My approach to investing is rooted in factual, historical evidence as to what has caused market performance, rather than marketing hype about the latest ‘hot tip’. So it seems logical to construct our clients’ portfolios (and our own as we eat our own investment advice cooking) to include representation in at least loose relationship with that region’s respective market capitalization. (Market cap is simply the total of all the outstanding company shares in any country multiplied by each company’s share price on any given day.)
We utilize international investments via Institutional No-Load Dimensional Fund Advisors’ mutual funds, in a percentage that better reflects the GDP of individual countries relative to the world’s total. This World Market Capitalization chart depicts the US as representing only 52% of the world’s market capitalization. Of course, this means that 48% comes from outside of the USA, so statistically should we be invested 50% in the USA and 50% abroad? Perhaps, yet we are happy now to split our clients’ overall stock allocation, 60% in the USA and 40% abroad. Further, we split those percentages between large and small company stocks, depending upon each client’s risk tolerance and investment goals. If we are targeting higher, long-term returns, we’ll overweight small stocks, for example.
We believe that based upon the last 80 years of history, there isn’t a significant enough reason (in financese, “correlation coefficient”) to warrant mid-cap investing, so we allocate only between USA and Foreign Large and Small—both in the larger, developed countries as well as emerging markets, rather than invest in what are called Mid-cap sized companies.
These are some of the foundation pieces to constructing an effectively diversified investment portfolio. Stay tuned for more distinctions that we’ve gleaned studying the history of stock market returns. Again, our investment approach is academically grounded, not subject to the winds of current marketing change, as the TV pundits would have you believe.