The Investment Committee (IC) at Abacus conducted its periodic review of the appropriate proportion to put into international stocks throughout our clients’ portfolios. We considered varying allocations between U.S. (“Domestic”) and non-U.S. (“International”) stocks all the way from 100% domestic to 100% international. We ran a study of the historical performance of each of these portfolios from 1970 through 2016, and we also computed the risk of the portfolios as measured by their standard deviation. What we found is that all the portfolios with less than 50% in Domestic stocks were historically “inefficient”, meaning that they had the same amount of risk as the portfolios with more than 50% or more in Domestic stocks but with less return. As the allocation to Domestic stocks increases above 50% historically, the risk increases with a small increase in return up to 70% in Domestic stocks and with no increase in return above 70% in Domestic stocks. Below is a graph of the findings.
This tells us that historically the optimal allocations were 50-70% in Domestic stocks. Abacus currently uses 60%, while 70% is more common amongst a greater population of financial advisory firms (usually because they do not want their portfolios to deviate too much from the U.S. indices that their clients hear about in the news, a phenomenon known as the “home-country bias”). The U.S. makes up only 54% of the world stock market, so our view is that keeping our Domestic allocation at 60% keeps our portfolio more in line with the flow of capital around the world.
We also ran the same study for each of the individual decades starting with the 1970s and ending with the 2010s. In each of the decades, one of the portfolios in the 50-70% Domestic allocation range was the most attractive from a risk versus return perspective, confirming our findings from the 1970-2016 period.
Our decision is to keep our Domestic allocation where it currently is at 60%, with International (including emerging markets) at 40%.
Disclosure: Abacus Wealth Partners, LLC (Abacus) is an SEC registered investment adviser with its principal place of business in the State of California. Abacus may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. This brochure is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by Abacus with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Abacus, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).
This is not an offer to sell any type of security, and there is no investment currently available through Abacus. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.
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