11:34 am

Post by muck53 »

fluffyistaken wrote: Might as well bet it all on Canada -- lots of resources, lots of water, lots of room to grow, and if all goes badly the global warming will turn it into new Florida!
Actually - of my 90% International? 50% is Canadian.
muck53
bigH
Posts: 957
Joined: Wed Mar 19, 2008 10:18 pm

Post by bigH »

why are we fighting over percentages? Let the world market decide how much to weight the uk vs. japan vs. us. You will perform fine if you own both. The danger is just owning US without any international. I know people did naively in the 80 and 90s because it was expensive to invest aboard, but not anymore.
User avatar
Opponent Process
Posts: 5157
Joined: Tue Sep 18, 2007 9:19 pm

Post by Opponent Process »

muck53 wrote:The story line has been since WW II, the US...is stabler, the US ...is superior...
propaganda didn't start after WWII, and doesn't just apply to the US. it's called home country bias. everyone thinks their country is the most powerful, their women are the most beautiful, their men are the smartest and toughest warriors, their belief systems are the only true way, their currency is the most stable, and their markets are the most transparent and honest.

the US is a great country, deserving (for now) to be 1/2 of global market cap. but a wise investor knows to discern risk from bias.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
User avatar
Cloud
Posts: 652
Joined: Wed Sep 12, 2007 12:43 pm

Post by Cloud »

I'm comfortable investing much more then 50% in the US because I live, work, and will retire in the US spending US dollars.
User avatar
jh
Posts: 1830
Joined: Mon May 14, 2007 11:36 am
Location: USA

Post by jh »

...
Last edited by jh on Mon Jun 08, 2009 1:05 pm, edited 1 time in total.
User avatar
tc101
Posts: 3416
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Post by tc101 »

if they're all correlated anyway why not diversify maximally?
Slightly higher expenses and slightly more taxes. Not a terribly big deal if it makes you feel better being maximally diversified.
. | The most important thing you should know about me is that I am not an expert.
User avatar
tetractys
Posts: 4836
Joined: Sat Mar 17, 2007 3:30 pm
Location: Along the Salish Sea

Re: Biggest non diversified risk = US Country Risk?

Post by tetractys »

LH wrote:Now, I am looking at the 50 percent US hard..... That 50 percent seems a pretty big number in a "diversified" portfolio considering country risk.
LH,

The thought just crossed my mind last night and I came to following quick and dirty conclusion--If I'm missing some pieces please kindly add them.

Whatever the country risk in the country you have your investment dollars, it's irrelevant because if the risk shows up there and your government collapses, all your investments in all other countries will likely be kaput as well. Access to your foreign investments will be gone right along with your local currency.

It might be added that if one has no faith in their local government, they probably shouldn't invest there, and should even park their money behind other borders.

On the other hand, if a foreign government collapses, you'll loose the portion of your investments in that particular country, so that country risk should be diversified.

Some of us have the ability to park multiple accounts in different countries, but most of us don't. And if our home government did collapse, it would take a certain amount of luck for the privileged few to get to one of those other countries anyway.

The second conclusion I came to was that mindful patriotism, of all citizens of all countries, is in everyone's best interest.

Best regards, Tet
RESISTANCE IS FRUITFUL
User avatar
Opponent Process
Posts: 5157
Joined: Tue Sep 18, 2007 9:19 pm

Re: Biggest non diversified risk = US Country Risk?

Post by Opponent Process »

tetractys wrote:if the risk shows up there and your government collapses, all your investments in all other countries will likely be kaput as well.
no one is imagining the US collapsing. what's possible is that 21st century US = 20th century UK (slow and steady relative decline). and maybe 21st century China = 20th century US. or not. the point is that equal market-weighters don't have to worry about one country or another maintaining some arbitrary level of biased weight. we don't want that kind of anxiety, just like we don't want the anxiety of trying to pick stocks within countries.
30/30/20/20 | US/International/Bonds/TIPS | Average Age=37
danbek
Posts: 224
Joined: Thu Aug 23, 2007 9:21 pm

Post by danbek »

muck53 wrote:America is restructuring, across many lines of industry - far too many for me to even name. They may need my capital, but it is not a good investment.
Shouldn't this type of environment be a great time to invest in the stock market? At the very least much better than 2 years ago. Recent big crash in stock prices, economy in the crapper, businesses restructuring, future of the economy seems uncertain ...

That's not to say that we shouldn't diversify, but if you only ever invest in countries who's economies appear to be booming, your expected returns are going to be lower, right?
Last edited by danbek on Wed Jun 03, 2009 11:13 pm, edited 1 time in total.
danbek
Posts: 224
Joined: Thu Aug 23, 2007 9:21 pm

Post by danbek »

FWIW, The Economist has a special section on the prospects for US Business this week. Unsurprisingly for a group of US-loving temperamentally optimistic classical-liberals, they think that the medium and long-term prospects are very good .... "the US is still the best place in the world to do business", etc.
User avatar
tetractys
Posts: 4836
Joined: Sat Mar 17, 2007 3:30 pm
Location: Along the Salish Sea

Re: Biggest non diversified risk = US Country Risk?

Post by tetractys »

Opponent Process wrote:
tetractys wrote:if the risk shows up there and your government collapses, all your investments in all other countries will likely be kaput as well.
no one is imagining the US collapsing. what's possible is that 21st century US = 20th century UK (slow and steady relative decline). and maybe 21st century China = 20th century US. or not. the point is that equal market-weighters don't have to worry about one country or another maintaining some arbitrary level of biased weight. we don't want that kind of anxiety, just like we don't want the anxiety of trying to pick stocks within countries.
Didn't say anyone was imagining their home country or the US collapsing, and matter of fact I was saying the opposite. I was addressing the OP directly. Investable governments collapse, recently Asian and South American BIG economies, and the main point of diversifying internationally is to reap the rewards and yet diminish THAT risk. So if no one is imagining their home country collapsing, all the more reason to put the bulk of investments there.

What one might call "home country bias," another would call informed common sense.

It might also be interesting to view the OP in the light of a couple old cliches, "keep the home fires burning" and "think globally, act locally."

I could be wrong, but see where I'm coming from? -- Tet
RESISTANCE IS FRUITFUL
User avatar
Padlin
Posts: 685
Joined: Thu Mar 01, 2007 7:46 pm
Location: MA

Post by Padlin »

Would not the VTWSX fund take care of country risk and make this all so much simpler?
Regards | Bob
User avatar
ddb
Posts: 5511
Joined: Mon Feb 26, 2007 12:37 pm
Location: American Gardens Building, West 81st St.

Post by ddb »

Padlin wrote:Would not the VTWSX fund take care of country risk and make this all so much simpler?
Yes, aside from the relatively high expense ratio compared to building your own global portfolio with, say, VLACX, VEIEX, and VTMGX.

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
jimdigriztn
Posts: 403
Joined: Tue Feb 19, 2008 3:25 pm

Post by jimdigriztn »

Juan wrote:global diversification doesn't offer that much protection anyway, since US/Global stocks are highly correlated, I don't think overweighting US stocks/bonds is a terrible idea.
There is nothing that guarantees this high correlation will persist indefinitely.
muck53
Posts: 212
Joined: Wed Feb 18, 2009 11:34 am

Post by muck53 »

danbek wrote:
muck53 wrote:America is restructuring, across many lines of industry - far too many for me to even name. They may need my capital, but it is not a good investment.
Shouldn't this type of environment be a great time to invest in the stock market? At the very least much better than 2 years ago. Recent big crash in stock prices, economy in the crapper, businesses restructuring, future of the economy seems uncertain ...

That's not to say that we shouldn't diversify, but if you only ever invest in countries who's economies appear to be booming, your expected returns are going to be lower, right?
Lower price to earnings is a good thing - so I agree, better then 2 years ago.

This is the part that I would describe more as media myth, then business reality "economy in the crapper, businesses restructuring, future of the economy seems uncertain ...". When business starts raising capital to pursue opportunity, that is capital I wish to provide. To provide capital so that business merely survives is hope, or charity. I didn't come to this understanding without first having been trained by a businessman. Then I understood the difference.

How do I offer an example? Let's use the farmer example I learned from. I assumed farmers were buying new farm equipment last season, because crop prices were so good, farming was profitable. My brother-in-law bought a fancy new huge farm implement of some sort. I assumed he made a lot of money last summer, and bought a new machine. I asked. Nope. The only reason a farmer buys new equipment is they see an opportunity for productivity improvements. This is investment for opportunity. Not, just because.

I don't know who lends to enterprises who are merely trying to survive. A lot folks, apparently, because recently business of all sorts have raised capital in the markets. By far, the majority are doing so to survive. There have been a few exceptions - Cisco, comes to mind. They have plenty of cash - why raise capital? Because they could? I suppose, or it is possible they raised capital in advance of pursuing opportunity. Microsoft has done so also, yet they also have plenty of cash.

Why does an individual household raise capital? In general, seek out a loan? To pursue perceived opportunity. If you go face to face with the banker - which plea is more likely to get you that loan? I wish to borrow xxx to invest in opportunity (such as, the home I will live in). Or I wish to borrow xxx to consolidate my bills? Bankers seem to give away credit without restraint these days, so assume they will lend to you for any reason. But which loan has the higher interest rate? The opportunity loan? Or the consolidate my bills loan? The interest rate tells you which is the greater risk.

Capital pursues opportunity. Mere survival is a greater risk, and carries a penalty (plus opportunity for higher returns).

I hope that helps. I didn't understand either until a businessman explained it to me.
muck53
Juan
Posts: 200
Joined: Mon Sep 15, 2008 10:04 am

Post by Juan »

jimdigriztn wrote:
Juan wrote:global diversification doesn't offer that much protection anyway, since US/Global stocks are highly correlated, I don't think overweighting US stocks/bonds is a terrible idea.
There is nothing that guarantees this high correlation will persist indefinitely.

True, but there's two reasons why I suspect it will:

a) Globally Integrated Markets -- Few industries only truly operate in their home country, and sales (the lifeblood of any company's growth) are quite international.

For example, look at the market for reconstructive implants and trauma products. According to Zimmer Holding's 10-K, the major competitors in this industry in the Asia/Pacific region are:

- Zimmer Holdings (US-based)
- Johnson & Johnson (US-based)
- Stryker Corporation (US-based)
- Synthes, Inc. (Swiss-based)
- Smith & Nephew plc (UK-based)
- Regional players such as Japan Medical Materials Corporation

If there's suddenly less demand for reconstructive surgery in Asia/Pacific, companies in the US, Switzerland, the UK and Japan will all be adversely affected at the same time. Markets are truly global for most large corporations.


b) Opportunity Costs -- Say I'm a portfolio manager constructing a portfolio with two wonderful companies, both with P/Es of 20. I choose to have 50% of each.

Now imagine suddenly one company's stock price falls to a P/E of 10. The company that did not fall looks less attractive because it's still at 20. I will probably sell some of the P/E 20 company and buy more of the P/E 10 company. Demand for the P/E 20 company falls because it became relatively more expensive to hold, which leads to a fall in stock price.

This holds true for most markets out there today. Even financially sound companies suffer from price drops in systemic risks because they're simply not as attractive relative to other companies. Investors won't buy a P/E 20 European stock when there's a P/E 10 US stock available; they'll probably move roughly together.


This in part explains why there's almost always positive correlation between asset classes.
User avatar
ddb
Posts: 5511
Joined: Mon Feb 26, 2007 12:37 pm
Location: American Gardens Building, West 81st St.

Post by ddb »

Juan wrote:
jimdigriztn wrote:There is nothing that guarantees this high correlation will persist indefinitely.
True, but there's two reasons why I suspect it will:
Doesn't really matter. As long as correlation is less than 1.0, there is a diversification benefit.

There's also a very high correlation between "US Corporations that Start With The Letters A-M" and "US Corporations That Start With The Letters N-Z", but I'm still going to go ahead and own both categories.

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB
allsop
Posts: 1046
Joined: Sun Jun 15, 2008 7:08 am

Post by allsop »

peter71 wrote:Hi LH,

I mostly agree with your basic concern. The US is an exceptional country in many ways but that could open up US-heavy investors to exceptional risks in the future. The point about all markets having been fairly closely correlated in the past also cuts both ways (i.e., if they're all correlated anyway why not diversify maximally?). Also, while I used to assume that the US market was the top-performing developed market of the 20th century, I believe it was actually 4th or 5th with Sweden being number one (the source on this was Elroy Dimson et al's research). Of course, if one believes in mean reversion I guess that means "avoid Sweden" :D

All best,
Pete
As I live in Sweden I can attest to the fact that the Swedish stock market has done very well for many years, but the market has dipped much from time to time.

Sweden is small (market wise) with big dependencies on exports. It also has a free-floating valuta that makes international investing interesting, as I learned last year, with the Krona getting hammered by the flight to "safety".
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Re: Biggest non diversified risk = US Country Risk?

Post by LH »

tetractys wrote:
LH wrote:Now, I am looking at the 50 percent US hard..... That 50 percent seems a pretty big number in a "diversified" portfolio considering country risk.
LH,

The thought just crossed my mind last night and I came to following quick and dirty conclusion--If I'm missing some pieces please kindly add them.

Whatever the country risk in the country you have your investment dollars, it's irrelevant because if the risk shows up there and your government collapses, all your investments in all other countries will likely be kaput as well. Access to your foreign investments will be gone right along with your local currency.

It might be added that if one has no faith in their local government, they probably shouldn't invest there, and should even park their money behind other borders.

On the other hand, if a foreign government collapses, you'll loose the portion of your investments in that particular country, so that country risk should be diversified.

Some of us have the ability to park multiple accounts in different countries, but most of us don't. And if our home government did collapse, it would take a certain amount of luck for the privileged few to get to one of those other countries anyway.

The second conclusion I came to was that mindful patriotism, of all citizens of all countries, is in everyone's best interest.

Best regards, Tet
Outright collapse is not what I am thinking per se.

Country risk(to me) is the possiblity that my country business environment, for whatever reason-lets not discuss it, its irrelevant, will go really really downhill. Basically, country risk is somewhat akin to single company risk. Take Proctor and Gamble - great company, has done well, has lots going for it, one can reasonably consider it safe. Well, things change. If I am in 50 percent PG, IBM, Enron, whatever, I am taking significant company risk on.

Ditto any ONE country. That one country, can signficantly change relatively rapidly, just like a companies fortunes can rapidly change. Bankruptcy, or government falling is not neccessary, merely significant long term underperformance of FIFTY percent of one portfolio, whether it be in Proctor and Gamble stock, or in ONE country. Thats my thought.

Really, on a fundamental level, states, countries and such are akin to businesses. One can concieve of the US as an area that passes business rules to produce GDP providing benefits. One can concieve of a company as an entity that makes internal rules and such to produce profit. In the end, its production that is important. With any government/nation or any company, you run the risk they will screw up, have bad fortunes, or whatever.

Diversify, Diversify, Diversify.

So, 50 percent in ONE country, is that really diversification?

LH
Heavymetal
Posts: 19
Joined: Fri Dec 12, 2008 10:37 am

Post by Heavymetal »

No reason to put all your stock in one country.
Here's some of my investments in foreign companies which have done really well in the last few months.
BE Areo BEAV
Fushi Copper FSIN
Chile Mining SQM
None of my American stocks have done that well.
User avatar
big_tail
Posts: 42
Joined: Mon Jul 28, 2008 11:59 am

Post by big_tail »

My belief is that the world market caps are the international global version of "owning the index". Right now it weighs the US around 43%. If you overweight the U.S., you're introducing speculation and "betting" that the U.S. will outperform in the future relative to other countries' equities. If you're underweight, then it's a bet the U.S. will do relatively worse. To be neutral means to own the global market weight, let the market decide.
User avatar
MekongTrader
Posts: 357
Joined: Wed Jul 16, 2008 2:33 am
Location: On the banks of the Mekong

Post by MekongTrader »

big_tail wrote:My belief is that the world market caps are the international global version of "owning the index". Right now it weighs the US around 43%. If you overweight the U.S., you're introducing speculation and "betting" that the U.S. will outperform in the future relative to other countries' equities. If you're underweight, then it's a bet the U.S. will do relatively worse. To be neutral means to own the global market weight, let the market decide.
I am with you on this one. For the sake of simplicity I allocate 50/50 international/US.

I get to travel a lot, especially Asia and China. And yes, I fully agree that this century will be the Chinese/Asian one. I wouldn't believe it until I saw it with my own eyes. The pace, the dynamics, the energy, etc is mind-blowing. Whereas in US or parts of Europe you drive over crumbling highways and bridges, in China they are building top-notch infrastucture. And yes, while they still have huge difficulties developing new and high tech technologies, they are getting there, churning out hundreds of thousands engineers every year.

Ok, environment, human rights, religious freedom, etc - all put on the backburner and we dont' want to get political here.

Especially their young people are mega switched-on seeming to have only one thought on their mind: How can I get ahead? They are focused, they learn and they are totally driven for success. If I compare them to their Western pears, no match.

So, claiming that certain countries, which clearly lost their way, will remain in the #1 spot is a pretty bold (and ignorant) statement to make, I find.

My 2 cents.

MT
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 7:12 am

Post by G-Money »

Remember, you're not really investing in countries, per se, you're investing in companies. If you tilt toward international (beyond market weight), you're underweighting Exxon, Microsoft, AT&T, P&G, etc., and overweighting BP, Nestle, HSBC, etc.

Maybe the question should be: Why do you think you should own more BP than Exxon?
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH »

G-Money wrote:Remember, you're not really investing in countries, per se, you're investing in companies. If you tilt toward international (beyond market weight), you're underweighting Exxon, Microsoft, AT&T, P&G, etc., and overweighting BP, Nestle, HSBC, etc.

Maybe the question should be: Why do you think you should own more BP than Exxon?
I would posit one is investing in an operating environment for business. Its impossible to tell what will happen going forward, what changes will or will not occur in a given country, or what thier effect, good or bad will be.

But I would posit there is such a thing as country risk.

Venuzela, Cuba, Germany, US, Japan, china, africa(say ghana) - all have different operating environments and investment risks.

In terms of individual companies, one could phrase the question why overweight GM, Chrysler, Ford vs Honda, Toyota, Nissan? It does not matter picking particular companies, one could talk apple and microsoft instead. Its the current and going forward aggregate operating environment provided by a country that matters a lot. the name "USA" itself does not mean much, its the environment of the country/USA thats important. Things change.

I am told, if one were to pick the preeminent country 110 years ago in the Americas alone, USA may not have been picked as the best investment.

50 percent in one country, one system, seems risky, if that countries decisions are unwise. Of course if they are wise, one gets a premium. But is that not what diversification is for? Allowing a big 50 percent swing in there.....

I am thinking about splitting my US small value to US and foriegn 50/50, and splitting my US REIT to US and foriegn 50/50. I already have the large index US TSM, australiaasiajapan, Europe, emerging split up equally.

14 US TSM
14 US REIT
14 US SV
14 australiaAsia (japan)
14 europe
14 emerging
5 china
5 US tips
5 US agg

would become

14 US TSM
7 US REIT
7 foreign REIT
7 US SV
7 foriegn SV
14 australiaAsia (japan)
14 europe
14 emerging
5 china
5 US tips
5 US agg


I dunno, seems a lot of asset classes to be honest. I would like a world REIT, and a world small value fund if such things exist.

Anyway, I gotta sit on this a bit, and think. It does not seem to be performance chasing, as currently US TSM sits with japan on my chart, while europe lags behind a bit, so its not like the US is doing worse than the others, and I am following current/past results ie recency bias.

It is I guess a timing move, prompted by me guessing, and my wish now for less risk of a single country, whereas before I was ok with the single country being about 50 percent......

50 percent does not seem really divesified to me currently..... Everything has dropped for a while about the same, so toning down the 50 percent or my eggs in one basket seems justifiable? Its not like its AFTER a isolated US downturn, and I am buying "hotter" assets that I can see.

So hard to tell rational from behavorioral rationalizing I think : )
grumel
Posts: 1629
Joined: Fri Mar 30, 2007 1:38 am
Location: Germany

Post by grumel »

The reasoning for country risk is hard to deny. The problem is more with the sice. How big is country risk and is it worth to give up diversifcation in other areas to lower country risk? My guess is country risk is rather small, especially for those countries with bigger stock markets. Countries with bigger stock markets are usually more stable and better diversified within.
dumbmoney
Posts: 2347
Joined: Sun Mar 16, 2008 8:58 pm

Post by dumbmoney »

MekongTrader wrote:I get to travel a lot, especially Asia and China. And yes, I fully agree that this century will be the Chinese/Asian one.
The post-WWII growth of Japan was an exciting story, and yet the Japan stock market was one of the worst for investors.

Excitement does not equal investor profit, sometimes quite the opposite.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.
muck53
Posts: 212
Joined: Wed Feb 18, 2009 11:34 am

Post by muck53 »

G-Money wrote: Maybe the question should be: Why do you think you should own more BP than Exxon?
Interesting example. I am equal weight Chevron & BP, but 3 times either, in Exxon. BP is by far, outperforming in the past few months, I presume this is 2 things; the currency fluctuation and the relatively huge dividends they were paying (getting smaller as their share price rises). I bought BP when the Pound was 1.39 to the dollar. This morning the pound is 1.64 to the dollar.

I admit, as I spend in dollars, I would not have even noticed this relative currency dislocation, if it had not been for my husband being in England in December 08. As I thought about it, it was clear to me, my relatively strong dollar would buy more BP (priced in the dislocated Pounds) then 6 months earlier (when the pound had priced at 2.02). Thus, I bought.

I no longer own any US index anything, but I do own shares of 5 US companies - Chevron, ConocoPhillips, Exxon, Monsanto & Deere.

I am taking more risk then I ever in my life have. I am not diversified marketcap weight worldwide, or even diversified in sectors, as I have been up until now. Somedays this makes me nervous, mostly because we have been trained not to do this. I have studied this for a year now, and that kind of diversification no longer makes any sense to me (for me and my family). It is predicated on the world growing, over time. It is time I have run out of. I am very small in equities varying between 30% & 35%. For fixed income I diversified across currencies using these ETF's;
http://www.currencyshares.com/

It is a globalized world. Yes, I spend in dollars, but a lot of what we buy in the US these days, comes from some other country - thus currency fluctuation is effecting the price we pay at the store. I am not so much trying to profit from currency fluctuation, as I am trying to stabilize my purchasing power.

My time horizon is at best is 20 years --- and I do think that makes my choices, by necessity, different then a younger person whose capital is more heavily weighted toward human capital, then financial capital.

I don't predict the collapse of anything. I'm an old fart. Old enough now to look at a world I barley recognize. And to laugh at myself, in remembering my parents being just as out of step. "Oh Dad, you just don't understand, the world is different today!" Well, good fortune has had me live long enough to become the old fart, that sees a different world, I don't quite recognize.

Some of you may be trying to grow your capital. That is one thing. Some of you may be deploying human capital. That is one thing. Me? I just want to pay my bills until I die. The goods I purchase are fluctuating in value as the dollar fluctuates - thus spending in dollars, no longer quite captures the whole story, and TIPs won't help me with this (I don't think - or will they?)
muck53
unclemick
Posts: 1318
Joined: Tue Feb 20, 2007 10:18 am
Location: greater Kansas City

Post by unclemick »

Vanguard Total World Stock Index?

:lol: :lol: :lol:

heh heh heh - 8)
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 7:12 am

Post by G-Money »

LH wrote:
G-Money wrote:Remember, you're not really investing in countries, per se, you're investing in companies. If you tilt toward international (beyond market weight), you're underweighting Exxon, Microsoft, AT&T, P&G, etc., and overweighting BP, Nestle, HSBC, etc.

Maybe the question should be: Why do you think you should own more BP than Exxon?
I would posit one is investing in an operating environment for business. Its impossible to tell what will happen going forward, what changes will or will not occur in a given country, or what thier effect, good or bad will be.

But I would posit there is such a thing as country risk.

Venuzela, Cuba, Germany, US, Japan, china, africa(say ghana) - all have different operating environments and investment risks.
The market has almost certainly priced "country risk" into the value of each company.

I'm also having a tough time understanding "country risk." Is the concern a dramatic devaluation of the dollar (currency risk)? Inflation? Complete and total breakdown of rule of law? I think it helps to more fully define the risks you're concerned about; finding solutions should be much easier then.

In the spirit of complete disclosure, I'm a TSMer. I presently have a heavy domestic tilt, although I'm still working my head around currency risk. I keep tinkering with the idea of 50/50 US/Foreign, or even simply All-World, but I have a deep-rooted fear that I'd be jumping on a bandwagon right before it goes over a cliff. Maybe they're selling better crystal balls on Ebay.
LH wrote:So hard to tell rational from behavorioral rationalizing I think : )
True dat.
bmb
Posts: 637
Joined: Wed May 06, 2009 2:35 pm

Post by bmb »

There are three ways of looking at this:
1. Academically - using historical returns and volatility)
2, Common-sensically - looking to Bogle
3. My way
From an academic standpoint, I suppose one should look at your overall AA and find the efficient frontier.
Common sense asks why would you take on additional (monetary) risk when buying equities? Sure, you do better by speculating on the value of the dollar vs. other currencies, but you can also do worse, and it is the economy you are living in that you need to keep pace with, not the rest of the world.
My approach has been to establish a baseline, then lean domestic or foreign based on world economic outlook. That meant a lean toward domestic markets in the late 1980s to late 1990s, then foreign for most of the 2000s. Though the current problems started here, it would appear that the US is suffering less than most countries and in any case the US is likely to be the first to recover. So I have been leaning a bit more to the US when making new investments than usual. If I were very young, I would be leaning toward volatile but potentially very rewarding emerging markets.
User avatar
Imperabo
Posts: 1109
Joined: Fri Aug 29, 2008 1:00 am

Post by Imperabo »

dumbmoney wrote:
The post-WWII growth of Japan was an exciting story, and yet the Japan stock market was one of the worst for investors.

The Nikkei was at 176.21 when it reopened after WWII. It's up a bit since then.
User avatar
preserve
Posts: 560
Joined: Thu Mar 15, 2007 10:13 pm

Re: Biggest non diversified risk = US Country Risk?

Post by preserve »

LH wrote: Why risk 50 percent in any ONE country?
Because it really doesn't make much difference (except in Expense ratio). The stock market / financial system is a western dominated system.

Even if someone were to go 100% ex-US, they can't escape the wrath of what occurs in England and the US. They really are just wasting their money in ER.

Most of the world really doesn't have an economy based off their stock market. They simply have a stock market to appease and attract western-money.
Rodc
Posts: 13601
Joined: Tue Jun 26, 2007 9:46 am

Post by Rodc »

I'm not so sure counting by country really makes sense.

Is it better to think of 50/50 US/Europe 50% one country and 3% seventeen other countries, or is better to think of it as 50/50 split between two regions, or something in between?

Some countries really only have a couple of dominate industries, or just a few dominate corporations. Then others have several hundred large companies over many sectors.

This is just another way to say market cap is a good starting position, as opposed to counting countries or even regions.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH »

Japan is a good example of individual country risk.

To a significant extent, the government/laws/economic environment of the country is a part of the companies located there, influencing thier stock market returns.

Structural problems in a country, problems with rule of law, problems with banking, land bubbles(japan recently, US more recently), etc all can case detrimental performance for years in a countries stock market.

Its impossible to say whether the country in question is going to do well going forward or not, but like japan, its a question of diversification of risk.

Thanks for replies,

LH
Post Reply