Jan 30
International Portfolio
With over 50% of the world markets located outside of the United States, why are we so biased that we hold over 70% of our assets in U.S. markets? When we do invest outside the U.S., we frequently chase emerging markets rather than invest in well established and developed countries. In the following analysis, I did not break the international markets into developed and emerging. Both developed and emerging markets are highly correlated with the S&P 500 as you will see in the screen shots below.
In the first screen shot we have eighteen (18) international ETFs covering all major countries in the world. In the table below, we see the investments and the percentage of funds invested in each. To sum to 100%, I “invested” 10% in VTSMX which does not show in the following table. Examine the data within the blue background. Note the projected annual return is 11.6% and the projected standard deviation (risk) is 22% when rounded. While the return is quite good in the current market, the risk is much too high for most investors. As a general guideline, we prefer to see the SD value below 15%.
Scroll down the page till you see the Diversification Metric (DM) percentage of 15%. The DM percentage is telling us we do not have a well diversified portfolio. Even though we are spreading our investments all over the world, this international portfolio falls short of our diversification goal. DM should top 40%.
Now move down to the second screen shot, or the correlation graph.
In the correlation table below, I did not include all the individual correlations as the table would have spilled off the right-hand edge of your screen. I only included how the different international ETFs are correlated to the overall portfolio. Note that only IDX is below 80% and that ETF has a record less than two years so the data is suspect. This combination of ETFs is not one to build a low correlation portfolio, even though one would think it is well diversified.
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