A point of reference for building your portfolio

In my work with investors, there are certain themes that are so common they are predictable.  For most who live in the United States and have not traveled extensively, we tend to see the US as the center of the universe.  That influences much of our thinking and even more of our investment decisions.  It is common to see investors who do not have any of their stock nor bond investments in companies or governments outside the US.

As the following chart illustrates, a diversified portfolio historically has outperformed the worst performing investment categories while underperforming the best.  Most seasoned investors would agree that predicting how the market will perform, consistently, is difficult – if not downright impossible.

Therefore, to smooth out the inevitable ups-and-downs of the market it is wise to consider adding many different types of investments to your portfolio.  For the stock portion, this would include US stocks – large, medium, and small in addition to international stocks of developed countries and emerging markets too.

Knowing how much to put in each of the different categories can be a challenge for novice and experienced investors alike.  That is why more astute investment advisors will start with what is known as the “market portfolio”.  The market portfolio is simply a portfolio made up of every stock (and bond – but we will save that for another time) in the world that is publicly-traded – meaning available for purchase by investors on a stock exchange.  This market portfolio will then be the basis for either underweighting or overweighting (having more or less than the market portfolio) the components of your portfolio.  The decision to have more in a particular region or sector is generally made by looking at the current valuations, expected returns, and public policy expectations.  Some investors will take a completely passive approach of “buying the market” which means buying a fund that mimics the global market portfolio.  In other words, their portfolio will simply own all stocks in their relative proportion to other stocks in the world.

If you would like to compare your current investments to the global stock market, here is a breakdown at the end of 2020 (data provided by Dimensional Fund Advisors).

  • There are 14,980 publicly traded stocks with a total value of approximately $68.4 trillion
  • US stocks are 56% of the global stock market with a value of roughly $37.9 trillion
    • That equates to 3,578 companies which means just one out of four publicly-traded stocks in the world are in the United States.
  • International stocks in developed countries make up 30% of the global stock market value worth an approximate combined $20.5 trillion
    • This represents 5,709 companies which is almost four-out-of-ten publicly traded companies on planet Earth
  • International Emerging Markets stocks are 13% of total world stock value at $8.8 trillion
    • While just 13% of the total value, these 5,693 companies make up nearly 40% of the available publicly traded stocks in the world
  • Combined global Real Estate Investment Trust (REIT) stocks make up just 1% of the total global stock market at $1.28 trillion
    • 60% of publicly-traded REITs are in the US with a combined value of $767 billion
    • 40% of publicly-traded REITs are outside the US with an estimated value of $510 billion

In other words, it’s a big world and more than three out of four publicly-traded companies available for purchase are outside the United States.  Some of the better-known international companies include Nestle, Unilever, Sony, and Toyota to name a few.  And there are thousands of others that are lesser known but are providing goods and services to some of the fastest growing parts of the globe.

Knowing how to allocate your investments to achieve the growth you need involves several important decisions.  The first decision is the amount of stock versus bonds and cash reserves you should have.  Ideally this decision is informed by your financial plan, income needs and expense expectations.  Next is deciding how to split your funds among US, International Developed, Emerging Markets and Real Estate stocks.  These allocation decisions will significantly impact investment returns – and potentially quality of life and your legacy.  Once you have made these decisions, you will want to identify the best funds to implement your decisions and then have a process for periodically monitoring the choices you have made to ensure they continue to serve you well.  Let me know if I can help!

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