Vanguard has a new research paper about global asset allocation. One of their findings was that market-cap-weighted indexed portfolios provided higher returns and lower volatility than the average actively managed fund. Thus, they suggest that a good starting point for all investors is a portfolio that is weighted according to the world’s relative market values.
However, in every country that they examined, investors on average had a home-country bias, tending to own more equity from the country they live in than the market-cap weighting would suggest. The chart below is rather striking. Found via Reformed Broker and Abnormal Returns.
Americans on average hold roughly 80% in US stocks, while the US market makes up 50% of the global market. However, the average Canadian resident holds roughly 60% in Canadian stocks while only making up 3% of the global market. Australian residents hold roughly 66% in Australian stocks while only making up 2% of the global market. I find this very interesting.
This is where I should state proudly that my stock holdings are split 50% US and 50% International, with equal amounts of the Vanguard Total US ETF (VTI) and Vanguard Total International ETF (VXUS) or their mutual fund equivalents. However, I admit that I do worry about the political and economic environments of other countries, especially given current events. On the other hand, I worry that I am being influenced by recent past performance. I usually end up telling myself that I am buying the haystack and letting the markets work themselves out over the long run.
The Vanguard paper also offers a guide to weighing various factors in deciding the amount of your home bias. Here’s a summary chart:
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