Sunday, May 23, 2021 11:44:09 AM
AIM of Foreign/Domestic Stock ratio
The likes of the Dow/Gold ratio provides a indicator of the relative value of the Dow, priced in ounces of gold, over time.
The US has had a relatively good last decade, of the order 15% annualised nominal gains, 12.5% annualised real gains. Some fret that may mean a subsequent decade of 0% real gains, to broadly average 6% annualised real gains over two decades, but a 'lost decade'. Perhaps via high/rising inflation.
Other countries have fallen far short of anywhere near those gains, and the common opinion is to diversify across both domestic and foreign stock to smooth things down. For instance if the US does endure a lost decade, international might by comparison do well.
Spinning that around to a UK investors perspective we might measure the relative performance of US versus UK stock total (nominal) returns. For that I've used Berkshire Hathaway as the proxy for US stock, along with a 'domestic' (for UK) FT250 mid cap stock index total return.
Divide BRK / FT250 for the US/UK ratio and during the 1980's BRK performed exceptionally well, which makes defining bands for when to perhaps flip between UK and US stocks that more difficult.
But AIM comes to the rescue. I simply AIM'd the BRK/FT250 ratio to let AIM advise as to when to add/reduce domestic/foreign. Basically AIM is just providing the % cash figure, which in this case represents how much domestic (FT250) exposure, and the rest being in BRK.
Run from 1986 and ...
... that provided a similar total return as 100% BRK, but did so with just 56% average exposure to BRK (44% average exposure to FT250). Individually BRK annualised 15.7% compared to the FT250's 11.5% (from a UK Pound based investors perspective). AIM of the BRK/FT250 ratio provided a 15.8% annualised.
If alternatively I'd gone with a total rotation based approach, using 3.5 and 2.5 ratio levels, i.e. rotate fully out of BRK (US) and into FT250 when the BRK/FT250 ratio rose to 3.5 or above, and then rotate fully out of FT250 and into BRK when the BRK/FT250 ratio had dropped to 2.5 or lower, then that yielded a 18.25% annualised. Where those 3.5 and 2.5 band choices fits nicely with the BRK/FT250 ratio chart, but where those bands couldn't have been known in advance. As such, AIM without such foresight of where to set rotation trigger bands did a pretty good job of working with what was available and that could be used in the real world.
More generally, it looks like having been US heavy since 2011 is starting to be indicated as perhaps being a bit toppy, and the above AIM is suggesting foreign (for US investors) should perhaps be increased to more like 40% levels. Or from a UK (foreign) perspective, reduce US exposure from relatively high (85% weighting) levels down to more around 60% weighting levels.
Clive.
The likes of the Dow/Gold ratio provides a indicator of the relative value of the Dow, priced in ounces of gold, over time.
The US has had a relatively good last decade, of the order 15% annualised nominal gains, 12.5% annualised real gains. Some fret that may mean a subsequent decade of 0% real gains, to broadly average 6% annualised real gains over two decades, but a 'lost decade'. Perhaps via high/rising inflation.
Other countries have fallen far short of anywhere near those gains, and the common opinion is to diversify across both domestic and foreign stock to smooth things down. For instance if the US does endure a lost decade, international might by comparison do well.
Spinning that around to a UK investors perspective we might measure the relative performance of US versus UK stock total (nominal) returns. For that I've used Berkshire Hathaway as the proxy for US stock, along with a 'domestic' (for UK) FT250 mid cap stock index total return.
Divide BRK / FT250 for the US/UK ratio and during the 1980's BRK performed exceptionally well, which makes defining bands for when to perhaps flip between UK and US stocks that more difficult.
But AIM comes to the rescue. I simply AIM'd the BRK/FT250 ratio to let AIM advise as to when to add/reduce domestic/foreign. Basically AIM is just providing the % cash figure, which in this case represents how much domestic (FT250) exposure, and the rest being in BRK.
Run from 1986 and ...
... that provided a similar total return as 100% BRK, but did so with just 56% average exposure to BRK (44% average exposure to FT250). Individually BRK annualised 15.7% compared to the FT250's 11.5% (from a UK Pound based investors perspective). AIM of the BRK/FT250 ratio provided a 15.8% annualised.
If alternatively I'd gone with a total rotation based approach, using 3.5 and 2.5 ratio levels, i.e. rotate fully out of BRK (US) and into FT250 when the BRK/FT250 ratio rose to 3.5 or above, and then rotate fully out of FT250 and into BRK when the BRK/FT250 ratio had dropped to 2.5 or lower, then that yielded a 18.25% annualised. Where those 3.5 and 2.5 band choices fits nicely with the BRK/FT250 ratio chart, but where those bands couldn't have been known in advance. As such, AIM without such foresight of where to set rotation trigger bands did a pretty good job of working with what was available and that could be used in the real world.
More generally, it looks like having been US heavy since 2011 is starting to be indicated as perhaps being a bit toppy, and the above AIM is suggesting foreign (for US investors) should perhaps be increased to more like 40% levels. Or from a UK (foreign) perspective, reduce US exposure from relatively high (85% weighting) levels down to more around 60% weighting levels.
Clive.
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