Author Topic: Portfolio diversification  (Read 1149 times)

helloyou

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Portfolio diversification
« on: July 03, 2020, 05:13:23 AM »
Hello 

How is your portfolio composition in order to minimize risk? I used to be very overweight in P2P and have been on all the big platforms (Lendy, Fundingsecure, Moneything, Growthstreet, Mintos) with load of defaults.

As more and more defaults happened, my portfolio shrunk gradually (very painful to write off massive losses) but it made the other asset classes bigger and bigger.

At the moment I'm a bit overweight on stock so I'd like to move more into commodity and increase my cash position. I won't touch bonds as they pay nothing and are all-time high and would rather stay in cash than buying bonds.  I'm also stopping any position on P2P due to having burnt too hard and just have a smaller % waiting for recovery to happen (hopefully not needing to write this off as well) 

How's your portfolio? And how's surviving the pandemic?

MustacheAndaHalf

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Re: Portfolio diversification
« Reply #1 on: July 03, 2020, 07:04:33 AM »
How is your portfolio composition in order to minimize risk? I used to be very overweight in P2P and have been on all the big platforms (Lendy, Fundingsecure, Moneything, Growthstreet, Mintos) with load of defaults.
...
How's your portfolio? And how's surviving the pandemic?
I recall Lending Club claiming lower default rates than I experienced, which matches your experience.  But I left them years ago, after hedge funds bought up all their loans.  Wasn't much left matching my strict criteria.

I've also rejected bonds - replaced them with cash in my portfolio.  Cash provides a similar return without the volatility of a bond fund.  (When stocks fall, treasury bonds are more likely to go up than cash or gold - so there's a diversification benefit from the slight negative correlation).

Speaking of gold... why do you reject bonds for their income, but want to add commodities that also don't provide income?  Why switch from little income to no income?  Commodities are also more volatile than bonds.
« Last Edit: July 03, 2020, 12:25:27 PM by MustacheAndaHalf »

mrmoonymartian

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Re: Portfolio diversification
« Reply #2 on: July 03, 2020, 07:14:36 AM »
What was your position in Jan 2020?

Buffaloski Boris

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Re: Portfolio diversification
« Reply #3 on: July 03, 2020, 07:53:56 AM »
When we talk about stocks, the can mean many things.  That can mean owning a couple of penny stocks, which is most likely a horrible investment.  It could mean a mutual fund with all large cap US stocks, which in my opinion is sort of meh.  Or it can mean a bunch of different indexes and stocks across international and domestic.  Which is a pretty good place to be in my view.

P2P was a bug waiting for a windshield.  As is crypto today in my view.  But some folks have made money on it and good for them.
   

maizefolk

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Re: Portfolio diversification
« Reply #4 on: July 03, 2020, 08:37:36 AM »
If you specify width size when posting an image, it makes the graphic a lot more readable. Otherwise SMF just displays the image at its native resolution even if that pushes it way off the edge of the screen.
Code: [Select]
[img width=600]https://uc20a6c406cd88985c9813f99eaf.previews.dropboxusercontent.com/p/thumb/AA2xfiVuw0wguElo375eBq-BZhhaMrqMYi41NIJj0HLOGf4KgmS2J_E6jaOZygRQGo_pfJcMHYdh83CW3q3F0tm-1zTULHDUXv_jy8cdzWDzOsWWLUw61aEZ8-yOJ0XCskQ_RWgyih-1I7pdJiksA5eJgbIs2LSby6FOQ-08JbSz6ope5CEvrSvCP7_7UrpDkD1u9gt6eCZQlUFo1fZ35FZxZX062xvyRNC13Fh9BhBP1d2C0dvV87qkRc3TJMBj_ZRyoaHEIXB3hkVlw1NtqfXdX9qvXHsiDB_9_B7ITklKf6hF_L81OAn9H4Lq4DY0nIXOKljSsRdWVMIv3bZKfA1Aq8-y5d6dZ1OMupItdzKV0xQdOXMv3XFtYFxruiANJAHhN7_-VBdXrENuZN3RIm5z/p.jpeg?fv_content=true&size_mode=5[/img]



In sort of rough orders of magnitude, how much money are you working with here? You are seeing huge swings in asset allocation that I wouldn't expect unless you are just starting out and each year are investing a large fraction of your previous net worth into different asset classes.

Sorry to hear about your P2P losses. Agree with those suggesting against commodities (gold, BTC, oil, etc) as places to invest/store your wealth. If you're nervous about inflation, stocks are pretty robust against inflation over the long haul although they can certainly get clobbered in the short term. If you need short term safety your cash position is probably the best place to get it from.
« Last Edit: July 03, 2020, 09:33:16 AM by maizefolk »

helloyou

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Re: Portfolio diversification
« Reply #5 on: July 03, 2020, 09:16:59 AM »
@MustacheAndaHalf
Commodity is insurance against depreciation of currency. It's a different asset class and as central banks keep printing more money at some stage inflation is going to catch up.

So I'm not expecting Gold or crypto to gain in real value, but to be protected against a downturn.

That is exactly the reason why Gold is at the moment all-time high. People are buying gold to be protected against inflation. It's an edge.

Bonds, on the other hand, are just cash. A gov bond is just a guarantee by the government to pay you back more cash at some stage in the future. And as Ray Dalio says... "Cash is Trash". And he also recommend to have 10% gold and to diversify if because we don't know what future may be. Not to make money. but as insurance.


@mrmoonymartian do you mean the breakdown? I didn't track at that time because my portfolio was very down lol. But then I decided to keep going because it makes sense.

@maizefolk We're talking about a portfolio around $700k. So not exactly small but not that big. And indeed, there was huge swing when I realised P2P was too dangerous. Then huge swing again when I realised that the virus was going to be global. My portfolio changed a lot! I also moved brokers so it was taking weeks to move cash from different brokers.


« Last Edit: July 03, 2020, 09:18:55 AM by cwah »

waltworks

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Re: Portfolio diversification
« Reply #6 on: July 03, 2020, 03:41:31 PM »
This active-passive investing system is doing you no favors.

Pick an asset allocation and stick to it. Don't listen to Ray Dalio (or any other random guru types).

-W

helloyou

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Re: Portfolio diversification
« Reply #7 on: July 03, 2020, 04:28:19 PM »
Whats wrong with my strategy? And Ray dalio has one of the most successful hedge fund worldwide. Whats wrong with it?

KBecks

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Re: Portfolio diversification
« Reply #8 on: July 03, 2020, 04:49:21 PM »
I'd suggest learning about saas stocks.  Read here, there is a very talented group of investors.  This forum is not all that newbie friendly, but lurk, read the knowledgebase and take your time learning. 

https://boards.fool.com/sauls-investing-discussions-120980.aspx?mid=34550876

What is your goal?

helloyou

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Re: Portfolio diversification
« Reply #9 on: July 03, 2020, 07:46:00 PM »
I'd suggest learning about saas stocks.  Read here, there is a very talented group of investors.  This forum is not all that newbie friendly, but lurk, read the knowledgebase and take your time learning. 

https://boards.fool.com/sauls-investing-discussions-120980.aspx?mid=34550876

What is your goal?

Thanks I had a quick check at the forum and they seem to have experience picking stock. It might give me some ideas of stock to pick.

My goal are simple.
- Preserve capital / purchasing power. (Ie. Inflation OR deflation)
- Grow my portfolio, ideally from winner stock but I can do with index as well if I can't find anything I like

waltworks

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Re: Portfolio diversification
« Reply #10 on: July 03, 2020, 09:36:26 PM »
Whats wrong with my strategy? And Ray dalio has one of the most successful hedge fund worldwide. Whats wrong with it?

What's wrong is that you don't actually have one, you're just making things up as you go/buying shiny things.

Dalio's track record is actually pretty bad, but he got really lucky once so now he's famous. It happens every time there's a big downturn or two.

-W

helloyou

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Re: Portfolio diversification
« Reply #11 on: July 03, 2020, 10:52:30 PM »
Whats wrong with my strategy? And Ray dalio has one of the most successful hedge fund worldwide. Whats wrong with it?

What's wrong is that you don't actually have one, you're just making things up as you go/buying shiny things.

Dalio's track record is actually pretty bad, but he got really lucky once so now he's famous. It happens every time there's a big downturn or two.

-W

But isn't it the same for warren buffett, which has a very strong track record? He doesn't have strategy, he just buys good business.

And for mr mustach, he only buy diversified index funds. So not much of a strategy either?

I actually want to have some protection on my portfolio with different asset class such as gold. Then mainly buy ETF and add individual stocks for the ones I like. I bought amazon, facebook, alibaba, slack as tech stock I liked and they all turned positive.

Some other turned negative as well of course, such as national express but I'm learning.

What else does it need? I can't see what strategy would do better?

DalioGold10

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Re: Portfolio diversification
« Reply #12 on: July 04, 2020, 03:07:04 AM »
Whats wrong with my strategy? And Ray dalio has one of the most successful hedge fund worldwide. Whats wrong with it?

What's wrong is that you don't actually have one, you're just making things up as you go/buying shiny things.

Dalio's track record is actually pretty bad, but he got really lucky once so now he's famous. It happens every time there's a big downturn or two.

-W

But isn't it the same for warren buffett, which has a very strong track record? He doesn't have strategy, he just buys good business.

And for mr mustach, he only buy diversified index funds. So not much of a strategy either?

I actually want to have some protection on my portfolio with different asset class such as gold. Then mainly buy ETF and add individual stocks for the ones I like. I bought amazon, facebook, alibaba, slack as tech stock I liked and they all turned positive.

Some other turned negative as well of course, such as national express but I'm learning.

What else does it need? I can't see what strategy would do better?

Hi cwah,

I will reveal my asset classes I am invested in (not the exact AA%) and rationale for holding these assets, maybe it will help you:
a. Stocks indices - I hold All World indices from Vanguard and Black Rock, mix of large and small cap indices. I am not feeling comfortable to be exposed to only one market, which is US, hence global diversification is important to me.
b. Individual stocks- as with many investors, I enjoy making bets on individual stocks. However, you need the time, research, willingness, patience and risk management to deal with this. At the moment I am overweight on commodities or cyclical stocks- e.g. Gazprom.
c. Gold- significant part, in gold ETFs or gold miners ETFs. Rationale is to gain protection against fiat currency devaluation, hedge against tail risk and gain diversification. I am happy with how gold developed so far and I expect to continue its trend.
d. Managed futures ETFs- small part of my portfolio. Note that these strategies performed badly in a choppy market. Their benefit is that are uncorrelated with stocks and bonds.
e. Cash/Long term treasuries- over 25 yrs. At the moment I have liquidated my long term treasuries due to low yield. I will get back when 20-30 yrs bonds YTM return above 2.5%. For the moment this holding is in cash.
f. I am still long on P2P but European platforms/market (e.g. Mintos as you mentioned)- basically there you make investments/finance the loan originators rather than direct retails borrowers. Hence, with appropriate due diligence you can pick reasonably solid companies to whom you can lend at 9%-10% per year. I am aware this is investing in junk bonds, but it is what it is. so far, I have manged to avoid capital losses despite numerous defaults during the last 6 months, but it requires monthly monitoring of loan originators. Definitely not for the buy and hold investor.

Hope the input helps.
My view is that over the next decade, at least, we need diversification across asset classes. Diversification within the asset class is not that relevant as in times of distress correlation rises pretty quickly.
« Last Edit: July 04, 2020, 03:34:16 AM by DalioGold10 »

Buffaloski Boris

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Re: Portfolio diversification
« Reply #13 on: July 04, 2020, 08:04:01 AM »

Hi cwah,

I will reveal my asset classes I am invested in (not the exact AA%) and rationale for holding these assets, maybe it will help you:
a. Stocks indices - I hold All World indices from Vanguard and Black Rock, mix of large and small cap indices. I am not feeling comfortable to be exposed to only one market, which is US, hence global diversification is important to me.
b. Individual stocks- as with many investors, I enjoy making bets on individual stocks. However, you need the time, research, willingness, patience and risk management to deal with this. At the moment I am overweight on commodities or cyclical stocks- e.g. Gazprom.
c. Gold- significant part, in gold ETFs or gold miners ETFs. Rationale is to gain protection against fiat currency devaluation, hedge against tail risk and gain diversification. I am happy with how gold developed so far and I expect to continue its trend.
d. Managed futures ETFs- small part of my portfolio. Note that these strategies performed badly in a choppy market. Their benefit is that are uncorrelated with stocks and bonds.
e. Cash/Long term treasuries- over 25 yrs. At the moment I have liquidated my long term treasuries due to low yield. I will get back when 20-30 yrs bonds YTM return above 2.5%. For the moment this holding is in cash.
f. I am still long on P2P but European platforms/market (e.g. Mintos as you mentioned)- basically there you make investments/finance the loan originators rather than direct retails borrowers. Hence, with appropriate due diligence you can pick reasonably solid companies to whom you can lend at 9%-10% per year. I am aware this is investing in junk bonds, but it is what it is. so far, I have manged to avoid capital losses despite numerous defaults during the last 6 months, but it requires monthly monitoring of loan originators. Definitely not for the buy and hold investor.

Hope the input helps.
My view is that over the next decade, at least, we need diversification across asset classes. Diversification within the asset class is not that relevant as in times of distress correlation rises pretty quickly.

Hi @DalioGold10 : good post and I have to say I wish I ran into you more often on the forums: you have an interesting perspective. 

I wanted to hone in on the last part of your comment regarding diversification across asset classes.  I think you're right, but would add that diversification across countries is also necessary because of currency and political risk. 

PDXTabs

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Re: Portfolio diversification
« Reply #14 on: July 04, 2020, 08:36:03 AM »
How is your portfolio composition in order to minimize risk?

I'm 100% VT all the time.

helloyou

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Re: Portfolio diversification
« Reply #15 on: July 04, 2020, 05:44:48 PM »
@DalioGold10 yes it's great to read. I think it's very close to my current portfolio mixt except for the ETF future. What's your allocation breakdown by asset class? And do future worth it? I never touched future or options.


@PDXTabs I initially wanted to do that as well, but when looking at their top stock it looks very heavily weighted toward US stock so I decided to create my own.

You can see the top 25 holding here, and they are all US stock, with only 2 chinese stock (Tencent and Alibaba). So I felt it wasn't really a diversified or "all world" allocation but more like an US ETF with some worldwide stock.

waltworks

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Re: Portfolio diversification
« Reply #16 on: July 04, 2020, 06:00:23 PM »
Buying just a pile of one index fund (or two, if you want more int'l) is in fact a "strategy". And it's one (one of the only ones) that's been proven to work over the long term. So MMM himself does have a "strategy", inasmuch as he (and many others) are using data to select investments that have a history of performing well.

Winning at investing is boring. The more complex and interesting you make it, the less likely you are to succeed.

As an aside, I wish people would STFU about Warren Buffet. He is not you. His investing goals, life situation, and resources are not even vaguely similar to yours or mine. He offers (for decades now!) what appears to be honest and well-meaning advice to people like you and me and it's... wait for it... invest in some boring index funds and don't touch 'em.

-W

maizefolk

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Re: Portfolio diversification
« Reply #17 on: July 04, 2020, 06:17:26 PM »
At the end of 2019, the value of all publically traded stocks around the world was about $85 trillion. The value of all publically traded stocks in the USA was about $38 trillion (about 45% of the world total).

In VT's 2019 prospectus they were about 55% invested in US stocks and 45% invested in the rest of the world. From my perspective, that's decently close to a true whole world index* and you cannot beat the expense ratio or the set and forget.

A lot of people don't realize what a large chunk of all the stocks all around the world are based in the USA. There are

*Keeping in mind that the total for the whole world includes companies like Saudi Aramco (the only one of the five publically traded companies with a market cap over $1T not based in the USA) where only 1.7% of the ownership of the company is publically traded, so it'd be very hard for Vanguard to buy a proportionate share of Aramco relative to its contribution to the overall work market cap.

helloyou

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Re: Portfolio diversification
« Reply #18 on: July 04, 2020, 06:24:52 PM »
Buying just a pile of one index fund (or two, if you want more int'l) is in fact a "strategy". And it's one (one of the only ones) that's been proven to work over the long term. So MMM himself does have a "strategy", inasmuch as he (and many others) are using data to select investments that have a history of performing well.

Winning at investing is boring. The more complex and interesting you make it, the less likely you are to succeed.

As an aside, I wish people would STFU about Warren Buffet. He is not you. His investing goals, life situation, and resources are not even vaguely similar to yours or mine. He offers (for decades now!) what appears to be honest and well-meaning advice to people like you and me and it's... wait for it... invest in some boring index funds and don't touch 'em.

-W

Ok I see. You can see on my allocation breakdown about 50% is on index fund. So just buy and wait.

And the rest is mostly individual stock I pick but I'm hoping to do the equivalent to a diversified fund by picking a decent chunck I like.

Tbh, initially I wanted to buy good diversified AND cheap index fund but I couldn't find any.

The vanguard world fund is heavily weighted toward US stock. And the technology funds either have again too much weight in US (eg. QQQ) or with too high fees.

I do feel I'll get better money for value building up an equivalent of an technology index. I added the likes of Alibaba and also some potential winner such as Slack. But kept the big ones such as Facebook, amazon and google.
And a big chunck of berkshire hathaway.

I do feel it'll cost less long term than an inded fund because I pay less fees!!!

As example, an index fund like QQQ (oriented technology) has an expense ratio of 0.2%. On a $500k investment you'd pay yearly $1000 just to hold it.

I can as well build up my own on a set of tech, large/mid/small cap and pay less

waltworks

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Re: Portfolio diversification
« Reply #19 on: July 04, 2020, 06:27:53 PM »
Ok, bro. Come back in 30 years and let us know how it went. Your money or your life... if you want to spend your time on picking stocks, with the knowledge that you're probably earning negative money for the time you're putting in, have at it.

I'll go mountain biking with my kids.

-W

BicycleB

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Re: Portfolio diversification
« Reply #20 on: July 04, 2020, 06:30:53 PM »

And for mr mustach, he only buy diversified index funds. So not much of a strategy either?


It's a pretty powerful strategy. One of several that exist.

Anyone who tells you one solution is definitely better than all the others is going to wrong sometimes. A key factor is that any strategy is  likely to be more effective for some goals than others. Your own goals have internal conflicts, as many of us do. You stated earlier that you want


My goal are simple.
- Preserve capital / purchasing power. (Ie. Inflation OR deflation)
- Grow my portfolio, ideally from winner stock but I can do with index as well if I can't find anything I like


"Preserve capital" is complex because different tools work in short timeframes versus long. In a short period such as 3 months, cash works great, much better than stock or gold. In long periods like 3 to 6 decades, an all stock portfolio could be very strong at preserving purchasing power. In the US, it's worked better than nearly everything else for timeframes that long. "Diversified index funds" can reasonbly be expected to be much better than individual stocks for the purpose of preserving capital, so MMM's strategy proves quite good for your goal if you plan to live that long.

"Grow my portfolio" is complex too, because many options exist that attempt that goal, and many of them have plausible rationales. Even deciding which options worked best in the past is tricky because the answers depend on which timeframe you choose. Projecting future returns is even trickier.

Trying both goals at once? Even more complex, of course! There's usually a trade-off between long term growth vs short term capital preservation. Longer term, disputes arise among numerous well informed people about subtler tradeoffs, but they exist too, meaning no one has an absolutely certain answer, they just think they do. MMM's strategy is one of several very good ones long term, if you can stand the ups and downs - and if you can keep calm enough to leave it alone for many decades.

A lot of gurus confidently offer solutions. The best answer depends on your individual goals and situation. MMM's personal solution is good for people who have spending flexibility, will be living for many years off the income, and are comfortable seeing their portfolio values fall for weeks or years while spending their life doing other things.

To understand other options, keep reading. One place you could read is portfoliocharts.com (looks complicated, does great job explaining different investments, has calculators showing how different investment combinations have done in the past; shows examples of investment portfolios that generally try to solve the preserve-but-grow puzzle). There are several charts there that measure the tradeoffs based on past results, while offering reasonable consideration of what the future might bring.








maizefolk

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Re: Portfolio diversification
« Reply #21 on: July 04, 2020, 06:54:55 PM »
Tbh, initially I wanted to buy good diversified AND cheap index fund but I couldn't find any.

The vanguard world fund is heavily weighted toward US stock. And the technology funds either have again too much weight in US (eg. QQQ) or with too high fees.

I do feel I'll get better money for value building up an equivalent of an technology index. I added the likes of Alibaba and also some potential winner such as Slack. But kept the big ones such as Facebook, amazon and google.
And a big chunck of berkshire hathaway.

I do feel it'll cost less long term than an inded fund because I pay less fees!!!

As example, an index fund like QQQ (oriented technology) has an expense ratio of 0.2%. On a $500k investment you'd pay yearly $1000 just to hold it.

I can as well build up my own on a set of tech, large/mid/small cap and pay less

As described above, no VT isn't heavily weighted towards the US. The most argument one could make is that VT is skewed 10 percentage points toward the US and when you look at which companies could actually be purchased by a retail investor like you or me the skew is significantly less than that.

However, if you think 10% more than the actual portion of world stock markets based on the USA isn't reasonable, there is also a very simple (and cheap) solution. Buy VTI and VXUS in whichever ratio you feel most comfortable with for your own ratio of US to non-US stocks.

VXUS is just as cheap as VT (0.08% expense ratio) but holds the stock of 7,200 no-US companies with zero US stock holdings.
VTI is even cheaper than VT (0.03% expense ratio) and gives you exposure to 3,500 stocks.

On a million-dollar portfolio split 50/50 between the two, you'd pay $550/year in expense ratios. $550/year to avoid having to manually place 9,700 separate stock transactions in each time I have some new money to invest in the index I built myself seems like a pretty good deal to me. You may value your time differently, or see less value in owning a diverse range of stocks instead of a smaller subset of "brand name" companies.

helloyou

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Re: Portfolio diversification
« Reply #22 on: July 04, 2020, 08:14:08 PM »
By the way, I just updated my username but it's the same person answer.

@BicycleB yeah the MMM strategy is something I'm using on over 50% of my portfolio. But I still pick some stock. I'll have a look at portfoliocharts.com and see if I can learn something

@maizefolk I live in the UK so I can't buy these funds. I think the closest equivalent to the VT is the VWRL which is 60% US funds? Isn't it overweight US?
https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/portfolio-data?intcmpgn=equityglobal_ftseallworlducitsetf_fund_link

waltworks

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Re: Portfolio diversification
« Reply #23 on: July 04, 2020, 10:42:32 PM »
US/Int'l is about 50/50 by market cap. Given that most of the big US companies (Alphabet, Amazon, etc) are international businesses anyway, you could make all kinds of complex arguments for more/less weighting one way or the other, but 60% US is probably close enough that it doesn't matter.

-W

helloyou

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Re: Portfolio diversification
« Reply #24 on: July 04, 2020, 11:03:44 PM »
US/Int'l is about 50/50 by market cap. Given that most of the big US companies (Alphabet, Amazon, etc) are international businesses anyway, you could make all kinds of complex arguments for more/less weighting one way or the other, but 60% US is probably close enough that it doesn't matter.

-W

Thanks that's good to know. This MMM practice I do it for my family account. I'm dollar-cost averaging (adding 5-10% of cash / month) on the S&P500, the VWRL and some BRK.B. I know it's safe and best.

I however don't do it for me as I like stock picking. So far I've done 7% gain this year. Not great as it's lower than the S&P but ok so far...

PDXTabs

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Re: Portfolio diversification
« Reply #25 on: July 05, 2020, 12:26:45 AM »
So I felt it wasn't really a diversified or "all world" allocation but more like an US ETF with some worldwide stock.

It's global market-cap weighted. To be more specific it tracks the FTSE Global All Cap Index.
« Last Edit: July 05, 2020, 12:29:42 AM by PDXTabs »