IFA.tv - Bhutan and International Investing

http://ifarcs.com - http://ifa.com - Global diversification is a good idea because the international market is increasingly important in the world economy. The United States used to be a much larger percentage of the world market. It declined from 68% of the global equity value to 46% in 2004. As of 2010, the US has declined to about 43% of the world total market value. There are additional risk factors in international markets that can both smooth out your volatility and increase your expected returns. To be effective, a portfolio cannot afford to exclude international investments.

Regional bias, also known as home bias, is the tendency for investors to hold a higher percentage of their portfolio in their home country than would be suggested by the weighting of their country relative to the rest of the world.

For example, as of 4/30/2010, the United States made up 43% of the total global market capitalization or $12.6 Trillion of the $29.3 Trillion global market. An American investor who has a higher percentage than this in U.S. equities is exhibiting regional bias. Even when it comes to international investing, regional bias is also present, as shown in "Home Bias in Foreign Investment Decisions" (Ke, Ng, and Wang, 2006). Specifically, American investors are more likely to overweigh foreign companies that have a strong American presence (e.g., Sony, Toyota, BP).

The extent of regional bias around the world is pervasive and surprisingly high, as illustrated by data from a 1997 IMF survey of cross-border equity holdings.

Although in theory it would be the most efficient approach in accordance with the Capital Asset Pricing Model, it is not IFA's recommendation that investors hold the global market percentage of their home countries, as this would be simply unrealistic. Most investors follow their home markets much more closely than they do foreign markets. In the U.S., for example, we are constantly bombarded by news and commentary from outlets such as CNBC.

During time periods when the U.S. market outperforms the foreign markets (as in the late 1990's) the pain of not having all of our investments in U.S. stocks is felt acutely. In other words, we have a tendency to assign a mental tracking error to our portfolio with respect to the U.S. market.

One objective to portfolio design is to minimize the urge to trade. Having a large percentage of our portfolio in U.S. equities mitigates that urge to trade and trades placed under duress are often deleterious to investor wealth.

The true US equity portion of IFA's standard portfolios is hard to determine, but the allocations indicate that it wouold be 65% US. However, we estimate that about 20% of sales from the US companies come from international markets, which would bring the allocation closer to 45% US. On the other hand, several international companies have a portion of their sales in the US, which may move the US allocation back to 50% or more. While higher than the CAPM suggested percentage of 43%, IFA considers this to be a reasonable allocation that aligns with IFA's goal of matching investors with portfolios that they will be more likely to hold when they are out of sync with US market returns.

The IFA iPortfolios also address the issue of investors being overly attracted to foreign companies with a strong American presence. These companies tend to be categorized as large growth, and IFA's tilt towards small and value companies will result in de-emphasizing these companies.

Category:

Education

Tags:

• indexfundsadvisors
• ifa.com
• investing
• news
• stock
• market
• picks
• efficient
• markets
• how
• to
• invest
• index
• funds
• modern
• portfolio
• theory
• financial
• stocks
• indexes
• madoff
• smart
• fama
• french
• economic
• crisis
• recession
• global
• economy
• diversified
• diversfication
• risk
• international
• etf
• etfs

[gesztidaniel]

The goal of a bhutanese company (if supervised by the king ) is not making profit, but to do their job to best serve the people. If you look for profit (which means other people's sweat and money) Better look somewhere else, where people and economy and life is more under the control of international banks.