Week 24: Wild Card Topic

What can you do this week?

• Review your investment mix.

• If more than a 70% of your stock allocation is to domestic stocks, it’s worth reconsidering that allocation.

• An allocation to international stock in your portfolio can reduce risk and potentially improve your expected returns.

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Just Buy The S&P 500 Or The Total US Stock Market Index, Right?

• This seems to be the default investment advice online.

• These index funds or ETFs don’t provide a global asset allocation.

• If the United States does not continue it’s global dominance in the equity markets, you risk underperforming the global market.

• If you value diversification by investing in many companies (the S&P 500 for example), you have to ask yourself why you wouldn’t also spread risk across other economies, asset classes, currencies.

• The unknown timing of returns can vary across continents and economic cycles.

  

The Risk In Recency

• Recency bias is a dangerous thing.

• Because a trend can last for years or decades, doesn’t mean it will always be so.

• Domestic stocks have done much better than international for a long time. Since 2010 per Morningstar.

• The future is anyone’s guess. Like high performing mutual fund managers, past performance is not indicative of future results.

  

What Goes Up….

• Mean Reversion is a concept in finance that could apply to future US stock market returns. The below definition is from Investopedia.

• When an asset's current market price is less than its average past price, it's considered attractive for purchase. Conversely, if the current price is above the average, it's expected to fall. Traders and investors use mean reversion for timing of their respective trading and investment strategies.

  

How Much Is Enough International Allocation?

• Per Vanguard, at least 20% is a place to start, on up to 40%. 40% is representative of the actual value of the global stock market vs. the U.S.

• If you’re allocating significantly more to the US, you are choosing to do what’s known as home country bias.

• Regular rebalancing of your investments helps you maintain reasonable allocations over time. To make sure you’re invested how you intend as valuations shift over time.

• Rebalancing helps manage risk and could improve potential for expected returns.

• Of course noone knows what the future holds.

  

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