If you could make your own soccer team from players all around the world and one country happens to have more than 50% of all soccer players of the world and also over 50% of the best 100 soccer players of the world, would you adjust your selection to total population?
USA isn’t just one country. Switzerland is just one country. A state in the US is like Germany. I’m not sure if you are forgetting how big this country is and how many globalized companies are there.
China will overtake the USA in terms of GDP, but they won’t become relevant in terms of market cap. It’s mostly the west that profits from this growth.
That’s what I have been arguing all along: one should maybe not invest solely based on (past) corporate profits, stock prices - or market capitalisation, for that matter. At least one should not assume that that would be the only sensible or “correct” way of doing.
So China, the US and India had the highest numbers of association football players in 2007. Even the Bangladesh football federation (at no. 9 in the ranking) had more players than France, Italy, Argentina, or England - and must have many times the number of players Portugal or Uruguay have had.
Surely these countries must have been dominating World Cup 2006 or later ones, haven’t they?
Well, I certainly wouldn’t automatically make up my team of 27% players from the US, China or India either. Or, more generally, make up my team of nationalities according to their share of the world’s soccer players. Cause… see above.
Investing based on market cap is sound strategy - you’re essentially assuming EMH and trusting the market to correctly assign values to stocks and countries.
In 1988, eight of ten of the world’s biggest companies by market capitalisation were Japanese.
In 1989, Japan accounted for 40-45% of the world’s stock market capitalisation.
So the sound investor would have invested accordingly back then?
To be clear, my reference to GDP was just a thrown in above to make or provide a (simplified) point for discussion and reference. It wasn’t intended as suggestion for best way to proceed.
…wherein the revenue exposure chart correlates well (but unsurprisingly) to the share of markets of the world’s GDP.
It is a good point. Still, it’s not like every developed-market company would or could just be globalising their activities and revenue sources. Due to various factors, be them cultural, economic protectionism (think China) etc
On the other hand, given a trend of globalisation as suggested, I would assume market capitalisation and revenue exposure (left and right charts) to converge further, at least to some degree. Especially by (today’s) emerging market companies increasing their market capitalisation.
But that might go both ways. For instance, Apple’s continued dominance as the world’s most profitable smartphone marker and world’s most valuable company, or Amazon’s as a retailer (and logistics and cloud computing company) is certainly not guaranteed, in a ten- or fifteen-year outlook.
I know that Japan once had the highest market cap in the world, but that was just for a short period of time. The US market is a totally different story. They are dominating the rest of the world for over 100 years. Still, I’m not at 55% US, that’s my current portfolio:
So I modified my allocation and am pretty sure that it is the allocation I will use. I dropped Switzerland down to the market cap and split the USA allocation into 1/3 Total market, 1/3 Value and 1/3 Small cap value. Value is split between just value and a concentrated part of the top value quintile of the sp500.
I would have split small cap value as well, but there is no etf that tracks the S&P 600 enhanced value index.
The exposure of pure value funds to the value factor is usually not that big.
That is also why I have split it into S&P 900 Value and S&P 500 enhanced value. The later is more concentrated and offers a bigger exposure to value than the S&P 600 value index. I also like that it has some measures that limit turnover and exposure to negative momentum a bit.
Btw, how do you keep Switzerland at market cap with 3rd pillar in mind? Are you using CHF hedged funds in VIAC to reduce your CH exposure? Or are you just talking about your IBKR investments?
I look at them seperate. Much easier to keep track and rebalance. I believe that the overweight of Swiss equities in VIAC won’t have a negative effect. Some diversification is lost, but overall the expected return is the same.
Oh ok then. I look at my total portfolio including VIAC. Using an Excel spreadsheet to keep track of everything and rebalance. That’s why Switzerland makes up 14% of my target portfolio.
Here is my not so mustachian portfolio. I do a lot of stock picking, rebalancing, and I try to time the market. I deserve to be beaten to death by the community.
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