Finance Professor blog posts a video of Jack Bogle (the father of indexing) talking about indexing.
Jack is responding to Mark Cuban's recent claim that "diversification is for idiots". I am sure Mark is a talented entrepreneur but being a entrepreneur requires taking undiversified risks. Investing for your retirement is completely different - diversification is essential. If Cuban doesn't realize this then he is the idiot here.
I agree with 99.9% of what Jack Bogle says. However, I have run portfolio optimization software several times and I've always found that adding a bit of foreign equity exposure expands the efficient frontier (raises returns and lowers risk). The impact is small, but it does help. No need to go overboard with foreign equity, but 10-15% of your equity exposure helps. Using the same software I also found that if you hedge out the currency risk from the foreign equity exposure, you lose all the diversification benefits.
ReplyDeleteBut, many pension funds recently have dramatically increased their exposure to foreign equity and it is not unusual for US based pension funds to hold MORE foreign equity than US equity AND hedge the currency risk. Both moves raise expenses and complication, and don't improve risk/return aspects of the portfolio, in my analyses.