Saturday, June 26, 2010
James Picerno has a post up exploring what the proper allocation to emerging market equities might be. He explores whether to go by market cap weight which would be 12% or maybe some other measurement that might yield a different number.
Here is a thought; the entire conversation needs to be thrown out and a completely different approach needs to be taken. Perhaps the title 'emerging' needs to be chucked. In going country by country in building a portfolio it seems logical that one would pick countries that have the best economic fundamentals. From there one could take volatility, not risk, characteristics into account in determining weighting and how to blend various countries together.
Based on various measures of indebtedness one could conclude that Brazil is in much better shape than the US or big Western Europe. Historically US based investors are pretty comfortable with 100% in US equities. I doubt too many people would be comfortable with 100% Brazil instead but maybe they should be.
Not really of course but if you believe the fundamental story is better in Brazil than the US then why would you have more US than Brazil? This becomes an interesting question. Not every healthy country is as volatile as Brazil, Norway as an example.
Instead of how much to invest in emerging markets the question should maybe change to how much each country, how much to countries more volatile than the US and how many less volatile (or maybe equally volatile).
The Sox lost last night but it was a good game. It was very cold the entire game but did not get colder as the game went on.