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● USA Today
2023 Best Financial Advisory Firms
usa today best financial advisory firms 2023 logo for wellspring financial

Award based on independent survey carried out by USA TODAY and Statista. Firms need to be nominated by a participant in the survey. No prior registration is required, and no costs are involved for the nomination. The recommendations for each firm are summarized and evaluated anonymously. 
In addition to the survey results, additional metrics (e.g., data in relation to assets under management (AUM)) will be included in the final analysis.

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Variety, the spice of Life

This letter’s emphasis is on the places you own companies.  I can tell you the great variety of countries playing in Brazil at the World Cup soccer games has got nothing on you.

First, the context of these remarks is simply around diversification of investments; as you innately are aware, not having all your eggs in one basket is smart.  It is simply unwise to concentrate your investments in any one country, much less company.  For those who were reading the news as we welcomed in a new millennia, we remember the deep pain of those employees who were stuck with the vast bulk of their net worth (now, lost net worth) tied up in Enron or WorldCom, and a mere 7 years later we saw the same thing happen in Lehman Brothers stocks / bonds.  Concentration in investments is like trying to score a goal all on your own; you are going to fail far more times that you succeed, and no one likes failing when their retirement livelihood is dependent on it.

We am pleased to inform you that you are currently invested in 44 countries, including the USA obviously.  That aggregate number comprises what is commonly known as “developed” countries (France, Germany, Japan, etc. as included in the MSCI – EAFE index), as well as “developing” countries (Egypt, India, Mexico, etc. also known as emerging markets).  These countries constitute 99% of the world’s total market capitalization[i].  Through the various investments we have structured your accounts, you have ownership in over 12,000 separate publicly traded companies! That fact all by itself is a level of diversification most investors will never come close to seeing.  Fantastic.

Notwithstanding how well the respective individual countries are doing visa vi the world, your portfolio also has limits on how much you will hold of any one country so that diversification is not compromised over time.  The primary benchmark used to make those decisions is what-is-called the Market-Cap Free-Float figure, which excludes the value of company shares NOT traded (as some portion of shares are held by the governments of the country where they are located and would unfairly bias the number the we would think of readily available to buy and sell on stock exchanges).  Further, way down in the dirty details there are limitations on how much can be owned in any one sector, so that ‘overweight’s to technology or banking sectors (etc.) are also avoided.  It is a very beautiful and sophisticated matrix.

But sooner or later you ask; “Why is this gobblety-gook important?”  The answer is best answered by anecdote.  Let’s take a look at Indonesia, a country whose broad market declined by 6.48%[ii] in the quarter ending December 31, 2013.  Doing this on your own, many folks would have said that Indonesia is a long ways away and maybe it’s time to get out.  However, you did not – in fact, because the market was down you bought a few more shares of the companies domiciled  there.  Then, in the next quarter, that stock market roars back to life with a positive 22.44%[iii] return in the period ending March 31, 2014!  That dynamic buying and selling, with a constant eye toward needed diversification, is going on in your portfolio EACH and EVERY day.

Therefore, this approach is not only a smoother investment ride, but brings the removal of unnecessary risk in your portfolio.  That risk, in technical terms, is called idiosyncratic country risk.  On average, more than half of the monthly variance of individual country portfolios can be diversified away, and that is being done for you, automatically.   It is complex, but it works together like an expertly designed play with each player fulfilling his unique role so that the team wins.  Your US Core Equity fund was up a very nice year-to-date 6.52% for the period ending June 30, 2014, but your teammate international developed was up 6.03% and your emerging markets group led the way, up 7.40%[iv].  Less risk, better returns; what’s not to like?

Enjoy the World Cup, whatever team you are cheering for.  On investments, you are drinking from the world of globalization, and your cup runneth over.

 

[i] “Beyond Emerging Markets; Examining Frontier Opportunities” (Karen Umland, June 21, 2012, Dimensional Fund Advisors internal communication).

[ii] 2013 Q4 Quarterly Market Review (MSCI (Morgan Stanley Capital Index) Emerging Markets IMI Index)

[iii] 2014 Q1 Quarterly Market Review (MSCI Emerging Markets IMI Index)

[iv] June 30, 2014 Fund Center (Prices, Dimensional Fund Advisors Advisor Website)

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