Just how far have we fallen from the days of our unquestioned economic hegemony, the days when the dollar was supreme and American productivity and innovation ruled the world? It’s a good question.
Factions of both the Democratic and Republican parties sometimes talk as if we have become, in the memorably maudlin words of Richard Nixon, “a pitiful, helpless giant.” On the other hand, the cheerleaders on Squawk Box talk as if the rest of the world is still an uncompetitive, over-regulated backwater. If only Obama would leave business alone, the dollar would dominate and Wall Street would remain the center of the universe. USA! USA!
The numbers tell a rather different story, though perhaps not quite as apocalyptic or triumphal as the partisans argue. How, for example, should a long-term investor allocate his assets assuming he seeks to mimic the market? Once the answer would have been dead simple. Depending on your age, some variant of 60% U.S. Stocks, 40% U.S. Bonds. Problem solved.
And if you take a look at the most plain vanilla all-in-one fund possible, at first blush it looks like this kind of ratio endures. Let’s use as an example the Life Strategy Moderate Growth Fund from Vanguard, the pioneer of low-cost, long-term, index investing, designed to match market returns.
The Moderate Growth Fund is invested exactly 60% stocks, 40% bonds, but look a bit deeper and a more complicated story emerges. Only 36% of the fund is in U.S. Stocks. The other 24% devoted to stocks is invested in international markets. Bonds, same deal. Twenty-eight percent of the bond portfolio is allocated to the U.S. bond market with 12% devoted to international bonds.
Even that allocation still overweight’s the United States compared to reality. One study of all invested assets worldwide comes up with the following percentages by market capitalization. That is, of all the money invested worldwide, here’s the percentage allocated to each asset class.
U.S. Stocks: 18%, Non-U.S. Developed Country Stocks: 14%, Emerging Market Stocks: 4%, U.S. Bonds: 15%, Non-U.S. Bonds: 22 %.
From this it is immediately apparent that much more money is invested in foreign bonds than in those from the U.S and that the U.S. stock market accounts for only half the money invested in stocks worldwide. Even this ratio may understate matters since many ostensibly U.S. stocks are of multinational companies that derive a large percentage of sales overseas. So when China sneezes, Caterpillar and Kentucky Fried Chicken get a cold as recent earning reseals suggested.
It is also noteworthy that conventional stocks and bonds account for just 73% of invested assets. The remaining 27% is in a smorgasbord of other assets classes including real estate investment trusts, commodities, hedge funds, junk bonds and cash. And even in the case of the latter, investors may be putting their money in the yen or the euro, the ringgit or the rupiah. Try reflecting the reality of today’s investment universe in a single All-In-One fund.
For years it seemed, to Americans at least, that the world was a one-ring circus, but investing can no longer be summed up as Blue Chips listed on the Big Board and T-bonds. In today’s complex, interrelated economy the United States is no longer at the center of the stage, but just one actor in an ensemble drama. One day’s headlines tell the tale.
“Brazil’s richest man dreams of taking over Coca-Cola and firing all its employees. He already controls Burger King, Stella Artois, Kraft and Heinz.”
“Boeing up on Ethiopian Airline deal.”
“Yum Brands down on weak sales in China.”
“Hike in Ivory Coast cocoa price puts pressure on Ghana.”
Yikes! We’re not in Kansas anymore, Toto. Good luck investing in Oz.