Geographic diversity of funds

lollynerd

I recently did a review of my ISA and pension funds (I am already retired) and I found that I am not as geographically diversified as I previously thought.
My current mix looks like this (These are all equities, not bonds):
USA 69%
UK 11%
China 7%
Taiwan, Japan, India 3% each
The rest is covered by Switzerland, Canada, Brazil, Korea, France.
Now, considering how expensive US equities are today, I am thinking that I am top heavy in this geography, and am worried that a reverse could hit me hard.
Do you have a view on a good geographical balance for the next few years?
Can you point me towards any good articles on this subject?
Thanks

Linton

I have no idea what geographic balance will be good for the next few years.  Neither does anyone else.  That is the reason why I believe putting 69% in one geographical area is unnecessarily risky. Not only will the portfolio suffer if the US hits problems but it will also miss out if another area does extremely well. Better to spread far more evenly, though one cant ignore the sizes of the individual markets.

The geographic allocations for my Growth Portfolio are: 
North America:  43%
Asia: 23%
Europe (ex UK): 24%
UK: 10%

virenque

Take 10% out of the US and put 5% each in China and Europe.

eskbanker

Although it's obviously focused on the present rather than the future, you could use the geographical weightings of a global tracker as a starting point, such as https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-acc/portfolio-data

dunroving

eskbanker said:

Although it's obviously focused on the present rather than the future, you could use the geographical weightings of a global tracker as a starting point, such as https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-acc/portfolio-data

Do global trackers typically reflect the global market share of each country (or region)? I suppose it makes sense, but I'd never thought about it that way.
Your link shows this tracker (vanguard-ftse-global-all-cap) is 59% weighted towards the US, which seems overweighted (just intuitively, which is why I asked my question). I just checked the Fidelity World index/tracker, and it's 65% US, and "my" global tracker (Vanguard FTSE Developed World ex-UK) is also 65% US. So compared to them, it is actually a bit lower.
My own portfolio is overall about 45% US-weighted. That's something I appreciate about the Fidelity X-ray - without painstakingly sorting through all of your funds' portfolios, you get a summary of your overall holdings regionally, sectorally, etc.

eskbanker

dunroving said:

Do global trackers typically reflect the global market share of each country (or region)? I suppose it makes sense, but I'd never thought about it that way.
Your link shows this tracker (vanguard-ftse-global-all-cap) is 59% weighted towards the US, which seems overweighted (just intuitively, which is why I asked my question). I just checked the Fidelity World index/tracker, and it's 65% US, and "my" global tracker (Vanguard FTSE Developed World ex-UK) is also 65% US.

It's not an exact science and there are multiple indices to track, so for the FTSE Global All-Cap one I mentioned, that includes 8,941 companies, including small ones.  There are other indices, such as that FTSE Developed World ex-UK, but of course that's not truly global, or FTSE All World, which omits small cap but is otherwise comparable to Global All-Cap - there is no right or wrong answer though, but it's just a case of identifying the index which most closely matches what you're trying to model and then picking a tracker.

In terms of the USA proportion, the Global All-Cap is 56% (the 59% is the whole of North America) and this is much the same in the All World one.  Both the FTSE Developed World ex-UK and MSCI World (tracked by the Fidelity product) relate to a subset of developed countries and so the USA proportion would be expected to be higher for those, hence your 65% figures.

Thrugelmir

Have you performed an analysis by market sector?  Geography is pretty meaningless if the stocks are international traders. 

eastmidsaver

i think you seem well diversified already.    i have some in emerging markets at the moment,  and most global funds are heavy on the USA.   but as per my recent post on this thread,  i am considering taking a punt on UK funds soon,  where many analysts believe this in undervalued,

lollynerd

Thrugelmir said:

Have you performed an analysis by market sector?  Geography is pretty meaningless if the stocks are international traders. 

Well sort of, but the problem is, if you have global funds, US funds, Technology funds you end up with loads of Apple, MSoft, Alphabet, Google, Tesla, etc as they are all top of each of those categories.
Hence why I want to diversify.

aroominyork

If you still want US but to reduce your FAANG-type exposure, there is an ETF which invests equal amounts in each of the S&P 500 companies. It is XDWE. 

JohnWinder

Yes, I have a view on a good geographical balance: a capitalisation weighted global portfolio.

You don't say whether your 69% USA is solely Apple, and your 11% UK is solely Unilever, but let's assume you see the sense in your holdings being widely diversified, low cost, index tracking funds, or active funds that look like that.

In which case you already know the benefits of cap weighted index investing: by diversifying, you reduce idiosyncratic individual stock risk to a minimum (which overall isn't rewarded simply because it can be almost eliminated) and you take only market risk which is rewarded (above risk free assets like cash or short term government bonds); and, they're likely the lowest cost funds.

If you believe all that, then it follows that going against the market by suggesting US stocks are over-priced, even though the market as a whole has priced them that way, means you are betting against the rest of the market. That's what active investing is: a belief that you can make more money than the market returns because you're smarter than the market as a whole, or you believe in luck.

Cap weighted index fund holding is investing in the market. Deviating from that, as you're contemplating, is continuing to invest in the market, but it's also having a bet. You could get market returns by having a bit of a bet, but you'll more likely get above or below market returns. Are you ok with that? All the dollars chasing above market returns can only get them at the expense of those also chasing above market returns but who don't get them; it's a zero sum game. On average it doesn't work. It's ok to try to beat the market, plenty here do, but know it for what it is: betting, unless you're an inside trader.

Markowitz and Sharpe are the two Nobel laureates who've influenced our thinking in this regard if you want to read up. The William Sharpe portfolio is one you'll find easily.