In today’s podcast, I’ll be discussing retirement investing and the importance of broad global diversification. I’ll explain the reasoning behind our approach and share a few of the strategies we use to help minimize risks. Some of the core ideas I want to share with you are recency bias, home country bias, the concentration of the S&P 500, why price matters, global market capitilazation and Vanguard forecast for the next 10 years.
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Articles, Links & Resources:
DFA: Global Diversification Can Make A World Of Difference
DFA: Which Country Will Outperform?
DFA: The Tale Of Two Decades
Morningstar: Can the US Continue To Outperform?
MarketWatch: Wall Street Sees No Alternative to US Stocks in 2025
FinancialTimes: The Mother Of All Bubbles. The US has never been so overhyped relative to the rest of the world
Reuters: US Stock Concentration – its not all doom and gloom
Vanguard Capital Markets Forecasts
Transcript:
Announcer: Welcome back America to sound retirement radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now here is your host, Jason Parker,
Jason Parker: America. Welcome back to another round of sound retirement radio.
So glad to have you tuning into this episode. The title is number 443. Retirement investing, why global diversification matters. But before we get going, let’s start the day by renewing our mind. I’ve got a verse here for us from Mark chapter eight, verses 36. What good is it for someone to gain the whole world, yet forfeit their soul?
And then something fun for the grandkids. What do you get when you cross a snowman with a dog? Frostbite.
Here’s one. This one. I told my wife this one last night. She looked across the table at me like she wanted to rip my face off. But, why was the snowman looking through carrots? He was picking his nose. In today’s podcast, I’m going to be discussing retirement investing and the importance of broad global diversification.
I’m going to explain the reasoning behind our approach and share a few of the strategies we use to help minimize risks. Some of the core ideas I want to share with you are recency bias, home country bias, the concentration of the S& P 500, why price matters, and Global market capitalization, and Vanguard’s forecast for the next 10 years.
Remember, articles, links, and resources from today’s show can be found at soundretirementplanning. com. Just click on episode number 443. Before we get into today’s show, I have a few holiday hacks and a money saving tip for you. Okay, so here are the hacks, first of all. Now, to understand why this is so important to me, for years, we’ve had a tradition in our family where we put the, we, uh, put the Christmas tree up.
And the very last thing we do is we put the star on the top of the tree. And when my kids were little, I would hold them up and they would put the star on and it would be all, Crazy and sideways. And then I’d spend the next hour, you know, with my wife telling me which direction to move it. And I don’t know about you, but if you put a star on the top of your Christmas tree, whoever invented those stars and those bases that they have, I mean, I don’t know, I have no idea what they were thinking when they designed those Christmas tree stars, but you could never get them on straight.
So this year we’re getting right. We’re putting together the fake Christmas tree, the artificial Christmas tree. My, my daughter’s boyfriend was at the house helping. And as we were assembling the tree, she said, We put the top of the tree on and then he said, Oh, you know, if we would have put the tree topper on first, it would make it so much easier.
And I looked at him and I was like, that’s the most brilliant thing I’ve ever heard in my life. So we took the tree top off. We attached the star. I went out to the garage and got some zip ties and I put that star on there. So it’s perfectly straight. Then we put the top of the tree on and instead of doing it at the very end, we did it at the very beginning.
We did it when we, I wasn’t having to scale a ladder to try to figure out how to get the star on straight. And I just can’t believe it took me 50 years of, of life before I figured out that Christmas tree hack. The second idea I have for you came from Allie who works here and uh, years ago at Thanksgiving, I was peeling potatoes for mashed potatoes and I was peeling them into the sink and the garbage disposal got all clogged up and we ended up having to call a plumber.
It was a total nightmare. So what I, what I’ve been doing since then is I’ve been peeling potatoes over the garbage can so that um, I don’t end up clogging up the sink. Well, occasionally when you’re doing that, potato slips, falls out of your hand, goes into the garbage can, and then you’re just irritated.
Allie said, well, what we do is we just put paper towels down in the bottom of the sink. And then when we’re done peeling the potatoes, it makes it really easy to clean up. And I thought, well, haven’t I ever thought of that? Just another one of these amazing, um, hacks, holiday hacks, if you will. And then the last thing I wanted to share with you, um, every once in a while, my phone company will just, Out of nowhere, increase the fees that they’re charging me for our mobile phone service for our cell phone service for our family.
And again, they did it again recently. And so I called them up and I’m like, Hey, what’s going on? And of course they said, well, we don’t have that plan anymore, but we can put you on this new plan. And the new plans actually less money than what I had been paying. So I don’t know what the, I don’t know what the gimmick is here, but, um, as I was talking to the woman that was helping me, she said, you know, Jason, if you had an AARP membership, you.
We could save you an additional 40 a month. And, um, you know, I had just turned 50 and I’m getting these AARP invitations in the mail. So after I hung up with my, uh, cell phone service, I called, uh, or I filled out a form and signed up for AARP, cost me 63 to sign up for a five year plan, and then I called, uh, the phone company back with my AARP membership.
And now I’m saving 40 a month, 480 a year savings. Let’s just round that up and call it 500. Over the next five years, I’m going to save 2, 500 for a 63 membership to AARP. Even though I’m not super happy about the AARP membership, just because it, you know, reflects my age, um, I’m really excited about the savings.
So just wanted to share those with you. In the portfolios we manage for clients, we emphasize broad global diversification. We invest in U. S. stocks as well as international emerging stocks, including large cap, mid cap, and small cap companies. In addition, we maintain diversification and high quality bonds across short term, mid term, and long term maturities.
We tilt portfolios towards driver of higher expected returns, which are value, size, and profitability. And we like to use ETFs or exchange traded funds to create the asset allocation because the ETFs we use have low fees, good liquidity and they help us to manage taxes more effectively than mutual funds for non qualified accounts.
If you’ve been a client for only the past five years or so, you might look at the holdings and want to sell positions that haven’t performed as well and reallocate those funds to investments that have recently done better. For instance, you might consider selling value stocks to buy more growth stocks or you might want to sell international stocks to increase your allocation to U.
S. equities. However, This reaction sometimes stems from two common investing behavioral mistakes called recency bias and home country bias. Recency bias leads us to overweight recent experiences when making decisions and this can result in short sighted investment moves like selling underperforming international stocks because U.
S. stocks have recently done better. Or favoring growth stocks over value stocks based on their recent outperformance. While it’s natural to focus on what’s worked well, it can cause us to miss opportunities, create overly concentrated portfolios, and overlook long term trends supported by historical data.
Home country bias is another behavioral pitfall. Where investors prefer domestic markets even when diversification into global markets might be more advantageous. While investing in U. S. companies feels familiar and comfortable, over concentration in any single market can increase risk and limit potential returns.
And let me just be clear, I love America. I have, I’m a strong advocate for American companies and believe in our culture of financial transparency and capitalism. But history has shown that even the U. S. stock market can struggle for extended periods. Consider the last decade, from 2000 to 2009, when the U.
S. stock market, as measured by the S& P 500, delivered a negative return. A 100, 000 investment in the S& P 500 at the start of 2000 would have shrunk to 90, 165 by the end of 2009. That’s a negative 1. 03 percent annualized return. Now compare that to a globally diversified portfolio. A mix of 60 percent U. S.
stocks, 30 percent international developed stocks, and 10 percent emerging markets would have grown to 113, 369 during the same period, resulting in a modest positive 1. 26 percent annualized return adding intermediate and short term high quality fixed income to the global mix would have increased the portfolio to 152, 183 with a much stronger 4.
29 percent annualized return. And this example highlights why diversification across global stocks and fixed income is important, especially during challenging market environments. It also underscores a key principle. Markets don’t move in one direction forever, and a globally diversified portfolio can be helps to smooth out the risks.
It’s the challenging times like from 2000 through 2009 that remind us why we must plan for tough market environments, particularly during the first 10 years of retirement. When you’re drawing down your portfolio, a poor sequence of returns early in retirement can significantly impact your financial security.
That’s why for those of you that are using the retirement budget calculator, I recommend modeling a 4 percent growth rate you Um, when doing your financial planning, it allows you to test your plan’s resilience against lower returns and modest inflation, helping you hope for the best, but plan for the worst.
Staying globally diversified across asset classes, sectors, and regions remains one of the most effective ways to manage risk and position your portfolio for long term success. And now the interest rates on bonds have reset and are offering more attractive yields than in, in the past several years. It’s a great time to consider having bonds in your portfolio to help produce income and create that ballast to help with the volatility of stocks.
Vanguard publishes forecasts from their capital market model, which uses historical data and statistical analysis to simulate a wide range of potential future returns for various asset classes. These forecasts incorporate. Uncertainty and risk to help analyze portfolios and provide expectations about future returns.
As of December 2024, Vanguard’s latest 10 year projections estimate U. S. equities to return between 2. 8 to 4. 8 percent per year, while international developed markets, excluding the U. S., are projected to return 6. 9 to 8. 9 percent, and emerging markets are expected to return 5. 2 percent to 7. 2 percent. One reason that Vanguard projects lower returns for U.
S. equities compared to international developed markets is valuation, the price that investors pay for a stock relative to its earnings or book value. For example, if we use the Vanguard Total U. S. Stock Market Fund, the ticker symbol VTSMX, has an average price to earnings ratio of 20. 6 times and a price to book ratio of 3.
8 times, The Vanguard Total International Stock Fund, VTMGX, has a price to earnings ratio of 13. 2 times and a price to book ratio of 1. 6 times. And to illustrate why this matters, let me share a simple story. When I was a kid, my friends and I ran a lemonade stand. On the first day, we used supplies from my friend’s mom’s kitchen.
And at the end of the day, she took half of our earnings to cover the cost of supplies. The next day, we used supplies from my mom’s kitchen and she didn’t charge us a thing. We sold the same amount of lemonade, but we got to keep all the profits. And it taught us a really important lesson. Costs matter.
The less you pay, the higher your potential profit. The same principle applies to investing. If you buy a great company, like our lemonade stand, at a lower price, the expectation is that your future returns are likely to be higher. Right now, buying international stocks costs less. It’s only 13 to buy 1 of earnings of international companies versus 21 to buy 1 of earnings of U.
S. companies. Lower valuations often lead to higher potential returns over time. So now that we’ve explored behavioral biases in investing and the importance of valuation, buying assets when they’re less expensive, the next step is determining how to allocate dollars across your portfolio. And a logical way to start is by looking at the global market capitalization.
Market capitalization refers to the total value of a company’s outstanding shares of stock. It reflects how much a company is worth in the stock market. To calculate market capitalization, you multiply the share price by the total number of shares outstanding. For example, if a company has 1 million shares outstanding and each share is valued at 50, its market capitalization is 50 million.
Global market capitalization extends this concept across the entire world. It is the combined market capitalization of all publicly traded companies worldwide, representing how investors allocate resources globally. Understanding global market capitalization helps us to see the relative size of each market and serves as a guide for building a globally diversified portfolio.
At the end of 2023, the United States represents 61 percent of global market capitalization, 50 trillion across 3, 481 companies. International developed markets represent 27 percent or 22 trillion across 6, 518 companies. Emerging markets represent 12 percent or 10 trillion across 9, 540 companies. This global allocation changes over time as markets are dynamic and continuously process information.
By using the global market cap as a baseline, we can allocate investments broadly across countries. For example, based on the 2023 data, a globally diversified portfolio might allocate 61 percent to U. S. stocks, 27 percent to international developed markets, and 12 percent to emerging markets.
Diversification is a fundamental risk management tool. It means not putting all of your eggs in one basket. A client once shared a childhood story that illustrates this perfectly. His mom sent him to buy three eggs. On the way home, the paper bag broke and all the eggs splattered on the sidewalk. Imagine if he had carried each egg in a separate bag.
If one bag broke, he would still have two good eggs left. Diversification works the same way with investments. For retirees, this is really important. Once you stop earning an income, managing risk becomes essential. Diversification helps protect your wealth. If you invest solely in the S& P 500, you own 500 companies.
But 10 of those companies make up about 30 percent of the portfolio. By expanding to the entire U. S. market, you own 3, 481 companies. However, with a globally diversified portfolio, like the ones we recommend for our clients, you own over 11, 500 companies worldwide. That’s more eggs in more baskets, reducing the risk of relying too heavily on any single market.
Remember, the goal of the investment strategy is to earn the returns that we need to make the plan work and to earn those returns with as little risk as possible. From 2004 to 2023. How many times do you think the U. S. had the highest annual returns among developed countries? The answer? Only once.
Instead of trying to predict which market will outperform, a better strategy is to diversify broadly across asset classes, sectors, and across the entire globe. A couple other risk mitigation strategies. Number one is rebalancing. Regularly rebalancing your portfolio is a powerful tool for risk management because it forces you to sell high and buy low.
a strategy that often feels counterintuitive. It requires you to sell your investments that have performed very well and buy more of those that have underperformed. For example, over the past five years, rebalancing would mean selling growth stocks and domestic stocks, areas that have done exceptionally well, and buying more value stocks and international stocks which have lagged.
This goes against what most people instinctively want to do. Selling underperforming positions and then chasing the recent winners. And this is why discipline is so important in a successful investment strategy, rebalancing works because it forces you to act rationally. Maintain a balanced portfolio and systematically sell high and buy low.
Rather than following emotions or chasing recent performance. Another risk mitigation tool is time diversification, or buckets. Segmenting your money into time buckets ensures secure cash flow during retirement, particularly in the early years when sequence of returns risks is highest. By diversifying across time, you can take less risk with the money you’ll need in the near term, while taking more risk with the money that you’re not going to need for 10 years or more.
And this approach allows you to match your assets to your liabilities and stay invested during periods of market stress and volatility. Remember, volatility, stress, and strain are all part of the growing pains of being an investor. They’re not going away. But having a plan to manage them can make all the difference.
Here’s a few quotes I think you might enjoy. Thomas Edison said, Vision without execution is hallucination. John Doerr said, Ideas are easy. Execution is everything. For the past seven years, I’ve poured time, energy, and money into developing the Retirement Budget Calculator, which is a tool that we use at our firm to help clients make better, more informed financial decisions.
And I made it publicly available because I know from the feedback that we’ve received that That it’s helping thousands of people improve their financial confidence. But there’s one challenge that I see time and time and time again, implementation, a solid retirement plan without the right investment strategy.
It’s like having a roadmap. But never starting the journey. While many people believe their investments are on track, we often find a collection of mutual funds and stocks with no cohesive strategy when we review accounts. It’s not about judgment. It’s just about clarity and alignment. So if you’re feeling uncertain about your investment strategy or unsure where to begin, we’re here to help.
Our team can take a fresh look at your situation and guide you toward aligning your investments with your retirement goals. Take the next step. Contact us today. Gain clarity, confidence, and freedom in your retirement planning and your investment strategy. Let’s make sure these things are all working together to support an amazing retirement.
Announcer: Thank you for tuning in to Sound Retirement Radio. For articles, links and resources from today’s show, visit sound retirement planning.com. If you enjoy the podcast, share it with a friend and give us a five star review. Ready to kickstart your retirement planning. Head over to retirement budget calculator.com.
Need assistance with investment management, explore our services@parkerfinancial.net. Information and opinions expressed here are believed to be accurate and complete for general information only and should not be construed as. tax, legal, or financial advice for any individual and does not constitute a solicitation for any securities or insurance products.
Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to claims paying ability of the company.
Investing involves risk. Jason Parker is the president of Parker Financial, LLC, an independent fee based wealth management firm located at 9230 Bayshore Drive Northwest, Suite 201, Silverdale, Washington. For additional information, call 360 337 2701 or visit us online at soundretirementplanning. com.
