ReSolve Talks Cognitive Biases and Global Diversification with S&P Dow Jones Indices
The entire interview is worth watching, but here are a few lightly edited snippets to get started. Enjoy!
Mike, on investing in “what you know”:
There’s a comfort with people owning things that they drive by on the way home, and this creates a couple of problems. One is that they’re under-diversified globally; there are other economies moving at different paces at different times. And then, the other problem is that people tend to invest in the sectors that their business or job is involved in. It increases negative impacts.
Adam, on home bias:
Investors in every country prefer to over-allocate to the companies within their country. For example, a recent Vanguard study showed that about the average Canadian invests 60% of the equity portion of his portfolio in Canadian stocks. If you contrast that against the weight of Canadian equities in the S&P Global 1200 index, which is closer to 3%, Canadians end up over-allocating to the tune of about 20x what would be expected when looking at a broader context.
Adam, on the growing availability and shrinking costs of global diversification:
We live in a time where we have the ability to gain exposure to virtually every region, and country and asset class that anyone might imagine, and in a very inexpensive way using index products. If you believe that markets are mostly efficient, then you would want to source your information from the largest crowd, which is the pool of global investors as expressed using a market cap-weighted index.
Mike, on regulatory change:
The heart of regulatory change is the conflict of interest between advisor compensation and best advice for the clients. They’re trying to get to the point where there’s no bias in the advice investors get, which is the Fiduciary Standard. What we observe is the steady decline in the number of overall reps in North America…accompanied by a commensurate increase in the quality of the remaining Advisors. Now, indexing plays an important role in this because indices (along with ETFs) are a transparent and low cost solution, which is exactly what Advisors are looking for to meet their obligations as Fiduciaries.