The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Conclusion: Think Globally, Act Locally

Thinking globally. Beginning the equity allocation process by looking at global equity market capitalization makes all the sense in the world (pun intended). Here is an exercise investors might try. Assume our investor has 35 percent of his entire portfolio in U.S. large-cap stocks, 5 percent in U.S. small-cap stocks, 15 percent in international stocks and 5 percent in emerging markets stocks. Of the 60 percent of the portfolio in equities, then, our investor has 40 percent (67 percent of the equity exposure) allocated to U.S. and 20 percent (33 percent) allocated to non-U.S., compared to a market weighting of (roughly) 45 percent U.S. and 55 percent non-U.S.:

Investor's Portfolio	Global Market Cap (rounded)
U.S. equities	67 percent	45 percent
Non-U.S. equities	33 percent	55 percent

Now we might ask ourselves why we are so smart that we can make a huge, 22 percent bet against non-U.S. stocks? What is it we know that gives us confidence to make such a sizable bet? Would we do so elsewhere in our portfolio? If not, we should probably take steps to bring these two allocations closer together.

Acting globally. I have discussed above the challenges associated with using a global manager for our equity portfolio, but of course it's possible to do so, with these being the main choices:

Option #1—Engage an active global equity manager. Here the main challenge is that there are so few firms that have the global resources required to demonstrate ...