I would overthink your strategic asset allocation. While the market cap weight of emerging markets makes up only 10% of the world, we can’t ignore the fact that we live in a highly globalized world.
If you look at the revenues (MSCI has some papers on that), a 90/10 allocation will lead to a revenue exposure of ~33% in emerging markets. Thus being very close to the current GDP ratios.
So I see no point in further increasing this exposure by overweighting EM stocks. I would just go with VT.
Thanks very much for your fast reply!
You have a very valid point regarding the revenue exposure, which also came up quite often during my research. Do you have the link to these MSCI papers?
In the following post of the website of morgan stanley, they suggested a weight anywhere between 13 and 39%, while the historical max return/risk is at 27% (since 1988):
again, thanks for your reply and would love to hear your thoughts
Also interesting. So instead of overweighting EM it might even make sense to overweight your domestic market. My overall CH allocation is around 15% for example.
Also quite an interesting point of view. I was always very much against too much home bias when looking at certain “World Funds” by Swiss providers with 40+% in Swiss Stocks. Then again, some home bias seems to make sense. Nonetheless, I think that as long as your portfolio is well diversified and you stick to your strategy, the difference in the very long run will be minor.
If I may ask, what is your current portfolio allocation?
I came to the conclusion that due to the unique situation of Switzerland and its CHF it’s sensible to add some home bias. As Switzerland is probably the most globalized country in the world (90% of the SMI revenues are made abroad, Nestle 98% as an extreme example) I saw no concentration risk in doing so. I decided to go with 15% and subtract those additional 12% from Europe/Japan/Pacific. So I’m 60% US, 15% CH and roughly 12.5% Emerging Markets and 12.5% EU/Japan/Pacific/Canada.
My only ETF in IBKR is VTI (US-only) because I’m able to get to the desired overall strategic allocation with Viac/ValuePension. This gives me also some tax advantages:
That’s just my personal investment strategy. No intent to try to outperform VT longterm, just some optimization from my view.
If anything this paper is against home bias (people often have way too much home bias), it aims at telling people how much is too much, but besides tax&similar market specific concerns, I don’t remember seeing arguments that home bias gives higher return.
It doesn’t, otherwise markets would be less efficient. Maybe I got the wrong paper. Ben Felix has something too on that matter:
Ben does have some good points here.
One argument I read about once was that since my “human capital” is in the Swiss market itself, this also leads to an additional weight in that field. I know it might sound a bit random but it does make sense to me.
Since I am for example in the Information Technology field, it would be suboptimal if I would overweigh this industry. When the tech industry (for whatever reason) would go down, not only will my stocks be more at risk but also my own job. Same with home bias.
Anyways, thats more of a “Gedankenanstoss”. I really like seeing different perspectives when it comes to investing to broaden my own horizon in this field. In the end, I might as well go with VT and stick with it for simplicity reasons.
This. You can find arguments for any deviations. Longterm, it won’t really matter as you will probably track the performance of VT.
Yeah you are right on this one. Appreciate your time and answers! All the best!
I like to also take into account that since my political capital is in Switzerland, I have a (slightly) greater ability to manage the risks of swiss assets and would probably get better protection from the swiss government (which has its most impact on swiss assets) than from others.
As I’ve very recently said: 2% allocation to Switzerland will most certainly make no meaningful difference whatsoever.
You’d better YOLO that into a good pyramid scheme or meme stock. If you’re more conservative, you could just as well allocate to World ex CH - or leave it in SMI/SPI Extra (though pointless).
As for Emerging Markets, you’ve probably noticed how they’ve lagged behind developed world indices for quite some time. A lot of the market growth seems often seems to be eaten away by a depreciation of the currency.
These are probably the main reasons why EM fund performance sucks despite the huge GDP growth:
I would even say that most of GDP growth is happening outside of stock market, because it will be no listed companies.
Look at Germany actually. Compared to GDP, the stockmarket is rather small, because a lot of medium companies are actually not listed (and if so, not free floating).
But then again, if the financial system (stock market) would pick up in these countries and the GDP would be a more representative. But for sure that’s not the case for all countries
How the stock market suppose to represent economy of a country with a non-market economy (China)?
Obviously you are right on this one. But given Chinas development since 1978 I don’t think its unlikely that their institutions and hence their attitude to a market economy will change
And if you look at many EM single-country indices, they are highly concentrated in one or two sectors. Often banking (see Colombia, Saudi Arabia even Poland) or natural resources. Some have one or two big behemoth companies that skew the picture (Samsung, Naspers, or also).
Regarding exposure to EM I’d also like to quote the extraordinary Ben Felix: The stock Market is not the Economy. Check Slippage and Equity recapitalization
