Foreign Stocks For The Long Run

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azanon
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Re: Foreign Stocks For The Long Run

Post by azanon »

One more thing, I don't know if the article title was coincidental, but I believe Jeremy Siegel's 5th edition of "Stocks for the Long Run" is due out January 10, 2014, and I believe much of the 5th revision will focus on additional information pertaining to foreign stock investing. I have no idea what he's going to say about it though.
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JoMoney
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Re: Foreign Stocks For The Long Run

Post by JoMoney »

Saying one style or sector has outperformed is period dependent. Go back 10 years U.S. TSM has slightly outperformed International, Go back 11 years and International has slightly outperformed. Valuations matter, but one of the most important for stocks is growth, which is highly dependent on the unknowable future. You can buy what appears to be "cheap" stocks today, but there's usually very good reason the market has priced them at a discount. The market is pricing future earnings. Sometimes things get heated and markets expectations for the future are far from what is reasonably possible, but most of the time the market is better at pricing than any individual could guess.
As far as portfolio diversification goes, bonds have consistently provided a better diversification benefit then owning more stocks of any style or origin.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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nedsaid
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Re: Foreign Stocks For The Long Run

Post by nedsaid »

I have invested Internationally for a long time. It makes sense to me for an investor to be globally diversified. Japanese investors who suffered through a 20 plus year bear market learned this the hard way. Though I think it unlikely, what would happen if the US became another Japan? One should not dismiss that possiblity.

Having a hefty stake in International Stocks helped my portfolio during the "lost decade". International Stock Markets did a lot better than their US counterpart during that time.

Until recently, the US Dollar has been in a long-term trend of decline again other major currencies. Owning foreign stocks is a good hedge against a declining dollar. I like the idea of currency diversification.

So I own both International Stocks and Bonds through mutual funds. There is a much stronger case for the stocks than the bonds, but I own both. Mark me down as a believer.
A fool and his money are good for business.
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in_reality
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Re: Foreign Stocks For The Long Run

Post by in_reality »

nedsaid wrote: Japanese investors who suffered through a 20 plus year bear market learned this the hard way. Though I think it unlikely, what would happen if the US became another Japan? One should not dismiss that possiblity.
Um, well what does this employment line (dark blue for Japan) tell you.

Image

It tells me that simply that Japan behaves differently than other economies. This is due to it's legal environment.

So while it may be suggested that performance wise perhaps 50% (US) 50%(international) is ideal over time, I have concerns about investor protections in some countries especially in times of conflicts. Feel free to dismiss my concerns but the fact is the blue line for employment in Japan is a result of it's employment regulations and impacts company performance. We would never see that kind of regulation in the US.

Now today, no matter the size of the economy, I have reservations about investing in a communist country that I suspect at some point may go it's own route and reduce economic cooperation. Wikipedia tells me that WWII casuality estimates, atrocisiously high as they are, are perhaps comparable to the casualities during the "Greap Leap Forward". To pay such a price for economic change, indicates to me that something like honoring intellectual property or foreign investment is likely something that is secondary to Chinese party ambitions. Intellectual property or foreign investment surely pales in importance to Chinese Sovereignty. I do not pretend to know what Chinese intentions are. I can only say that I feel investing overseas is involves risks that are not possible to calculate simply looking at past returns. Probably in my timeframe, China will not change all that much. Still, I suspect that eventually the ideal of Chinese Sovereignty will trump any economic disruption from hindering foreign corporations and foreing investment from functioning normally if for whatever reason the Party decides that is what would be best.
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baw703916
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Re: Foreign Stocks For The Long Run

Post by baw703916 »

One thing is that Japan's population is no longer growing. How can employment continue to grow if population doesn't?
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stemikger
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Re: Foreign Stocks For The Long Run

Post by stemikger »

Calm Man wrote:Rick,
Thank you for an excellent analysis. Now if I wish to be a person who pushes back hard, I could say the difference in standard deviation between 70/30 and 100% US is 1%. And the difference in Sharpe ratio is miniscule. The after tax returns (because of a lot less QDIs) and higher expense ratios of international vs US funds might completely outweigh this trivial benefit. So why bother at all with anything other than TSM. My response is that the future might be different than the past but the past results just don't do it for me. Am I missing anything from your analysis?
+100

Rick, that was a great article, and I really did try to understand most of it, but I agree with Jack Bogle because everything I read about the reasons to invest in international equities just don't make as much sense as what Jack wrote many years ago in Common Sense on Mutual Funds. Like Calm Man said so much more eloquently than I the benefit is trivial. That chapter just made so much sense and like Jack said, if I invest 100% in the Total Market or S&P aren't I already getting a fair amount of international exposure by the multi-nationals? Thanks again Rick!
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
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baw703916
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Re: Foreign Stocks For The Long Run

Post by baw703916 »

I have to strongly disagree with avoiding international. While international may be somewhat more expensive than TSM for a U.S. investor, the total cost is going to be no more than 20 bp--which is insignificant compared to the typical annual return of equities.

The argument about the historical effect of adding international on return and the Sharpe ratio is just that--historical. Does past performance now predict the future? How can one be sure that the U.S. won't have an extended period of poor performance like Japan has had? After all, the market in all its efficiency and knowledge had priced the Nikkei in 1990 at what it thought to be a fair level.

Sorry, but I think many Bogleheads have a severe case of home country bias. It just doesn't make any sense to exclude international when you can easily and cheaply hold it.

Brad
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gkaplan
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Re: Foreign Stocks For The Long Run

Post by gkaplan »

Brad, I totally agree with you.

My Vanguard European and Pacific stock index funds Admiral Shares have expense ratios of .12%. By contrast, my Vanguard Value and Small-Cap Value index funds Admiral Shares have expense ratios of .10%. I don't think the two basis points difference is at all significant. My Vanguard Emerging Markets Stock Index Fund Admiral Shares has an expense ratio of .18%, which is quite acceptable, especially when you consider the expense ratios of competitor emerging markets funds probably are four times greater. My Vanguard FTSE All-World ex-US Small-Cap Index Fund does have a relatively expensive expense ratio of .45%; however, when I started investing in this fund when it first became available, the expense ratio was .75%. I expect the expense ratio will continue to come down as the fund accumulates more assets. Eventually, as well, I expect that Vanguard will add an Admiral Shares class as the fund accumulates more assets. The fund does have a purchase fee of .25%, but which Vanguard recently reduced from .50%. I expect Vanguard eventually will eliminate the purchase fee in its entirety, as it did with the Vanguard Emerging Markets Stock Index Fund.

Furthermore, Investors who argue that American companies do business throughout the world, and this precludes the need to invest in foreign funds, seem to think that foreign companies do business only in their own country. I just don't understand this reasoning.
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baw703916
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Re: Foreign Stocks For The Long Run

Post by baw703916 »

Gordon,

I'm sure you know that the ETF for small FTSE (VSS) has a considerably lower cost (0.25% E/R) and no purchase fee (but you do have to deal with spreads and possibly commissions). This may be a good alternative for those with a brokerage account who are comfortable with ETFs. I own small FTSE via the ETF.

Brad
Most of my posts assume no behavioral errors.
gkaplan
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Re: Foreign Stocks For The Long Run

Post by gkaplan »

Brad, I do know that; however, I don't wish to open a brokerage account. Anyway, as I mentioned, I believe the expense ratio will continue to come down by virtue of the fund's assets growing and by virtue of Vanguard creating an Admiral Shares class, and I also believe that Vanguard eventually will eliminate the purchase fee.
Gordon
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nedsaid
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Re: Foreign Stocks For The Long Run

Post by nedsaid »

I don't advocate investing heavily in communist countries. What I advocate is broad-based international investing and spreading your risk across the globe. You are diversifying across political systems, legal environments, labor markets, financial markets, regulation, and availability of natural resources. I think the China and the Commoditiy bull markets are yesterday's news and I see China as Japan on steroids. I would not overweight Chinese stocks.

It seemed like in the late 1980's that Japan was going to take over the world. Their economic model looked unbeatable and it was good that we ultimately did not copy it. I certainly did not forsee a 20 plus year bear market in Japanese stocks.

Diversification is a great idea since no one knows what the future will hold. It is prudent to spread risks the best you can. The old saying that you don't put all your eggs in one basket. Even if that basket is the United States of America.
A fool and his money are good for business.
peppers
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Re: Foreign Stocks For The Long Run

Post by peppers »

Rick Ferri wrote:Tactical asset allocation is like trying to guess which professional baseball team will win the World Series in 2017.

Rick Ferri
The Chicago Cubs have not won the World Series in 105 years.
That is, most definitely, long term underperformance.
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baw703916
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Re: Foreign Stocks For The Long Run

Post by baw703916 »

peppers wrote:
The Chicago Cubs have not won the World Series in 105 years.
That is, most definitely, long term underperformance.
I'm sure Cubs fans wouldn't claim that past performance predicts future results. :)
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Karl
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Re: Foreign Stocks For The Long Run

Post by Karl »

Before reading Rick's article I'm guessing Japan is the problem for most of the last 40 years. Japan peaked in 1989 and has been going down or sideways for the last quarter century. Now I must go read Rick's wisdom.
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