Investment advice is often written from the perspective of a large domestic economy, where global effects have less impact. I live in Australia, where GDP is $1.13 trillion and our stock exchange has a market capitalisation of $1.6 trillion — around 1/20th of the United States'. Suppose I want to allocate 60% of my assets to stocks, 30% to bonds, and 10% to cash. How should I divide the allocations between Australian and foreign assets?
Most Australian superannuation funds are weighted in favour of Australian shares. For example, AustralianSuper's default portfolio currently allocates 23% to Australian shares and 35% to international shares. Individual investors are also less likely to purchase foreign stocks because of higher transaction costs and unwanted currency risk.
Since Australia is taken out of the index, I still don't know how to decide on the weighting to give to Australian assets in my own portfolio. Currency risk and higher transaction fees are good reasons for a strong bias in favour of domestic assets. I'm not a forex trader, so it's probably pointless for me to hold any foreign bonds or cash.
Conversely, if I want to allocate 60% of my portfolio to diversified stock holdings, why should I have any bias in favour of my local economy? Should the composition of my stock portfolio track the global economy, like the MSCI World index?