Home ⇒ Mutual Funds ⇒ How much US stocks should your portfolio hold?
How much US stocks should your portfolio hold?
Each time the S&P 500 provides a return higher than local Indices, Indian investors want to know if they can hold US Stocks. Does this make sense? If so, how much exposure should they have?
“Should I hold international stocks in my portfolio?” is a question that investors ask when returns in the local stock markets pale. In an Indian context, this typically means “buying US stocks”. So the questions to ask are, “should I buy US stocks?”, “if yes, how much should I hold?”
After the 2008 crisis, the US markets have had moved up significantly with only two -negative annual returns: -0.7% in 2015 and -6% in 2018. Almost all other annual returns were in two digits and three 20% plus years. Dividends are not included in this! Source: macrotrends
Although the Indian markets too moved up during this period and often much more, the Sensex fell by 23% in2011; In 2015 and 2016, Sensex did not beat a savings bank account and an FD in 2018. Naturally, this would make any investor look for greener pastures. Let us find out.
We start the analysis with a comparison of Nifty 50, Nifty Next 50 and S and P 500 (all dividends included) from Nov 2002. Unfortunately, this data set is rather small. There are several disadvantages associated with this, as discussed below. This is what we have, and we will have to work with it.
🔥Secure your future with our Robo-advisory tool trusted by over 3,000 investors and advisors. From effortless retirement planning to funding your children’s biggest dreams, turn your financial goals into reality. 🔥
The graph is in log scale, and a small portion of the S and P 500 (during the 2008 crisis) is cut off to make the rest of the plot clear.
Just by looking at this, one might be tempted to conclude that “over the long term” it makes sense for an Indian investor to stick with the Indian market. This is reasonable with the caveat that the Indian market may not grow as much and as fast as it did in the past.
Not so fast! We need to dig deeper. Please be sure to see all the graphs and read the article in full. Also, there is something missing in the above chart. The S and P 500 is in USD while the Nifty indices are in INR. So when the S and P 500 is converted to INR, we get this.
Nifty 50 vs Nifty Next 50 vs S and P 500 (in INR)
Many readers may be disappointed to note that the difference is not much between the S&P 500 and S&P500-INR. This is because the USD to INR conversion rate does not provide a significant gain over time (although it feels like it). This is the five-year rolling returns.
We shall ignore taxes and exit loads. The portfolios are assumed to be rebalanced each month. Look for the movement of the white line. This is the composite portfolio. The evolution of the composite portfolios is shown below. This is monthly data so some features may be missing.
We have a short window to work with here. Focus your attention on the dotted green line. That has no S&P 500 contribution. It perhaps ironic and even amusing that after the start of the late-2013 upward movement in the Indian stock market, composite portfolios have done better!
The red line with 50% of S&P 500 and 25% n50 and 25% nn50 has the lowest return spread. Based on this limited dataset, this balances return and risk well (based on a simple visual observation).
Yes, the above data suggests that “some exposure to S and P 500” will be beneficial to the investor. At the very least, it cannot hurt and will lower risk. However, there are two significant problems.
It is not easy to say “how much” is enough. Exposure to 50% of S and P 500 is simply too risky if there is a repeat of 2008. Say how about 20%? Yes, but this involves effort. Regular rebalancing ignoring taxes and exit loads. Anything lower will not help.
The second problem is, most investors who want returns, want only returns. They are either ignorant of risk management or unwilling to put in the effort and pay the taxes. The higher returns or lower risk that seems so natural in Excel is quite in reality.
What the investment options?
Funds like Parag Parikh Long Term Equity Fund handle this quite well. There is not tax or exit load outgo and rebalancing to worry about. Also, the international portfolio is not restricted to US stocks. This IMO is the best-suited option for most investors. However, exposure to the fund must be significant to make a difference. Disclosure: the author is invested. See for details: My personal financial audit 2018
Using international feeder funds will also work, the expense ratio (not considered above) can dampen returns. Investors with an eye on the Nasdaq 100 via Motilal Oswal Nasdaq 100 Fund of Fund will have to keep concentration risk in mind. See this comparison with S & P 500, for example.
Exposure to the US market can be fruitful when it moves up but can hurt badly during downturns. Therefore investors must study past risk (not the returns, especially recent) before committing money. To profit from international diversification discipline and active management is essential.
Do share this article with your friends using the buttons below.
Use our Robo-advisory Tool to create a complete financial plan!More than 3,000 investors and advisors use this! Use the discount code robo25 for 20% off. Plan your retirement (early, normal, before, and after), as well as non-recurring financial goals (such as child education) and recurring financial goals (such as holidays and appliance purchases). The tool would help anyone aged 18 to 80 plan for their retirement, as well as for six non-recurring and four recurring financial goals, with a detailed cash flow summary.
Have a question? Subscribe to our newsletter using the form below.
Hit 'reply' to any email from us! We do not offer personalised investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Our flagship course!Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,500 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.Increase your income by getting people to pay for your skills!More than 900 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner seeking more clients through online visibility, or a salaried individual looking for a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you. (Watch the 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!Our book for kids: “Chinchu Gets a Superpower!” is now available!Both the boy and girl versions of "Chinchu Gets a Superpower". Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. The narrative revolves around what he wants for his birthday and how his parents plan for it, while also teaching him several key ideas of decision-making and money management. What readers say!Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Freefincal is a News Media organisation dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact Information: To get in touch, please use our contact form. (Sponsored posts or paid collaborations will not be entertained.)
Published by CNBC TV18, this book is designed to help you ask the right questions and find the correct answers. Additionally, it comes with nine online calculators, allowing you to create custom solutions tailored to your lifestyle. Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is designed for young earners to get their basics right from the start! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.
Your Ultimate Guide to Travel
This is an in-depth exploration of vacation planning, including finding affordable flights, budget accommodations, and practical travel tips. It also examines the benefits of travelling slowly, both financially and psychologically, with links to relevant web pages and guidance at every step. Get the PDF for Rs 300 (instant download)
Create a complete financial plan with our Robo-advisor!
Trusted by 3500+ investors and advisors! Use code robo25 for a 20% discount!
