Opinion on Index trackers, diversification, flexibility, rebalancing

Linton

MrMartyn wrote: »

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Just wondering what people think of the equity fund allocation I'm considering for my monthly ISA contributions. I'm doing this after reading the excellent "Smarter Investing" (by Tim Hale). One thing to point out is that whereas the book talks about developed, value, smaller, growth, etc, my fund choices are more based around regions. I think that's partly because I'm basing my stockmarket world-view on the Fidelity platform (which has a Tracker Funds page that categorises them by region) and partly because a lot of the tracker funds themselves seem to be based around regions.

This is on an index-tracking basis. Actually, I say "funds" but this is really more about regions/indexes to track. I've not actually stated my fund choices, but they are likely to be funds (OEIC, Unit Trust, ETF) that track the regions/indexes that I've listed below. Here's what I'm thinking of doing:

Region: US
Index: S&P500
Weighting: 20%
Reason: US too big to ignore but it's risen a lot recently so I don't want to risk too much "buying high"

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Region: Emerging Markets
Index: MSCI Emerging Markets Index
Weighting: 20%
Reason: I'm hoping that this could deliver big growth over the next 20 years

My intention is to invest long term (I'm about 20 to 25 years away from retirement, hopefully). However, I follow the financial news daily as a hobby (yes I'm that sad!). If I see that one market has crashed I might sell some of my other holdings and invest more in that market in the hope of capturing a future rebound. Or I might not sell any but just redirect future ISA contributions (for a while) into the market that has crashed.

I'm interested to hear people's comments. .
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You are only looking at spreading your geographic allocations according to personal criteria but ignoring other categorisations by simply accepting those the index trackers happen to provide. This seems illogical to me as with globalisation one would expect the markets of the major economies to converge providing decreasing diversification. On the other hand there are clear differences between the various industry sectors and between company sizes which can be more significant than those between the major geographies.

In my investing I pay equal attention to all 3 aspects of my portfolio allocation.

My other comment is that your reasons for choosing particular geographies and thoughts of buying on a rebound seem rather short term for someone with an horizon of 20-25 years. In that time frame QE could well be a distant memory only of interest to a few specialists. Much better in my view is to decide on a % allocation and keep to it, rebalancing only rarely when the % allocations have moved too far.