May 6, 2019: Global Allocation Revisited

May 7, 2019 | All, Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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For regular SAA and TAA portfolios, the next re-balance will be on Tuesday, May 28, 2019. You can also find the re-balance calendar for 2019 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Global Allocation Revisited

Asset allocation is the key framework to construct a balanced portfolio that meets investment goals. Global allocation advocates that international stocks and bonds are important assets that can diversify risk while keeping or improving returns. 

Unfortunately, in the past 10 years since the last recession, international stocks (including emerging market stocks) have been more harmful than helpful to a portfolio. In fact since 2010, there was only one year (2017) when VEA (international stocks) (the second row in the following table) returned more than SPY. Similar underperformance of VWO (emerging market stocks) to SPY can be observed: 

This wasn’t the case before 2008: international and economy stocks had performed better than the US stocks by some meaningful margins. This has been a key reason to support global allocation. 

While we should remind ourself of the benefit of diversification in a long term if the idea of abandoning or reducing international exposure in a portfolio ever occurs, it’s still important to revisit this concept and look at it closely. 

S&P 500 companies international exposure

Perhaps the recent anti-globalization politics signals a peak of this trend: these days, many large US corporations derive much revenues internationally. For example, here is the geographical sales allocation for Apple Inc. since 2012:

Courtesy of statista

Apple revenue in America has declined from almost 48% in 2012 to 44% in 2019. In fact, Apple is more an international company than an American company as more than half of its revenues are from oversea. 

Granted, Apple brand is an international phenomenon. But most US large companies have also expanded internationally. Based on Factset, the latest S&P 500 companies’ geographical revenue share is as follows:

So roughly, about 40% of sales of these companies are coming from oversea. That’s very globalized. 

The significance of the ‘globalization’ of US large companies is that these companies contribute (or command) a large chunk of international economic activities. This should be taken into account accordingly in one’s investment allocation.

US centric or ?? 

The often criticized US centric allocation such as Vanguard’s two-fund portfolio (60% US stocks and 40% bonds, represented by VBINX) probably has 18% to 24% international exposure (and 42% to 36% US exposure) when the US companies’ international exposure is considered. This suddenly looks very well globally diversified, not US centric at all!

When considering constructing a portfolio, for an US based investor, an investor should also take the currency risk into account. That means a proper discount for international exposure based on this factor. Put it another way, a 36% US, 24% international allocation is perhaps more or less like 33% US, 27% international allocation after adjusting currency risk. 

Other risks such as geopolitical risk (US is by far the most coherent and stable geopolitical bloc, compared with euro zone and/or Asia pacific) should further weigh down a bit in the international exposure. 

The following static allocation portfolio MPIQ AllStk: 

USStk VFINX 50%
USREIT VGSIX 29%
IntlStk VGTSX 14%
EmStk VEIEX 7%

probably reflects an allocation of 49% US stocks (and REITs), 46% international and emerging market stocks. Such an allocation is probably very ‘globally’ diversified after taking the risks mentioned above into account. 

The following shows the comparison between this portfolio and our Six Core Asset SAA All Stocks:

Portfolio Performance Comparison (as of 5/3/2019)
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15 Yr AR Since 2001
Six Core Asset ETFs Strategic Asset Allocation – Optimal Most Aggressive 6.7% 11.1% 6.6% 11.3% 9.5% 8%
MPIQ AllStk 12.2% 11.4% 9.1% 14.1% 6.5% 6.3%

See more details here. 

In conclusion, the significant exposure of US assets (especially US large company stocks) to foreign countries should be taken into account when considering global allocation. In fact, the traditional lazy portfolios such as equal weight among US and international actually overweight very much internationally. In MyPlanIQ, we will further adjust our strategic asset allocation weights accordingly some point in the future when US valuation comes down a bit.

Market overview

As more companies reported earnings (78% of S&P 500), S&P 500 companies continued to deliver better than watered down expected earnings for last quarter: up to last Friday, the blended earnings decline is -0.8%, compared with -2.3% a week ago and -4% expected on March 31, 2019. As a result, stocks continued to rise. However, as of this writing, the US China trade friction might flare up again. This and many similar factors can destabilize a market that’s been very overvalued and over extended. Again, stay the course and be risk conscious. 

For more detailed asset trend scores, please refer to 360° Market Overview. 

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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