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TMFJake wrote a wonderful and thoughtful blog post today, and I highly reccomend reading it. I thought I'd post my thoughts on the subject here because while his post inspired me to write this, what I have to say here doesn't really 'fit' with the direction I think he intened his thread to go.


My thoughts on asset allocation:


Like TMFJake, asset allocation has never been a strategy of mine, per se. Heck, it's never been a strategy of mine at all.


One of my favorite things to do is to take lessons I've learned from one arena and apply them to a different arena. My approach to asset allocation is a function of things I've learned from the realms of corporate strategy, and gambling (specifically card counting).


From the realm of corporate strategy, one of my professors once said something that immedaitely struck a chord with me. To paraphrase, he said, "A flawless strategy executed with mediocrity will invariably be outperformed by a mediocre strategy executed flawlessly."


From the realm of card counting (though I've never been a card counter myself), one of my best friends through childhood, with whom I still have contact, is probably one of the world's leading experts on the matematics of gaming and gambling. In talking about all of the different card counting methods out there he said (again, to paraphrase), "Much more important than which card counting method or system you use is how well you use your chosen method."


What does this have to do with asset allocation and the fact that it's something I've never really incorporated into my personal investing style?


Frankly, I know terribly little about asset allocation, even less about China and other emerging markets, nor do I have much knowledge about commodity markets (other than in broad, general terms). I choose, instead, to invest in my proverbial 'wheelhouse', U.S. equities.


Might U.S. equities underperform those of emerging markets? You betcha. But when I look at this issue, I'm reminded of what my professor, and my friend, had to say. I think I can do a far better job of execution with U.S. equities, so that's what I plan on sticking with, at least for the time being.


I'm not saying that I'll never seek international exposure, or limit myself exclusively to U.S. equities. Far from it. What I am trying to say, though, is that I'm not going to make it a point to do so as I think that would, at least given my present knowledge (which is ever changing), be investing outside of what Mr. Buffett would call my 'circle of competence'.

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If you would like to expose your portfolio to foreign or emerging markets, but fear leaving your 'circle of competence' you can always invest in a foreign equities ETF. Companies like Barclays and Vanguard offer ETFs that track global indices, like the MSCI EFA Index, or even country specific ones, if your want exposure to places like China, or India.


If your real-life portfolio performs anything like your CAPS one, I wouldn't be too worried about asset allocation =)

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Or, a mutual fund that deals in international stocks? Mine currently is returning 21.56% YTD, and 25.35% 12months. It has an expense ratio of 1.2%, and no load. Don't know if that's terribly good compared to others, but it works for me to be invested "overseas."

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Thanks for the comments/suggestions. :-)


If I do decided to make it a point to add some more international exposure to my portfolio, ETFs and mutual funds are certainly a good alternative.


That said, my first step would probably be to purchase U.S. equties that have large international exposure. There are a lot of U.S. companies that derive a significant amount of their business from overseas (Coca-cola comes immediately to mind, though there are a whole host of others).


There are a couple of things that I think many investors might take for granted regarding U.S. equities that are certainly no small part of the reason why I generally favor them over their foreign counterparts.


First are the SEC reporting requirements. Enron and other shameful debacles aside, when looked at from a global perspective, the reporting requirements for publicly traded companies in the U.S. are excellent, and improving all of the time (like reg FD, for example). While I'm not very familiar with overseas requirements and therefore might hold this opinion out of a little bit of ignorance, I think U.S. reporting requirements are perhaps the best in the world - and that's definately something to consider that might not immediately leap to mind.


The other thing that I think gets overlooked or perhpaps underestimated is political risk. Be a Fool a Republican, Democrat, or something else, the United States is one of the most, if not the most, politically stable governments in the world. Chances of the U.S. government deciding to nationalize large swaths of the private sector are so remote as to be practically nonesistent - not so with many other countries. Even if nationalization isn't an issue, the chances of the U.S. government suddenly passing legislation that drastically changes the business environment in this country (be it onerous regulation, huge taxation changes, etc.) is also much smaller than it is in many countries.


I don't profess to know much about China, but its reasons like these that have me thinking twice and sitting on my hands while many other investors are tripping over themselves to get a piece of the action in this and other important emerging markets.


Maybe I will decide before too long, as I learn more, to seek more international exposure in one way or another - but if and when I do, it will be with a keen eye on the risks I've mentioned above. I think there are good reasons why the U.S. garners the lion's share of invested capital - good reporting requirements and low political risk not being least among them.

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