Deciding How Much to put in International

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Deciding How Much to put in International

Postby tr123 » Thu May 09, 2013 12:53 am

What are the considerations when deciding what percentage of one's stock holdings to allocate to international stocks?
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Re: Deciding How Much to put in International

Postby rickmerrill » Thu May 09, 2013 1:15 am

Vanguard says the sweet spot is around 30% https://personal.vanguard.com/pdf/icriecr.pdf
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Re: Deciding How Much to put in International

Postby freebeer » Thu May 09, 2013 1:36 am

rickmerrill wrote:Vanguard says the sweet spot is around 30% https://personal.vanguard.com/pdf/icriecr.pdf


There is no statement about a sweet spot at 30% in the cited white paper. And I read it as implying that the sweet spot is more like 40%. The rationale of a lower allocation because of "being influenced by embedded home biases" amounts to pandering to non-objective considerations. And while the paper states that 30% delivered almost as much diversification benefit in the past, it also notes that "a significant weakness of this analysis is that it is backward-looking and particularly dependent on the time period examined" (a period in which we know the US economy led the world, so subject to recency bias as well).
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Re: Deciding How Much to put in International

Postby texasgal47 » Thu May 09, 2013 1:52 am

I believe the mongraph referenced above does speak about bands of approximate 10 yr. periods where different percentages of between 20% and 40% were optimal. If my recollection from the paper is correct, around 20% has been the current sweet spot for this cycle.
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Re: Deciding How Much to put in International

Postby SnowSkier » Thu May 09, 2013 2:25 am

This recent thread is helpful:
viewtopic.php?f=10&t=112848 (a "prudent way to increase expected returns")
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Re: Deciding How Much to put in International

Postby Cash » Thu May 09, 2013 6:48 am

rickmerrill wrote:Vanguard says the sweet spot is around 30% https://personal.vanguard.com/pdf/icriecr.pdf


From the executive summary:

Although there is no right answer for all investors, empirical and
practical considerations suggest a reasonable starting allocation
to non-U.S. stocks of 20%, with an upper limit based on global
market capitalization.


In other words, anything from 20% to approximately 55% is reasonable. Having no basis to do otherwise, I go with the global market capitalization.
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Re: Deciding How Much to put in International

Postby Call_Me_Op » Thu May 09, 2013 6:55 am

I see no justification to deviate from global market capitalization if one believes in broad diversification. The cost of international investing is comparable (now) to US investing, and the currency risk can be thought-of as currency diversification. The US is now only about 30% of world market cap.
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Re: Deciding How Much to put in International

Postby z3r0c00l » Thu May 09, 2013 7:15 am

I do 50/50 and age-10 in bonds. Just because it is easy to remember and easy to stick with. I like the idea of investing outside the country because economic problems here hurt me in many other ways, like the risk of employment loss.
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Re: Deciding How Much to put in International

Postby Trev H » Thu May 09, 2013 7:30 am

#1 thing to consider is diversification...

Vanguards Total World fund breaks it down like this:

10.6 Emerging Markets
22.6 Europe
15.2 Pacific
0.30 Middle East
51.3 North America (good old USA and Canada).

I would suggest somewhere around 50% In US Equities (Max).

Anything more than that and you are starting to overweight something just because you like it, or are familliar with it, because it's home, etc...

That is one of the leading causes of a lack of diversification in portfolio's.

Good Luck !

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Re: Deciding How Much to put in International

Postby dickenjb » Thu May 09, 2013 7:30 am

Call_Me_Op wrote:I see no justification to deviate from global market capitalization if one believes in broad diversification. The cost of international investing is comparable (now) to US investing, and the currency risk can be thought-of as currency diversification. The US is now only about 30% of world market cap.


Really? Then why is Vanguard World Index 51% in NAFTA? I can't think Canada and Mexico take it from 30% to 51%, given that Canada is the same size as the US but has 10% of our GDP.

https://personal.vanguard.com/us/funds/ ... =INT#tab=2
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Re: Deciding How Much to put in International

Postby HardKnocker » Thu May 09, 2013 8:20 am

I don't have anything in International.

Who needs it. Most large cap US companies have considerable international exposure.

TSM for me in the equity department.
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Re: Deciding How Much to put in International

Postby ruralavalon » Thu May 09, 2013 9:13 am

The term "sweet spot" is not used, but you get most (90%) of the benefit at around 30%.

The general range of international at 20 - 40% of total equities is endorsed, historically around 30% gives most (90%) of the benefit, with no significant benefit to going over 40%.

Vanguard wrote: . . . on average, a 20% allocation of a domestic portfolio to non-U.S. equities has provided 70% of the maximum diversification benefit. An investor who allocated 30% to non-U.S. equities has averaged 90% of the maximum diversification benefit across all periods.(p. 8, emphasis added)


Vanguard wrote: . . . we have demonstrated that domestic investors should consider allocating part of their portfolios to international securities, and that a 20% allocation may be a reasonable starting point. Although finance theory dictates that an upper asset allocation limit should be based on the global market capitalization for international equities (currently approximately 58%), we have demonstrated that international allocations exceeding 40% have not historically added significant additional diversification benefits, particularly accounting for costs For many investors, an allocation between 20% and 40% should be considered reasonable, given the historical benefits of diversification. (p. 13, emphasis added)
https://personal.vanguard.com/pdf/icriecr.pdf .



And, it is not enough to just invest in U.S. companies because they are are multi-national, "an all-U.S. portfolio would be a very lopsided one in terms of industry exposures". https://institutional.vanguard.com/VGAp ... nvestTrap2 .
Vanguard wrote:a portfolio made up solely of U.S. firms, which are more concentrated in biotechnology, computer equipment, information technology and IT services, and software, would be underweighted in “old world” industries such as electrical equipment, durable household goods, and automobiles. In other words, an all-U.S. portfolio would lose not just investment opportunities but also the diversification benefits of a portfolio that’s more evenly distributed across industries. (p.3, emphasis added )
https://personal.vanguard.com/pdf/icriecr.pdf
Last edited by ruralavalon on Thu May 09, 2013 9:34 am, edited 1 time in total.
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Re: Deciding How Much to put in International

Postby steve r » Thu May 09, 2013 9:22 am

After reading the paper I decided to do some of my own research using Simba Data (1972 to 2012)

I found nothing conclusive - it depends on your goals and beliefs going forward - particularly related to emerging markets:

Goal 1 - Minimize Downward Standard Deviation

100% TSM (US) does this

To see if this has to do with global having highly volatile Emerging Markets - I ran similar numbers with International Developed (ex EM)

100% TSM (same thing)

Goal 2 - Minimize Standard Deviation

80/20 TSM/TISM

Goal 3 - Maximize Sortino

70% TISM

To see how much this has to do with the great returns of EM over 40 years (that may not repeat?) - I ran similar numbers with International Developed (ex EM)

100% TSM - so yeah - the above finding is all about EM which had 75 percent higher returns during the period than developed ex US, but with 1/3 more volatility.

Goal 4 - Maximize Sharpe

60 TSM / 40

I might add the last two goals with risk adjusted returns - differences between them and +/- 10 TSM were like .002 ... small ....
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Re: Deciding How Much to put in International

Postby HardKnocker » Thu May 09, 2013 9:22 am

ruralavalon wrote:And, it is not enough to just invest in U.S. companies because they are are multi-national, "an all-U.S. portfolio would be a very lopsided one in terms of industry exposures". https://institutional.vanguard.com/VGAp ... nvestTrap2 .


I'll take the lead of John Bogle and pass on International.
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Re: Deciding How Much to put in International

Postby Dulocracy » Thu May 09, 2013 9:33 am

My plan calls for 30-40%. My AA falls within that range.

I got this from looking at a LOT of AA threads on here. I saw that most BH posters were 20-50. The most common answers were 30 and 40. I figured the range used most by smart people was a good place to start. If I am wrong, at least I am with the herd of wrong people who usually do well anyway.

Since that time, I have learned more about diversification. For me, having 30-40% in international provides a good diversification mix. My AA is currently 40% international, but when my retirement account starts offering REIT funds, I will drop it to 35%. (My AA would be 35% international and 5% REIT, but that was not available. I will admit to a bit of market timing in that I think international stocks are cheap right now, so I parked the 5% there.)
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Re: Deciding How Much to put in International

Postby connya » Thu May 09, 2013 9:37 am

freebeer wrote:The rationale of a lower allocation because of "being influenced by embedded home biases" amounts to pandering to non-objective considerations. And while the paper states that 30% delivered almost as much diversification benefit in the past, it also notes that "a significant weakness of this analysis is that it is backward-looking and particularly dependent on the time period examined" (a period in which we know the US economy led the world, so subject to recency bias as well).


This is a great articulation of my confusion. I just don't understand why tilting heavily to the U.S. is "default" here. All the talk of volatility and optimal returns is based on past performance - is there research claiming that the U.S. itself will perform better in the future than the rest of the world? If not, why the home bias?

If investors shouldn't hold company stock of their employer (due to risk of losing job AND investments), why is it a good idea for investors to overweight their home country?
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Re: Deciding How Much to put in International

Postby ruralavalon » Thu May 09, 2013 9:39 am

Dulocracy wrote:I got this from looking at a LOT of AA threads on here. I saw that most BH posters were 20-50. The most common answers were 30 and 40. I figured the range used most by smart people was a good place to start. If I am wrong, at least I am with the herd of wrong people who usually do well anyway


Most common BH allocation (median) is somewhere in the low 30s: 2011 poll viewtopic.php?p=98922 ; and 2012 poll viewtopic.php?f=10&t=103617 .
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Re: Deciding How Much to put in International

Postby ruralavalon » Thu May 09, 2013 9:45 am

connya wrote:This is a great articulation of my confusion. I just don't understand why tilting heavily to the U.S. is "default" here. All the talk of volatility and optimal returns is based on past performance - is there research claiming that the U.S. itself will perform better in the future than the rest of the world? If not, why the home bias? (emphasis added)

If you want to use actual data rather than opinion, you have to look at the past. There is no other choice.
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Re: Deciding How Much to put in International

Postby rickmerrill » Thu May 09, 2013 9:46 am

freebeer wrote:
rickmerrill wrote:Vanguard says the sweet spot is around 30% https://personal.vanguard.com/pdf/icriecr.pdf


There is no statement about a sweet spot at 30% in the cited white paper. And I read it as implying that the sweet spot is more like 40%. The rationale of a lower allocation because of "being influenced by embedded home biases" amounts to pandering to non-objective considerations. And while the paper states that 30% delivered almost as much diversification benefit in the past, it also notes that "a significant weakness of this analysis is that it is backward-looking and particularly dependent on the time period examined" (a period in which we know the US economy led the world, so subject to recency bias as well).


Gee, all I was trying to do was give the link to a commonly cited paper with a tidbit to introduce the link. I should have said it was my opinion or from my memory or just given the link. When I wrote it I was actually thinking of the comment Duckie frequently uses (see example below) - I just don't like to refer to a range as as a spot so instead of calling the sweet spot 20-40 I just say 30. When I said around I was thinking +-10 percent. My opinion is that international might add some diversification and I have less than market weight because of currency risk and AFAIK international funds are still slightly more expense.

Duckie and others frequently give advice along these lines - I think it is good advice:
"Vanguard has found that between 20% and 40% of stocks in international to be the "sweet spot". See the discussion and the Vanguard paper link. Vanguard splits the difference and uses 30% in their Target Retirement and LifeStrategy funds."

This may be an old quote - I don't know if 30% is is always or still the international allocation used but I think for the OP's purposes it is close enough.
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Re: Deciding How Much to put in International

Postby Gauntlet » Thu May 09, 2013 9:47 am

The choice of an investor's percentage of equities that are international is much less important than the choice of percentage of the overall portfolio that is in bonds. Having said that, I really don't understand why some are so against holding international. If an investor owns zero international then she/he is missing out on the earnings of many great companies and industries not found in the U.S. It seems to me that one should pick a percentage between 20 and 50 (or the market cap) and stick with it. One-third of my equities are international.
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Re: Deciding How Much to put in International

Postby The Wizard » Thu May 09, 2013 9:54 am

My target is 1/3 international, of my total stock allocation.
International is more VOLATILE than domestic, so pay attention to rebalancing here...
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Re: Deciding How Much to put in International

Postby freebeer » Thu May 09, 2013 10:11 am

ruralavalon wrote:The term "sweet spot" is not used, but you get most (90%) of the benefit at around 30%. ...
Vanguard wrote: . . . on average, a 20% allocation of a domestic portfolio to non-U.S. equities has provided 70% of the maximum diversification benefit. An investor who allocated 30% to non-U.S. equities has averaged 90% of the maximum diversification benefit across all periods.(p. 8, emphasis added)
...

I think you meant to say "have gotten in the past" most of the benefit rather than "you get" most of the benefit... and you left out the part where VG noted: "a significant weakness of this analysis is that it is backward-looking and particularly dependent on the time period examined".
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Re: Deciding How Much to put in International

Postby momar » Thu May 09, 2013 10:16 am

Gauntlet wrote:The choice of an investor's percentage of equities that are international is much less important than the choice of percentage of the overall portfolio that is in bonds.

+1. You will be fine anywhere between 20-55% and it is unlikely you will notice the difference unless you squint really hard.
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Re: Deciding How Much to put in International

Postby freebeer » Thu May 09, 2013 10:21 am

rickmerrill wrote:... I just don't like to refer to a range as as a spot so instead of calling the sweet spot 20-40 I just say 30. When I said around I was thinking +-10 percent. My opinion is that international might add some diversification and I have less than market weight because of currency risk and AFAIK international funds are still slightly more expense....


Right but the range cited in the paper was 20% to 55% (the non-US % of global market cap), not 20-40. And it seemed that only very weak justification was presented for being at the low-end of that range (although FWIW we're 35% of equity in international, and are not planning to modify our investment plan, so this is only theoretical for me).

IMO this whole topic is really a perfect illustration of various cognitive biases that even us Bogleheads (even Jack Bogle) can subscribe to: recency, localism, anchoring. Much of the argument in the paper, and on this thread, seems to amount to rationalizations of why in this case subscribing to some or all of these biases (i.e. over-weighting US) won't cost too much in terms of total return. But that is itself a weird way to think about it vs. seeking to optimize return and follow the key Bogleheads principle of maximizing diversification.
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Re: Deciding How Much to put in International

Postby OverTheHill » Thu May 09, 2013 10:34 am

How about nothing. The large multi-national domestic corporations have huge exposure to international markets and earnings. Why do you think virtually every foreign government in the world buys huge amounts of US Treasury bonds? It certainly isn't because international investing is better.
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Re: Deciding How Much to put in International

Postby steve r » Thu May 09, 2013 10:57 am

momar wrote:
Gauntlet wrote:The choice of an investor's percentage of equities that are international is much less important than the choice of percentage of the overall portfolio that is in bonds.

+1. You will be fine anywhere between 20-55% and it is unlikely you will notice the difference unless you squint really hard.

+2
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Re: Deciding How Much to put in International

Postby Noobvestor » Thu May 09, 2013 11:37 am

freebeer wrote:IMO this whole topic is really a perfect illustration of various cognitive biases that even us Bogleheads (even Jack Bogle) can subscribe to: recency, localism, anchoring. Much of the argument in the paper, and on this thread, seems to amount to rationalizations of why in this case subscribing to some or all of these biases (i.e. over-weighting US) won't cost too much in terms of total return. But that is itself a weird way to think about it vs. seeking to optimize return and follow the key Bogleheads principle of maximizing diversification.


I couldn't agree more. It's like people decide first they want to hold less in international, then look for good reasons to do it, forgetting the first rule of investing: risk accompanies reward - even if they are somehow right that it is 'riskier' to have international stocks, then they are ignoring the fact that risk should, statistically, be rewarded.

OverTheHill wrote:How about nothing ... Why do you think virtually every foreign government in the world buys huge amounts of US Treasury bonds? It certainly isn't because international investing is better.


So let me see if I understand this argument correctly. Because the United States holds the world's reserve currency, there is a free lunch in investing in only its stock market? Is there some economic theory that backs this up, or is the premise (as it appears to me to be) just disconnected from the conclusion?

HardKnocker wrote:Who needs it. Most large cap US companies have considerable international exposure.


Well, their earnings may be diversified, but consider the US-specific economic and political risks that they all share - e.g. if all US tech stocks become subject to some new tax, or if US immigration policy changes for the worse and that negatively impacts the tech sector, or if the best new technologies this decade end up coming from foreign companies, or Silicon Valley gets hit by an earthquake ... (I'm just picking a random sector and a few obvious examples ... there are plenty of of other possibilities).

HardKnocker wrote:I'll take the lead of John Bogle and pass on International.


Oh really? He suggests you not follow his lead and "think it through for yourself" (yes, that's a quote): viewtopic.php?f=10&t=104781&newpost=1521456

I get it, folks. Some of you are long-time investors with 0% international. If you've been at this for thirty years and are mostly bonds at this point, it probably *doesn't* matter if your remaining stocks are US-only. But for anyone else ... there's no sense is remaining intentionally undiversified by avoiding ex-US stocks. I'm 50/50, FWIW.
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Re: Deciding How Much to put in International

Postby Tigermoose » Thu May 09, 2013 11:47 am

The fanatical replies and accusations by some on this topic indicate an emotional attachment or bias more than a rational decision. I'll leave it up to you to decide. Personally, I just go with a % that I can sleep at night with and not make a hasty decision if International either under or over returns the TSM or S&P.
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Re: Deciding How Much to put in International

Postby MnD » Thu May 09, 2013 11:58 am

100% international. The large international multi-nationals have plenty of exposure to the US markets so no need to hold any US stocks directly.
Also your non-equity assets - human capital, real estate, personal property, social security, etc. all have a strong home-country bias and exposure, especially if you are not multi-lingual working for a multi-national with well compensated career opportunities abroad. So 100% international in your investment equities will provide a decent balance to your overall portfolio.

:wink:
(I'm actually 55% international per Total World Stock but I would be far more comfortable going 100% if the only choice was 0% or 100%)
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Re: Deciding How Much to put in International

Postby Dulocracy » Thu May 09, 2013 2:05 pm

MnD wrote:100% international. The large international multi-nationals have plenty of exposure to the US markets so no need to hold any US stocks directly.
Also your non-equity assets - human capital, real estate, personal property, social security, etc. all have a strong home-country bias and exposure, especially if you are not multi-lingual working for a multi-national with well compensated career opportunities abroad. So 100% international in your investment equities will provide a decent balance to your overall portfolio.

:wink:
(I'm actually 55% international per Total World Stock but I would be far more comfortable going 100% if the only choice was 0% or 100%)



Thank you for the levity while pointing out the straw man argument against diversification. I will be stealing that statement to email it to a non-boglehead friend of mine who often quotes the mantra of all-US.
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Re: Deciding How Much to put in International

Postby Noobvestor » Thu May 09, 2013 2:58 pm

Tigermoose wrote:The fanatical replies and accusations by some on this topic indicate an emotional attachment or bias more than a rational decision. I'll leave it up to you to decide. Personally, I just go with a % that I can sleep at night with and not make a hasty decision if International either under or over returns the TSM or S&P.


I will admit my own side of it: I'm skeptical of the US' prospects - it has had a great run, but all things change. That said, I'm also skeptical of EM's reported growth vs. actual, and and of Europe's recovery pace. Being thus skeptical of most everything, I throw up my hands and diversify per the quote in my signature line ;)
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Re: Deciding How Much to put in International

Postby Calm Man » Thu May 09, 2013 5:47 pm

I had my checkup with a Vanguard CFP a few months ago. I went in completely open-minded. I listened to the 30% idea and asked for the data. So we looked over the report that was attached by OP. I have done research most of my adult life and am familiar with viewing data and interpretations. So looking at the graph of changes in volatility as international is added, it is always under 1% and often 0.5% or even less. Looking at the correlations, one notices that they have increased every year as of late and approached 80% in 2010. I would not be surprised if the correlation is now higher. So I concluded that I saw no data to support any benefit to international investing nor any to stay away from it. Tax considerations (loss of QDI in TISM to 70%) and currency risk suggested to me to stick with 100% TSM. Any other decisions by others are valid but not supported by data. I would like to see one of the great posters here establish a way of following 100% TSM, 100% TISM and 10 or 20% increments in between and then show us in 5 and then 10 years what the results are.
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Re: Deciding How Much to put in International

Postby HardKnocker » Thu May 09, 2013 5:59 pm

rickmerrill wrote:Vanguard says the sweet spot is around 30% https://personal.vanguard.com/pdf/icriecr.pdf


John Bogle: "Nobody knows nothin'."

My own personal experience investing in International over a 20+ year period led me to believe it is not necessary. However past performance is not indicative of future results.
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Re: Deciding How Much to put in International

Postby Dulocracy » Thu May 09, 2013 6:24 pm

Calm Man wrote:I had my checkup with a Vanguard CFP a few months ago. I went in completely open-minded. I listened to the 30% idea and asked for the data. So we looked over the report that was attached by OP. I have done research most of my adult life and am familiar with viewing data and interpretations. So looking at the graph of changes in volatility as international is added, it is always under 1% and often 0.5% or even less. Looking at the correlations, one notices that they have increased every year as of late and approached 80% in 2010. I would not be surprised if the correlation is now higher. So I concluded that I saw no data to support any benefit to international investing nor any to stay away from it. Tax considerations (loss of QDI in TISM to 70%) and currency risk suggested to me to stick with 100% TSM. Any other decisions by others are valid but not supported by data. I would like to see one of the great posters here establish a way of following 100% TSM, 100% TISM and 10 or 20% increments in between and then show us in 5 and then 10 years what the results are.


Though brief, that is the best argument for all US that I have read. As an alternative view, do you not think that currency risk also provides diversification. Risk can go both ways, and if the US dollar drops, you will have the benefit or reward for taking that risk. Currency risk is actually one of the reasons that I wanted international- for further diversification.

I did pause when I realized that I put international stock in my ROTH where I would not receive any credit for the international taxes, but I decided that the diversification was worth it.
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Re: Deciding How Much to put in International

Postby inbox788 » Thu May 09, 2013 6:32 pm

MnD wrote:100% international. The large international multi-nationals have plenty of exposure to the US markets so no need to hold any US stocks directly.
Also your non-equity assets - human capital, real estate, personal property, social security, etc. all have a strong home-country bias and exposure, especially if you are not multi-lingual working for a multi-national with well compensated career opportunities abroad. So 100% international in your investment equities will provide a decent balance to your overall portfolio.

:wink:
(I'm actually 55% international per Total World Stock but I would be far more comfortable going 100% if the only choice was 0% or 100%)


Absolutely!

Nescafe, Tasters Choice, Nesquick, Juicy Juice, Dryers, Drumsticks, Stouffers, Hot Pockets, Baby Ruth, Butterfingers, Carnation, Toll House - all FOREIGN - Nestle (http://www.nestle.com/)
Budweiser, Beck’s, Bud Light, Michelob - FOREIGN - http://www.ab-inbev.com/go/brands/brand ... weiser.cfm
Foreign companies like Toyota, BMW, Chrysler (Fiat) sells the majority (2/3) of cars here in the US:

Arguably, the converse is just as true: "100% domestic. The large domestic multi-nationals have plenty of exposure to the international markets so no need to hold any international stocks directly."

Ironically, US companies like GM sell tons of cars in the rest of the world. You may have more foreign exposure with GM and more domestic exposure with Toyota. :shock:

Besides companies like F, GM, other US companies like McDonalds, Yum Brands (KFC, Pizza Hut, Taco Bell), P&G, KO, BA, Amex are all growing internationally, while their US growth slows.

Simply labeling domestic vs international is no longer sufficient these days to really understand the investment implications without deeply looking at individual companies.

Therefore, the correct answer is to have between 0% - 100% international allocation!!!

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Re: Deciding How Much to put in International

Postby steve r » Thu May 09, 2013 8:39 pm

inbox788 wrote:[
Therefore, the correct answer is to have between 0% - 100% international allocation!!!



Perfect! My allocation is correct then. :beer

To further your point, even emerging markets is something like 4 percent Samsung.

Maybe the question should be how much international small cap.
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Re: Deciding How Much to put in International

Postby lostInFinance » Thu May 09, 2013 9:15 pm

connya wrote:If investors shouldn't hold company stock of their employer (due to risk of losing job AND investments), why is it a good idea for investors to overweight their home country?


Short answer: international currency risk
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Re: Deciding How Much to put in International

Postby Call_Me_Op » Fri May 10, 2013 6:49 pm

lostInFinance wrote:
connya wrote:If investors shouldn't hold company stock of their employer (due to risk of losing job AND investments), why is it a good idea for investors to overweight their home country?


Short answer: international currency risk


You must mean currency diversification.
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Re: Deciding How Much to put in International

Postby lostInFinance » Fri May 10, 2013 7:12 pm

Call_Me_Op wrote:
lostInFinance wrote:
connya wrote:If investors shouldn't hold company stock of their employer (due to risk of losing job AND investments), why is it a good idea for investors to overweight their home country?


Short answer: international currency risk


You must mean currency diversification.


Another poster has came up with a similar analogy, but suppose you had a very unusual defined benefit pension plan that gave you the option of receiving either A) 100k usd or B) 25k usd, 19.26k euros, 153k yuan, and 3942k naira each year for the rest of your life. However, after you start drawing retirement, you can't switch options. Which option would you choose and why?
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Re: Deciding How Much to put in International

Postby OverTheHill » Fri May 10, 2013 7:59 pm

I think it's possible that the argument in favor of international is similar to the argument against high yield. It's an ideology.
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Re: Deciding How Much to put in International

Postby gkaplan » Fri May 10, 2013 8:46 pm

OverTheHill wrote:I think it's possible that the argument in favor of international is similar to the argument against high yield. It's an ideology.


]I think it's possible that the argument against international is similar to the argument in favor of high yield. It's an ideology.
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Re: Deciding How Much to put in International

Postby RNJ » Fri May 10, 2013 9:45 pm

MnD wrote:100% international. The large international multi-nationals have plenty of exposure to the US markets so no need to hold any US stocks directly.
Also your non-equity assets - human capital, real estate, personal property, social security, etc. all have a strong home-country bias and exposure, especially if you are not multi-lingual working for a multi-national with well compensated career opportunities abroad. So 100% international in your investment equities will provide a decent balance to your overall portfolio.

:wink:
(I'm actually 55% international per Total World Stock but I would be far more comfortable going 100% if the only choice was 0% or 100%)


Love it!
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Re: Deciding How Much to put in International

Postby Noobvestor » Fri May 10, 2013 10:07 pm

Calm Man wrote:I had my checkup with a Vanguard CFP a few months ago. I went in completely open-minded. I listened to the 30% idea and asked for the data. So we looked over the report that was attached by OP. I have done research most of my adult life and am familiar with viewing data and interpretations. So looking at the graph of changes in volatility as international is added, it is always under 1% and often 0.5% or even less. Looking at the correlations, one notices that they have increased every year as of late and approached 80% in 2010. I would not be surprised if the correlation is now higher. So I concluded that I saw no data to support any benefit to international investing nor any to stay away from it. Tax considerations (loss of QDI in TISM to 70%) and currency risk suggested to me to stick with 100% TSM. Any other decisions by others are valid but not supported by data. I would like to see one of the great posters here establish a way of following 100% TSM, 100% TISM and 10 or 20% increments in between and then show us in 5 and then 10 years what the results are.


1) Correlations in direction != correlations in magnitude - personally, I would rather not underperform (even if it means not outperforming) the global market by a significant margin for a long period of time, be that due to geographical or currency reasons. They may move the same direction more often than not, but bonds do, too (less so, sure, but they're not negatively correlated) - it's the times they diverge, though, that they become critical to a portfolio.

2) Past performance != future performance. A lot of people cite rising correlations or similarity in long-term performance over particular periods in a way that suggests these things will stay true going forward. Anyone in Japan knows that one national market can diverge significantly from the global market. The fact that we happen to live in a country that happens to have performed similarly to the rest of countries combined over recent history doesn't say much about the future.

In my opinion, the data does support going international - at least if we look beyond US-only data and raw correlations to see real cases where one nation's stock market has significantly different from the global market in terms of actual cold hard returns. Unless, of course, one subscribes to what I'll call the Special Snowflake theory of investing - the idea that the US is safer and better, and that the market doesn't know this, so there is a free lunch in US investing.

I think the entire line of reasoning that suggests international is an 'addition' is something that itself skews the results (it assumes a starting point of US-only). I would suggest thinking about it in reverse: do you have a good reason for subtracting over half of the market from your portfolio (a half that notably adds geographic, economic and political diversity)? I mean, I could tilt toward growth or non-dividend-paying stocks in some form to get a slight tax advantage too, but that doesn't seem reason enough. I could see saying 'yes' to the question in days gone by when international funds had significantly higher ERs, but today?

Image

There are already large slices of the pie that are hard to invest in efficiently ... why limit oneself to less than 1/3 of the possibilities when it's easy to at least get a bit over half?
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Re: Deciding How Much to put in International

Postby azanon » Sat May 11, 2013 8:23 am

I'm about 65% non-US stock, or thereabouts, which is relatively close to world market cap (so in other words, I'm counting Canada as non-us).

The mistake I don't want to make is to "tilt" US simply because I happen to be an American. I'm most interested in maximum diversification/reducing risk. The way I think of it is to say to myself, "Wow, I have 35% of all of my stock JUST in the U.S.". In other words, I actually see it as having a lot of confidence in the U.S. If anything, with our lowering debt rating, 16 trillion in debt and rising, etc. I think there's a case for underweighting the U.S. (less than 35% of total), but I try to resist that.

As others have said, cost difference is dang near nil these days between the two, if you buy the right funds. In my taxable, I'm holding Vanguard tax-managed international which runs 0.10%, AND you get the foreign tax credit. 4 or so extra basis points is certainly no reason to tilt US.

If you find any value in P/E 10 valuation metrics, you may or may not be aware that the U.S. currently is running almost the highest P/E 10 of all major countries. Yet another reason not to tilt higher than world market cap on U.S. If anyone doubts that claim, just send me a PM and I'll link to you some of Melbane Faber's work (or just google it).
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Re: Deciding How Much to put in International

Postby ofcmetz » Sat May 11, 2013 10:56 pm

OP, I have 30% of my equity in international, and I have all of that invested in the Vanguard Total International Index. I understand those who argue for more and those who argue for less. I agree with those who say it probably should be somewhere between 20% and 50% of equity.
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Re: Deciding How Much to put in International

Postby arcticpineapplecorp. » Sun May 12, 2013 12:49 am

Noobvestor wrote:
Calm Man wrote:I had my checkup with a Vanguard CFP a few months ago. I went in completely open-minded. I listened to the 30% idea and asked for the data. So we looked over the report that was attached by OP. I have done research most of my adult life and am familiar with viewing data and interpretations. So looking at the graph of changes in volatility as international is added, it is always under 1% and often 0.5% or even less. Looking at the correlations, one notices that they have increased every year as of late and approached 80% in 2010. I would not be surprised if the correlation is now higher. So I concluded that I saw no data to support any benefit to international investing nor any to stay away from it. Tax considerations (loss of QDI in TISM to 70%) and currency risk suggested to me to stick with 100% TSM. Any other decisions by others are valid but not supported by data. I would like to see one of the great posters here establish a way of following 100% TSM, 100% TISM and 10 or 20% increments in between and then show us in 5 and then 10 years what the results are.


I believe the rate of return over 2000-2009 would have been higher with US + international than just US.

While correlations might be rising they are not perfect otherwise the rate of return each year would be the same between US and Int. US has risen 2X as much as INT. at this point in the year so far, so if you're buying equities you'd be wanting to buy Int rather than US right now since they haven't gone up as much. Having imperfectly correlated asset classes allows you to purchase assets that are cheaper relative to the other asset classes in your portfolio which increases your returns over time.
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Re: Deciding How Much to put in International

Postby leonard » Sun May 12, 2013 1:14 am

Equity is 50/50 domestic (US) and International. But, I would have been comfortable with international equity as a percent of total down to 30%.

The information I read when setting IPS was an even split provided good diversification and leaned away from home country bias. However, 50% of the equity portfolio is still a lot of concentration in one country. Ultimately, I found the merriman-like slice/dice portfolio recommendation of 50/50 compelling as well.
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Re: Deciding How Much to put in International

Postby nedsaid » Sun May 12, 2013 1:11 pm

There is no magic answer to this. Most folks on this forum are between 20% and 50% of an equity portfolio.

Having been overseas three times and soon going for a fourth time, my perspective has changed a bit. I have decided that I want a globally diversified portfolio. Probably about 25% of my stocks are international and about 8% of my bonds. Over time, I want to increase the percentages of both.

I see purchasing power as purchasing power whether it is dollars, pounds, euros, or yen. To me, currency diversification makes sense.

This is a matter of personal preference. I would argue that at a minimum, an investor should have 20% of their stocks in international funds. There isn't a need to hold foreign bonds, I do so from personal preference.

You don't want to be like the investors in Japan who believed that holding the big Japanese multinationals gave them all the international diversification they needed. This was disastrous thinking for Japanese investors and I don't understand why John Bogle gives similar advice regarding US Multinational Companies. Will the US be another Japan? Not likely, but it could happen. I don't think having all your investments in one country is a good idea. Even if that one country is the United States.
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Re: Deciding How Much to put in International

Postby Blues » Sun May 12, 2013 1:16 pm

I believe our current international allocation is just a hair under 30% of the equity side of the portfolio.
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Re: Deciding How Much to put in International

Postby lostInFinance » Sun May 12, 2013 7:19 pm

arcticpineapplecorp. wrote:While correlations might be rising they are not perfect otherwise the rate of return each year would be the same between US and Int.


Mathematically, you can have perfectly correlated assets with different rates of return, especially over the short run of a decade or so.
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