Not quite sure what to think.Actually, I am a big fan of a market-capitalized index, such as the FTSE All-World ETF recommended here, which reflects the opinions of all market participants and weights it according to the absolute wisdom of the market.
But given the enormous increase in the weight of the USA, which now accounts for 65% of the All World index, I wonder whether the weighting of countries in the index should not be limited in order to control risk.
I would like to put forward the arguments against marketcap weight from a German blog post for discussion here, which is that if a country has too much weight in the index, a black swan event, for example, could have a great negative impact on the investor.
Blog article: https://gerd-kommer.de/marktkapitalisierung-vs-bip/
It's in german but you can use google translate:
https://gerd--kommer-de.translate.goog/ ... r_pto=wapp
My aim is not to map the world exactly according to GDP, which would be far too complicated, but to have a simple cap that limits the weighting of a particular country.
I my opinion, it would not require a particularly complicated portfolio to implement this.
The simplest would be a 3-Funds Portfolio:
30% S&P 500 or MSCI North America
40% MSCI World exUSA
30% MSCI Emerging Markets
With this portfolio, no country could be above 40%.
Opinions on this?
On one hand, I think wanting to limit exposure to the US relative to market cap weighting is reasonable. On the other hand, I'm wary of the fact this article mostly justifies their advocacy for the GDP weighed portfolio with backtests and case studies. Not much mention of theory or underlying explanations beyond a quick nod to expected returns being higher.
I'm also not sure to what extent even a measure like GDP weighing would be sufficient for a black swan event. The 4 case studies listed were the Russian and Chinese Communist Revolutions, the rise of the Third Reich, and the stagnant Japanese stock market. For the lattermost case heavy global diversification across countries would've worked out very well, but otherwise? I think the whole concept of "if it goes to 0% you have bigger problems than your 401k" is a bit reductionist, but given the magnitude of most of these examples I believe it's a fair point. If you're an American and are concerned of regime collapse, perhaps the measures you should take go beyond diversifying your portfolio.
If your worries are confined to the stock market, an asset allocation around 30US/70EXUS is a pretty significant bet against current valuations of the US, but certainly one you could make. I buy into the idea of an efficient market pretty wholly and thus would personally be rather uneasy deviating from market cap by so much.
Statistics: Posted by JMACatfish — Thu Jan 09, 2025 4:59 pm — Replies 9 — Views 444