Global exposure can be a great thing, but in the context of a diversified portfolio of stocks, too much of a good thing can increase risk.
There could be a couple of different ways to interpret the comment but the way I read it, the author is lumping together all foreign exposure as if it was one thing which is the wrong way to look at it. As we've talked about countless times each country has its own attributes as an investment destination. The attributes of a given country might be similar to the attributes of some other countries but it will not have the same attributes as every other investment destination.
Which countries having banking crises and which do not? Which countries have resources in the ground that the world must have and which do not? Which countries have problems with aging populations and which do not?
There are more differences of course and obviously the answers to every question are not all that cut and dried so for anyone inclined to spend the time it would be easy to construct a portfolio of different countries that takes in various types of fundamental attributes. The importance here is that countries with different attributes are likely to be at different points in their respective economic cycles which gives them a chance to be at different points in their respective stock market cycles which in turn creates the opportunity for lower long term portfolio volatility.
The best example of this is probably the fact that Brazil and Norway kept going up until June 2008 after the US peaked in October 2007. That example also makes a point about realistic expectations for this type of diversification. In the face of a short term market calamity it is not realistic to expect some market to be immune but a country that is fundamentally healthier has a decent chance of outperforming over longer periods of time. There were dozens of countries that did just that in the last decade and that will repeat again in the new decade (assuming the US turns out to be the laggard I think it will).
Contrary to the quote above I think an allocation to various countries with different fundamental attributes from each other and different from the US makes a portfolio less risky not more risky.
Generally we target 2-6% in any single country although China is more like 1% these days by virtue of its weighting in a couple of thematic ETFs we use for most clients. A 6% weighting would equate to two stocks with each one targeted at 3%.
11 comments:
"Generally we target 2-6% in any single country"
So if I average that to 4%, does that imply that you are invested in 25 different countries? I've been a long time reader and only recall you discussing a handful of countries you are invested in, am I reading this wrong?
John, your math makes sense but we are about 50% US.
Isn't a 50% allocation high for a country (U.S.) you think will be a laggard for quite awhile?
You said,
"Which countries having banking crises and which do not? Which countries have resources in the ground that the world must have and which do not? Which countries have problems with aging populations and which do not?"
To which I would add, "Which countries with bad fundamentals have low stock prices that already price in those negative factors?", or "Which countries with good fundamentals have high stock prices that already price in those positive factors?" What sense does it make to avoid investments where the negative factors are already priced in? What sense does it make to choose investments where the positive factors are already priced in?
Roger - I've been reading this blog for years, and I've tried to open your eyes to this point *many* times, but you always ignore me. Why? You seem to be a good guy who knows how to think. But you also seem to have a serious blind spot on this point. It simply makes no sense to either choose or avoid investments in countries or individual securities without considering price. You're doing a disservice to your readers and clients in ignoring this rather obvious fact.
Do me a favor. Instead of immediately dismissing this comment, and saying something like "things that look cheap can stay cheap for a long time" or something else similarly dismissive, why not actually think about what I'm saying?
- aagold
Roger,
I was 80 to 90% foreign last year. Now I am less than 20% foreign. I think they were over valued. The foreign I do have is trailing my US holdings this year.
Is it time to go back into foreign? Not for me but I'm not sure I am right about that either.
Is foreign correct for the long term - YES
But it is going to be a more volatile ride. The volatility is already fatiguing me with my US holdings. I am still bullish even with all the current issues, but I do not want to add foreign volatility this year and maybe not next year.
7:33,
you might be right. the vast majority of our us holdings are in defensive sectors with high yields.
aagold,
How do you know what is priced in? You think something is priced in but you don't know.
One point I have made repeatedly over the years is that success can be had with every conceivable approach including mine and including yours. Your comment seems to imply that success can't be had in many different ways.
This blog is about one approach. People can take little bits from here plus what they pick up elsewhere to develop their own approach.
Finally, why I don't I listen to you? How many anonymous people on the internet should I consult before implementing client accounts?
"How many anonymous people on the internet should I consult before implementing client accounts?"
7
You need it to be an odd number that is not to high or to low :}
that is a quality heckle! can our dog Trixie be one of the seven?
"Finally, why I don't I listen to you? How many anonymous people on the internet should I consult before implementing client accounts?"
No need to get snippy...
I wouldn't be such a long time reader if I didn't get something out of your process and your writing. I guess I've just gotten frustrated by the fact that you've never seemed at all interested in exploring the idea that maybe a stock's price, or a country's stock market price, should have something to do with whether one should buy or avoid it. I mean, what else in life is like that? Would you buy a house without thinking about price? What about a farm? What about clothing? Don't we always compare the price we pay for something to what we're getting for that money? Seriously - is there *anything* in life that one should buy without thinking about price? I don't think so.
You said,
"How do you *know* what is priced in? You *think* something is priced in but you don't *know*."
I never said I (or anybody else) *know* what is or isn't priced in. Evaluating whether a market is undervalued or overvalued requires broad knowledge and judgement. My point is that when you suggest choosing countries/stocks with good fundamentals, you're implicitly suggesting that you *know* that those good fundamentals are *not* already priced in. Similarly, when you suggest avoiding countries/stocks with bad fundamentals, you're implicitly suggesting that you *know* that those bad fundamentals are *not* already priced in.
You said,
"This blog is about one approach. People can take little bits from here plus what they pick up elsewhere to develop their own approach."
Well shouldn't that learning go in both directions? If a reader says something that has value, maybe the blog owner can pick up on the idea and incorporate it into his process? Just a thought...
- aagold
I spend all sorts of time learning about different approaches, it is a two way street.
trixie can be one but she will need to be balance by another dog leaving an odd number of humans :)
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