9Mes
Incidentally, it is an illusion that the complete mapping of the equity market actually diversifies the portfolio. 1. the equity market is only a very manageable part of all asset classes (30%, bonds, real estate, commodities, currencies are much larger). 2. the various equity markets are all highly correlated in today's interconnected world. If MSCIWorld crashes, so does EM IMI.
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9Mes
@Epi
80% equities and 20% bonds are enough to provide a sufficiently diversified picture of companies around the world. Shares are equity capital, bonds are debt capital. Companies do not have any other options for obtaining direct money for their own investments so that they can generate a profit in their natural objective.
Real estate: yields only a meagre return (4%) and is dependent on politics (risk)
Commodities: yield meagre returns and are dependent on supply and politics (risk)
Currencies: unpredictable exchange rate risk
Crypto: pure gambling in the current bubble (normally a "currency" should remain relatively stable like gold instead of fluctuating so strongly in price)
In combination, they may calm the volatility of a portfolio, but at the same time they are a brake on returns. -> If you have at least 10 years, it is better to do without them.
=> If all equities (ETFs) crash, then the bond part stagnates/rises!
(Because companies still need money even/especially in a crash: via debt capital...)
80% equities and 20% bonds are enough to provide a sufficiently diversified picture of companies around the world. Shares are equity capital, bonds are debt capital. Companies do not have any other options for obtaining direct money for their own investments so that they can generate a profit in their natural objective.
Real estate: yields only a meagre return (4%) and is dependent on politics (risk)
Commodities: yield meagre returns and are dependent on supply and politics (risk)
Currencies: unpredictable exchange rate risk
Crypto: pure gambling in the current bubble (normally a "currency" should remain relatively stable like gold instead of fluctuating so strongly in price)
In combination, they may calm the volatility of a portfolio, but at the same time they are a brake on returns. -> If you have at least 10 years, it is better to do without them.
=> If all equities (ETFs) crash, then the bond part stagnates/rises!
(Because companies still need money even/especially in a crash: via debt capital...)
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9Mes
@AlexBloch You're basically right, of course. What you're saying is basically the consensus in finance and its offshoots in the financial media. However, a few things increasingly bother me about it (not your opinion, but the consensus).
1. what does "mapping the global economy" actually mean? There are so many different definitions, e.g. market capitalization (equities), corporate capital (equities + corp bonds + Reits), liquid financial market (corporate capital + government bonds + commodities + currencies), total financial market (liquid financial market + hedge funds + venture capital + real estate) etc pp. Each of these terms implies a different "world portfolio". Seems rather arbitrary to me and dependent on the zeitgeist. The fact that 80% equities and 20% bonds cover the entire market seems somewhat questionable.
2) Real estate, commodities, currencies (including Bitcoin) and bonds do not have the return of equities, but together they reduce vola. That is all true. However, the decisive factor here is what you want: a safe global portfolio with low volatility or higher returns. My point here is: If "world portfolio with security", then incl. other assets. If return, then there is no longer any reason for a "world portfolio with all equities", then I can and must concentrate on equities with higher potential returns and focus on factors. If I have more than 15 years, there is actually not much to be said for an ACWI in terms of returns. The current mainstream rationale for ACWI is simply inconsistent in every respect.
And by the way: when shares crash, it is because something is going wrong in the economy, then the central banks intervene and lower interest rates, which leads to rising government bond prices. Hence the effect of lowering volatility.
1. what does "mapping the global economy" actually mean? There are so many different definitions, e.g. market capitalization (equities), corporate capital (equities + corp bonds + Reits), liquid financial market (corporate capital + government bonds + commodities + currencies), total financial market (liquid financial market + hedge funds + venture capital + real estate) etc pp. Each of these terms implies a different "world portfolio". Seems rather arbitrary to me and dependent on the zeitgeist. The fact that 80% equities and 20% bonds cover the entire market seems somewhat questionable.
2) Real estate, commodities, currencies (including Bitcoin) and bonds do not have the return of equities, but together they reduce vola. That is all true. However, the decisive factor here is what you want: a safe global portfolio with low volatility or higher returns. My point here is: If "world portfolio with security", then incl. other assets. If return, then there is no longer any reason for a "world portfolio with all equities", then I can and must concentrate on equities with higher potential returns and focus on factors. If I have more than 15 years, there is actually not much to be said for an ACWI in terms of returns. The current mainstream rationale for ACWI is simply inconsistent in every respect.
And by the way: when shares crash, it is because something is going wrong in the economy, then the central banks intervene and lower interest rates, which leads to rising government bond prices. Hence the effect of lowering volatility.
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