SP500 globalized; substitute for int'l investing?

[TimDex]

I ran across an interesting statistic the other day -- that the sales of companies in the SP500 are increasingly international -- at this point the writer claimed they were 48% and estimated that this would increase steadily in the years ahead.

My question: are the increasing global sales of large U.S. companies a substitute for including an international index in your asset allocation plan?

tim

[NYBoglehead]

I don't think so. What the statistic doesn't say is what % of OVERALL international sales those 48% of S&P 500 companies represent. And there is difference between international sales figures and the ownership of international stocks. You own international stocks to have ownership of foreign based companies (and to own more of a sample of the global equity market) not just to have exposure to international sales.

In a nutshell, I don't think it is an adequate substitute.

[nisiprius]

This is a topic of constant controversy in this forum, and for one of the more recent go-arounds see the thread containing my posting here. It's controversial because John C. Bogle himself believes international investing is not necessary, and says if you want to do it anyway, OK, but don't go over 20% of your stock allocation. Within the forum, that is a minority view and one area in which many Bogleheads are willing to say, simply, "I think Bogle is wrong."

Sandip Bhagat, who is some fairly high-ranking person at Vanguard, has written a Vanguard Research and Commentary article entitled Global investing trap: Multinational not the same as international which lays out the case for multinational domestic companies not being equivalent to international investing.

For allocation of stocks to international, Vanguard officially recommends a wide range in which the minimum is 20%, and the maximum is full global cap-weighted (which is about 55-60% international). In the forum, there are a number of posters arguing very strongly for full global cap-weighting, which can be conveniently obtained in a single Vanguard fund, the Vanguard Total World Stock Index Fund.

Despite all that, and despite an obvious trend for ever-increasing international allocation recommendations, correlations between U.S. and international stocks are high, and have probably been increasing, possibly because of globalization and big corporations being increasingly multinational.

The interesting thing about all this is that despite strong opinions, usually expressed with high degrees of confidence, the actual data is sufficiently ambiguous and weak that it can be and is argued indefinitely. Over the past decade, international has helped portfolios, but that is mostly because of currency factors--the dollar weakening a lot over 2002-2008--not because of diversification in the behavior of national stock markets as such.

Regardless of whether the S&P 500 is globalized, these days the idea of holding no international at all is definitely out of the mainstream of investment thinking.

[stan1]

I may be simple-minded, but why would I want to own Ford, General Motors, and Chrysler but not Toyota, Volkswagen, BMW, Daimler, and Hyundai? Why would I own Exxon and Chevron but not Shell or BP? Apple and Dell but not Samsung or Ericsson? To me its a pretty straightforward diversification argument.

I think there are two extremes on currency risk. One camp will advocate market weighting and view currency risk as a rebalancing opportunity that might enable you to buy low and sell high over a long period. The other extreme is that currency risk can be avoided by not investing in international equities. I have chosen the middle ground -- which puts me about 1/3 international and 2/3 domestic.

The other point of difference is age and objective. A retiree in his 80s may not need any international exposure; an accumulator in her 20s has no clue what the world will look like in 60 years and should cover her bases. Assuming that the next 60 years will be just like the last 60 years is a flawed assumption as it is a highly unlikely outcome.

[rmelvey]

I have a bias for domestic companies that receive revenue overseas vs. international companies because with the domestic companies I don't have to worry about withholding tax.

[kenyan]

I threw a bunch of asset classes in ETFscreen.com, which will quickly tell you the daily correlation over the past 6 months.

VTI - Total US stock market
VOO - S&P 500
VTV - US large value
VBR - US small value
VXUS - Total International
VSS - International small cap
VWO - Emerging markets
VNQ - US REIT
VNQI - International REIT
BND - Total US Bond market
GLD - Gold

BND had large negative correlations to everything, particularly all equities. GLD was weakly correlated to equities, approximately 0.4-0.5. VNQ was the next-best diversifier, at 0.5-0.6. VNQI was strangely quite correlated with domestic equities, at over 0.8, though I'd suspect that's due to a small sample size of 6 months. International was 85-90% correlated with Large US equity, 80% with small. US Small approximately 90% with US Large.

So...yes, correlations are quite high with all equity, and they are higher with large caps domestic and abroad. Maybe that's due to international sales of large caps, maybe not. US Small Cap Value was 82% correlated with International Small Cap, and there's probably not a lot of cross-pollination going on there.

Overall, there is a high correlation between US and abroad, and I don't think it necessarily is explained by the international sales of large US companies (or vice versa). I'd think it has more to do with the internet, freedom of information and explosion of inexpensive investing options, and globalization of the world economy in general. To really study whether there is a separate "US sales abroad" effect, I think you'd have to study individual companies - or a basket of companies - based upon their international sales, and deconvolute that effect.

Personally, I feel there is no compelling reason not to invest internationally and be better diversified.

[thebogledude]

It's controversial because John C. Bogle himself believes international investing is not necessary, and says if you want to do it anyway, OK, but don't go over 20% of your stock allocation.

this is probably one of the well articulated, well thought out replies I have read on this forum. I'm also on the "if it's good enough for Bogle..." bandwagon but as a disclosure, I intend to hold international in my taxable for tax loss harvesting purposes.

[mrpotatoheadsays]

My question: are the increasing global sales of large U.S. companies a substitute for including an international index in your asset allocation plan?

tim

Yes.

[Simplegift]

It's controversial because John C. Bogle himself believes international investing is not necessary, and says if you want to do it anyway, OK, but don't go over 20% of your stock allocation. Within the forum, that is a minority view and one area in which many Bogleheads are willing to say, simply, "I think Bogle is wrong."

Well stated, Nisi. The problem that many Forum members have with Mr. Bogle's views on international equity investing, I believe, is that the strength of an authoritative argument depends on two factors (according to Wikipedia):

1. The authority is a legitimate expert on the the subject.
2. There exists a consensus among legitimate experts in the subject matter under discussion.

There can be no doubt that Mr. Bogle is a legitimate and respected (even loved) expert on personal investing. However, not only do his views on international equities not represent an expert consensus, but they seem to be entirely personal to Mr. Bogle alone. Are there any other legitimate investment experts who recommend an all-U.S. equity portfolio? Any expert practitioners? Any peer-reviewed academic papers that have reached this conclusion?

Since the preponderance of expert opinion and academic studies seems to disagree with Mr. Bogle, it's hard to be persuaded by any appeal to his authority in this particular matter. Just my two cents.

[stemikger]

This is a topic of constant controversy in this forum, and for one of the more recent go-arounds see the thread containing my posting here. It's controversial because John C. Bogle himself believes international investing is not necessary, and says if you want to do it anyway, OK, but don't go over 20% of your stock allocation. Within the forum, that is a minority view and one area in which many Bogleheads are willing to say, simply, "I think Bogle is wrong."

Sandip Bhagat, who is some fairly high-ranking person at Vanguard, has written a Vanguard Research and Commentary article entitled Global investing trap: Multinational not the same as international which lays out the case for multinational domestic companies not being equivalent to international investing.

For allocation of stocks to international, Vanguard officially recommends a wide range in which the minimum is 20%, and the maximum is full global cap-weighted (which is about 55-60% international). In the forum, there are a number of posters arguing very strongly for full global cap-weighting, which can be conveniently obtained in a single Vanguard fund, the Vanguard Total World Stock Index Fund.

Despite all that, and despite an obvious trend for ever-increasing international allocation recommendations, correlations between U.S. and international stocks are high, and have probably been increasing, possibly because of globalization and big corporations being increasingly multinational.

The interesting thing about all this is that despite strong opinions, usually expressed with high degrees of confidence, the actual data is sufficiently ambiguous and weak that it can be and is argued indefinitely. Over the past decade, international has helped portfolios, but that is mostly because of currency factors--the dollar weakening a lot over 2002-2008--not because of diversification in the behavior of national stock markets as such.

Regardless of whether the S&P 500 is globalized, these days the idea of holding no international at all is definitely out of the mainstream of investment thinking.

Standing Ovation for such a great reply!!!

Having said that, this is to the OP. I would reccomend reading the book Common Sense On Mutual Funds. Mr. Bogle devotes an entire chapter to this topic and IMHO does a good job explaining why he thinks one can do without it. He is definitely a minority out there when it comes to this view point. However, there are many very smart folks on these boards who make just as good of an argument on why you should hold it. I would suggest reading both views and then make your own decision.

[stemikger]

It's controversial because John C. Bogle himself believes international investing is not necessary, and says if you want to do it anyway, OK, but don't go over 20% of your stock allocation. Within the forum, that is a minority view and one area in which many Bogleheads are willing to say, simply, "I think Bogle is wrong."

Well stated, Nisi. The problem that many Forum members have with Mr. Bogle's views on international equity investing, I believe, is that the strength of an authoritative argument depends on two factors (according to Wikipedia):

1. The authority is a legitimate expert on the the subject.
2. There exists a consensus among legitimate experts in the subject matter under discussion.

There can be no doubt that Mr. Bogle is a legitimate and respected (even loved) expert on personal investing. However, not only do his views on international equities not represent an expert consensus, but they seem to be entirely personal to Mr. Bogle alone. Are there any other legitimate investment experts who recommend an all-U.S. equity portfolio? Any expert practitioners? Any peer-reviewed academic papers that have reached this conclusion?

Since the preponderance of expert opinion and academic studies seems to disagree with Mr. Bogle, it's hard to be persuaded by any appeal to his authority in this particular matter. Just my two cents.

Scott Burns several years ago created the Couch Potato Portfolio where he has no international just the S&P 500 and the Total Bond Fund. He now advises the Total Market for equities and still the Total Bond with a 50/50 split.

[magneto]

You guys think you have problems! Think of how we non US investors must allocate.

The same argument that the FTSE100 is mainly international operating companies is put forward here in the UK.

With the UK market at about 8% of global I feel most happy with 1/3rd UK, 2/3rds Global. This is the same proportion as the Boglehead WIKI suggests for middle aged UK investors.

Unexpectedly for late retirement the WIKI suggests for UK investors that all stocks be international i.e. zero domestic stocks.