Ed Mamula.com

Nowadays, market cap weighted index funds and ETFs (Exchange Traded Funds–these trade just like a stock) are widely available at a very low cost.  While it is always fashionable to try to devise ways to beat the market averages, investors’ collective track record for doing so is quite poor.  So even if these index funds don’t represent some sort of mythical ideal, they surely do allow us an easy, inexpensive way to build a global, diversified equity portfolio. 

If market cap indexing is a good strategy domestically, it would follow that it should be a good investment internationally as well.  Interestingly, I’ve seen a few global indexes such as the one offered by Russell, but I have yet to see a single mutual fund or ETF that provides a market cap weighted portfolio of the entire world.  The products that I see are usually more along the lines of single country funds and “all world except for country X” funds.  That still makes it pretty easy to build the portfolio.  All we need are two funds, and an idea of what percentage of our money to put into each one.

 Let’s start with the funds.  While there are certainly other options, I will use Vanguard ETFs as an illustration, because they are generally recognized as low cost index fund pioneers.  We can build the portfolio with Vanguard’s Total Stock Market ETF (ticker VTI) to cover US Equities and the Vanguard FTSE All-World ex-US ETF (ticker VEU) to cover all other countries.  With just two instruments, we get low cost exposure to more than 95% of the global investable universe. 

Since we’d like to be market cap weighted, all that remains is discovering the USA’s percentage of world market cap…(insert Jeopardy theme music)…okay, this was surprisingly difficult to track down, but the World Federation of Exchanges does publish this data on a monthly basis.  Using their monthly domestic market cap figures, I have the US share of global market cap at roughly 40% as of this writing.

So that’s it!  40% goes into VTI and 60% goes into VEU.  We can check the World Federation of Exchanges data on a yearly basis to ensure that our portfolio is still representative of world market cap.  Except for the real world nuisances of adding additional capital and dividend reinvestment, the beauty of this plan is that it never needs to be rebalanced.  Remember, we are not setting some arbitrary division like 50% US and 50% rest of world.  We are simply investing in the entire world by market cap weight.  Whether the US percentage of world market cap shrinks or grows in the future, our portfolio will automatically reflect it.

  Keep in mind that this was just one example, and it’s provided for illustration only…your mileage may vary…blah blah blah…etc….I am not an investment advisor.

Now as soon as someone gives us a good All-World in One index fund option, this plan will get even simpler…100% in one fund…set it and forget it!

From Investopedia…

Financial Porn :  

“A slang term used to describe sensationalist reports of financial news and products causing irrational buying that can be detrimental to investors’ financial health. Short-term focus by the media on a financial topic can create excitement that does little to help investors make smart, long-term financial decisions, and in many cases clouds investors’ decision-making ability. ” 

The folks in the in the financial news game have a tough task.  They have to keep their viewers from tuning out, despite a multitude of evidence that suggests that investors who do not regularly watch the financial news achieve better long term results.  In order to keep viewers tuned in, the financial networks manufacture a sense of excitement by constantly making predictions about the short term direction of the markets and implying that it’s always time to DO SOMETHING.  The problem is that whatever that “something” is, it probably causes the investor to deviate from his long-term plan.

In the context of retirement saving, this means that it is prudent to plan an appropriate asset allocation and set up periodic rebalancing.  If an investor reacts to news and deviates from his retirement plan, he is injecting a potentially large new source of randomness into his returns…one that has the power to derail a good financial plan.

In the context of mechanical trading, it means that it is appropriate to follow the system’s signal on the next trade.  Whenever I have the urge to override a signal, I’m usually being influenced by something I’ve just seen on TV.  In such a case, I remind myself that it’s almost never time to deviate from the plan.  I’m always amazed at how much trouble and anxiety that I could have avoided if I had simply walked away from the screen for a day and let the system do its work.

It is wise to keep in mind that financial news networks are bankrolled to a large extent by advertising dollars from brokerage firms.  The brokers are the folks who would love nothing more than if we were all day traders, churning our accounts and generating lots and lots of commissions.  The networks create the impression that the “fast” traders are the ones who make all the money, without substantiating this claim in any way. 

I was prompted to make this post because I want to mention that CNBC is always counting down to something.  It could be a financial report, the market open, the market close, whatever.  They don’t count it down in minutes and seconds…oh no.  They count it down to hundreths of a second!  With those hundreths flying by, how could a viewer’s blood pressure not rise?

When I was in San Francisco over the summer, I did not have access to cable TV.  I disconnected from financial porn and my results did not suffer.  I’d go so far as to say that actual masturbation is more productive than the financial kind.