How diversified is diversified?

[JapanRed]

I'm new to investing and this is my first venture into stocks and shares. I've put an initial lump sum into it and also then a further investment on a monthly basis. I'm looking long term (18+ years) as it's on behalf of my newborn daughter.

I want to be high risk but also diversified. My question to you is "how diversified is diversified enough"? My high risk portfolio is below;

By Asset class
91% developed markets equity
8% emergeing markets
1% other

By continent
43% North America
38% Europe
14% Asia
2% Australia
0.7% South America
0.7% Africa

By sector
21% consumer
19% finance
14% technology
11% industry
10% health
7% energy
7% materials
4% real estate

So, is this what you would call well diversified? Should I be looking to reduce exposure to USA and Europe and increase exposure to Asia, Africa and South America in order to maximise gains?

Thanks in advance,
Rob

[bitchstewie]

Have you stuck them through Morningstar's X-Ray?

[Ginge R]

Lots of developed US exposure there. As you say, it’s a high risk position. Who knows what Trump will do if/when he repatriates overseas held wealth, if/when he engages/wins a trade war with the EU, if/when the trillions of bucks which can no longer be attributed to QE, have an impact. And if you do want developed US holdings, are FAANG holdings as robust and as unassailable as they once were?

We’re probably seeing the emergence once more of the value of value stocks, so I imagine you’ll have a view on whether or not it’s a good time to be getting into the US (based on your unique circumstances) and whether or not Japan/BRIC, and even Greece are looking good.

The thing to remember is, the market is still a little worried. I think I’m right in saying that in the UK, the biggest influx of wealth into one class, recently, has been into Fixed Interest, despite it being (superficially at least) unattractive. Hundreds of millions has been wrenched from DB funds by novice self investors and you have to wonder how much thinking or experience went into the fund selection. All the talk has been of ‘toppy’ equity prices, but there’s not much nuance being interpreted.

We live in interesting times. But, seeing as you’re focusing on equity holdings, my gut instinct for my own circumstances only, and this isn’t advice - ***everyone is different!*** - says;

+ Japan, Europe
= UK, BRIC, Asia
- US.

NB: Like I said, that applies to me only, and my own circumstances, needs, wishes and feelings, and isn’t financial advice. Take personal, regulated financial advice that you trust.

[Dr Mike Oxgreen]

JapanRed said:

By continent
43% North America
38% Europe
14% Asia
2% Australia
0.7% South America
0.7% Africa

One way of looking at it is to invest in proportion to the sizes of each geographic market. Here is a web site that gives you that information:

http://money.visualcapitalist.com/all-of-the-world...

If you were to invest more into a market than its proportion of the world, you’d effectively be saying that you think that market will do better than other markets. Unless you have information to that effect then it’s not a rational decision. Ginge R has presented some interesting arguments that might sway you, but as he says they’re his opinions. It’s for you to decide if you agree.

By the rationale of investing proportionately, your 43% in US is about right. Maybe a couple of percent heavy, but pretty close. Your 38% in Europe is too heavy, perhaps because you naturally gravitate towards investing locally. Arguably Europe should be about 20%. And your 14% in Asia is too light - should be about 33%.

This is precisely how I’ve rebalanced my investments recently. I was massively over-invested in the UK. Historically, the US has delivered far better returns and more smoothly than the UK, for example. So personally I’m reasonably comfortable with putting a lot more into the US.

But as Ginge R said, we live in interesting times. Is “interesting” good?

[LeoSayer]

8% in emerging markets doesn't sound high risk to me.

It's all equities - no property and no commodities.

[Derek Chevalier]

Dr Mike Oxgreen said:

By the rationale of investing proportionately, your 43% in US is about right. Maybe a couple of percent heavy, but pretty close.

You sure it's not too low?

[Ayahuasca]

Your 'Asset Class' diversification is not really diversified by asset class as the assets are still all equities. Diversifying by asset class normally means spreading across equities, government bonds, corporate bonds, cash, gold, fine wines, air-cooled 911s, and so on. Assets whose performance is not strongly correlated with each other.

With a massive proportion in the US, the dollar:sterling FX movement will make or break you.

The aim of diversification is to reduce risk, without reducing returns by the same proportion (See Markowitz 1952 - he is the guy who developed the theory of diversification) - but, over an 18 year period, and investing in small chunks rather than a single lump sum, there is an argument that you would be better off with MORE risk as you will be a buyer of investments for the next 18 years, and only a seller thereafter, in which case, don't worry so much about trying to get perfect diversification.

https://en.wikipedia.org/wiki/Modern_portfolio_the...

[GT03ROB]

As equity portfolios go, I would not see that as a high risk mix in the traditional sense, it's actually very conservative. The weighting towards asia is very low, whilst the developed markets of US & Europe is high.

The risk/reward mix on that portfolio I would not be happy with. Too much exposure to toppy markets (US).

[Testaburger]

GT03ROB said:

As equity portfolios go, I would not see that as a high risk mix in the traditional sense, it's actually very conservative. The weighting towards asia is very low, whilst the developed markets of US & Europe is high.

The risk/reward mix on that portfolio I would not be happy with. Too much exposure to toppy markets (US).

Interesting point in your second paragraph. If you'll indulge me (a novice); am I wrong in thinking developed markets are a bit less 'toppy'? The US has ridden a wave for a few years, of course. However, I always thought of it as a reasonable bet compared with EU and BRIC markets that have been all over the shop.

I'm in the throes of putting together a portfolio or sorts, but thought that a Vanguard Lifestrategy to be fairly globally diversified - but I think it's 40% or so in the US.

I suspect I'll find a small number of funds (4-5) and share my monthly investment across them, but the LS100 seemed like a good place to start. Followed by a Japan growth, an EU developed and a small & mid cap global fund.

Interested to hear your thoughts.

[GT03ROB]

Testaburger said:

GT03ROB said:

As equity portfolios go, I would not see that as a high risk mix in the traditional sense, it's actually very conservative. The weighting towards asia is very low, whilst the developed markets of US & Europe is high.

The risk/reward mix on that portfolio I would not be happy with. Too much exposure to toppy markets (US).

Interesting point in your second paragraph. If you'll indulge me (a novice); am I wrong in thinking developed markets are a bit less 'toppy'? The US has ridden a wave for a few years, of course. However, I always thought of it as a reasonable bet compared with EU and BRIC markets that have been all over the shop.

I'm in the throes of putting together a portfolio or sorts, but thought that a Vanguard Lifestrategy to be fairly globally diversified - but I think it's 40% or so in the US.

I suspect I'll find a small number of funds (4-5) and share my monthly investment across them, but the LS100 seemed like a good place to start. Followed by a Japan growth, an EU developed and a small & mid cap global fund.

Interested to hear your thoughts.

I take a view that in the short term the risk on developed markets, US, UK, Western Europe is lower in so far as being toppy they will fall less. But in a portfolio I tend to look for long term performance. In my experience with the funds I've had, even where the falls have been greater initially in markets such as India & China, they bounce back much much stronger as there is more overall growth available to companies in these markets. Over a long period there is far more upside to "toppy" lesser developed markets than "toppy" developed markets, even if in the short term the risk is greater. I run around a third in Asian markets (predominantly India & China). It's just my theory & over the last 10yrs it's worked.

[Derek Chevalier]

Ayahuasca said:

With a massive proportion in the US, the dollar:sterling FX movement will make or break you.

Over an 18 year period?

[Derek Chevalier]

Testaburger said:

GT03ROB said:

As equity portfolios go, I would not see that as a high risk mix in the traditional sense, it's actually very conservative. The weighting towards asia is very low, whilst the developed markets of US & Europe is high.

The risk/reward mix on that portfolio I would not be happy with. Too much exposure to toppy markets (US).

Interesting point in your second paragraph. If you'll indulge me (a novice); am I wrong in thinking developed markets are a bit less 'toppy'? The US has ridden a wave for a few years, of course. However, I always thought of it as a reasonable bet compared with EU and BRIC markets that have been all over the shop.

I'm in the throes of putting together a portfolio or sorts, but thought that a Vanguard Lifestrategy to be fairly globally diversified - but I think it's 40% or so in the US.

I suspect I'll find a small number of funds (4-5) and share my monthly investment across them, but the LS100 seemed like a good place to start. Followed by a Japan growth, an EU developed and a small & mid cap global fund.

Interested to hear your thoughts.

No one knows (other than in hindsight) which geographic regions are going to outperform/underperform the others.

If you look at the returns of a typical private investor that picks individual funds and track their returns vs the actual performance of the funds, the underperformance is eye opening (selling funds that are underperforming etc - buy high, sell low).

The Vanguard LS have a UK skew - something to bear in mind.

It would be interesting to see the 18 year results of a sample of 100 people, 1 person buying a global tracker and forgetting about it, the other 99 picking funds and regions that were "likely" to outperform.

[bitchstewie]

What are the funds?

I see no mention of whether the companies are small or global i.e. are the funds things like Fundsmith or are they global small companies?

[Ayahuasca]

Derek Chevalier said:

Ayahuasca said:

With a massive proportion in the US, the dollar:sterling FX movement will make or break you.

Over an 18 year period?

Yes. It is wise to have your assets in the same currency as your liabilities.

[Derek Chevalier]

Ayahuasca said:

Derek Chevalier said:

Ayahuasca said:

With a massive proportion in the US, the dollar:sterling FX movement will make or break you.

Over an 18 year period?

Yes. It is wise to have your assets in the same currency as your liabilities.

According to whom?

[Dr Mike Oxgreen]

Derek Chevalier said:

Dr Mike Oxgreen said:

By the rationale of investing proportionately, your 43% in US is about right. Maybe a couple of percent heavy, but pretty close.

You sure it's not too low?

What makes you ask that?

According to the link I gave, the US is about 40-41% of the world.

[jeff m2]

Assuming the funds you choose are cap weighted, many are, then your "Asia14%" would be nearly all China.
Not necc a bad thing as long as you are aware. Similar situation with Latin America and Brazil.
Unless you are using a lot of money sector choices may be limited apart from maybe finance and energy.

Other considerations, US healthcare fund and small caps, not AIM.
Don't be afraid to put 5% in a contrarian position...you are looking at 18 years!

Your large position in Europe includes the home team, so not irrational, although the fortunes of UK and continental Europe may differ over time.
Possibly better to split, using a FTSE250 for UK and a dedicated large cap Europe. (I currently like Europe)

I don't think anybody actually gets diversification exactly right, it's a bit like blackjack we put more money on an ace than a four, and it often works out OK.

While growing money, not getting it right is not usually a disaster as contributions tend to compensate for not being in Chile or any other non predictable opportunity. Once a decent sum is amassed then diversification becomes a lot more important, but once you get halfway thru the 18 year period you will have attained that skill without realising it.

[Derek Chevalier]

Dr Mike Oxgreen said:

Derek Chevalier said:

Dr Mike Oxgreen said:

By the rationale of investing proportionately, your 43% in US is about right. Maybe a couple of percent heavy, but pretty close.

You sure it's not too low?

What makes you ask that?

According to the link I gave, the US is about 40-41% of the world.

That's a couple of years out of date which I assume may be why I'm seeing different. I've got data from mid ~Q1 2017 showing US (equity, not including bond) at 54%, and the FTSE global all cap is currently around 52%

https://www.bogleheads.org/wiki/FTSE_Global_All_Ca...

[Ayahuasca]

Derek Chevalier said:

Ayahuasca said:

Derek Chevalier said:

Ayahuasca said:

With a massive proportion in the US, the dollar:sterling FX movement will make or break you.

Over an 18 year period?

Yes. It is wise to have your assets in the same currency as your liabilities.

According to whom?

Me.

[Dr Mike Oxgreen]

jeff m2 said:

Possibly better to split, using a FTSE250 for UK and a dedicated large cap Europe.

Why exclude the top 100 FTSE shares?

(You do realise the FTSE 100 is the top 100, then the 250 is the next 250, excluding the top 100, right? Perhaps you should be thinking about the FTSE 350 or All Share?)