Asset allocation, we’re told, is the critical variable driving success and failure for diversified portfolios in the long haul. If you get asset allocation wrong, market timing and security selection can’t save you. We’re inclined to agree, although that generally sound counsel suffers from subjectivity once you go into the details of designing actual portfolios. One man’s notion of an asset allocation dream is another’s nightmare. Perhaps that’s inevitable, as every asset allocation should be custom designed for each investor’s goals, risk tolerance, time horizon, and so on.
Standard benchmarks, in short, are hard to come by for asset allocation. But if there’s such a thing as a default, Mr. Market’s take on how to allocate money arguably comes closest to such an ideal. By “Mr. Market” we’re referring to the distribution of market capitalization. To be sure, market cap is under attack these days from new-fangled concepts of benchmark crafting, i.e., fundamental indexing. But say what you might about market cap, it still seems to be the most objective measure of the capital markets. You may or may not want to own equities based on market-cap allocations, but the measure remains a valuable and largely objective standard by which to gauge trends in the financial markets.
With that in mind, we crunched the numbers on the world equity markets, courtesy of data from S&P/Citigroup Global Equity Indices. Although this benchmark series offers dozens of indices, we looked at seven with the idea of forging a big-picture overview of the changing face of market-cap equity allocations on a global scale.