Discussion in 'Shares & Funds' started by Nodrog, 6th Jul, 2018.
Some Considerations For Investing Globally
I found this interesting too -
Behavioral diversification. Diversification can not only help with your own emotions about investing, but it can allow you to take advantage of the emotions of others as well. Human nature is the one constant we’re all forced to deal with when investing but people from different countries and regions are bound to react differently to their own situations.
You could perform all of the sector, valuation, or economic analysis you want to compare foreign stocks to U.S. shares but the cultural element and different ways people approach the markets is an underrated facet of global diversification.
For a retiree and dividend focused investor like myself it’s very easy to try to find reasons NOT to invest globally especially given the low dividends, currency issues and the downsides of hedging. As mentioned in the past and also in Carlson’s excellent article it’s not necessarily about expecting improved performance but as an insurance policy against Home country risk. So for SANF I do it, sometimes reluctantly.
The one thing I don’t agree with Carlson though is the seeming indifference to Hedged vs Unhedged although the article is US centric. From a risk management perspective especially in a small market like Australia UNHEDGED would appear to be the more suitable choice.
The next question is what does one invest in. Other than a legacy holding in PMC, VGS is all I use now for International exposure. Being locally domiciled is important to me.
But with the barrage of financial porn and vested interests telling us that we should be investing in everything under the sun Internationally one wonders if VGS as just a large cap, developed only market fund offers broad enough exposure?
Initially I wondered if the absence of small caps from VGS was an issue? But I’ve seen US charts comparing with and without small caps showing it makes little difference given the nature of market cap weighting.
Then I wondered about the absence of Emerging Markets / Asia from VGS? @The Falcon has some excellent views on this which for me ring true. Even more so as a retiree where the lower risk of and higher dividends from international developed markets are more appealing. And locally domiciled EM / Asia Index ETFs are not cheap fee wise. Yet still despite this there is an occasional niggle deep down about whether it might be worthwhile to own an Asian ETF such as VAE? But given that any EM / Asia holding relative to the overall portfolio wouldn’t really make a noticeable difference and importantly in order to maintain simplicity I resist the urge to add it.
I do find the subject of International diversification very interesting so would be keen to hear others views.
@oracle what did you make of Carlson’s views given your strong preference for US only developed exposure?
@Nodrog as you know I like Carlson’s stuff generally and agree with this. Viz EM exposure, I also share those niggles. Sixpark’s SAA for different risk levels is probably close to an ideal model for the Australian DIY index asset allocator and following that would give most some comfort that some proper thought has gone into it. It is always a balance between cost, tax efficiency, behavourial “stickiness” and insurance against country specific bad outcomes.
Thanks. I agree re Sixpark.
For those that haven’t seen Sixpark’s asset allocation model it is one of the better ones I’ve seen for Australian Asset allocator investors. Well thought out:
And an excellent choice of low fee index ETFs for the model:
as you would know a few of the US investors suggest only investing in the total US market (such as JL Collins, Buffett's will, etc) as it also provides significant international exposure. As well as VGS, what about also investing in IVV (as it is AUS domiciled)?
Why limit yourself to global investments? Word on the street is that Tesla & Branson are going intergalactic - needless to say, the projected returns are out of this world.
The S&P500 exposure is already covered in VGS.
That would require me to have a view and assumes I know what the future holds. More importantly as I said earlier investing Globally for me is all about insurance against single country risk, not only our own but globally as well. Investing in US may or may not give better performance but it only gives around half as much insurance.
One of the reasons I am not a fan of VGS, is that ~60% of the stocks are US. I would rather buy a pure US ETF like IVV and then buy other global ETFs. By nature it means I am overweight on other countries as far as global market cap but I think it does a better job of single country risk as @Nodrog points out.
I am in the camp of no one knows what the future will look like. But I am also in the camp of using your knowledge, intuition and history and making a calculated guess about your investments.
It's bit hard to find the right words to describe what I mean. It's basically the same reasons you invest in AFI, ARG and MLT and sleep soundly knowing they have been around for decades and odds are they will be around for many decades in future providing returns similar to market returns with growing income stream because their investment process doesn't involve single person risk.
To give another example is based on historical shareholder returns and dynamics of the industry would you invest in CSL or TLS (Telstra)? Some might say since no one knows the future hence you should diversify and invest 50% in CSL and 50% in Telstra because there is a small chance CSL who has returned 25% compounded for decades might one day become a bad investment and TLS would become a great investment. In theory anything is possible but I would be much more comfortable in investing in CSL based on current market knowledge (Ignoring valuation part).
The example above is bit extreme since we are talking two individual stocks. Sometime back I read somewhere in the past say 20-25 years or so ago the concept of diversification used to be buy between 1 to 3 stocks in each industry sector so having around 20-25 stocks was all you needed to achieve good diversification.
Suddenly, now everyone thinks the only way to have good diversification is by buying entire world stock market. It might be true in theory but going back to my first two paragraphs I want to diversify where I feel comfortable. This is how I view my future portfolio.
High dividend income, mostly commodity exposure, good future due to being gifted with abundance of natural resources and low population so plenty of scope for population and economy to grow. About 300 stocks through VAS
Some of the fastest growing economies, millions of people moving into the middle class, minting more new billionaires than anywhere else in the world. Question, where are they going to continue to invest and increase their wealth. There is only so much you can invest in property and overseas if overseas consumer market is not growing while the local consumer market is. A lot of these billionaires are due to their business ventures. They will continue to grow their businesses and in process investor's should benefit.
I have heard a lot of arguments about corruption and lack of corporate oversight and fraud in these countries. In spite of the above being true if you look back in history the returns of China, Hong Kong and Indian stock markets they have been great (Atleast last 30 years). Things are improving with corporate governance and I am sure it will be much better similar to developed world in future. The developed world didn't get to this stage without having the same problems over the past century. But did investors miss out on good returns? So why is that argument used for not investing in emerging Asian markets? I would be skeptical if returns from emerging market was sub-par to developed markets but that's not the case at all.
This market has exposure to financials, technology and good diversification with around 800 odd companies (VAE)
The best of the best companies exists here. With IVV your money is invested in top 500 companies and IJR another 600 odd companies. All my research points to the US market performing atleast 1% better than the rest of the developed market over the long term.
This market is one of the most diversified markets in the world where you get exposure to all industry sectors.
So we have it. I personally think I have good diversification both with number of companies ASX (300), Asia (800) and US (500 + 600) and geographically as well.
The above allocation helps me sleep well and most importantly I believe I can stay the course when things get difficult because I believe the investments are sound and will bounce back.
In terms of future returns no one knows that but I certainly believe the odds are US, emerging Asia and Australia together should provide better returns than Europe, Japan, South America, Africa and Russia combined.
Looking at increasing regulatory risk here, the direction of leftist oriented union leadership and Labor’s divisive polices supposeadly based on war on the rich / equality likely to severely dampen aspiration any wonder global investing is looking more and more attractive.
Personally I think home country risk is the one thing that can never be taken too lightly. Just because an expert says it’s not an issue because you hold CSL and Cochlear hardly provides much comfort to me. I like to be optimistic in thinking Australia will continue to be fine over the long term but I would not sleep well at night without some “insurance” in place. Or maybe I’m just paranoid. Regardless one has to do what’s required for SANF which for me includes having exposure to unhedged global equities.
Airlie's Matt Williams sees a bigger risk than disruption
The CSL / Cochlear justification is ridiculous, just grasping at straws to support a position already rusted on.
What Aus/International allocation split are you guys running?
60/40 AUS / International split - Long term growth.
45% VAS or MLT or WHF
15% QVE or MIR (LIC - Aus Small cap)
I was going for more allocation to Australia but from reading it seems i should have the greatest allocation to international?
I'm a bit of a learner here.
I already have VGS,VAS,VAE,VHY, I'm trying to cover all bases
I'm assuming that I now have enough of an allocation with regard Asia and Europe
I'm keen to explore the US market a bit more - which other ETF/s should I look at?
I'm in it for long term growth
I'm a bit like Big Daddy, I was initially skewed towards Australia but after a bit of reading it seems I should invest a bit more in the US
Any thoughts would be greatly appreciated
As a retiree I’m still heavily weighted to Australia with around 20 - 25% International. I’d prefer not to invest in global equities all all given currency messes with cash flow planning and the lower dividend yield given we are living off our investments NOW.
I simply looked at our portfolio and asked the question what’s the least amount of International equity exposure I need as “insurance” to let me sleep well at night and help keep our heads above water if the OZ economy turned to **** for a long period of time?
This figure will vary for each investor with some comfortable having zero Global exposure.
I assume that 20-25% international is just COH and CSL @Nodrog ????!!!!! Couldn't help myself!
Crikey @pippen I know some feel exposure to global markets is important but one can over-diversify. Surely CSL is all one needs for sufficient diversification. Adding COH is overkill.
Transurban owns a couple roads in the US that’ll do
When holding direct stocks I had others such as MQG and LLC which in part provided some exposure to global earnings. Hugely diversified globally when you think about it. Seems silly now that I added VGS.
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