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Family Inc. by Douglas P. McCormick

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CHAPTER 14

Use Indexing for Your Low-Cost Investment Portfolio

It is beyond the scope of this book to recommend specific ETFs (exchange-traded funds) or index mutual funds. Let’s explore, however, the world stock markets that represent most of the equity exposure a family should desire, regardless of the branded investment product.

Figure 14.1 shows the composition of the world’s stock market capitalization by region. U.S. stocks now account for half the $60 trillion value of world stocks while developed countries outside the United States make up approximately 38 percent, and emerging markets represent the remaining 12 percent. Numerous ETFs and index funds provide desired exposure to the global market at an attractive annual cost of approximately 0.3 percent. However, to constrain costs even more, I recommend dividing the developed-markets index into a U.S. index (as low as 0.05 percent annual cost) and an international index that excludes the United States (as low as 0.14 percent).

Pie chart shows United States, UK, Europe, Canada-Australia-New Zealand, Japan, emerging markets and other markets with percent of capitalizations 50, 6, 17, 7, 7, 12 and 1 respectively.

FIGURE 14.1 Weighted Capitalization of World Stock Markets

Source: MSCI ACWI Index, October 2014.

International Allocation

Analysts debate whether it’s best to allocate your global equity investments according to countries’ market capitalization, as charted in Figure 14.1, or country GDPs. ...

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