If you were building a global stock portfolio for the long run -- let's say 2020 and beyond -- how much of your money would you put in the world's stock markets?
Personally, over that time period, I'd pick India over China, Poland over India and Brazil over them all.
Let me explain how I get to those weightings.
To build a global portfolio you could, of course, start by investing in what you know. That's why so many U.S. investors are massively overweight U.S. stocks. That's a problem because forecasts say the U.S. economy -- and therefore U.S. stocks -- will grow more slowly over the next few years than those of China, India and Brazil, to name just three.
You could, of course, build a portfolio that mirrors today's global capital markets. In 2004, U.S. capital markets accounted for 53% of the world's shares that were free to trade. By 2008, that number was down to 41% and has kept falling. Over time, I guess, you could keep adjusting the portfolio allocations so that your portfolio mirrored a changing world. That would leave you constantly chasing last year's returns, however, and buying at the top of whatever market had done best in the past year (or whatever period you chose).
That would give you a shot at getting ahead of the game, but not much of one because everybody else has the same access to these projections that you do. A great deal of that near-term projected growth is already factored into stock prices.
While they're not hot
So, are your portfolio allocations forever doomed to lag behind a changing world?Not if you use Jubak's handy-dandy Global Three-Part Asset Allocator. (Send no money now, and we won't bill you later either. No operators are standing by to take your call.)
I'm not promising that you'll find the hottest markets before anyone else knows they're even warm, but I think you can use long-term trends in these three areas to adjust the weightings of your portfolio before all the good stuff is priced in.
But remember, I'm talking long-term allocations here. The three factors that I'm going to explain will shove markets in one direction or another over the next decade or two. They aren't going to give you a buy for tomorrow's market or even next week's.
Start with demographics: Age counts, at least when it's the average age of a population. There's a strong correlation between the age of a population and how fast an economy grows. The younger a country's population, the faster its economy generally grows.
By 2020 about 16.3% of the U.S. population is projected to be 65 or older.
One reason to think that developing countries will grow faster than the U.S. is that those countries will be supporting fewer retirees. In China, for example, projections by the U.N. Population Division indicate that only 12.4% of the population will be 65 or older in 2020.
But the difference among countries in the developing world is just about as large as the difference between the United States and China. China, with 12.4% of its population 65 or older by 2020, looks positively ancient next to Brazil (at 8.7%) or India (at 6.7%).
In fact, almost all the world looks ancient compared with India. If you're allocating assets just by what percentage of oldsters there are in a population, you ought to put all your money into India. (And if you like really scary demographic numbers from even further out the timeline, see my blog post on the subject.)
Continued: Another factor to consider
