Market cap is a simple meassure and doesn’t require active decisions. If the US market does worse, it will lose marketshare. If it continues to do better, it will gain some more. Acording to EMH both scenarios are equally likely and betting on one outcome is a zero sum game.
It is probably a better use of time to include factors that offer an additional risk premium over the market such as value, size and profitability.
Or add 20-30% leveraged ETFs like SSO or UPRO 
This graph is totally misleading anyway. You know why international beat US so badly in the 80s? Because of the absurd bubble in Japan which resulted into a 40% CAGR over 4 years. If the bubble of all bubbles is your best argument to underweight the US, than it’s a rather bad argument.
At least the value premium is a risk premium that is uncorrelated to the market premium. So it can reduce the volatility of the whole portfolio
Obviously I know. And so do you. Cause I did mention exactly that point to you a week ago.
(…though you would have already known or found out without me bringing it up, I’m sure 
)
Of course it’s not.
Now I certainly won’t be calling the valuation U.S. (especially tech) stocks a bubble to rival Japanese asset price inflation in the 1980. But the facts still remain:
- U.S. equity enjoys very high valuations, historically
- and it’s much higher valued than most of the (developed) world
Is it overalued? Or is the valuation justified? Why?
I am just advocating that - before putting more than half of one’s portfolio into that one market - one would maybe want to try to answer these question. To himself at least. Though I would (honestly) welcome opinions on the forum here.
I think there is a strong tendency in markets to revert to the mean, in the longer term. I also believe that U.S. economic dominance and the U.S. share of the total market cap won’t greatly expand above what it is today. If any, it might rather decline. This leads me to the conclusion that other markets might outperform U.S. equity in the future - though it won’t necessarily be today’s developed economies in the EU (with its problemativ currency) or Japan.
Thank you for this very interesting discussion. I believe that many investors wondered about the original question of this thread.
Personally, I have read a lot about it here, the bogleheads forum and other places - and although people have different opinions on this topic, a lot of it comes down to personal situation and valuation.
The way I see it, as swiss investors we have not only our direct investments in the stock market but we also have the Säule 2 and (most of us) Säule 3a which we need to take into account. E.g. the VIAC 100 Säule 3a has a large portion of swiss stocks (37%, therefore overweighting Switzerland and underweighting other countries like the US) which should surely play a role in the discussion whether you are actually overweighting the US in your personalized overall investment strategy.
I believe that 100% VT is a reasonable and informed decision, at least in my case.
However, I am open to having my mind changed… 
I would say, that unless you want to trade professionally, or at least make it your serious hobby, you should not deviate from the market capped allocation. Yes, you may paste som charts that suggest that the exUS is due to start catching up with the US. But for some reason the market still thinks otherwise, and I’m sure they all know this chart, and many other charts. It’s an incredibly complicated issue and to me it seems bold or naive to believe that you know better.
Just for info.
If you parse the VT (they are several tools but IB offers one) you’ll see that is cheaper to have VTI + VXUS.
Like that you can balance US and non-US as you like. Is what I’m doing.
can you quantify?
as far as i remember it is something like 0.10 % TER vs. 0.10% and 0.06%, that gives you a 0.02% advantage if you weight them both equally. this compounds to a whopping 1.2% advantage after 60 years. Hence insignificant. About everything else on investing is much more important than this aspect.
VTI: 0.03%
VXUS: 0.09%
VT: 0.09%
So you save ~0.033%.
Comparing countries on their P/E ratios is a meaningless apples-to-oranges comparison. It makes sense only within a particular industry or for comparison across time (which is roughly what CAPE does - P over past 10y E vs current P/E).
Good quality ex-US companies are enjoy high valuations as well. Don’t assume that the market is stupid and values companies just on jurisdiction factor! For example BABA or YNDX, their P/Es are comparable to US tech giants. The issue is that the bulk of ex-US companies are value crap and traded like the value they are. US is unique with their high concentration of quality growth companies.
Brands, network effects and data moats.
@Hedgehog was even advocating for a 3-fund portfolio, because of lowest TER and highest AUM and trading volume of these. I made a wiki post on it, there is a table which compares the 3. But the TER are no longer up to date.
Edit: I updated the table. Anyway, I don’t think that TER is the most important factor. It’s the total AUM, trading volume & total number of stocks that are more interesting.
| ETF Name | Ticker | Inception Date | #Stocks | TER | 1 Fund | 2 Funds | 3 Funds |
|---|---|---|---|---|---|---|---|
| Total US Stock | VTI | 2001-05-24 | 3’611 | 0.03% | 50% | 50% | |
| Emerging Markets | VWO | 2005-03-04 | 5’074 | 0.12% | 10% | ||
| Developed Markets | VEA | 2007-07-20 | 3’960 | 0.05% | 40% | ||
| Total World Stock | VT | 2008-06-24 | 8’178 | 0.09% | 100% | ||
| Total Intl Stock | VXUS | 2011-01-26 | 7’453 | 0.09% | 50% | ||
| Combined TER | 0.090% | 0.060% | 0.047% | ||||
| Fee for $100’000 | 90 | 60 | 47 |
Do you know if an ireland domiciled emerging markets fund is more tax efficient than an us based fund?
I would say, you shouldn’t deviate from it, if
- you blindly want to achieve total stock market returns and
- you don’t want to think for yourself
Market capitalization is, to a great degree arbitrary. A result of corporate financing - which, in turn, is substantially influenced by politics (taxes) and regulation.
Recent case in point: Saudi Aramco, the world’s biggest oil & gas company went (partly) public - at a price that values the company at 1.7 trillion USD. Now of course just can’t take 100% of such a behemoth public overnight. The market needs to “absorb” it slowly. But suppose they did (gradually): ceteris paribus, it would then suddenly have a market cap that size.
A market cap that’s 40% larger than Apple, the world’s currently most valuable company (by market cap). Which means that, according to your logic of not deviating from market cap, I would have to allocate 3-4% (4% on the basis of following the MSCI world) of my entire equity portfolio to it. That would be more than the percentage allocation of entire countries in VT - like France (3.0%), Switzerland (2.6%), Germany (2.5%) or India (1.2%) in VT. Even approaching China’s share (3.7%).
I don’t know about you, but I’d rather invest more money in reasonably diversified economies like the aforementioned - than in one single Saudi oil company.
Agreed - it’s to be treated with great caution, at least.
That’s why Yahoo is the world’s most popular search engine and internet portal.
ICQ and Skype dominate the instant messenging market.
Blackberrys are dominant enterprise mobile phones
And Intel makes the chips that run inside them.
check out
That’s why stock market indexes routinely use float-adjusted market capitalization.
It’s both a blessing and a curse though - when large insiders start selling their previously non-public shares, indexers are forced to buy as the float increases, and vice versa.
I think that’s a wrong way to look at it. The allocation is not in countries, but in stock markets. And stock market size is not directly connected to the size of the economy, where it operates. You know, you could also argue that Apple & Amazon together have higher market cap than all companies domiciled in Germany, which also is hard to grasp. I mean, in public conscience one makes most money by selling smartphones and the other one is a web shop.
You give one extreme example to back your claim. I see it differently: the market cap of 1.7 trillion is not there without reason. We’re talking about huge oil reserves here. It’s best to have as much of the World’s economy included in your portfolio, so I’m happy that this company will be included.
OK, but there is no easy way around it. I especially don’t like quantitative easing, markets being inflated by central banks and cheap credit. I invest unleveraged money and it competes with highly leveraged money, which is lended at an unfair rate. But what can you do?
Yes, allocated by stock market size.
Though that’s the argument I’m making above:
Why should you allocate according to that?
Sure, listed companies will be (on average) more strictly regulated in their business and accounting practices. But otherwise… it doesn’t say much per se about the quality of these companies.
There could be markets with great, innovative companies that have high margins and growth figures - though relatively difficult access and high barriers to going public on stock markets (due to a jurisdictions legal framework, for example), stock markets could be inefficient, etc.
And others, where the stock market is easily accessible to corporate finance, but companies are lower-quality or have lower growth perspective. Sure, there will be some correlation to the contrary (economic freedom and responsible regulation fostering the development of higher-quality companies - and, in turn, higher stock market capitalisation), but still…
Why should you allocate according to market cap?
Why should that be “best”? 
It serves only one objective I can think of: To achieve approx. the returns of the world’s total stock market.
Sure, that’s far from the worst strategy one can have as an investor in listed equity. It’s pretty good, probably. But why should it be “best”, necessarily? Also… (quoting it again, to make another point)
Allocation by market cap doesn’t even ensure that purpose all that much.
The Japanese market cap is, again, a great example: Japan made up 7.8% of VT - that’s more than double the 3.5% of China. Even though China has almost triple the GDP Japan has.
You’re not even getting “as much of World’s economy” by allocating according to market cap!
So what would you propose? I don’t really know what the alternative is. GDP adjusted feels very wrong too.
USA: 25%
EU: 21%
China: 16%
Japan: 5.8%
India: 3.3%
Switzerland: 0.8%