Vanguard - Increasing International Equity %

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Vanguard - Increasing International Equity %

Postby abuss368 » Fri Jun 14, 2013 9:39 am

From watching Vanguard's webcasts and reading their research reports, it appears they are heading in a direction of increasing the international equity percentage's in their Target & Life Strategy funds over time.

Observations:

1) Research Reports - I have read the research reports where they recommend a range of 20% - 40% of equity for most investors.

2) Target & Life Strategy Funds - A few years ago, they increased the international allocation from 20% of equity to 30% of equity.

3) Webcasts - I watched a recent webcast where the recommendation appeared to move past the prior 20% - 40% of equity to 20% up to and including the market weight of 55%/60%. They appeared more willing increase the allocation than previously.

Looking for a little more clarification and guidence, I sent a message to Vanguard and received the following response:

Thank you for taking the time to contact us.

Vanguard has been recommending an increasing percentage of international
stocks that would create a suitable diversified stock portfolio over the
past several years. While an individual's suitability differs one from
another, in general Vanguard currently argues 20 to 40% for international
stock holdings in a stock portfolio,. So, yes, there is a valid point and
argument to consider increasing the international equity allocation to 40%
of equity with the remaining 60% of equity to the U.S.

Vanguard is continuing to update its view on suitable asset allocation, and
diversification Your thoughts have been passed on to our management team
for review.



I personally moved to a 60% US / 40% International allocation recently after using 70% US / 30% International for many years. I am really on the fence either way regarding these two allcoations.

I would be very interested in the Boglehead's thoughts and perspectives.

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Re: Vanguard - Increasing International Equity %

Postby Blues » Fri Jun 14, 2013 9:45 am

Absent an announcement from them indicating a planned increase in the international equity allocation to those funds, I'd treat any discussion as mere speculation.

Whether it would be a good or bad move remains to be seen (and cannot be known in advance).

Personally, I'd be content with it remaining at 30%.
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Re: Vanguard - Increasing International Equity %

Postby G-Money » Fri Jun 14, 2013 9:46 am

abuss368 wrote:I personally moved to a 60% US / 40% International allocation recently after using 70% US / 30% International for many years. I am really on the fence either way regarding these two allcoations.

I would be very interested in the Boglehead's thoughts and perspectives.

When in doubt, I split the difference. So if I was torn between 70/30 and 60/40, 65/35 seems like a natural compromise.

If you're asking if Bogleheads think Vanguard will increase the international equity allocation in its Target Retirement and LifeStrategy funds, it's certainly possible. It's been my observation that Vanguard releases a research paper which supports the moves it makes before it actually makes the moves. So, for example, I'm pretty sure Vanguard released the research paper saying 20% to 40% international equity was optimal before increasing the TR and LS funds' allocations from 20% to 30%. Since 30% is right in between 20% and 40%, I'd expect Vanguard to keep the international allocation at 30%, at least until it releases another research paper showing that things have changed and the optimal allocation is between 30% and 60%. :)
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Re: Vanguard - Increasing International Equity %

Postby nisiprius » Fri Jun 14, 2013 9:49 am

I wouldn't read anything into it. That is, I wouldn't read it as saying that Vanguard is going to up the allocation to 40%. I think that what reps do is to answer intelligently based on what they read in official Vanguard documents. The official Vanguard documents support 40% as one of a number of reasonable choices, i.e. there is a case to be made. I think the rep is simply helping to interpret the Vanguard documents available to everyone.

Vanguard has been saying "from 20% up to market cap" for a long time.

I emailed Vanguard about their "risk potential" rating for the new Vanguard Emerging Markets Government Bond Index fund, which their website originally showed as "5." I asked, basically, whether this was a goof. The reply said "Vanguard Emerging Markets Government Bond Index fund is correctly placed at 5 because" and then basically cut-and-pasted the risk language from the Prospectus.

A few days later they changed it to 3, I emailed them asking about the change, and they replied "apologizing for any confusion" that might have been caused and simply stating that it was "correctly placed at 3" and quoted about the same "reasons."
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Re: Vanguard - Increasing International Equity %

Postby abuss368 » Fri Jun 14, 2013 9:53 am

My thought process at first was 20% up to market weight of 60% as they have noted recently is a middle of the road 40% allocation to be reasonable.
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Re: Vanguard - Increasing International Equity %

Postby G-Money » Fri Jun 14, 2013 9:54 am

nisiprius wrote:I wouldn't read anything into it. That is, I wouldn't read it as saying that Vanguard is going to up the allocation to 40%. I think that what reps do is to answer intelligently based on what they read in official Vanguard documents. The official Vanguard documents support 40% as one of a number of reasonable choices, i.e. there is a case to be made. I think the rep is simply helping to interpret the Vanguard documents available to everyone.

Agreed. And I think it matters a great deal what precise question was asked. If the question was along the lines of: "Currently, I allocate 30% of my stocks to international equities; is raising it to 40% reasonable?" The answer would almost certainly be similar to the one the OP posted.

Of course, had the OP instead asked the question: "Currently, I allocate 40% of my stocks to international equities; is lowering it to 30% reasonable?" The answer there would also likely be "yes."
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Re: Vanguard - Increasing International Equity %

Postby bogleblitz » Fri Jun 14, 2013 11:13 am

Rick Ferri's article has a solution for you. Pick one and stick with it. In 20 years time, it probably doesn't matter.

http://www.rickferri.com/blog/strategy/ ... r-optimal/
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Re: Vanguard - Increasing International Equity %

Postby abuss368 » Fri Jun 14, 2013 1:16 pm

bogleblitz wrote:Rick Ferri's article has a solution for you. Pick one and stick with it. In 20 years time, it probably doesn't matter.

http://www.rickferri.com/blog/strategy/ ... r-optimal/



That is an excellent blog post by Rick Ferri that I forgot about. I re-read it and he always provides a different perspective.

Thank you for providing the link.

Best.
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Re: Vanguard - Increasing International Equity %

Postby pascalwager » Fri Jun 14, 2013 2:34 pm

In their longstanding research paper VG refers to 20% intl stocks as the starting point, now they're saying 30% intl stocks as a starting point (in a recent message about intl bonds), and up to 50%.
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Re: Vanguard - Increasing International Equity %

Postby YDNAL » Fri Jun 14, 2013 2:49 pm

abuss368 wrote:I personally moved to a 60% US / 40% International allocation recently after using 70% US / 30% International for many years. I am really on the fence either way regarding these two allcoations.

What's the difference, in your opinion ?
  • These market weights move/change all the time.
  • Do I believe there is much of a difference between 70/30, 60/40, or perhaps 50/50 ?... only time will tell us IF there is a difference.
  • FWIW, I'm fully-aware that currently, per FTSE Global All Cap Index, the split sits at 47/53 US/non-US [edit: numbers were flipped].
    https://personal.vanguard.com/us/funds/ ... =INT#tab=2
So, I don't try to out-smart anything and use 50/50.
Last edited by YDNAL on Sat Jun 15, 2013 8:51 am, edited 1 time in total.
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Re: Vanguard - Increasing International Equity %

Postby Quidnam » Fri Jun 14, 2013 3:09 pm

YDNAL wrote:FWIW, I'm fully-aware that currently, per FTSE Global All Cap Index, the split sits at 53/47 US/non-US.

You flipped it -- it's 47 US / 53 non-US.
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Re: Vanguard - Increasing International Equity %

Postby abuss368 » Fri Jun 14, 2013 3:23 pm

pascalwager wrote:In their longstanding research paper VG refers to 20% intl stocks as the starting point, now they're saying 30% intl stocks as a starting point (in a recent message about intl bonds), and up to 50%.


Hi pascalwager,

You are correct. I remembered a recent Vanguard article on their website and was able to find it here:

https://personal.vanguard.com/us/insigh ... s_overview

Vanguard Senior Investment Analyst Chris Philips noted:

In contrast, what's Vanguard's recommendation for an international equity allocation?

For international equities, we suggest starting at 30% of the total equity allocation. Considering again the trade-off of costs, diversification, and home bias, we are comfortable when investors deviate from that amount, even up to fully market proportional, which is currently about 50%
.

I would not be surprised if Vanguard increases the International equity allocation to the "middle of the road" with 40% in the Target and Life Strategy funds in the not so distant future.

Best.
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Re: Vanguard - Increasing International Equity %

Postby dharrythomas » Fri Jun 14, 2013 9:57 pm

Look at the difference between 60/40 and 70/30 this way:

If your portfolio is 67% Stock and 33% Bond, as a % of your total portfolio:

60/40 = 40.2% US 26.8% International

70/30 = 46.9% US 20.1% International

Historically returns have been so similar that Jack Bogle argues that international is unnecessary. A 6.7% difference in the allocation across the total portfolio will make a difference if the US follows a downward path like Japan over the next 30 years but probably isn't enough to save you. With anything similar to historical returns, there will be a small difference in returns in one direction or another but anyone who tells you which will return mor over any particular timeframe is either guessing or lying.

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Re: Vanguard - Increasing International Equity %

Postby nedsaid » Fri Jun 14, 2013 10:08 pm

To me, increasing International Equity exposure makes sense. The United States stock market is a smaller and smaller share of the world stock market. My International percentage is at about 26% of my stocks. I want it to go higher over time.
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Re: Vanguard - Increasing International Equity %

Postby abuss368 » Fri Jun 14, 2013 10:22 pm

Right. I keep thinking Vanguard is going to do nothing but keep increasing it.

Appears they produce research and then adjust. Feels like they are starting to warm up to an increase.
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Re: Vanguard - Increasing International Equity %

Postby nisiprius » Fri Jun 14, 2013 10:45 pm

nedsaid wrote:To me, increasing International Equity exposure makes sense. The United States stock market is a smaller and smaller share of the world stock market.
Yes, but the degree is often exaggerated. I've seen charts purporting to show decreasing U.S. market share whose starting point was the peak of the 1990-2000 bull market, giving the impression that U. S. share was plummeting.

I've drawn red and green lines here on Vanguard's chart. U. S. share fluctuates as the market fluctuates. If I draw a line between the start and endpoints of Vanguard's chart, it has been decreasing at the rate of less than 0.5% per year. (If you want to fit the line some different way, do so). This matters, but it is being used as a rationalization for increases in international allocation that are much higher than that. (Just as small increases in life expectancy are being used as a rationalization for large increases in stock allocation).

And, of course, U. S. share has been increasing slightly since 2009 because of the U. S. stock market recovery.

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Re: Vanguard - Increasing International Equity %

Postby nedsaid » Fri Jun 14, 2013 11:53 pm

Thank you Nisiprius, that is an informative chart.
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Re: Vanguard - Increasing International Equity %

Postby InvestorNewb » Fri Jun 14, 2013 11:54 pm

I wonder if Vanguard will also reduce the rating of its International fund from 5 to 4?

I prefer to stick with the funds that are rated 4 out of 5, since they aren't as risky.
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Re: Vanguard - Increasing International Equity %

Postby YDNAL » Sat Jun 15, 2013 8:51 am

Quidnam wrote:
YDNAL wrote:FWIW, I'm fully-aware that currently, per FTSE Global All Cap Index, the split sits at 53/47 US/non-US.

You flipped it -- it's 47 US / 53 non-US.

Yes, thank you!
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Re: Vanguard - Increasing International Equity %

Postby ps56k » Sat Jun 15, 2013 1:39 pm

Interesting chart and red/green lines.
Another aspect for me, is the entire topic of globalization.... and how things have changed.
ie - several large cap companies are currently making more income overseas than domestically - how is that reflected ?
places like Coke, KFC/YUM, CAT, etc...

One thing that always gets me,
is the constant comparisons of past history tables & charts
to help discuss current trends and potential investment strategies.... be it stocks/equity, bonds, etc -

I'm beginning to more and more think it really doesn't matter - and it will always be different...
The world at each decade in the past 100yrs was very different - in so many ways -
How can you compare a chart or table from 1920 or even 1960 to the present ?

I'm beginning to toss any previous history to the side,
and merely concentrate on how the world might evolve over the next 5 years -
and what impact that will have on investing.....
be it domestic, international, bonds, - sectors, countries, duration, interest rates, inflation, etc -
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Re: Vanguard - Increasing International Equity %

Postby ruralavalon » Sat Jun 15, 2013 1:57 pm

abuss368 wrote:From watching Vanguard's webcasts and reading their research reports, it appears they are heading in a direction of increasing the international equity percentage's in their Target & Life Strategy funds over time.

I think that's reading way too much into small diferences in how they phrase essentially the same observations.

I'm not going to try to predict how Vanguard may change their future allocations in LifeStrategy funds, or how the U,S. share of the world market allocation might change.
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Re: Vanguard - Increasing International Equity %

Postby zaboomafoozarg » Sat Jun 15, 2013 2:09 pm

InvestorNewb wrote:I wonder if Vanguard will also reduce the rating of its International fund from 5 to 4?

I prefer to stick with the funds that are rated 4 out of 5, since they aren't as risky.


Interesting, I would have thought for sure VNQ would be a 5.
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Re: Vanguard - Increasing International Equity %

Postby Random Musings » Sat Jun 15, 2013 9:34 pm

Ultimately, when they move to 33%, 35% or 40% international in their next allocation iteration, I hope it comes with the slogan "This is not your father's target retirement fund".

OTOH, maybes they peel a little equity off and adds a little REIT's to the mix first.

Most likely, they won't add HY and commodities next, that could cause an uproar.

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Re: Vanguard - Increasing International Equity %

Postby nisiprius » Sat Jun 15, 2013 10:05 pm

OK, I'm making a ***prediction.*** (Stupid, stupid, stupid! :oops:) I don't think Vanguard is going to change the proportions of domestic and international equity in its Target Retirement and LifeStrategy funds for, let's say, three years. Equities will stay at 30% international, 70% domestic until 2016 or later. Here's why I think so.

The funds were introduced in 2003; revamped by making them more aggressive in 2006; revamped by increasing the international allocation in 2010; and now they have just been revamped with international bonds and short-term TIPS in 2013. So it looks as if Vanguard revamps them about every 3-4 years, and having just done it, I don't think they'll do it again for a while.

The addition of international bonds IS the way they have decided to increase international exposure. If they'd been going to tweak the international stock allocation, they'd have done it in this round of tweaks.

The real driver of interest in international stocks in recent years was not the good rational case that can be made for it, but the fact that they outperformed domestic stocks from 2002-2008. And now they have been underperforming domestic stocks for four years. Those who give "diversification" as the rationale for international will say, correctly, that this is an indication that the theory is valid. But what people are going to be aware of is the underperformance. So popular interest in international stocks is likely to cool, assuming it isn't cooling already.

By adding international bonds, Vanguard can say to those who want more international, "We have more international, it just happens to be bonds, not stocks."

To those who say "I don't want any more international stocks, they've been, yecch, losers," Vanguard can say "We didn't add any more international stocks."

And to those who say "Bonds? My nephew says everybody says bonds are bad, less bonds please," Vanguard can say "We have less bonds--less U.S. bonds, that is. We've replaced them bonds that are outside of Ben Bernanke's grip."

So, while in reality the international bonds are going to have virtually no effect whatsoever, it is a great something-for-everyone marketing story, and I think they're all set now for another three or four years.

When it turns out that I am dramatically wrong (naturally, as the result of a ten-sigma event that nobody could possibly have foreseen) you can all point at me and taunt and laugh.
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Re: Vanguard - Increasing International Equity %

Postby Noobvestor » Sat Jun 15, 2013 10:09 pm

The fact that we even have to wonder if/when they'll make a big change like this suggests they have a horrible lack of credibility (and, I might add, well-earned) on this front. See also: viewtopic.php?f=10&t=104932#p1523119

Meanwhile, I hope the go to market weights and leave it there - at least then they would have a fixed reason to keep it the same, and investors might have a reasonable expectation they would, in fact, do so. Until then, I will continue to advocate that people, where possible, roll their own.
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Re: Vanguard - Increasing International Equity %

Postby joe8d » Sun Jun 16, 2013 12:36 am

The real driver of interest in international stocks in recent years was not the good rational case that can be made for it, but the fact that they outperformed domestic stocks from 2002-2008. And now they have been underperforming domestic stocks for four years. Those who give "diversification" as the rationale for international will say, correctly, that this is an indication that the theory is valid. But what people are going to be aware of is the underperformance. So popular interest in international stocks is likely to cool, assuming it isn't cooling already


The primary reason for the outperformance of International during that period was the devaluation of the dollar due to artificially low interest rates.
I remember reading an article about 5 years ago that showed that,when priced in local currency, many of the various international markets actually underperformed the US market.
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Re: Vanguard - Increasing International Equity %

Postby pascalwager » Sun Jun 16, 2013 4:15 am

I don't find the diversification effect documented in the VG paper, 0.4% volatility reduction for a balanced fund with 30% intl, to be very persuasive.
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Re: Vanguard - Increasing International Equity %

Postby leo383 » Sun Jun 16, 2013 7:40 am

Noobvestor wrote:Meanwhile, I hope the go to market weights and leave it there - at least then they would have a fixed reason to keep it the same, and investors might have a reasonable expectation they would, in fact, do so. Until then, I will continue to advocate that people, where possible, roll their own.


+1

If the premise is that investors can't and shouldn't try to outguess the markets, something other than market weight US/Int'l has always struck me as odd.
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Re: Vanguard - Increasing International Equity %

Postby Trev H » Sun Jun 16, 2013 7:44 am

I think 50/50 is ideal... and looks like eventually Vanguard will agree with me :-)

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Re: Vanguard - Increasing International Equity %

Postby nisiprius » Sun Jun 16, 2013 8:08 am

leo383 wrote:
Noobvestor wrote:Meanwhile, I hope the go to market weights and leave it there - at least then they would have a fixed reason to keep it the same, and investors might have a reasonable expectation they would, in fact, do so. Until then, I will continue to advocate that people, where possible, roll their own.
+1

If the premise is that investors can't and shouldn't try to outguess the markets, something other than market weight US/Int'l has always struck me as odd.
They shouldn't outguess the market, and they shouldn't ignore the effect of currency fluctuations.

It's fine when people acknowledge the existence of currency fluctuation and give reasons for dismissing it, but it won't do to assume that there's no difference between domestic investing and global investing.

If we had a universal world currency, the case for global cap-weighting would be irrefutable.

OK, we're back on the stale debate and I'll try hard not to carry it further, but just to be clear, I'm not suggesting that currency fluctuations always hurt; they helped from 2002-2008, and I assume they do cancel out in the long run, but they add unrewarded volatility, and in the long run they must harm a portfolio as a whole unless they can be shown to have strong, persistent negative correlation (not low, not zero; negative) with stocks (or unless they can be shown to have a permanent, persistent positive return, i.e. the dollar will never ever ever do anything but weaken, forever).

Global cap-weighting has not been the optimum or close to it in the past. Noob and others argue from what they present as fundamental first principles that it will be the optimum going forward.

The topic of the thread is whether Vanguard is planning to increase the percentage of international equity in their all-in-one funds. I think not and I've said why not. However, as for Vanguard's "credibility" with those who want global cap-weighting, surely Vanguard deserves credit for being one of the very few firms to offer a single global cap-weighted stock fund, and an awfully good one, too. For years they used three separate index funds as the international allocation in their Target Retirement funds, then they replaced it with Total International. They are certainly well positioned to replace the separate Total Stock and Total International with Total World if they want to. I don't think they will but time will tell.
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Re: Vanguard - Increasing International Equity %

Postby Blues » Sun Jun 16, 2013 9:07 am

nisiprius wrote:They are certainly well positioned to replace the separate Total Stock and Total International with Total World if they want to. I don't think they will but time will tell.


In theory I don't have a huge issue with such an eventuality, though the meager results of international are certainly holding that fund back and the expense ratio is pricey by Vanguard standards. (Plus, in the absence of further research / evidence indicating that more than 20 to 30% is necessary to get the benefit of international investing, I'll hope they keep things as currently set.)
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Re: Vanguard - Increasing International Equity %

Postby garlandwhizzer » Sun Jun 16, 2013 1:28 pm

I don't know for certain but I do suspect that the reason why Vanguard has increased exposure to international equities in their strategic funds is due to the changes in valuations of the basic fundamentals of DM, EM relative to US markets. DM and EM are having more economic woes in general at present than the US and their stock evaluations reflect that. Both DM and EM indexes currently have lower P/B and PE ratios than TSM at present an their profits are more depressed relative to past years than are US corporate profits which are at an all time high. Both DM and EM have more attractive Shiller PE 10 levels than does the US at present. Shiller PE 10 and P/B are as good as any indicators of future equity performance (although nothing is really reliable) and both of them point to future outperformance of international over US. Theoretically the investor wants to buy stocks not when they are at or near all time highs but when their prices relative to long term future prospects are depressed and that appears to be the case now for international markets relative the US.

Having said that, I have not at all increased my international exposure (30%) relative to US. John Bogle has argued for 80% - 100% US equity exposure relative to international in the past and the more I travel internationally and see how things are run elsewhere, the more I tend to agree with him. In the long run, it may not make much difference at all.

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Re: Vanguard - Increasing International Equity %

Postby staythecourse » Sun Jun 16, 2013 2:38 pm

I love this forum because we beat a dead horse and then come back and beat it some more. :D

We can argue forever, but Vanguard's well quoted paper about international diversification sums it up as best as you can: Anything from 20% to market cap is reasonable and choose what is comfortable for you.

It is NOT what asset allocation (within reason) that matter, but STICKING to it. You would think that would not need to be reinforced so much on a bogleheads forum!!

Now that being known let the arguing continue.

p.s. If your BIGGEST problem in investing is deciding between 70/30 vs. 60/40 then you are doing a great job investing. BTW, I can GAURANTEE that decision is not the biggest problem in your or anyone else's portfolio.

Good luck.
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Re: Vanguard - Increasing International Equity %

Postby pascalwager » Sun Jun 16, 2013 5:33 pm

I've used different intl allocations for my total market and tilted accounts. I use 70/30 US/intl for my total market (Life Strategy) accounts and 50/50 for my small/value accounts (no large market).

The 70/30 ratio is based on VG research using total market indexes, and Gus Sauter once said 30% intl was the sweet spot.

Some studies show that intl small/value have a stronger diversifying effect compared to TISM. When intl large beats US large, then the intl small premium is manifested.

My overall intl allocation is currently 43%, but I guess this is irrelevant in my case.
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Re: Vanguard - Increasing International Equity %

Postby abuss368 » Mon Jun 17, 2013 11:38 am

I did notice that Vanguard's Portfolio Watch feature notes an "ok" up to and including an international equity allocation of 40% of equity.
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Re: Vanguard - Increasing International Equity %

Postby nisiprius » Mon Jun 17, 2013 12:04 pm

abuss368 wrote:I did notice that Vanguard's Portfolio Watch feature notes an "ok" up to and including an international equity allocation of 40% of equity.
Well, the bottom is 20%, or was the last time I explored. They've been suggesting 20%-40% for a while now; when the boosted the international allocation to 30% in the Target Funds, one of their explanations was that it put it in the middle of that range.
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Re: Vanguard - Increasing International Equity %

Postby Blues » Mon Jun 17, 2013 12:22 pm

I think the title of this thread should add a ? to indicate that this is in no way a done deal and avoid delivering an erroneous message.
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Re: Vanguard - Increasing International Equity %

Postby zotty » Mon Jun 17, 2013 12:55 pm

Vanguard has been drifting on international allocation for several years. I'm not sure what to make of it. On the plus side, increasing international % right now is doing the opposite of the herd. International equities have been cheap relative to domestic equities since 2011. It is still cheap relative, although not as extreme. (emerging markets appear to be the weakest now).

I think vanguard is the source of a lot of noise lately. They seem to be on the cusp of a crash with each new "hot" financial product they offer. (Emerging market bonds are looking very dicey) I don't get it, but i guess if it draws in assets it's good for us too.

If i were a market timer, i would think that moving a little more from domestic to international might be a win, based on valuation. Unfortunately, this is just baloney too.... markets don't make sense and thus timing the markets using logic is equally not sensible.
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Re: Vanguard - Increasing International Equity %

Postby azanon » Mon Jun 17, 2013 1:35 pm

nisiprius wrote:
nedsaid wrote:I've drawn red and green lines here on Vanguard's chart. U. S. share fluctuates as the market fluctuates. If I draw a line between the start and endpoints of Vanguard's chart, it has been decreasing at the rate of less than 0.5% per year. (If you want to fit the line some different way, do so).


Yeah, I would have fit the line differently, recalling (long ago, sadly) that in my stats class, we'd try to draw a best fit line down the center splitting peaks and troughs (mean fitting) instead of at the beginning and end, especially given that the beginning and end in this case were at peaks.

Eyeballing a best fit line puts the start very near 60% (or slightly above) and the end very near 40%. Worth mentioning becaues that's almost a full 10% difference, and because it explains why I went with a 60% non-us allocation for stocks.

The rate of change (what you were measuring) would be very similiar though, again just eyeballing the chart.
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Re: Vanguard - Increasing International Equity %

Postby Noobvestor » Mon Jun 17, 2013 11:58 pm

nisiprius wrote:Global cap-weighting has not been the optimum or close to it in the past.


The Vanguard study says you can get 'most' of the benefit 'most' of the time of international diversification by being 20-40% international. But let's see what else they say in that same study when I search for 'optimal':

Although such optimization can serve as a reference point, a significant weakness of this analysis is that it is backward-looking and particularly dependent on the time period examined. For example, at different observation dates,[b] the “optimal” allocation to non-U.S stocks has been as low as 20% or as high as 70%.


I would humbly suggest, per my Larry Swedroe quote signature line, that if the 'optimal' range is 20 to 70 percent international, then 50/50 is a good middle ground for the typical investor - basically market weights rounded off (and, bonus: a compromise between the historical 'optimal' average of around 40% and market weights of 55-60%).

nisiprius wrote:Noob and others argue from what they present as fundamental first principles that it will be the optimum going forward.


I do not believe I ever claimed it would be optimal going forward. My main contention is that if you're going to total-market invest, you should total-market invest unless you have reasons to deviate from that position. The historic data backs this up, but even if it didn't, I would be hesitant not to diversify globally having seen how divergent the results of equities can be across national markets. I don't know the future. I don't know what will work best. Unless you mean something else by 'the optimum'.

As to the question of them raising international: they have done it already, and I see no reason they would not do it again. Unfortunately, I rather doubt they will do it when international is down ... last time they performance-chased (or competitor-chased) - either of which is a disappointing behavior from Vanguard. Sure, I'm glad they offer the Total World fund, but even that is kind of a joke ... no admiral shares, higher ER than the constituent parts if you split them in two. I love Vanguard, but on this front they fail IMO.
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Re: Vanguard - Increasing International Equity %

Postby Noobvestor » Tue Jun 18, 2013 12:06 am

nisiprius wrote:OK, we're back on the stale debate and I'll try hard not to carry it further, but just to be clear, I'm not suggesting that currency fluctuations always hurt; they helped from 2002-2008, and I assume they do cancel out in the long run, but they add unrewarded volatility, and in the long run they must harm a portfolio as a whole unless they can be shown to have strong, persistent negative correlation (not low, not zero; negative) with stocks (or unless they can be shown to have a permanent, persistent positive return, i.e. the dollar will never ever ever do anything but weaken, forever).


My underlines. Unless I'm reading this chart wrong, adding up market weights of ex-US (even slightly beyond) still reduced volatility on average over a US-only portfolio, so your argument is incorrect. That said, I could be reading the chart wrong, or misunderstanding your argument ...

Image

As I read it, for any allocation between 60/40 and 100% stocks adding anything from 1% to around 70% reduced portfolio volatility overall. Chart source: https://personal.vanguard.com/pdf/icriecr.pdf
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Re: Vanguard - Increasing International Equity %

Postby nisiprius » Tue Jun 18, 2013 6:20 am

Noob, rather than rehashing our perennial debate... addressing the question in this thread... which is more about Vanguardology than investing...

...based on your observations of Vanguard, and regardless of what you think Vanguard should do, what is your guess as to what Vanguard is actually going to do? Not an investing question, a Vanguardology question. Just for fun. I've said that I think Vanguard is going to hold international equity at the present allocation, 30% of total equity, for three years. (My degree of sureness is such that I might consider betting €0.05 at even money on it).

Do you see any signals that Vanguard intends to increase international allocation?

What do you think Vanguard will do?
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Re: Vanguard - Increasing International Equity %

Postby Simplegift » Tue Jun 18, 2013 11:06 am

nisiprius wrote:...based on your observations of Vanguard, and regardless of what you think Vanguard should do, what is your guess as to what Vanguard is actually going to do?

The only way I can see Vanguard changing their allocation to international stocks is if they applied their analysis to a longer historical data series. Vanguard's current analysis of international equities (and their 20%-40% recommendation) relies exclusively on their study of the MSCI Indexes for the 42 years from 1970 to 2012.

What would their recommendation be if they analyzed the Dimson, Marsh and Staunton data series (chart below), covering 22 countries over the 112 years from 1900 to 2012? Not to say Vanguard would then come up with the "right" allocation to international equities — or even a better one — but their recommendation would likely change.

Image
Source: Credit Suisse Global Investment Returns Yearbook 2013
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Re: Vanguard - Increasing International Equity %

Postby YDNAL » Tue Jun 18, 2013 11:46 am

YDNAL wrote:
abuss368 wrote:I personally moved to a 60% US / 40% International allocation recently after using 70% US / 30% International for many years. I am really on the fence either way regarding these two allcoations.

What's the difference, in your opinion ?
  • These market weights move/change all the time.....

Great illustration, Simplegift, of my previous comment to OP.
  • Certainly, I can go out on a limb to guess that NO ONE posting here and investing with home country bias can imagine a future where the U.S. accounts for about 25% of the World's cap. (like through 1920)
  • Also, for crying out loud, look at Japan pre/post-WWII and pre/post-1990.
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Re: Vanguard - Increasing International Equity %

Postby Noobvestor » Tue Jun 18, 2013 12:58 pm

nisiprius wrote:Noob, rather than rehashing our perennial debate... addressing the question in this thread... which is more about Vanguardology than investing...

...based on your observations of Vanguard, and regardless of what you think Vanguard should do, what is your guess as to what Vanguard is actually going to do? Not an investing question, a Vanguardology question. Just for fun. I've said that I think Vanguard is going to hold international equity at the present allocation, 30% of total equity, for three years. (My degree of sureness is such that I might consider betting €0.05 at even money on it).

Do you see any signals that Vanguard intends to increase international allocation?

What do you think Vanguard will do?


Fair enough. I agree and think they are likely to hold it steady for now, because there is no driving force pushing them toward increasing it - and they previously increased it when (a) international markets were doing well, and (b) other fund companies were doing the same (interrelated events), but perhaps also (c) their most recent change was still recent enough that if they have any sense they'll know to not change too often or they'll just be obviously uncertain.

I rather cynically think they may increase it down the line, in let's say 3 to 5 years, because (1) at some point, international will start doing well and US will do poorly, (2) by their own data (which I cited above) there is no compelling reason to keep it this low in the first place. That's the real kicker: there is nothing anchoring the percentage right now. That's also the point of the graph I showed - do you see anything on that graph that makes it clear how much international those target funds should hold (within the, say, 10% to 60% range)? I see a slightly-sloped curve that bottoms out somewhere, but such small incremental differences that that bottom point will undoubtedly shift over time. But meanwhile, no, I don't see any signals they will increase it anytime soon.

The next natural question is: what *should* they be doing with it? I (probably controversially) think now is as good a time as any (and better than most, since international is down) to up the allocation, and stake a claim at market weights, and say 'this is where we are going to stay, because we don't want to try and time the market'. Ironically, changing it to market weights is probably the one way they could convince me they *aren't* going to just change it again the next time the winds shift - they need some anchor, and a back-tested bottom of a shallow curve that will shift over time just isn't it. As an added benefit, they could use their Total World Fund to do it, which would give it admiral shares and a lower ER and thus make it more accessible and affordable to their investors in general. As a further and final benefit: it would help convince me personally (and others) that their changes do not involve performance-chasing - the last two big changes they made DID chase performance, intentionally or by accident, and resulted in net underperformance over staying the course.
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Re: Vanguard - Increasing International Equity %

Postby Simplegift » Tue Jun 18, 2013 8:10 pm

One interesting aspect of this issue: As global equities have become more highly correlated in recent decades, it takes a smaller and smaller allocation to them for a U.S. investor to achieve the maximum reduction in portfolio volatility. Vanguard discusses this aspect at length in the March 2012 version of their Considerations for Investing in Non-U.S. Equities (see pages 7-11).

Global equity correlations can certainly change dramatically over time, but for U.S. investors who look to international stocks mainly to reduce portfolio volatility, this is an ironic situation — the non-U.S. portion of global market cap is getting larger and larger just as its diversification benefit is getting smaller and smaller! Therefore, as long as global equity correlations remain high, I believe Vanguard is unlikely to increase their recommended international stock allocation (currently 20%-40%), even if the U.S. global market share continues to shrink further.

For other investors though (myself included), a larger allocation to international stock (say 40% or more) is mainly designed to ameliorate the single country risk of an all-U.S. equity portfolio — and volatility reduction is just a minor consideration. These investors are unlikely to ever reduce their international allocations, despite the higher global equity correlations and Vanguard's recommendations. Cheers!
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Re: Vanguard - Increasing International Equity %

Postby nisiprius » Tue Jun 18, 2013 9:21 pm

Noob, I'm pretty much in agreement with everything you say, quoted below, except of course that I personally prefer to be at the low end of the broad range of reasonable allocations. If I happened to own a Vanguard Target Retirement fund, and they announced that they were swapping out the separate U.S. and international funds for Total World, I wouldn't say "oh, good, it's what I wanted," but I probably wouldn't bail, either.

It would be interesting to know more about the investors who have put $3 billion total into Total World.

Noobvestor wrote:Fair enough. I agree and think they are likely to hold it steady for now, because there is no driving force pushing them toward increasing it - and they previously increased it when (a) international markets were doing well, and (b) other fund companies were doing the same (interrelated events), but perhaps also (c) their most recent change was still recent enough that if they have any sense they'll know to not change too often or they'll just be obviously uncertain.

I rather cynically think they may increase it down the line, in let's say 3 to 5 years, because (1) at some point, international will start doing well and US will do poorly, (2) by their own data (which I cited above) there is no compelling reason to keep it this low in the first place. That's the real kicker: there is nothing anchoring the percentage right now. That's also the point of the graph I showed - do you see anything on that graph that makes it clear how much international those target funds should hold (within the, say, 10% to 60% range)? I see a slightly-sloped curve that bottoms out somewhere, but such small incremental differences that that bottom point will undoubtedly shift over time. But meanwhile, no, I don't see any signals they will increase it anytime soon.

The next natural question is: what *should* they be doing with it? I (probably controversially) think now is as good a time as any (and better than most, since international is down) to up the allocation, and stake a claim at market weights, and say 'this is where we are going to stay, because we don't want to try and time the market'. Ironically, changing it to market weights is probably the one way they could convince me they *aren't* going to just change it again the next time the winds shift - they need some anchor, and a back-tested bottom of a shallow curve that will shift over time just isn't it. As an added benefit, they could use their Total World Fund to do it, which would give it admiral shares and a lower ER and thus make it more accessible and affordable to their investors in general. As a further and final benefit: it would help convince me personally (and others) that their changes do not involve performance-chasing - the last two big changes they made DID chase performance, intentionally or by accident, and resulted in net underperformance over staying the course.
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Re: Vanguard - Increasing International Equity %

Postby Noobvestor » Tue Jun 18, 2013 9:40 pm

nisiprius wrote:Noob, I'm pretty much in agreement with everything you say, quoted below, except of course that I personally prefer to be at the low end of the broad range of reasonable allocations. If I happened to own a Vanguard Target Retirement fund, and they announced that they were swapping out the separate U.S. and international funds for Total World, I wouldn't say "oh, good, it's what I wanted," but I probably wouldn't bail, either.

It would be interesting to know more about the investors who have put $3 billion total into Total World.


I wonder if I knew and forgot but ... do you actually use a TR fund? For some reason I thought you had things separated out.

According to VG about 80% or so of them are using the ETF share class, which helps a bit with the expense ratio. Other than that, I'm guessing people who are aiming for utmost simplicity - when I was still considering ETFs (before opting for mutual funds) I toyed with the idea of using VT myself for just that reason :)
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Re: Vanguard - Increasing International Equity %

Postby joe8d » Tue Jun 18, 2013 10:23 pm

abuss368 wrote:
pascal wager wrote:In their longstanding research paper VG refers to 20% int stocks as the starting point, now they're saying 30% int stocks as a starting point (in a recent message about intl bonds), and up to 50%.


Hi pascal wager,

You are correct. I remembered a recent Vanguard article on their website and was able to find it here:

https://personal.vanguard.com/us/insigh ... s_overview

Vanguard Senior Investment Analyst Chris Philips noted:

In contrast, what's Vanguard's recommendation for an international equity allocation?

For international equities, we suggest starting at 30% of the total equity allocation. Considering again the trade-off of costs, diversification, and home bias, we are comfortable when investors deviate from that amount, even up to fully market proportional, which is currently about 50%
.

I would not be surprised if Vanguard increases the International equity allocation to the "middle of the road" with 40% in the Target and Life Strategy funds in the not so distant future.

Best.


I would not be surprised if VG just used the Total World Index for the stock component of the TR / LS Funds.
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Re: Vanguard - Increasing International Equity %

Postby pascalwager » Wed Jun 19, 2013 1:22 am

I would not be surprised if VG just used the Total World Index for the stock component of the TR / LS Funds.


I'd prefer they use TSM/TISM 50/50–twice the number of companies compared to TWS. Revise LS similarly. Or improve TWS.
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