Jack Bogle on International Investing at Bogleheads 11

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Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Thu Oct 25, 2012 5:21 pm

Those who I talked to at BH11 and others who know me from this forum may be familiar with the fact that I have been critical of Jack Bogle's stance on international investing. I paid close attention when it came up in one of our sessions at the Reunion and was surprised to find his position as being perhaps more flexible than I had formerly realized (or maybe he has simply softened on the subject over time). Here were my takeaways in terms of his position and my own interpretations.

(Note: this is from my notes, so if someone thinks I'm misrepresenting an example or has the exact quotes to flesh things out, let me know.)

Summary of His Statements from BH11

1) Country-Specific Critiques: Mr. Bogle has in the past - and did again - criticize foreign countries, but not all that he mentioned in this case. He reiterated his joke (made previously in at least one interview) that 'no one works' in France, mentioned that Britain is threatened by austerity, but also conceded that Germany seemed to have a solid basis for future prosperity.

2) Predicting the Future: very notably, he said if he were asked what would win over any-given next-ten-years period between the US, ex-US developed and emerging markets, he would give them each around 33% odds, at least off the top of his head. Presumably if pressed, he'd maybe consider fundamentals, etc... but again, it was just an abstract example to me, saying markets are efficient and you just never know.

3) Quote of the Day: unfortunately (anti-climactic, I know) I didn't have time to write down the exact quote in the moment. However, paraphrasing, he said something to the effect of: You're the next generation of investors, and you have to make your own decisions. EDIT (Thanks to ObliviousInvestor for writing down the full quote!): "If there's one place I don't want people to take my advice, it's international. I want you to think it through for yourself."

My Theories: I have a few (potentially overlapping) theories on why Jack doesn't want to tackle the issue more than he has, each connected to one of the points above. (A) He genuinely thinks there is something special about the United States that will persist - I find this endearingly patriotic, even if I don't agree, (B) At the same time, he recognizes that predicting the future is a fool's game - but he must think (now I'm really reading into things) that one can indeed capture most international benefits from a domestic-only allocation, despite historic counter-examples, but also and finally (C) he is struggling for consistency - he doesn't want to tell long-time US-only investors to change course. Given how much the professionals (even Boglehead-style ones) change their mind from one book or decade to the next, this is understandable. But, to reiterate: these are just theories.

My Conclusions: On the one hand, I was hoping the discussion would go a bit deeper, and he would end up debating with other professionals in attendance in more depth on this issue. On the other hand, even setting my speculation aside, it was good to see (1) the joking manner when it came to criticizing other countries - I hadn't realized it was more humorous than biting when I read similar comments before, (2) the humble admission that he wouldn't lay odds on the US winning over a given decade, and (3) the even-more-humble admission that he is not the expert to consult on international investing.

Which leads me to my unrelated final note: I was beyond impressed by Mr. Bogle throughout - his energy, enthusiasm, intelligence, passion but also his modesty, honesty and sincerity were an inspiration through and through. Thanks to Mel and everyone else who helped put together this spectacular gathering!
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby stemikger » Thu Oct 25, 2012 5:33 pm

Thanks for posting this. As someone who struggles with this myself, I found this helpful.

I really an impressed how Mr. Bogle knows this is not his thing and clearly tells you, listen to my simple approach, but if international is where you feel you need to be, I'm not the guy to advise you.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby dpbsmith » Thu Oct 25, 2012 6:03 pm

I wasn't taking notes either, but your impressions match mine. I was not surprised, because to me one of Jack Bogle's salient characteristics is that he's not doctrinaire. I don't think he's softened, I think he was always flexible. Although in the past I do think he made a fairly definite recommendation not to go over 20% international in the equity allotment, and I don't think I heard that at BH11.
Noobvestor wrote:However, paraphrasing, he said something to the effect of: You're the next generation of investors, and you have to make your own decisions. If there is one place I don't want people looking to me for advice it is with regard to international equities.
That sounds accurate to me.

High point for me was his mockery of Fidelity CEO Ned Johnson III's Bahstin Brahmin accent. "Do something about Vangahd, theyah eating ah lunch!"
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Thu Oct 25, 2012 8:14 pm

dpbsmith wrote:High point for me was his mockery of Fidelity CEO Ned Johnson III's Bahstin Brahmin accent. "Do something about Vangahd, theyah eating ah lunch!"


Hah, for me it was the line (paraphrasing, but close): "Just remember who is the rock, and where is the hard place"
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby abuss368 » Thu Oct 25, 2012 10:36 pm

Thanks for the insight.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby FrugalInvestor » Thu Oct 25, 2012 10:58 pm

In a recent interview article by Allan Roth Jack says this (link to article - http://www.financial-planning.com/fp_is ... 620-1.html)...

Q. For a long time, you've recommended against owning international stocks. Your argument states that one has substantial international exposure from owning U.S. stocks and you don't pick up the foreign currency risk. But doesn't the large performance differential between total U.S. and total international stocks over the past 10 years, as well as currency fluctuations not correlated with U.S. stock performance, argue for owning international stocks directly?

A. Let me be clear, I have never argued against owning international stocks. I just don't think one should have more than 20% of their equity portfolio in international stocks. International stocks are dominated by the U.K., France and Japan, which have large problems.

Of course, these problems are known by investors, but international stocks have additional sovereign risks and far less shareholder protection than in the U.S. Thus, international investing is riskier, and I don't think planners should put more than 20% of their client's equity exposure in international stocks.


So not don't but not too much due to increased risk.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby ObliviousInvestor » Thu Oct 25, 2012 11:15 pm

The quote that I wrote down was, "If there's one place I don't want people to take my advice, it's international. I want you to think it through for yourself."
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Thu Oct 25, 2012 11:37 pm

FrugalInvestor wrote:A. Let me be clear, I have never argued against owning international stocks. I just don't think one should have more than 20% of their equity portfolio in international stocks. International stocks are dominated by the U.K., France and Japan, which have large problems.

Of course, these problems are known by investors, but international stocks have additional sovereign risks and far less shareholder protection than in the U.S. Thus, international investing is riskier, and I don't think planners should put more than 20% of their client's equity exposure in international stocks.


So not don't but not too much due to increased risk.


See, this, unfortunately, is where he loses me again, and where I wonder if he just feels more strongly about it on some days than others. If UK, France and Japan have larger problems, but markets are efficient, those problems should be priced in. If international stocks have additional risks and less protections, that should be priced in.

To me, the analogy would be to invest only in large-cap blue-chips or to double-weight utilities because those are supposedly 'safer' stocks or sectors, rather than a total-market approach. Holding only 20% international instead of the market weights (close to 60%, generally) is a huge tilt. But ces la vie ;P

ObliviousInvestor wrote:The quote that I wrote down was, "If there's one place I don't want people to take my advice, it's international. I want you to think it through for yourself."


Nice! Thank you! I had 'one place I don't want people taking my advice - it's international' but wasn't sure if I'd short-handed it - and I didn't have the second piece written down, was going from memory. Edited my OP!
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby stemikger » Fri Oct 26, 2012 3:23 am

Posted by Noobvestor
To me, the analogy would be to invest only in large-cap blue-chips or to double-weight utilities because those are supposedly 'safer' stocks or sectors, rather than a total-market approach. Holding only 20% international instead of the market weights (close to 60%, generally) is a huge tilt. But ces la vie ;P


Noobvestor, you seem to be very well versed when it comes to international. I personally feel more comfortable just investing in the U.S. Having said that, how much international do you suggest?

If I ever do decide to add it to my portfolio, I would definitely follow Mr. Bogle's advice and no more than 20%.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Fri Oct 26, 2012 1:30 pm

stemikger wrote:
Posted by Noobvestor
To me, the analogy would be to invest only in large-cap blue-chips or to double-weight utilities because those are supposedly 'safer' stocks or sectors, rather than a total-market approach. Holding only 20% international instead of the market weights (close to 60%, generally) is a huge tilt. But ces la vie ;P


Noobvestor, you seem to be very well versed when it comes to international. I personally feel more comfortable just investing in the U.S. Having said that, how much international do you suggest?


My default recommendation is 50%, for a few reasons. (1) It is simple, easy to remember, easy to implement via Taylor's Three-Fund or otherwise, (2) it is fairly close to market weights (still a slight tilt to the US, but nothing dramatic).

As I discussed with some folks at BH11: it is not that I think *everyone* needs to follow my suggestion as such, more that I think it should be the *starting point* for investors. If individuals want to tilt dramatically away from that, that's fine, but they should have very clear and well-grounded reasons. The mistake people make, IMO, is thinking that 'US only' is the 'starting point' from which you 'add international' - in reality, the global index is the starting point for a total-market investor from which one subtracts international. It may sound like semantics, but that approach at least forces people to think about the conscious tilt they are making.

stemikger wrote:If I ever do decide to add it to my portfolio, I would definitely follow Mr. Bogle's advice and no more than 20%.


I am curious as to your reasons why if you would care to share!

Personally, it would make me nervous to hold so little ex-US. Already, my human capital, home, future social security and medicare, bonds and some stocks are both based in the US and denominated in USD. If our currency loses value, I would lose global purchasing power. If our market stagnates, I would have global tracking error. I am not predicting either of those outcomes, but fear and wish to diversify against their possibility (just as I hold bonds because I fear certain potential risks from equities).

I've run some interesting (well, to me anyway) calculations in other threads, showing that even someone with 50% international in stocks still has relatively little foreign currency exposure, for instance, because of all of the other things that aren't directly part of the portfolio. When young, they have mostly human capital which is de facto denominated in home-country currency - when older, they have a home, car, etc... potentially, and social security, pension, etc... again factored in home-country currency, plus less equity exposure anyway (and thus, if only international on the equities, side, less international exposure).

50/50 US/Intl Equity Portfolio Examples:

30 years old: 70% equities, 30% bonds - 35% of your portfolio is exposed to other currencies, but your portfolio is pretty small and most of your value is 'human capital' which is denominated in your own currency, since that's where you work. If you're, say 35, and are working for 25 more years, maybe you've saved up 1/4 or so of your eventual portfolio. So realistically, your net foreign currency exposure is almost certainly under 10% (35% of 25%).

60 years old: 40% equities, 60% bonds - 20% of your portfolio is all that is exposed to other currencies - add to that your home equity and emergency funds and other items of net worth in USD, plus social security, etc... and again presumably less than or around 10% of your effective net worth is in foreign currencies. Perhaps you do a flat-floor annuity, too, if in a position, making it so only non-essential funds are in equities and exposed to currency risks.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby nisiprius » Fri Oct 26, 2012 1:53 pm

Read Boss Rail: The disaster that exposed the underside of the boom, by Evan Osnos. Because it's an interesting article, but also because it bears on the topic of corruption in some markets. As I read the article, the phrase that kept coming to mind was "the Gilded Age"--it all sounded like the period in the U.S. around the end of the 1800s. The Credit Mobilier scandal, "Hoax Ames" (Oakes Ames); Vanderbilt, Harriman, Jay Gould and the other robber barons playing with railroads and trying to ruin each other; no SEC, no Investment Company Act of 1940. So I was pleased when the author himself used the term "Gilded Age." They got a lot of railroads built. (Too many, of course. It was a bubble.) Now, I am sure a lot of British investors got rich investing in U.S. railroads during that era--if they knew which robber baron to back. But it was not like investing in VTSMX.

Osnos calls China a "kleptocracy" (government by thieves). Is he biased? Likely. Still, he sounds like he knows more about business in China than I do.

So, is the risk of investing in China priced in by the efficient market? Whose efficient market and who is doing the pricing? If I Googled the right numbers, U.S. investors buy about $60 billion a year of Chinese stocks from a $3 trillion stock market. Dunno what the grand total is, but I think that Chinese stocks are largely priced by the actions of Chinese investors, not by U.S. investors.

And we buy Chinese stocks in U.S. currency, at an exchange rate that's manipulated. Let's be clear, I am sure it is manipulated by both countries--it's part of the economic power struggle, in which the U.S. seeks to get an unfair advantage for U.S. investors, and the Chinese do the opposite. The point is I don't see how currency risk can be priced in because the price of currency is so strongly influenced by government action. We buy stocks priced by Chinese investors, and we do it in currency priced by the joint actions of the U.S. and Chinese governments.

My point is, no, to a U.S. investor, investing in China--and other emerging markets--and even to some extent in foreign developed markets is not the same as investing in the United States. And it really does have some special risks. Just like the Prospectus says.:
Plain Talk About International Investing

U.S. investors who invest abroad will encounter risks not typically associated with U.S. companies because foreign stock and bond markets operate differently from the U.S. markets. For instance, foreign companies are not subject to the same accounting, auditing, and financial-reporting standards and practices as U.S. companies, and their stocks may not be as liquid as those of similar U.S. firms. In addition, foreign stock exchanges, brokers, and companies generally have less government supervision and regulation than their counterparts in the United States.
One should not be unduly fearful of casting some bread on transoceanic waters, but I think there are reasons not to be totally comfortable with it, either.

OK, that's all for this thread.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby stemikger » Fri Oct 26, 2012 2:11 pm

Posted by Nisprius
I am curious as to your reasons why if you would care to share!


One of the main reasons is what nisprius wrote in quotes below and also everything Mr. Bogle says in Commonsense on Mutual Funds really hits home with me. I truly think if I got my stock and bond allocation, I can keep it clean and simple and save by keeping my costs down and not worry about adding international and taking on that extra risk.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby gkaplan » Fri Oct 26, 2012 3:55 pm

I can keep it clean and simple and save by keeping my costs down and not worry about adding international and taking on that extra risk.


The expense ratios of most Vanguard foreign equity funds, if you invest in Admiral shares, are not significantly higher than Vanguard domestic equity funds. The one exception is the FTSE All-World ex-US Small-Cap Index Fund, and its expense ratio has decreased by about a third since the fund was launched.

Furthermore, you are diversifying your risk, not increasing your risk, by adding international.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Fri Oct 26, 2012 4:45 pm

gkaplan wrote:
I can keep it clean and simple and save by keeping my costs down and not worry about adding international and taking on that extra risk.


The expense ratios of most Vanguard foreign equity funds, if you invest in Admiral shares, are not significantly higher than Vanguard domestic equity funds. The one exception is the FTSE All-World ex-US Small-Cap Index Fund, and its expense ratio has decreased by about a third since the fund was launched.

Furthermore, you are diversifying your risk, not increasing your risk, by adding international.


I agree. The basis-point difference between Total Stock and Total International is .18 vs .22. A reasonable question to ask is: is there any other decision I would make based on a difference that small (e.g. picking one bond fund over another)? If not, I think we have to agree cost is not a significant factor. Realistically, .04 is in the noise. Admittedly, the difference is smaller, but, for instance: no one talks about only using the 500 index because it is .01 cheaper than the Total Market index. I do see the point about simplicity, though, (it is nice to worry about one less fund) and wish they would make Total World a lower-ER fund (hopefully it will yet get there).

As for risk: I would (and I believe Larry and others do) that it is more risky to concentrate one's assets in one country than to diversify globally. This leads me to my follow-up question: I would like to know what exactly people who are US-only-oriented think the additional risks are, and whether they think these are uncompensated or compensated with rewards (diversification) or at least insurance (currency). If there are *compensated* risk factors, this would be a good thing - adding diversification. If there are *uncompensated* risk factors, like currency, my example shows how little exposure a 50/50 portfolio has, plus one could view that small exposure as currency insurance. I would welcome counter-arguments, or the addition of other risks I may not be thinking of (particularly any uncompensated risks, which are what would detract from the diversifying usefulness of international rather than add to it).

Like Bernstein, I think it is important to separate out 'risky' from 'riskless' assets. Stocks are very risky, wherever they are in the world - some grow big, others grow bankrupt. The incremental additional risk of an ex-US allocation is not terribly dramatic as far as I can tell.

Leading to another question: why are people very comfortable with equity risk not comfortable with a small amount of international risk in addition to their equity risk? And if it's a question of rewarded risks, why not hold both US and international then tilt slightly more toward bonds overall, thus gaining the diversification benefits of international without increasing overall portfolio risk?

What I'm really trying to figure out is if there are people who hold mostly or only US who have thought through all of their decisions, step by step, in the process of tilting so heavily toward one country's market. How much emphasis is placed on each risk, and what are the results (e.g. 'currency risk caused me to reduce international by 20%'). Maybe I need to go back and reread some of Bogle's book sections to see how he played out his own arguments :)
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby RyeWhiskey » Fri Oct 26, 2012 4:51 pm

I run a 50/50 domestic/international split for several reasons:
1) It's closer to the market weight than the VGuard recommended 80/20.
2) It's freakishly easy to re-balance. In a 3 fund portfolio it's 35 domestic/35 international/30 bond.
3) I read somewhere (or saw a graph here) that showed, on average, that international stocks outperform domestic stocks around 50% of the time.
4) Your bond exposure, cash exposure (emergency fund/slush fund), real estate, and whole life is already domestic (for those in the US obviously).

So with all this in mind a 50/50 split is my choice though I completely understand those who seek a more domestic-centered approach. :beer
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Taylor Larimore » Fri Oct 26, 2012 4:59 pm

Noobvestor:

Maybe I need to go back and reread some of Bogle's book sections to see how he played out his own arguments.


Mr. Bogle, in Common Sense on Mutual Funds, devotes an entire chapter to Global Investing. You may or may not agree, but after reading his chapter you will realize that he is extremely well informed on the subject and did not come to his recommendation lightly ("up to 20% international").

Best wishes.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby egrog33 » Fri Oct 26, 2012 5:11 pm

I don't know why this is, but no one ever mentions witholding taxes when comparing international funds to US funds. Witholding taxes aren't part of the ER, they're taken directly out of the dividend. With a 2% dividend, witholding taxes will cost right around 0.15% for most funds. 0.15% witholding taxes + 0.18% ER (total international ETF/admiral shares) = 0.33% total cost. That's 0.27% more expensive per year compared to total US ETF/admiral shares. Not extreme, but still adds up over a long period of time. Of course this assumes the holdings are in a tax advantaged account, and one can't get the foreign tax credit.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby thebogledude » Fri Oct 26, 2012 5:13 pm

I tend to believe that if you hold US Blue Chips that have earnings overseas, that's good enough for me. Otherwise, there 's too much volatility right now to invest in an international fund.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Simplegift » Fri Oct 26, 2012 5:36 pm

Noobvestor wrote:What I'm really trying to figure out is if there are people who hold mostly or only US who have thought through all of their decisions, step by step, in the process of tilting so heavily toward one country's market. How much emphasis is placed on each risk, and what are the results (e.g. 'currency risk caused me to reduce international by 20%').

Noobvestor, it may be asking too much to try and find a rational explanation from equity investors for over-weighting their home country. Researchers have been struggling for years to explain the equity home bias puzzle, which is certainly a global psychological phenomenon:

Image
Source: BNY Mellon Asset Management

Actually, U.S. investors could probably be a little bit excused for their home bias, as the U.S. equity market is the broadest and most diverse on the planet. As for equity investors in other countries — well, not so much.

[Edit: The foreign country allocations in the above chart don't seem right. As a percentage of global market cap, Germany is about 3%, France is 4% and Italy 1%. Thus their home country biases would be much worse than shown.]
Last edited by Simplegift on Fri Oct 26, 2012 6:52 pm, edited 2 times in total.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby stemikger » Fri Oct 26, 2012 5:49 pm

Taylor Larimore wrote:Noobvestor:

Maybe I need to go back and reread some of Bogle's book sections to see how he played out his own arguments.


Mr. Bogle, in Common Sense on Mutual Funds, devotes an entire chapter to Global Investing. You may or may not agree, but after reading his chapter you will realize that he is extremely well informed on the subject and did not come to his recommendation lightly ("up to 20% international").

Best wishes.
Taylor


I have read this chapter several times to try to see if I can change my mindset, but every time I reread it, it just makes so much sense and fits my personality. Also, I invest in the Vanguard Index Balanced Fund Admiral Shares and that is the fund Mr. Bogle puts all his Grandchildren's money in. That’s a good enough reason for me to invest my retirement fund in it. I rather max out my retirement and payoff my house then worry about adding international. I may be totally wrong on this but I feel having a mortgage free house offers a form of diversification.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby arcticpineapplecorp. » Fri Oct 26, 2012 5:56 pm

See the link to the research paper (by Vanguard) below...I remember reading that 30% was the high end to achieve 99.9% diversification of the world market, but if one has more than 30% international holdings, the diversification didn't increase, but the risk did. So, it depends on why you're investing internationally...if for diversification, somewhere between 20-30% should get you there, more than that, you're taking on more risk. My understanding is the return of international has been similar (a little less) than US (in the past, this could change in the future), so I don't believe you're getting a much higher return with internationals, but you might get a rebalancing bonus, but you're also taking on currency risk (which is an additional risk you won't have holding US equities). Again, as you can see, a personal decision and no "one" correct answer. If you want to hold world market, I believe it's 55% international and 45% US although the total world stock index fund shows 46.8% US as of 9/30/12, up from 43.3% as of 9/30/11. For what it's worth.

here's the link to the full article and the summary below the link:
https://institutional.vanguard.com/iam/ ... omain=true

"Conclusion
In light of quantitative analysis and qualitative considerations, 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. Allocations closer to 40% may be suitable for those investors seeking to be closer to a market-proportional weighting or for those who are hoping to obtain potentially greater diversification benefits and are less concerned with the potential risks and higher costs. On the other hand, allocations closer to 20% may be viewed as offering a greater balance among the benefits of diversification, the risks of currency volatility and higher U.S. to non-U.S. stock correlations, investor preferences, and costs."
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby abuss368 » Fri Oct 26, 2012 6:16 pm

I wonder why a lot of folks move past Mr. Bogle's recommendation of 20%? Vanguard now has 30% of equity in their target funds.

I also allocate 30% of equity to international.
Last edited by abuss368 on Fri Jul 05, 2013 7:39 pm, edited 1 time in total.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby nisiprius » Fri Oct 26, 2012 6:51 pm

Didn't take me long to break my vow not to post again in this thread, did it... By the way, I'm personally not US-only, just want to make that clear.
Noobvestor wrote:I think we have to agree cost is not a significant factor. Realistically, .04 is in the noise.
Agree completely.
As for risk: I would (and I believe Larry and others do) that it is more risky to concentrate one's assets in one country than to diversify globally.
Exhibit A: 100% concentrated in one country:
Image
Exhibit B, global weighted by world capitalization (i.e. a little over 50% international)
Image
Risk as measured by Vanguard's broad categorization--not reduced, not increased.

Exhibit C. This is what Total World did when it really mattered:
Image
Risk as measured by crashing in a crisis--not reduced, not increased.

Exhibit D. It is Larry Swedroe's, and of course he absolutely does endorse international. He says the most important diversification on the equity side is to add an exposure to international equities. In fact he says so right here. And what is the effect, over a time period that a) he chose, and that b) goes back as far as the oldest available international index data available?
Image
Adding international "reduced" the standard deviation from 11.3 to... 11.3!
Risk as measured by standard deviation--not reduced, not increased.

My suspicion is that what's happening is that the risk reduction from diversification and the risk increase from adding a riskier asset class (international by itself is riskier than domestic) roughly balance each other.

Anyway, I would say that any risk difference between domestic and total global stock investing looks lost in the noise, just like the difference in expenses.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby dnaumov » Fri Oct 26, 2012 8:41 pm

Own Vanguard Total World Stock (VT) and forget about it.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby abuss368 » Fri Oct 26, 2012 9:47 pm

stemikger wrote:
Taylor Larimore wrote:Noobvestor:

Maybe I need to go back and reread some of Bogle's book sections to see how he played out his own arguments.


Mr. Bogle, in Common Sense on Mutual Funds, devotes an entire chapter to Global Investing. You may or may not agree, but after reading his chapter you will realize that he is extremely well informed on the subject and did not come to his recommendation lightly ("up to 20% international").

Best wishes.
Taylor


I have read this chapter several times to try to see if I can change my mindset, but every time I reread it, it just makes so much sense and fits my personality. Also, I invest in the Vanguard Index Balanced Fund Admiral Shares and that is the fund Mr. Bogle puts all his Grandchildren's money in. That’s a good enough reason for me to invest my retirement fund in it. I rather max out my retirement and payoff my house then worry about adding international. I may be totally wrong on this but I feel having a mortgage free house offers a form of diversification.


I can't argue with this approach at all. I did read that recent Jack Bogle article where he mentions the simple and very effective one balanced fund approach. He also mentioned this in Common Sense on Mutual Funds.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sat Oct 27, 2012 12:27 am

nisiprius wrote:Osnos calls China a "kleptocracy" (government by thieves). Is he biased? Likely. Still, he sounds like he knows more about business in China than I do.

So, is the risk of investing in China priced in by the efficient market? Whose efficient market and who is doing the pricing? If I Googled the right numbers, U.S. investors buy about $60 billion a year of Chinese stocks from a $3 trillion stock market. Dunno what the grand total is, but I think that Chinese stocks are largely priced by the actions of Chinese investors, not by U.S. investors.


See, to me this is like worrying that Microsoft is doing something wrong, and panicking that I hold Microsoft in my stock index fund. China is 2.2% of a total-world stock market fund - and that's just the stock side of the portfolio, and that portfolio is just one piece of your net worth. A US-only investor holds nearly twice as much stock in *one company* (Apple) as I do in the *whole country of China*.

And we buy Chinese stocks in U.S. currency, at an exchange rate that's manipulated. Let's be clear, I am sure it is manipulated by both countries--it's part of the economic power struggle, in which the U.S. seeks to get an unfair advantage for U.S. investors, and the Chinese do the opposite. The point is I don't see how currency risk can be priced in because the price of currency is so strongly influenced by government action. We buy stocks priced by Chinese investors, and we do it in currency priced by the joint actions of the U.S. and Chinese governments.


I won't say much on this topic, but if you see both governments at work manipulating currencies, surely it's then better to have stakes in multiple currencies since none of them is safe from interference.

My point is, no, to a U.S. investor, investing in China--and other emerging markets--and even to some extent in foreign developed markets is not the same as investing in the United States. And it really does have some special risks. Just like the Prospectus says.:Plain Talk About International Investing


And these risks are priced into the market, if you believe markets are relatively efficient. If you don't believe that, then please explain why everyone doesn't just invest in the 'safe' US and get a free lunch out of the deal. For someone who is so skeptical of free desserts in small/value I'm amazed at your reluctance to denounce the free lunch of US investing :)

U.S. investors who invest abroad will encounter risks not typically associated with U.S. companies because foreign stock and bond markets operate differently from the U.S. markets. For instance, foreign companies are not subject to the same accounting, auditing, and financial-reporting standards and practices as U.S. companies, and their stocks may not be as liquid as those of similar U.S. firms. In addition, foreign stock exchanges, brokers, and companies generally have less government supervision and regulation than their counterparts in the United States. One should not be unduly fearful of casting some bread on transoceanic waters, but I think there are reasons not to be totally comfortable with it, either.


Diversifying sources of risk goes hand in hand with diversifying sources of return. If companies in Asia are suddenly in the middle of a war, I'm glad I don't have all of my assets in Asia. If companies in South America get swarmed by a nationalizing fever, same there. If companies here are suddenly subjected to certain taxes or trade restrictions, I'll be glad I don't have all my assets here. Some of the terms you mentioned - like liquidity - are essentially universally accepted as rewarded risks (e.g. in TIPS or SCV).

Exhibit C. This is what Total World did when it really mattered:


No no no no no no no. That's exactly the point people get hung up on - just because our last short-term crisis saw all equities tank together (many do) does not mean there's no diversification benefit. Equities are not for short-term downside protection, they are for long-term growth and return. You've seen me post this before:

Image

Who would have guessed that Sweden (small), Australia (new) and South Africa (conflict-ridden) would beat out the big global-superpower, US-like markets (US included) last century? Who would have thought that Germany (strong manufacturing), Japan (tech-savvy) and Switzerland (focused and financially-centric) would be on the losing side of average? It's these long-term unpredictabilities that are problematic. And if our criteria for fearing international is *regional and/or political risk* surely South Africa stands out, proving that this does not mean equity investments won't be rewarded.

egrog33 wrote:I don't know why this is, but no one ever mentions witholding taxes when comparing international funds to US funds. Witholding taxes aren't part of the ER, they're taken directly out of the dividend. With a 2% dividend, witholding taxes will cost right around 0.15% for most funds. 0.15% witholding taxes + 0.18% ER (total international ETF/admiral shares) = 0.33% total cost. That's 0.27% more expensive per year compared to total US ETF/admiral shares. Not extreme, but still adds up over a long period of time. Of course this assumes the holdings are in a tax advantaged account, and one can't get the foreign tax credit.


A worthy point, though I, for one, hold all of my international stocks in taxable accounts, so it does not apply to me. Many Bogleheads hold much of their retirement money in taxable accounts, too. But beyond that, even at .27% more ... *shrug*

Simplegift wrote:
Noobvestor wrote:What I'm really trying to figure out is if there are people who hold mostly or only US who have thought through all of their decisions, step by step, in the process of tilting so heavily toward one country's market. How much emphasis is placed on each risk, and what are the results (e.g. 'currency risk caused me to reduce international by 20%').

Noobvestor, it may be asking too much to try and find a rational explanation from equity investors for over-weighting their home country. Researchers have been struggling for years to explain the equity home bias puzzle, which is certainly a global psychological phenomenon:


Great chart and good point. I've been trying to avoid saying it, but I suppose it has to be said: I strongly suspect that a lot of people are just home-biased - no real other explanation for it as a global phenomenon unless there are really compelling cost/tax/currency benefits someone has somewhere quantified. My hope was that there was a rationale behind it, but I rather doubt it in most cases.

stemikger wrote:I rather max out my retirement and payoff my house then worry about adding international. I may be totally wrong on this but I feel having a mortgage free house offers a form of diversification.


This is a bit off-topic, but since you brought it up: a house is a non-diversified, highly-concentrated, hyper-local investment - it offers little diversification, IMHO, outside of the question of US or international equities. I definitely understand wanting to keep things simple and safe, but the house bit threw me a bit, because owning a house can be tricky (surprise costs) and is definitely not the safest place to put money (per recent crashes) ;)

arcticpineapplecorp. wrote:See the link to the research paper (by Vanguard) below...I remember reading that 30% was the high end to achieve 99.9% diversification of the world market, but if one has more than 30% international holdings, the diversification didn't increase, but the risk did.


Two points to this: (1) this is all based on backward-looking data - it is easy to say what was the perfect mix in retrospect, but harder to say going forward. I could look back and craft an ideal set of sector tilts, but we wouldn't use that for forward-looking investing, would we? Aptly enough, Jack Bogle, p. 258 of Common Sense on Mutual Funds, is skeptical exactly of people who, like Vanguard did here, try to rely on past efficient frontiers to predict future ideal allocations. (2) Vanguard made one of its worst mistakes a few years back - in its target date funds: after years at a lower allocation to international, during which time international was outperforming, it decided to switch to a higher allocation of international. Performance chasing? Matching the competition? New data that magically wasn't available a few years before? Your guess is as good as mine. Regardless, I think this illustrates why not using market weights as a starting point can be a recipe for tinkering - even if you're Vanguard itself.

arcticpineapplecorp. wrote:My understanding is the return of international has been similar (a little less) than US (in the past, this could change in the future), so I don't believe you're getting a much higher return with internationals


It's not about getting higher returns - it's about holding the market as a starting point, controlling for concentration risk (both in terms of locations and sectors) and being aware of dramatic tilts. As it happens ,the US did better than most countries this past century. If you think it's destined to do the same this century, you're always welcome to time the market, but why stop there? If you know what country will do best, you should be able to figure out what sectors and stocks will too, right? :twisted:
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sat Oct 27, 2012 1:07 am

All Quotes From Common Sense on Mutual Funds, Chapter 8: On Global Investing by Jack Bogle


First, a graph from the chapter I find interesting. What I specifically like is the fact that it's intended to show that efficient frontiers aren't consistent, thus we shouldn't try to match them. But what it actually shows is that having some international for each of the three periods he sampled helped bring you closer to the efficient frontier - in fact, a 50/50 portfolio was closer than a 100/0 in two of three cases - and the last case where tilting US won happens to be around the time he wrote the book:

Image

Writing in 1998 or shortly thereafter, as I understand my copy of this book, Jack Bogle discusses the collapse of certain Asian markets and offers this warning:

The problems persisted in 1998. These reversals have given investors a humbling lesson in the risks of global investing. Those risks are especially high in nations where U.S. standards for accounting, financial transparency and liquidity have not yet been attained.


Since 1998, those same emerging markets he expresses skepticism about turned $10K into $35K, while the US turned $10 into $18K. I bring this not only up as an interesting anecdote, as you'll see momentarily. So keep in mind my comparison above, and read this:

Perhaps the fairest way to evaluate the investment merit of global investing is to rest the case on neither abstract theories nor anecdotal market evidence, but on the results achieved by real global managers (Noob's note: this is already kind of unfair, because he's talking about active management vs. global indexes, but let's continue). In the 10 years through 1997, global funds realized total returns averaging only 11.2 percent annually, a far cry from the 18 percent rate of return for the S&P 500 index.


So OK, he's saying that this decade is instructive. First, he shows the downfall of some emerging markets. Then he shows the success of some developed ones. Let's play out these numbers. In the 10 years leading up to 1998, for the US investor, $10K turned into $58K. For the ex-US active fund manager, $10K turned into $28K. His conclusion: this is the last nail in the coffin, and shows that in practice we don't need to go international at all - after all, it did half as well in net-return terms, right?

Now let's compare that to the numbers regarding emerging markets since 1998, which I mentioned above and will reprint here: leading up to 2008, for the US investor, $10 into $18K. For the EM investor, $10K into $35K. Notice the parallel yet? If we use that *same argument here*, the conclusion would be absurd: that we can forget the US entirely and invest only in emerging markets. Basically, the logic reverses the conclusion if we follow it in each separate decade. This, to me, points clearly to diversification, because you never know what will win or lose (per Bogle's own comments at BH11).

My point? Well, my signature line is my point. And beyond that, this final quote from Jack (p. 262) actually makes my point for me, too: markets are efficient, and risks should be rewarded:

So far, I have not dealt with one of the most obvious risks of putting money to work abroad: the contrasts between the governments, economies and financial systems of most foreign countries and those of the united states. As a theoretical matter, those risks tend to be subsumed by the marvelous arbitrage pricing mechanism that is implicit in the financial markets. Through this mechanism, market prices are assumed to take into account all existing information about a stock - including all stocks of all nations - and, through the decisions of informed buyers and sellers, to reach a price that accurately balances potential risk and prospective reward


My take? When he wrote the book, the US had been outperforming most markets for so long it started to seem inevitable. Now emerging markets come along and thrash everything else for a decade, which brings us full circle back to my original post: his example is revealing, where he says he doesn't know which will do best over the (or any) next decade between US, international and emerging markets. Neither, for that matter, do I :sharebeer
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Ricola » Sat Oct 27, 2012 11:29 am

Based on the past 5 years I'd say Jack Bogle was correct. Purchased in 2007 my VTI has recovered, but my VEU is still down 23% after 5 years. It's a long wait for reversion to the mean.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby staythecourse » Sat Oct 27, 2012 11:37 am

Noobvestor wrote: it is not that I think *everyone* needs to follow my suggestion as such, more that I think it should be the *starting point* for investors. If individuals want to tilt dramatically away from that, that's fine, but they should have very clear and well-grounded reasons. The mistake people make, IMO, is thinking that 'US only' is the 'starting point' from which you 'add international' - in reality, the global index is the starting point for a total-market investor from which one subtracts international. It may sound like semantics, but that approach at least forces people to think about the conscious tilt they are making.


Excellent point. Folks on here LOVE to point out to those who tilt on small and value that they are tilting away from the market cap and warn to do so on you own risk, but yet they tilt away from market cap themselves on a U.S. vs. international tilt, but trick themselves into thinking it is okay because Jack Bogle says so or older posters on this board say so.

I am sure I will get some flak for this, but I see definite xenophobia in international investing based on two factors: 1. Age of the investor (the older folks are brought up as patriots and ideally believe America is special) and 2. If they are U.S. or foreign in heritage. Folks who are not U.S. born have a more natural world view vs. those who have never lived outside the confines of the U.S.

To each their own, but I can say money as capital has no prejudices and will flow to wherever the best deals are to be made based on whatever valuations the upper guys in venture capital and financiers see. If there is more money to be made abroad then the money will flow abroad to foreign domiciled companies. That is what globilization is all about and is only expanding as every year goes by.

Good luck.
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Xenophobia and Prejudice

Postby Taylor Larimore » Sat Oct 27, 2012 11:59 am

Staythecourse:

I see definite xenophobia in international investing based on two factors: 1. Age of the investor (the older folks are brought up as patriots and ideally believe America is special) and 2. If they are U.S. or foreign in heritage.


I'm not sure which is worse, xenophobia or prejudice.

"Xenophobia* is a dislike or fear of people from other countries or of that which is foreign or strange."

"Prejudice* is most often used to refer to preconceived, usually unfavorable, judgments toward people or a person because of gender, social class, age, disability, religion, sexuality, race/ethnicity, language, nationality or other personal characteristics."

* Wikipedia definitions

Best wishes
Taylor (age 88)
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby staythecourse » Sat Oct 27, 2012 12:11 pm

Taylor,

I didn't mean it as degrading, just an explanation of the reason home country bias occurs EVERYWHERE as the chart in a previous post on this thread shows. There is home country bias and the explanation is what is foreign to folks is often felt as unsafe. That is just human nature. Just like what is familiar always feels safer even if it isn't.

Good luck.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Taylor Larimore » Sat Oct 27, 2012 12:44 pm

staythecourse wrote:Taylor,

I didn't mean it as degrading, just an explanation of the reason home country bias occurs EVERYWHERE as the chart in a previous post on this thread shows. There is home country bias and the explanation is what is foreign to folks is often felt as unsafe. That is just human nature. Just like what is familiar always feels safer even if it isn't.

Stay the course:

I know you didn't mean it as "degrading" but you specifically targeted your remark to Mr. Bogle and older investors when you wrote:
"but trick themselves into thinking it is okay because Jack Bogle says so or older posters on this board say so."

It is not a "trick" to think we can learn from Jack Bogle and older investors--even young ones. :wink:

Best wishes.
Taylor
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sat Oct 27, 2012 2:16 pm

Ricola wrote:Based on the past 5 years I'd say Jack Bogle was correct. Purchased in 2007 my VTI has recovered, but my VEU is still down 23% after 5 years. It's a long wait for reversion to the mean.


It is a mistake, in my opinion, to base your assessment of investment strategy based on five years of past performance. If you go back 10 years to the tech bubble, you would find the results reversing themselves (ex-US doing better than US). And if you specifically look at emerging markets - which is what Jack critiques above in, per my quotes - you'd find that while Total US doubled over the last decade, EM more than quadrupled. Again: the point isn't that EM is better - it's that, as Jack himself said at BH11, you can never be sure which will win in any given decade. Question: if we were right now in 2007, looking back on the prior five years in which the US market had gone up by 100% but ex-US had gone up by 200%, what would your conclusions be? Would you say 'I'm doing half as well as I could be - this is too long to wait for mean reversion, so I'll invest only in ex-US'?

staythecourse wrote:I am sure I will get some flak for this, but I see definite xenophobia in international investing based on two factors: 1. Age of the investor (the older folks are brought up as patriots and ideally believe America is special) and 2. If they are U.S. or foreign in heritage. Folks who are not U.S. born have a more natural world view vs. those who have never lived outside the confines of the U.S.

To each their own, but I can say money as capital has no prejudices and will flow to wherever the best deals are to be made based on whatever valuations the upper guys in venture capital and financiers see. If there is more money to be made abroad then the money will flow abroad to foreign domiciled companies. That is what globilization is all about and is only expanding as every year goes by.

Good luck.


Having lived in a few foreign countries for extended periods (Germany and Australia) I have to admit my experiences have conditioned me to see things from different perspectives - I happened to be in Germany when the US invaded a country a while back, and seeing things through the lens of their youth and television was eye-opening.

I can see some solid and understandable reasons (not justified, but ones I can sympathize with) for some of these biases. (1) older generations grew up in an era of perceived and actual US exceptionalism, in terms of both global power and market success (2) the US is relatively isolated from neighbors - just one to the north, one to the south - unlike most of the rest of global markets (Europe and Asia), (3) Jack himself founded the most powerful and amazing index fund of a generation - the 500 index - and is attached to this creation, (4) it is only recently (the last few decades) that ex-US became investible via index funds, and even more recently (this past decade or so) that it became truly cost-efficient, and Bogleheads (rightly, most of the time, anyway) are reluctant to change course.

None of this changes your correct conclusion that money is not prejudiced, but I think it helps explains some of the leanings we see, particularly, as you say, in folks of certain ages and with less personal experiences in or connections to other parts of the globe.

Taylor Larimore wrote:It is not a "trick" to think we can learn from Jack Bogle and older investors--even young ones. :wink:

Best wishes.
Taylor


I know you were responding to StaytheCourse, but for me: as I've said in this thread and elsewhere, I wouldn't be here (I mean both this forum but also where I am with hopefully-wise, low-cost, broad-market index investing!) without Jack Bogle. I owe that man so much. Still, as he himself said about international: it is the last place he wants us - the next generation of investors - to blindly take his advice. I sincerely hope he would see criticisms on this front as a positive sign that we are thinking for ourselves and adapting strategies in a way consistent with fundamental principles of sound investing, but while also recognizing fundamentally new investment conditions (like the recent near-parity of costs for investing in ex-US).
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Ricola » Sat Oct 27, 2012 4:14 pm

I hope more folks do invest international, especially VEU so I can get even on my investment. My outlook is long term, but unfortunately my comfort level is short term.

It is not the return on my investment that I am concerned about; it is the return of my investment. -- Will Rogers :happy
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Aequipondium » Sat Oct 27, 2012 4:31 pm

Much of what Noobvestor has said in this thread is reinforced for me in the paper The Long-Term Risks of Global Stock Markets, by Phillipe Jorion. His research investigated the idea of time diversification. The paper's most important conclusion, for me, is that over the past century, a global stock market index had less downside risk than any single country's market, and that across-country diversification is more effective than time diversification.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby stemikger » Sat Oct 27, 2012 4:55 pm

I always try to stay away from this debate (unsuccessfully I might add) because it really is a matter of preference.

There was a poster a while back who said that he fears a new investor or a non-sophisticated investor (like myself) will get hung up on this and the bottom line is if you save as much as you can, get your AA right between stocks and bonds and keep costs as low as possible, you will be well served if you never even knew about international options.

Can it help smooth out the short term bumps in the road – my guess is yes!! At the end of your saving life time will it matter - no one really knows, but my guess is not by much.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby bayview » Sat Oct 27, 2012 5:07 pm

abuss368 wrote:I wonder why a lot of folks move past Mr. Bogle's recommendation of 20%? Vanguard now has 30% of equity in there target funds.

I also allocate 30% of equity to international.

Why did you "move past Mr. Bogle's recommendation of 20%"?
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby bayview » Sat Oct 27, 2012 5:11 pm

Taylor Larimore wrote:
staythecourse wrote:Taylor,

I didn't mean it as degrading, just an explanation of the reason home country bias occurs EVERYWHERE as the chart in a previous post on this thread shows. There is home country bias and the explanation is what is foreign to folks is often felt as unsafe. That is just human nature. Just like what is familiar always feels safer even if it isn't.

Stay the course:

I know you didn't mean it as "degrading" but you specifically targeted your remark to Mr. Bogle and older investors when you wrote:
"but trick themselves into thinking it is okay because Jack Bogle says so or older posters on this board say so."

It is not a "trick" to think we can learn from Jack Bogle and older investors--even young ones. :wink:

Best wishes.
Taylor

What I find confusing is that if it is wise to come as close as possible to capturing the whole market, why do people who obviously subscribe to this theory NOT capture the whole market?

I'm not trying to be snarky or argumentative, I'm genuinely baffled why the "invest in the market rather than trying to outsmart it" approach wouldn't automatically mean that one invests globally.
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sat Oct 27, 2012 5:37 pm

Aequipondium wrote:Much of what Noobvestor has said in this thread is reinforced for me in the paper The Long-Term Risks of Global Stock Markets, by Phillipe Jorion. His research investigated the idea of time diversification. The paper's most important conclusion, for me, is that over the past century, a global stock market index had less downside risk than any single country's market, and that across-country diversification is more effective than time diversification.


Thanks for the reference, and you nailed the most important point there: it's not about downside protection in a crisis - it's about ensuring you're not in one of the markets that happens to underperform long-term (which, per Boglehead principles and Jack's statements, is impossible to know in advance).

stemikger wrote:I always try to stay away from this debate (unsuccessfully I might add) because it really is a matter of preference.

There was a poster a while back who said that he fears a new investor or a non-sophisticated investor (like myself) will get hung up on this and the bottom line is if you save as much as you can, get your AA right between stocks and bonds and keep costs as low as possible, you will be well served if you never even knew about international options.

Can it help smooth out the short term bumps in the road – my guess is yes!! At the end of your saving life time will it matter - no one really knows, but my guess is not by much.


'Preference' is an interesting word to use. It suggests that there is no right answer. An analogous question: is it 'preference' to invest in all sectors instead of one? I would call it 'hubris' ;) Nonetheless, I do agree that the question of international comes *after* issues of low-cost and stock-versus-bond investing. Still, it is a close third. Incidentally, US-only investing means betting more heavily than 'the market' on tech, and less heavily on basic materials, so it is in reality also a sector bet.

As for whether it will matter ... I know we could spin off a whole side debate about this, but Japan over the last 30 years shows it can (as do Germany and the other countries over the entire last century). If your answer is: ah, but I know the US is different, I have to ask: how do you know better than the markets? By the way, I do appreciate you weighing in on this issue - it *does* help to see your side, and I *can* understand and respect how simplicity has directed you toward the approach you maintain.

bayview wrote:What I find confusing is that if it is wise to come as close as possible to capturing the whole market, why do people who obviously subscribe to this theory NOT capture the whole market?

I'm not trying to be snarky or argumentative, I'm genuinely baffled why the "invest in the market rather than trying to outsmart it" approach wouldn't automatically mean that one invests globally.


Well, there used to be a lot of valid reasons. The problem is: these reasons have slowly been stripped away over time. And while I don't advocate changing one's portfolio sharply based on market conditions, I do think we need to recognize opportunities when we see them (like: low-cost, broadly-diversified, tax-friendly access to global stock index funds). Now the argument against feebly comes down to currency risk for the most part, which I've tried to show via real-life examples of differently-aged investors is not as big a factor as people think (not to mention that Bogle himself says it evens out over time).

Before Bogle's 500 index debuted, there was no way to passively index. After, however, many wise investors (perhaps many who expected to stay the course with their portfolio of large-cap, individually-held stocks or Wellington mutual fund shares) recognized the revolution and switched to owning the fund. Were they wrong to change course from something that was working? Heck, for some of them it might have meant an *increase* in cost, if they were managing their own portfolios (vs. using an active fund). But the diversification was worth the change. I think that applies again, today, with international - but now, like then, some who have taken one road to Dublin for so long might have trouble accepting a somewhat smoother and more reliable side route has been built.

Is it as essential a decision as saving, or keeping costs low, or choosing a stock/bond allocation? Probably not, but you never know, and history shows that being a robust developed country with good accounting practices and a stable legal system does not give investors a free lunch on the return side of things. Regardless, I agree: when people talk about 'the market' and it turns out they just mean 'the US market' I always find myself more than a little perplexed, even if I am used to it ;)
Last edited by Noobvestor on Sat Oct 27, 2012 5:42 pm, edited 1 time in total.
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Vanguard Research Report

Postby Taylor Larimore » Sat Oct 27, 2012 5:40 pm

Bayview:

I'm genuinely baffled why the "invest in the market rather than trying to outsmart it" approach wouldn't automatically mean that one invests globally.


This Vanguard research report explains why most Bogleheads hold a greater percentage of U.S. stocks than the U.S. global allocation in stocks.

International Equity: Considerations and Recommendations

Best wishes.
Taylor
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Re: Vanguard Research Report

Postby Noobvestor » Sat Oct 27, 2012 6:04 pm

Taylor Larimore wrote:Bayview:

I'm genuinely baffled why the "invest in the market rather than trying to outsmart it" approach wouldn't automatically mean that one invests globally.


This Vanguard research report explains why most Bogleheads hold a greater percentage of U.S. stocks than the U.S. global allocation in stocks.

International Equity: Considerations and Recommendations

Best wishes.
Taylor


No offense to Vanguard, but at BH11 it was the one thing where their presentation (to me) sounded rather like bogus backpeddling (well, one of two: basically both of their major last-ten-years changes to Target Date funds were ill-timed). After years of a lower international allocation, but with international outperforming, they suddenly changed to a higher allocation to international in their target date funds ... just before international started doing worse again. It reeked, frankly, of marking timing and keeping up with the Joneses (in this case: other mutual fund companies that already had higher allocation).

Beyond that, their research in this case is backward-looking - Bogle himself (in Common Sense) says that trusting backward-looking efficient frontier chasing is dangerous. But even if we are to take their research as valuable, and the past as prologue (if not predictor), Vanguard concludes that 40% provides most of the backward-looking diversification benefit (20% only provided half of the potential benefit), so if the past is to be our guide, then a 20% cap does not make sense. From their study:

a 10% allocation to international stocks historically reduced the volatility of a U.S.- only equity portfolio (represented by the x-axis) by 60 basis points, while a 40% allocation has resulted in a historical reduction in volatility of 150 basis points .... the “optimal” allocation to international stocks has been as low as 20% or as high as 70%.


Anyway, I can understand tilting toward the US, Taylor - I really can. But holding no international, or just 20%, is not supported by the data (per the above quotes) from the study you linked, nor is it common sense IMO. Again, from the study, with the section title from the study in bold:

U.S. investors should invest in foreign stocks: Global investments provide a diversification benefit to a portfolio focused on a local stock market.


I have to say, one of the reasons I frequently and without hesitation recommend your excellent three-fund portfolio is because it gives equal weight to US and ex-US equities - I think it is hands down the best portfolio to recommend broadly to investors (sure, some may vary it, as I do, but as a broad path anyone can use it's hard to beat something that diversified and simple!). There may be many roads to Dublin, but that three-fund route is one of the clearest and most reliable-looking ones, if you ask me :D
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Allocating The Three Fund Portfolio.

Postby Taylor Larimore » Sat Oct 27, 2012 8:09 pm

I frequently and without hesitation recommend your excellent three-fund portfolio is because it gives equal weight to US and ex-US equities.

Noobvestor:

I am pleased that you appreciate the three-fund portfolio. However, it makes no attempt to weight U.S. stocks, international stocks or bonds. Each investor decides for themselves the exact allocation they prefer.

Best wishes.
Taylor
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Re: Vanguard Research Report

Postby staythecourse » Sat Oct 27, 2012 9:40 pm

Taylor Larimore wrote:Bayview:

I'm genuinely baffled why the "invest in the market rather than trying to outsmart it" approach wouldn't automatically mean that one invests globally.


This Vanguard research report explains why most Bogleheads hold a greater percentage of U.S. stocks than the U.S. global allocation in stocks.

International Equity: Considerations and Recommendations

Best wishes.
Taylor


That is fair to say then why do the same folks not use the numerous studies and statistics pointing to small and value tilting to support tilting away from TSM approach??

This has ALWAYS been my biggest pet peeve on investing and that is that NO ONE invests in the market. I have stated that on numerous occasions and this is one example, just like no international bonds or way too much TIPS is tiltinng away from the Market Portfolio.

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Dublin

Postby Taylor Larimore » Sun Oct 28, 2012 8:04 am

staythecourse:

This has ALWAYS been my biggest pet peeve on investing and that is that NO ONE invests in the market.


There is more than one road the Dublin.

Best wishes.
Taylor
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby t0x1n » Sat May 18, 2013 4:49 pm

I apologize for the bump, but going over some home bias threads (much harder when your country constitutes 0.4% of the world's economy) I keep running into Noobvestor's excellent advice and flawless logic.

I think he deserves some kind of prize :sharebeer

That being said, another angle worth mentioning is small economies. I mean the difference between 47% (US global cap) and say 60% which is a common allocation is not like the difference between 4% (Canada global cap) and 60%. I think in such cases 33.3% home / 33.3% US / 33.3% International ex US makes sense (ala global couch potato).
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sun May 19, 2013 1:44 am

t0x1n wrote:I apologize for the bump, but going over some home bias threads (much harder when your country constitutes 0.4% of the world's economy) I keep running into Noobvestor's excellent advice and flawless logic.

I think he deserves some kind of prize :sharebeer

That being said, another angle worth mentioning is small economies. I mean the difference between 47% (US global cap) and say 60% which is a common allocation is not like the difference between 4% (Canada global cap) and 60%. I think in such cases 33.3% home / 33.3% US / 33.3% International ex US makes sense (ala global couch potato).


You are too kind! I can't deny it - I smiled at your generous praise, though I am also and always humbled by the contributions of others on this forum. So if prizes start getting handed out, I would strongly nominate others to be first in line (Taylor for his steadfast dedication and experienced wisdom, Robert T for his diligent data analyses and summaries thereof, LadyGeek and Alex for keeping the whole ship afloat, various gurus including Larry, Rick and Bil, and the list goes on!). And regardless, I just hope I can help people diversify into portfolios that further reduce their risks and up expected returns!

Really, whether or note Jack would agree, I see my arguments as extensions of his own - diversify as broadly as possible, and either avoid (or be very self-aware about) any tilts away from the (I would say: global) market. I agree, too, that for US investors the game is relatively simple - anything in the range of 50/50 US/intl on the stock side won't represent a dramatic tilt. I also agree with your non-US-resident assessment: investors in smaller-cap countries have a more challenging puzzle to solve with respect to weightings.

And, finally, I'm glad to see different regions starting to decouple a bit in the past months, and am hoping this means less correlation going forward and thus more effective diversification. Looking forward to adding to my ex-US funds again soon!
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