Jason Zweig on Country Selection
Jason Zweig put up an article on the WSJ the other day called Placing Your Investment Chips in the Right Countries. Well that sounds interesting especially as Zweig seems to be more of a broad based index believer.

The article was not so much about country selection as about not avoiding Japan, the UK and France. Zweig notes that emerging markets, more specifically BRIC related, have received the lion's share of investor dollars going into mutual funds such that the exposure is out of whack with the reality of global market capitalization.

Most of the article focuses on asking a reasonable question about whether people have too much in emerging market funds and stocks and perhaps they do but the article concludes with an unnecessarily snarky rhetorical question that I think distracts from the important point he is trying to make. In favoring emerging markets countries Zweig wonders "What insights do you possess into the global economy that hundreds of millions of other investors have somehow overlooked?"

It seems to me that "hundreds of millions of other investors" overlook all sorts of things continuously and repeatedly. Further the tone that I think he takes assumes no forward looking analysis which I believe is common to passive indexing.

Perhaps it is true that picking the correct country is difficult (or maybe not but we can worry about that on a different day) but I think I am on to something with the notion of figuring out what to avoid. Japan is down a zillion percent (slight exaggeration) since peaking a little over 20 years ago. We've watched this unfold right before our eyes all that time. That is the past and maybe the future for Japan but today looking forward how many times are you going hear or read how much trouble the UK might be in before you conclude that reducing that one might be a good idea?

At the sector level any time a big US sector grows to be 20% of the the S&P 500 it is a warning that trouble could be coming, even more so on the rarer occasion that a sector gets up to 30%. There are many behaviors and thought processes that manifest themselves in market prices that repeat in cycle after cycle.

The willingness to believe there is nothing to any of this is a little hard for me to understand. Anything talked about in this context is certainly not able to provide a guarantee of success but watching the equity portion of my portfolio cutting in half without make any effort to protect what I've accumulated is unacceptable. "Any effort" might fail but how does some not even try?

With regard to choosing individual countries if you know that a given country is a mess and that country features prominently in some broad based index fund you'd want to use how do you not invest in such a way as to avoid that country.

A few days ago we learned that iShares had filed for a New Zealand fund. Yesterday it was reported that iShares has also filed for Egypt, Ireland, Russia and the Philippines. A couple of these are me too filings and a couple would be new. I think there are three Egypt funds filed for and someone will list one eventually. Between the various country funds and regional funds that exist it is almost possible to recreate EAFE and exclude Japan and the UK.

That isn't necessarily a practical solution but it makes a point of the versatility that the ETF industry is capable of offering toward the aim of portfolio construction. Buying broad based indexes and holding on no matter what has caused a serious bump in the road for a lot of people. How many years of the typical person's investing career is devoted to accumulation and growth versus preservation and income? A bad ten years may not be too far out of the ordinary but someone who is 60 years old today could be facing some very uncomfortable decisions. If a bad ten years becomes a bad 15 for the broad indexes that could be enough to be truly game changing for an entire generation.

How willing are you to bet your financial future on the expectation that broad based indexing will turn things around for this decade? What will the consequence be if you are wrong?
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