World Stock and Bond Markets and Portfolio Diversity

How diversified is your investment portfolio? How does it compare to the diversity of the global
capital markets? In order to facilitate this comparison, the Asset Allocation Advisor compiled the
following table of the values of the worlds stock and bond markets.
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The most striking observation one can make from the table is the sheer size of the markets. The
worlds stock and bond markets in aggregate have a market value in U.S. dollar terms of more
than $125 trillion, or approximately two times the value of the worlds economic output,
estimated at approximately $61 trillion in 2008. It is also interesting to note that the world bond
market exceeds the world stock market in size by a factor of nearly 2 to 1.

U.S. equities account for just less than one-third of the global stock market value despite the fact
that U.S. economic output accounts for less than one-fourth of global output. U.S. bonds account
for a somewhat larger portion of the global bond market at nearly 38%.

Values of the World Stock and Bond Markets, 2009
In equivalent U.S. dollars, numbers in billions

market Stocks
2
Bonds
3
U.S. $14,281 32.3% $31,172 37.9%
euro area 6,506 14.7% 23,611 28.7%
China (incl Hong Kong, excl Taiwan) 4,944 11.2% 2,357 2.9%
J apan 3,508 7.9% 10,675 13.0%
UK 2,614 5.9% 4,010 4.9%
Canada 1,568 3.5% 1,512 1.8%
Australia 1,188 2.7% 1,073 1.3%
India 1,187 2.7% 489 0.6%
Brazil 1,173 2.7% 1,010 1.2%
Switzerland 1,034 2.3% 668 0.8%
Nordic area (Norway, Sweden, Denmark,
Baltic countries and Iceland) 1,004 2.3% 1,653 2.0%
South Korea 807 1.8% 913 1.1%
South Africa 709 1.6% 121 0.1%
Taiwan 594 1.3% 12 0.0%
Singapore 445 1.0% 150 0.2%
Russia 357 0.8% 135 0.2%
Mexico 308 0.7% 392 0.5%
Malaysia 261 0.6% 221 0.3%
Other 1,734 3.9% 2,053 2.5%
Total $44,223 100.0% $82,226 100.0%

Percent of total stocks & bonds 35.0% 65.0%
Total stock & bond markets $126,449

Investors have no reason to match the diversity of the global capital markets in their portfolios
just for diversitys sake. Allocation decisions should be made on the basis of which capital
Copyright, the Asset Allocation Advisor. All rights reserved. November 2009. www.aametrics.com
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market instruments will contribute most efficiently to total portfolio return and risk and not on the
basis of trying to replicate relative market values. Nevertheless, the size and diversity of the
worlds stock and bond markets is an indication that opportunities for more efficient portfolio
diversification may be available to those whose investment options span the global markets.
Investors who limit themselves to a domestic market or to a limited segment of the global market
are likely losing out on opportunities for better return/risk performance.

We also provide the following table on the components of the U.S. bond market, data courtesy of
the Securities Industry and Financial Markets Association.
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U.S. Bond Market Debt Outstanding
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As of 30 J une 2009, dollars in billions

$6,927.8 U.S. Treasury (marketable securities out of a total debt
of $12 trillion, $7.5 of which is public)
2,972.4 Agencies of the U.S.
2,726.8 State & Municipal
6,778.4 Corporate
3,430.3 Money Market
8,948.7 Mortgage-backed
2,533.6 Asset-backed
$34,318.0 Total

The single largest segment of the U.S. bond market, in terms of outstanding and marketable debt,
is the mortgage-backed bond market. This segment alone is larger than any of the worlds stock
markets, except the U.S. stock market. Although the sub-prime portion of the mortgage-backed
bond market is smallvariously estimated at between $500 billion to $1.4 trillionthe fact that
it shook investor confidence in an asset class of its size makes the impact of the sub-prime crisis
more understandable.

J ust as investors need not necessarily mimic the global diversification of the equity and bond
markets in their portfolios, they also need not mimic the diversification of the U.S. bond market
in the domestic bond portion of their portfolios. Once again, the critical question is which asset
classes will contribute most efficiently to the return and risk characteristics of their portfolios.
This is an issue to be decided on the basis of expected returns, risks, and correlations, not on
relative asset class market values.

Although investors may not include all of the global stock and bond or U.S. bond asset classes in
their portfolios, all of these asset classes (and others such as real estate and commodities, to name
just two) should be under consideration. They should be in the universe of possible investments,
and the asset allocation/portfolio management process should evaluate the contributions which
they could potentially make to portfolio return and risk performance. Optimal portfolios need a
broad range of investment options. A limited range is imprudent and may result in lower future
returns and/or higher return volatility.

Albert J . Brenner, CFA
November 15, 2009


Copyright, the Asset Allocation Advisor. All rights reserved. November 2009. www.aametrics.com
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1
Careful readers will note that stock market values are based on market capitalization while bond market
values are based on debt outstanding. Values for the stock markets, therefore, are true market values,
whereas values for the bond markets are essentially book values and do not reflect the market values of the
outstanding bonds. Since global interest rates generally are near to historic low levels, it would not be
unreasonable to estimate that the market value of global debt is at least equal to, if not greater than, the
book value of the debt. Readers should also note that stock market values are generally as of 30 September
2009 while bond values are as of 31 March 2009, both being the most recent data available at the level of
detail required for this compilationsee notes 2 and 3.

2
Stock market capitalization data is as of 30 September 2009 from the World Federation of Exchanges
(WFE) for all areas except for Russia, www.world-exchanges.org/statistics/ytd-monthly. Data for the
Russian stock market is as of 31 March 2009 and is from MICEX, Moscow Interbank Currency Exchange,
the largest stock exchange in Russia and the Commonwealth of Independent States. MICEX achieved full
membership status in the WFE in October 2009.

3
Bond market data is as of 31 March 2009 and is from the Bank for International Settlements.

4
Domestic bond market data provided by the Securities Industry and Financial Markets Association
(SIFMA) is not directly comparable to the data provided by The Bank for International Settlements (BIS).
BIS reports outstanding debt for nations by government, financial institutions, and corporate issuers for
both domestic and international issues. The total U.S. debt outstanding as of 31 March 2009 was $31.2
trillion according to BIS, compared to $34.2 trillion according to SIFMA.

5
As reported by the Securities Industry and Financial Markets Association (SIFMA),
www.sifma.org/uploadedFiles/Reserach/Statistics/SIFMA_USBondMarketOutstanding.pdf

Copyright, the Asset Allocation Advisor. All rights reserved. November 2009. www.aametrics.com
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