a single asset class: No limit. Very high equites share is the best strategy in the accumulation phase (was at least prior to the recent interest rate hikes)
a single broker: 100k cash, don’t care about total share of investments
a single currency: No limit. I live, work, spend, and plan to retire in Switzerland. No reason to limit my CHF exposure. Limitation comes through regional allocation automatically to some degree, but with equities it’s complicated anyway (do you for example consider a Nestle share a CHF investment?)
a single country: Region not country for me, 50% (need to watch North America/USA exposure)
a single industry: 20% (need to watch technology)
a single etf issuer: No limit
a single stock/company: 3%
I add minimum single asset class: 5%. I do not uphold my own rule, and am too equity heavy. It is important however to diversify and add bonds, alternative assets like PE and commodities. Also I still have not invested anything in crypto, but might make sense from a risk perspective.
or more specific: i know that nestle is ~99% non-chf revenues. but it’s still a ch-domiciled company. i guess one underlying question re risk is how relevant a co’s headquarters are in an existential crisis (e.g. war) of its home country?
but every index is biased, right? i mean, someone determines which countries are ‘developed’ (for msci world) or ‘developed or emerging’ (msci acwi) or neither (~150 other countries). and then, which companies per country are in the index. is it the top sized ~85% each? or the top-sized 10% from all of 'em? there’s also a difference between the ‘cap-weighting mechanism’ (how to rebalance) and the ‘size-orientation’. biggest 10 companies in the world are not necessarily the best, nor the safest 10 in the world. and there’s still a nation / political system behind every country. let’s say 20 yrs from now, msci acwi is 80% usa (i know, how realistic). would you not care, because single country isn’t that relevant, or start reducing that weight? and would you not allocate 40% to ch simply because its size is not big?
That said, I‘d be less concerned about ETF issuers.
Countries may fail because of politics. Broker may fail because of bad risk management, IT security etc. Even fraud, maybe.
An ETF though? Seems pretty straightforward and not too many vectors for fraud - and I doubt I can be wiped out in a singular event, such as someone hacking my account/credentials.
I haven’t really been in a situation where I was about to invest (close to) 100% of my liquid net worth into a single security. Most of my brokerage accounts don’t have access to U.S. ETFs anyway.
As for countries, I‘m not sure if I have (partly) reversed my opinion on this over the last year or so. But it’s just hard if not impossible to ignore (underweight) the U.S. at this point. While the U.S. got rid of their Trump (for the time being), Europe got new problems with the Ukraine war and cutting itself off from cheap Russian energy. But as far as alternate universes go, there are some in which Trump didn’t peacefully hand over power after the election and Putin may have decided not go all out on Ukraine. And the junctions between them are just a handful key decisions taken (possibly only on a whim) by these two world leaders.
hmm, i’d say market cap weighted somehow means ‘large size factor’ by design. a single country, sector or company can become a huge part of an index. so the index needs / would need rules to cap at a certain weighting each to consider it risk-managed by itself, no? an investor is never totally passive, we choose our asset classes, indices, etc. the swiss perf index (spi) is a good example, we probably wouldn’t allocate a huge part of our pf’s to it.
I think Bessembinder showed that only 4% of the U.S. stock market’s companies accounted for its entire gains. My guess is it’s similar for the global stock market. To me, it would be a risk not to weight these companies according to market cap.
Market cap makes intuitively sense to me because it simply follows the fundamental principle of supply and demand. Also, I wouldn’t really know what other principle to choose.
But of course, many ways lead to Rome, as long as you stick to them
my reply was simply re you mentioning ‘risk’ being priced in. and my take would be that risk-return is generally priced in for every stock, but risk mgmt is different (and market cap weighting generally leads to concentration, not diversification).
assuming efficient markets, it should basically be irrelevant what basket of companies you own at any time, no? whenever you buy an index, you get the weights valid at that time and which are based on past performance. and all of them include roughly the same expected future returns over a certain timeframe (risk premium). and the weights will change based on their future performance. a bigger co doesn’t have better odds of outperforming or being safer per se.
imo, market cap weighted simply means bigger weight for a bigger company (larger size). higher demand (without higher supply at the same time) would mean higher price, so basically momentum factor. bigger companies usually have higher volume, of course, which leads to one reason why small caps (size factor, and thus same for equal weighted) tend to have a higher risk premium.
Well, I think you are right! Not a specialist in finance, but my understanding is: according to the efficient market hypothesis, at any given moment the price of a share of every company corresponds to the discounted value of all future earnings minus risk-based haircut. So theoretically you can buy any share and have the same expected return, even taking the risk into account. But practically the possible range of outcomes for a single company is from getting bankrupt in 1 year to becoming “next Apple/Amazon/etc.”. If you are gambling, sure, pick your horse. But if you want to live from your portfolio and want to have “reliable” (as good as it gets) outcomes from the stocks market, you have to diversify. Then the law of large numbers starts to kick in and you have much lower variability of outcomes.
And there are seem to be some financial models that shows that market capitalization weighted stocks portfolio have the best risk-return profile, although I was not be able to find it quickly.
yep, my understanding as well - i have not (yet) read about it in detail, but my own logic would say equal weight is favorable in general. but it’s not cheap to implement and even ‘equal weight’ can mean different things (equal weight companies, countries, sectors, all of 'em?).
i’ve also just seen another thread which links to this interesting tweet (plus here’s another one from that guy with some nice content from studies).
anyway, just trying to get less dumb, challenge some of my own assumptions and receive+provide some feedback.