Very specific question on international allocation

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Very specific question on international allocation

Postby Calm Man » Sun Dec 23, 2012 3:08 pm

Over the last few days and often before that, there have been threads about the % of the stock portfolio to have in TISM. There has been good discussion and generally it goes from between 20% and market weight, which would be a little over half. I suffer from hating to pay more basis points (18 for TISM Admiral vs 6 for TSM which is just cheapness) and wanting 1 fund if at all possible, so my hope would be/is that 100% TSM without any international would suffice. (Total world would be great but is simply too expensive right now for perfect diversification). I have read all the arguments about why diversification is needed across countries and they make sense. I also believe that if one adds TISM, it should be on the higher side percentagewise because if one did 20% in a 50% stock portfolio, that is only 10% overall and would not save the day if there was a US crisis. So the question is: is there any compelling or even remotely plausible reason that one can use to justify a 100% stock allocation to the United States only? Thank you.
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Re: Very specific question on international allocation

Postby Taylor Larimore » Sun Dec 23, 2012 3:33 pm

So the question is: is there any compelling or even remotely plausible reason that one can use to justify a 100% stock allocation to the United States only?


Calm Man:

I can think of one VERY compelling reason--Jack Bogle:

Mr. Bogle, who knows much more about investing than you or I, believes: "International investments are not necessary."

In his book, Common Sense on Mutual Funds Mr. Bogle devotes an entire chapter (which most have not read) with his reasons that foreign investing is not necessary (up to 20% is OK).

Personally, 35% of our equity funds are international. I'm not sure it matters.

Best wishes.
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Re: Very specific question on international allocation

Postby nisiprius » Sun Dec 23, 2012 3:40 pm

[Taylor Larimore beat me to it...]

Sure there is. John C. Bogle has opined that a U.S. investor does not need any international, and has actively recommended against holding more than 20% of equities in international. He devoted an entire chapter of Common Sense on Mutual Funds to that topic. He cites extensive data. Contrary to what some have implied, it's a well-thought-out, well-supported opinion, not know-nothing flag-waving. And it's not a salesman disparaging a product category he doesn't offer, as Vanguard of course offers excellent, popular, well-regarded international funds.

This is one of the areas where many Bogleheads shrug and say "Bogle is wrong." I don't say that; my own views are considerably than that. My personal view is that, very simply, I am too chicken to go so far out of the mainstream as to hold no international at all, and I really think that the costs and nuisance factor of holding 20% international are negligible.

I don't think you should hold 0% international based solely on costs. I think you need to have some fairly well articulated positive reason that's stronger than that.

20% is a low enough percentage that I was psychologically unaffected recently when international stumbled a bit. I had no difficulty staying the course. I wasn't even paying attention. Then people making concerned posts in this forum. I looked, hey how about that, I'm down to 18%, shrug, OK, go to Vanguard.com, My Portfolio, Exchange, click, done. No anxiety.

Bogle reiterated his opinions in his "Ten Years Later" notes in the revised 2009 edition. His notes begin:
I want to reemphasize my reluctance to enbrace the idea of holding a true global portfolio, in which a U.S. investor's market weighting would be based on the weights of the markets of each major nation, resulting, in mid-2009, in 44% U. S. stocks and 56% international stocks. But I have no reluctance whatsoever to emphasize a truly global strategy, focussed largely on U. S. stocks.
That doesn't address the question of the lower end. In other statements I don't have exact quotations for, he's said that he thinks 0% is fine, but if you want some international up to 20% is fine--but he actually recommends against more than that.

The arguments are, roughly, that the past data shows no compelling evidence that international is needed, and that the global character of modern business assures that markets are coupled and that you have enough indirect exposure through U.S. companies doing international business that actually holding international business directly is redundant.

You can find articles, in fact I think Vanguard has one, strongly rejecting the idea that holdings of multinational U.S. businesses are a substitute for direct international holdings.
Last edited by nisiprius on Sun Dec 23, 2012 3:49 pm, edited 4 times in total.
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Re: Very specific question on international allocation

Postby baw703916 » Sun Dec 23, 2012 3:46 pm

You do realize that for all index funds there is some tracking error of the fund's actual performance compared to the benchmark of the index return - expenses? This is due to sampling the index (the funds don't hold every stock in the index), trading costs, income from securities lending, etc. For both Total Stock Market and Total International the tracking error is at least as big (on average) as the expense ratio.

I think you would be hard pressed to notice the difference in E/R reflected in actual fund returns outside of the tracking error noise even after several years.
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Reassurance

Postby Taylor Larimore » Sun Dec 23, 2012 3:48 pm

Nisi:

It is reassuring when we arrive at the same or similar conclusions. :happy

Best wishes and Happy Holiday!
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Re: Very specific question on international allocation

Postby FNK » Sun Dec 23, 2012 4:07 pm

Calm Man: paying attention to expenses is something Jack Bogle taught us well, but the temptation is to take it too far. 12 basis points is a lunch a year for $10k. Seriously, that's a really extreme case of the tail wagging the dog. Dividend yield and foreign tax credit on TISM is a lot more than this.

You can argue that the correlation between domestic and intl stocks is above 90% so you don't need international. You can extend this argument to not needing small caps, or perhaps just buying the DJIA stocks directly and avoiding costs altogether. Diversification shmiversification.
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Re: Very specific question on international allocation

Postby Simplegift » Sun Dec 23, 2012 4:22 pm

Calm Man wrote:So the question is: is there any compelling or even remotely plausible reason that one can use to justify a 100% stock allocation to the United States only?

You're searching for justifications, so why not add this one: the U.S. stock market is the largest, most liquid and diverse equity market on the planet. Thus a 100% allocation to U.S. stocks is not a big mistake — but it's also not an optimal portfolio allocation, as you already seem to recognize.

Besides exposing yourself to huge single-country risk, you're also skewing your equity portfolio toward certain sectors of the global market (chart below). For many investors, the easy access to the global economy and global companies through low cost international index funds is seen as an unqualified benefit to their portfolios. Personally, I'm baffled by the resistance to it, even by Mr. Bogle. The question should be, "Why not diversify internationally?"

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Re: Very specific question on international allocation

Postby Taylor Larimore » Sun Dec 23, 2012 6:29 pm

Simplegift:

The question should be, "Why not diversify internationally?"


The answer may be found on pages 251-276 in Common Sense on Mutual Funds.

There is more than one road to Dublin.

Happy Holiday!
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Re: Very specific question on international allocation

Postby baw703916 » Sun Dec 23, 2012 6:57 pm

There were no doubt Japanese investors in 1990 who felt it unnecessary to diversify internationally. I'd like to think that an analogous situation could never happen in the U.S.--but can I be 100% sure that my opinion is based on solid evidence, rather than home country bias?

I'm somewhat fortunate in that I can own the EAFE portion of international markets for considerably less than Vanguard charges. But I'm pretty sure I would hold the same AA in any event.

Happy holidays to everyone,
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Re: Very specific question on international allocation

Postby artthomp » Sun Dec 23, 2012 7:02 pm

Last May I discussed my portfolio with Mel Lindauer via a private message. Since I'm 72 years old and I expressed an interest in using the "age in bonds" rule of thumb, he suggested I look at the Vanguard Target Retirement Income Fund (VTINX). I liked the allocation so much I basically copied it for my allocation. For convenience I rounded their allocation as follows:
45% Vanguard Total Bond Index
20% Vanguard Inflation-protected Bond Fund
5% Vanguard Money Market
20% Vanguard Total Stock Market
10% Vanguard Total International Stock Market
Siince I still have more than 90% of my assets in an IRA, I did use the core funds and ETFs so I could place my reinvested IRS Required Minimum Distributions (RMDS) in taxable equity funds and leave the income funds in the IRA as long as possible instead of purchasing VTINX.
The equity ratio I am using and the one used by VTINX appears to be two-thirds U. S. and one-third International.
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Postby maddyken » Sun Dec 23, 2012 8:01 pm

[Off-topic comment removed by admin LadyGeek]
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Re: Very specific question on international allocation

Postby papito23 » Sun Dec 23, 2012 8:31 pm

Simplegift wrote:The question should be, "Why not diversify internationally?"


+1

Even at a 70/30 US/Int'l split, you have >15x as much assets in the U.S. than the closet country (4.65%, UK). Granted, the U.S. has 5x as many people, is more culturally/economically/geographically diverse than the UK. And since Vanguard seems to default to this, it would be a good starting place. I would just set it up like this and forget it.

Then again, then again... you could go on forever. This isn't piddly tinkering, it seems pretty foundational and important... then again there is more than one road to Dublin. Until we become the next Japan. At which point, is only 30% enough to save you? Probably not (do you see how this goes on forever and ever :)
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Re: Very specific question on international allocation

Postby Simplegift » Sun Dec 23, 2012 8:52 pm

Taylor Larimore wrote:The question should be, "Why not diversify internationally?"

The answer may be found on pages 251-276 in Common Sense on Mutual Funds.

Thanks, Taylor. I hadn't read Mr. Bogle's views on international investing in years and it was a good refresher. But I have to say, re-reading his comments today (excerpted below), they do seem a bit anachronistic to my mind, in light of the unprecedented economic and financial globalization the world has experienced in the last two decades. His basic premise seems to rely on a strong vision of "American exceptionalism" that I'm not sure is shared by many global observers today — rather than portfolio theory.

Just out of curiosity, are there any other respected investment experts (academics, practitioners, etc.) besides Mr. Bogle who recommend an all-U.S. equity portfolio today?

John Bogle, in Common Sense on Mutual Funds wrote:The moral of the story is clear and simple: Stay home and dig your own garden, instead of tempting fate in an alien world. You will find "acres of diamonds" right where you are.

The more I read about investing outside the United States, the more I think about this story. I am not suggesting that the U.S. economy is a new Golconda, nor that investing in overseas ventures is parallel to death in a foreign land. But here in the United States we have, at least for the moment, the most productive economy, the greatest innovation, the most hospitable legal environment, and the finest capital markets on the globe. With 5 percent of the world's population, we produce 25 percent of its goods and services. It is safe to say that the United States is the envy of almost every other nation. As U.S. citizens, we should count our blessings every day.

If our diamond lode is within our own borders, shouldn't the investments we choose for our portfolios stay here, too? I believe that would be a sensible strategy. Overseas investments — holdings in the corporations of other nations — are not essential, or even necessary, to a well-diversified portfolio.
Last edited by Simplegift on Sun Dec 23, 2012 9:37 pm, edited 1 time in total.
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