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Calculating Asset Allocation with Country
Old 02-24-2013, 11:40 AM   #1
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Calculating Asset Allocation with Country

I'd like to get opinions about proper calculation of asset allocation when the split includes the country of investment.

If I'm looking at an ETF or Mutual fund, I can go to the fund site and they have a list of countries and percentages. That's easy enough, but what if I have a specific stock holding of a company that operatated internationally? Say the company happens to be located in Spain, but gets their revenues equally from Spain, UK, US, and Latin America? Would it be most accurate, from an asset allocation theory standpoint, to book that as 100% Spain? What if a competitor had the same set of countries as revenue sources, but happened to be located in the US? Would it be most accurate to book that one as 100% US? I understand part of what we're trying to do with asset allocation by country is to account for currency valuations, which supports the "100% at the home base" argument, but it just seems like something is amiss with that, but can't put my finger on it.

--Dale--
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Old 02-24-2013, 12:10 PM   #2
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I think it depends a bit on what you are trying to do. If you are selecting the investment because you want extra exposure to a specific country's economy or a specific currency then those factors should influence where it goes in your allocation.

As far as diversification, how do you want to divide up the world of equities? Countries, currencies, regions, local economy, or something else? It seems popular now to say that you have lots of exposure to the U.S. economy, so why invest in a foreign company whose income is mostly from the U.S.? Well, if that company belongs in your "U.S. economy" allocation then maybe you already have enough exposure and don't need to invest in this company. On the other hand, if this company is outside your "U.S. based companies" allocation and instead belongs in your "non-U.S. developed countries companies" allocation then you should consider it separately from your U.S. investments. But it should belong to one of your allocations, even if it's in the "do not invest" segment.

The common and easy allocations right now are by regions where the company is headquartered, U.S., Non-U.S. developed countries, Emerging Market, and Frontier Market. If you are going to do something different, it will take a little extra work on your part.
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Old 02-28-2013, 08:36 PM   #3
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I think it depends a bit on what you are trying to do.
Thanks for the thoughtful reply. I think your first sentence captured the problem....I don't know what I'm trying to do, hehe.

I've been reading a fee-only financial planner's blogs for years and he's presented an allocation that contains a significant foreign component. He calls it "gone fishin' portfolio", meaning it's trying to be on the "set and forget" side (just rebalance every once in a while). I happen to have a utility stock that used to be Pacific Power, then it became Pacificorp, then it became Scottish Power, and now it's Iberdrola (out of Spain). I made the mistake of going to their web site and saw the revenues by country.

So, long story short, I think I'm making this too complicated. It's not that much of the total anyway. Still curious what "the right way" is, but since the problem remains amorphous, I'll just put it down as Europe and call it a day.

--Dale--
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Old 02-28-2013, 10:43 PM   #4
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I agree, the whole key to a good investment plan (IMHO) is to use the KISS principle.

If you think you need international exposure, I would first ask you to do some research on the returns over 15 to 20 years of this international exposure -- is it going to help or hurt your portfolio return -- that by the way you have to spend (in most cases) in US dollars. The reason I ask this question is because I personally am not convinced that I can (or anyone else can) pick international exposure that is going to improve my long term returns - so I don't bother with it. I am not trying to convince you one way or the other, just asking that you do some research.

In the end you will most likely simplify your life and improve your returns by just picking a few well managed index funds in the assets you think are important and not sweat over such things as how much of each country you have in your asset allocation -- there are no fortune tellers that can predict which countries are going to be better in the future, despite what you may have read somewhere.

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Old 03-07-2013, 04:23 PM   #5
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I agree, the whole key to a good investment plan (IMHO) is to use the KISS principle.
My approach is pretty simple...select an asset allocation (that includes exposure outside of the US, more on that in a minute), and then rebalance periodically. It's that last step that I'm trying to put a fine point on. I mean, before you rebalance, you need to take a reading. And the "detailed oriented" person that I am (hehe, others might not use that nice label), I just want to measure as accurately as possible. But I have concluded that I'll just pick a reasonable way to measure, and stick with it.

I'm going with a low cost indexing strategy for both in and out of the US. There is theory that supports the idea that contries that have more economic freedom do better in the long run than those with less. Since there are 9 countries higher in economic freedom than the US, I have concluded that to ignore those would not be a good idea. But I, like you, am not trying to change anyone's mind

--Dale--
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Old 03-08-2013, 06:33 AM   #6
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You can find ETF's (ishares) that have specific country exposure if you want to focus on a specific country(s)
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Old 03-08-2013, 04:08 PM   #7
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You can find ETF's (ishares) that have specific country exposure if you want to focus on a specific country(s)
Yep, Been there, done that: EPP, EWL, EWC.
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