Geographic diversification is an interesting topic in itself...
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Originally Posted by Slava
I get the way you index. Its a strategy I use to some extent. The fact is though that there are a lot of decisions. Its great that you like the Vanguard funds, and I do as well. The thing is though, not all indexes or ETFs are created equally. Some have different mandates and different structures. My issue isn't that indexing is terrible, just that you can do better.
The ETF providers and industry in general have done a great job marketing though. They would have you believe that you should just buy the index and forget entirely about investing globally or that some companies are better values than others. Its a simple approach, and I guess that sells funds and gathers assets, but that doesn't mean it can't be improved upon at all.
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What? How does passive investing equate to not investing globally?
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Originally Posted by HockeyIlliterate
I don't get that impression at all, and many companies (Vanguard, Fidelity, etc) expressly acknowledge that part of having a truly diversified portfolio means that you are diversified not only amongst asset types, but also amongst geographic regions.
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Absolutely.
But are you aware that over the past 50 years, due to the general acceptance of diversification, as well as the ability provided from computers to be able to invest globally, that the actual benefit of global diversification - with respect to major indexes - has all but vanished?
Prior to the 60s, and the advent of proper asset allocation, the correlation between the major indexes of various countries and geographic regions was quite low - in the range of .5 or .6, meaning that there was a tremendous benefit to diversifying geographically. Those same correlations are now more like .95 (in other words the benefit is almost non-existent.
All is not lost however, as there are still very effective ways to diversify globally (but not via the major indexes).