Index Universe posted some comments from Vanguard on their thoughts about portfolio construction looking out over the current decade. The headline was Stick to Allocation Strategies and from the standpoint of not giving up on equities, I agree completely. I've said before that for people who have learned they just cannot handle the potential volatility with equities fine, just understand the tradeoff of needing to save more.
For those who can generally handle equity volatility, I do believe in sticking to their asset allocation, making changes as appropriate for getting older or unexpected changes in life circumstances. Then as the article, and Vanguard's comments, progressed, I found myself disagreeing with much of what they said about equities. I found the following to be a real head-scratcher:
Specifically, Davis said Valley Forge, Pa.-based Vanguard is concerned investors may be tempted these days to reach for yield, chase regions with higher economic growth and pursue alternative investments—all without taking full measure of the plethora of associated risks.
I wanted to include the entire sentence so that context would not be lost but the peculiar comment was "chase regions with higher economic growth." There are studies that conclude there is very little correlation between GDP growth and stock market performance, but the results for specific countries in the previous decade paint a different picture for me.
Chasing anything is a bad idea, no question, but there is a difference between chasing some country's returns and doing some research and realizing that looking out over the rest of this decade, which is the time frame the Vanguard has in mind, there are a lot countries with far better prospects than the US--this has been a major theme on this blog since 2004.
Vanguard does say that prospects for developed Europe and Japan look pretty badm so this isn't necessarily a stick to all the old standbys that worked in the 1990s argument. Seemingly contradicting the above passage Vanguard notes that they expect "emerging market economies, as well as Australia, to lead global economic growth in the next decade," but don't chase them?
If you are going use country selection in your process, we do, then I would say to pick countries based on your opinion of future prospects. While buying something that just doubled is probably not a great idea, where they are going is almost always going to be more important than where they've been.
The article may also be another case of misusing the term asset allocation. Other than perhaps conversational expedience, I would say that domestic equities and foreign equities are not different asset classes; they are both equities. Different asset classes (from equities) would include bonds, commodities and maybe absolute return--there are others. While I realize opinions differ on this, I think most people come up with some number for their equity exposure as opposed to X% in domestic and Y% so in that context; stick to your allocation strategy.