International investing. A good call by our mentor.

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Taylor Larimore
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International investing. A good call by our mentor.

Post by Taylor Larimore »

Bogleheads:

Fifteen Years ago Mr. Bogle published his first edition of Common Sense on Mutual Funds. He wrote (page 186):
I would recommend limiting international investments to a maximum of 20 percent of a global equity portfolio.
Today, fifteen years later, I went to Morningstar to look-up the past performance of Vanguard Total U.S. Stock Market Index Fund (VTSMX) and Vanguard Total International Stock Market Index Fund (VGTSX). These are annualized returns:

Period - - - -VTSMX- - - - -VGTSX

5 Years- - - - 17.80% - -- - - 9.59%

10 Years- - - - 8.79%- - - - - 7.83%

15 Years- - - - 5.28%- - - - - 4.98%

Past performance does not forecast future performance.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Leif
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Re: International investing. A good call by our mentor.

Post by Leif »

Taylor Larimore wrote: Past performance does not forecast future performance.
And yet we all really love to quote it.

As Larry Swedroe likes to say:
assets shouldn’t be viewed in isolation (but in how their addition impacts the risk and return of the portfolio)
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JoMoney
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Re: International investing. A good call by our mentor.

Post by JoMoney »

assets shouldn’t be viewed in isolation (but in how their addition impacts the risk and return of the portfolio)
If only we could predict what their future returns and correlations would be. "Expert" guesses on what they think a portfolio should have has certainly changed over time
https://personal.vanguard.com/pdf/ISGGEB.pdf
...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, the “optimal” allocation to non-U.S stocks has been as low as 20% or as high as 70%. As recently as year-end 2005, the bottom of the “U” pattern in Figure 3 fell between 40% and 50%; through both year-end 2008 and year-end 2013, however, the curve clearly bottomed out between 30% and 40%. And even more recently over shorter time periods, we have seen non-U.S. stocks fail to reduce the volatility of a portfolio at any allocation ...
John Bogle in Common Sense On Mutual Funds wrote:...Assett allocation is not a panacea. It is a reasoned -if imperfect- approach to the inevitable uncertainty of the financial markets...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Twins Fan
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Re: International investing. A good call by our mentor.

Post by Twins Fan »

Didn't Mr. Bogle say right before that, that he didn't feel international investing was necessary at all? Then say that if one wanted international to limit it at 20%?

Don't dare say international isn't necessary or question certain "experts" about that lately on the BOGLEheads forum though.
Stonebr
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Re: International investing. A good call by our mentor.

Post by Stonebr »

You could also argue that small and mid cap stocks aren't absolutely necessary either. Then keep the same logic going long enough and pretty soon you own just the 20 largest US based companies.

I'll take Total US Stock and Total International Stock. I want to own everything.

Keep it simple and don't try to over-think things. :happy
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steve_14
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Re: International investing. A good call by our mentor.

Post by steve_14 »

My foreign stocks are purely insurance against country specific risk, which we know can pop up dramatically from time to time. In that 10% chance where the US economy implodes (see: Japan), I'll be glad I took out the policy. In the other 90% of cases, my real estate, human capital, etc. values showing be growing as I expect.
Twins Fan
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Re: International investing. A good call by our mentor.

Post by Twins Fan »

You don't know how close you got to describing how simple I am, Stone. :happy I don't think much is "necessary" when it comes to all this investing stuff.
John3754
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Re: International investing. A good call by our mentor.

Post by John3754 »

This seems to me like A) Confusing outcome with strategy, and B) Confirmation bias. Could I not pick time periods when international beat domestic? Or show that over certain time periods international did not perfectly correlate with domestic and therefore reduced volatility? I really just don't see how pointing out that international has beat out domestic by 0.3% over the past 15 years proves anything.
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Re: International investing. A good call by our mentor.

Post by ddb »

A few points worth mentioning here:

1. Basing an investment strategy on a recent 15-year period of returns is probably a bad idea. Else, we should all invest entirely in long-term government bonds and small-cap value stocks.

2. Looking at annualized returns of each component is not particularly helpful, as we should be more interested in how adding a new asset class (in this case, foreign stocks) affects the overall risk and return characteristics of the entire portfolio. In this simple 2-asset class universe, we have the following annualized returns and standard deviations in annual returns for the 15-year period of 1999-2013:

Image

By going from 100% US stocks to 50% US stocks, you would have lost ~0.06% in annualized returns, or ~0.91% over the entire 15-year period. There was a similarly-negligible increase in portfolio volatility. I mean, let's call it a wash. Further, approximately ALL of the performance differential between 100% US and 50% US can be explained by what used to be a much larger difference in expense ratio between the two funds. BTW, as of now, the ETF variants of these funds, VTI and VXUS have an expense ratio differential of 0.09% per year, at 0.05% and 0.14%, respectively.

I believe that Mr. Bogle is wrong in advocating such a heavy US bias, however I acknowledge that it probably doesn't matter very much compared to other much more important decisions in developing a suitable asset allocation.

- DDB
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Re: International investing. A good call by our mentor.

Post by Sunny Sarkar »

Stonebr wrote:You could also argue that small and mid cap stocks aren't absolutely necessary either. Then keep the same logic going long enough and pretty soon you own just the 20 largest US based companies.
Portfolio Engineering is overrated.

1. Keep costs low - very important
2. Stay the course - very important
3. Find the perfect allocation - low importance

My thought is that the perfect allocation is any reasonable allocation that enables the investor to stay the course and sleep at night.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: International investing. A good call by our mentor.

Post by cfs »

The Rowboat Syndrome.

A couple of years ago I read a good article from Morningstar (Bogle: Why I Don't Invest Overseas) where John Bogle discussed international investing and the rowboat syndrome. But then I read another article in which he said that if one wanted to invest in internationals to keep it at around 20%. Now, on a personal note, I need to do my best to avoid catching the rowboat syndrome, it is contagious.

Thanks for reading.
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baw703916
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Re: International investing. A good call by our mentor.

Post by baw703916 »

Sorry to be blunt, but this thread encapsulates everything that I am starting to find frustrating about this board.

Don't get me wrong--I absolutely believe in passive investing, staying the course, diversification, and tax efficiency,

But this discussion is about cherry-picking data that supports someone's pre-existing bias. In short, it's meaningless.

Investing internationally, as opposed to completely on nearly completely in the U.S. increases diversification. As the saying goes, "if it adds diversification, it's probably a good thing."

I don't care what happened the last 15 years. I do care what will happen in the next 15 years. But I don't know, and I don't believe anyone else does either, whether stocks will perform better than bonds, whether international will do better than U.S., or whether small value will do better or worse than large caps. So I own all of the above.
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Re: International investing. A good call by our mentor.

Post by Twins Fan »

That's a nice rant, baw. But, I think you missed the point of the thread.

To me, the point was that Mr. Bogle made a call 15 years ago and it was correct. Maybe some can see what will happen?

If you want to call that cherry picking though...
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Re: International investing. A good call by our mentor.

Post by baw703916 »

Twins Fan wrote:That's a nice rant, baw. But, I think you missed the point of the thread.

To me, the point was that Mr. Bogle made a call 15 years ago and it was correct. Maybe some can see what will happen?

If you want to call that cherry picking though...
So perhaps you can give a definitive proof that the accuracy of that prediction was skill rather than luck? As in, can we have confidence that what he or anyone else predicts for the next 15 years will be accurate?
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Twins Fan
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Re: International investing. A good call by our mentor.

Post by Twins Fan »

I'm not Mr. Bogle, so no I can't give a definitive answer to skill or luck. The part I find funny and frustrating about the board lately is that so many BOGLEheads don't place confidence in Mr. Bogle about the international deal. But, do place confidence in what "anyone else" says about it.

To each their own, I guess.
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Re: International investing. A good call by our mentor.

Post by ddb »

Twins Fan wrote:That's a nice rant, baw. But, I think you missed the point of the thread.

To me, the point was that Mr. Bogle made a call 15 years ago and it was correct. Maybe some can see what will happen?

If you want to call that cherry picking though...
John Bogle didn't make a call 15 years ago regarding the future performance of US vs. non-US stocks. He made a recommendation to limit non-US stock holdings to a maximum of 20% of one's equity portfolio.

The data I posted above showed that a buy-hold-rebalance investor over the last 15 years would have earned approximately the same performance whether he had 0%, 20%, or 50% in foreign stocks, i.e. it didn't really matter. This neither supports nor refutes Bogle's advice.

- DDB
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Re: International investing. A good call by our mentor.

Post by M_to_the_G »

Mr. Bogle made a very good argument 15 years ago, and if you read that chapter in Common Sense, you will understand why. I believe he feels the same way today and has not changed his tune. Accordingly, I have allocated 20% of my portfolio to international stocks, and I ignore Vanguard's current advice to allocate 30% or more... not out of blind adherence to Mr. Bogle, but because of the very convincing arguments made in Common Sense. Nothing coming out of Vanguard today has convinced me that their new advice is better than that.
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Re: International investing. A good call by our mentor.

Post by Sunny Sarkar »

Twins Fan wrote:The part I find funny and frustrating about the board lately is that so many BOGLEheads don't place confidence in Mr. Bogle about the international deal.
It's a matter of degree of importance. Jack Bogle's overarching advice is "Costs Matter" and "Stay The Course". Bogleheads follow these two unanimously. The tweaking between domestic/international or small/value etc. is not nearly as important and matters a lot less - so we feel OK to have a little fun with hairsplitting in that area.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
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Re: International investing. A good call by our mentor.

Post by YDNAL »

.

Investing is NOT science. Water boiled at 212°F (99.98°C) at sea level in each of the last 15 years, the next 15 years, and 15 years after that.

Stocks (US and non-US) behaved a certain way in the past and the behavior is unknown in the future.

PS. "In this world nothing can be said to be certain, except death and taxes." -- Benjamin Franklin
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Re: International investing. A good call by our mentor.

Post by RyeWhiskey »

I think if we take into account the following widely-accepted and practiced general outlines, the conclusion is clear:
- Keep things simple and costs low
- Diversify
- Stay the course
The conclusion: Vanguard Total World Stock Market fund. Maximum diversity, maximum simplicity, low costs, easy to stay the course. Bogle's 20% International is fine but, in my opinion, actually makes things more complicated. :beer
This post was brought to you by Vanguard Total World Stock Index (VTWSX/VT).
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Re: International investing. A good call by our mentor.

Post by CrossOverGuy »

Andrew Tobias in his classic book "The Only Investment Guide You'll Ever Need" makes a really good point.
Stock markets of different countries move up and down somewhat independent of each other. A U.S. investor in 1929 who was wise enough to place 50% in foreign stocks would have needed only five years to recover from the worst crash in American history. A Japanese investor in 1990 who had 50% of his money outside of Japan--likewise. ... The rest of the world has discovered capitalism in a big way, and there is no reason that you shouldn't try to profit from that while reducing your exposure to the dangers of a bear market here.
Of course, 50% international might be too much for some people, but having some diversification outside of the U.S. seems downright prudent according to this argument. I would add it also seems that adding some international bonds would provide further diversification to only having U.S. bonds as well.
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Re: International investing. A good call by our mentor.

Post by Gambler »

Taylor Larimore wrote:Bogleheads:

Fifteen Years ago Mr. Bogle published his first edition of Common Sense on Mutual Funds. He wrote (page 186):
I would recommend limiting international investments to a maximum of 20 percent of a global equity portfolio.
Today, fifteen years later, I went to Morningstar to look-up the past performance of Vanguard Total U.S. Stock Market Index Fund (VTSMX) and Vanguard Total International Stock Market Index Fund (VGTSX). These are annualized returns:

Period - - - -VTSMX- - - - -VGTSX

5 Years- - - - 17.80% - - - -9.59%

10 Years- - - -8.79%- - - - -7.83%

15 Years- - - -5.28%- - - - -4.98%

Past performance does not forecast future performance.

Best wishes.
Taylor
wait.. total stock market only averaged 5%/yr over the past 15yrs?!

oh my.. didn't realize how big of an effect the tech meltdown of 2000 and real estate bubble of 2008 had.
so I guess 5%/yr gain is now the standard in which to estimate how much $ I will have when I turn 60?
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JoMoney
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Re: International investing. A good call by our mentor.

Post by JoMoney »

ddb wrote:...
John Bogle didn't make a call 15 years ago regarding the future performance of US vs. non-US stocks. He made a recommendation to limit non-US stock holdings to a maximum of 20% of one's equity portfolio.

The data I posted above showed that a buy-hold-rebalance investor over the last 15 years would have earned approximately the same performance whether he had 0%, 20%, or 50% in foreign stocks, i.e. it didn't really matter. This neither supports nor refutes Bogle's advice.

- DDB
It completely supports Mr.Bogle's opinion that for a U.S. investor, an international allocation doesn't (it didn't) really matter. For a passive investor returns are likely to be quite similar over the long run, but International potentially brings additional risks and expenses. Which is pretty much what the data has shown, even when using volatility as a proxy for risk.
If you've elected to keep a portion in international, by all means "stay the course", whatever reasoning you used to decide you needed it is probably just as valid today as it was before. But for a passive investor, all the portfolio theory and slice-n-dice activity that's non-Bogle but quite popular here might not amount to a hill of beans. Some people just can't embrace how simple it can be, and seem to want to try and push and pull their stocks hoping their efforts will somehow generate something extra.
"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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Taylor Larimore
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Sound investing is not complicated.

Post by Taylor Larimore »

Some people just can't embrace how simple it can be, and seem to want to try and push and pull their stocks hoping their efforts will somehow generate something extra.
JoMoney:

Thank you for your post.

A study by Rick Ferri found that for the 10-year period (2003-2012) The Three Fund Portfolio outperformed 87.7% of its managed fund counterparts.
Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
Best wishes.
Taylor
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Post by Johno »

Taylor Larimore wrote:
Some people just can't embrace how simple it can be, and seem to want to try and push and pull their stocks hoping their efforts will somehow generate something extra.
JoMoney:

Thank you for your post.

A study by Rick Ferri found that for the 10-year period (2003-2012) The Three Fund Portfolio outperformed 87.7% of its managed fund counterparts.
Jack Bogle: "The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- There may be better investment strategies than owning just three broad-based index funds but the number of strategies that are worse is infinite."
Best wishes.
Taylor
If you look at the article on 'three fund portfolio' on wikapedia (admittedly just one source) the illustration shows about equal weights in US and non-US stocks. But the OP seems to claim that the ~equal performance of US and foreign stocks in the last 15yrs 'confirms' John Bogle's general opinion to have a lower international allocation than that.

The unanswered question is why to limit international exposure to an arbitrary 20%. The fact that a larger allocation didn't outperform in the last 15yrs doesn't answer that. For that matter high grade bonds out slightly performed US stocks in the last 15 yrs. Does that 'prove right' people who advocated low stock and high bond allocations in 1999 (I'm sure we can find some commentators who did) or that it doesn't matter much for the next 15 yrs?

And the general Bogle quote you give tends to undermine his position on international. With a relatively hefty international allocation "...you eliminate individual stock risk, you eliminate sector risk, and you reduce country risk to sets of *future* circumstances which might cause a particular country's market to sharply under perform others for a prolonged period".

Jack Bogle's a better man than I, but everyone has their blind spots and you don't have to be the equal of the person in question to see where those blind spots are. Mixing in emotional feelings of American exceptionalism and pride into what should be a hard nosed assessment of investment opportunities and risks in the *future* is a blind spot of Jack Bogle's, IMHO.

A comparison to managed funds is irrelevant. The issue is international diversification (cap weight v 50-50 v 'no more than 20' v 'doesn't matter', etc), not index v managed.
Last edited by Johno on Thu Jul 31, 2014 7:41 pm, edited 1 time in total.
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Re: International investing. A good call by our mentor.

Post by baw703916 »

"The market" includes international; I can't think of a good reason not to own that part of the market. It may be appropriate to hold at somewhat less than market weight, given currency fluctuations and foreign tax withholding of dividends, but market forces tend to set a fair price on foreign equities compared to U.S. ones.
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Re: International investing. A good call by our mentor.

Post by berntson »

In fact, holding the global portfolio is much less risky than owning your country's domestic portfolio. The 2012 Credit Suisse Yearbook uses its 112 year database to look at the risks of international diversification.

Image

The average global investor would have experienced a standard deviation of 30 investing only in her home country. However, her investments would have been 1/3 less volatile if she had bought the global portfolio instead. While currency risk increases the standard deviation of the global portfolio from 17.8 to 20.6, this is insignificant compared to the nearly huge drop in standard deviation achieved by owing the global portfolio.
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Re: International investing. A good call by our mentor.

Post by steve_14 »

JoMoney wrote:It completely supports Mr.Bogle's opinion that for a U.S. investor, an international allocation doesn't (it didn't) really matter
It's just like putting 100% of your portfolio in GE stock - 90% of the time, investing in more than one company "won't really matter" over your time horizon. You diversify due to that other 10%.
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Re: International investing. A good call by our mentor.

Post by Trev H »

Prior to 1990 no doubt there were several so called investment guru's in Japan recommending ... why by anything but Nikkei.

Hmmm.. there is no need to diversify... well... until there is a need to diversify.

Trev H
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Re: International investing. A good call by our mentor.

Post by AviN »

bernston,

I think the argument for international diversification is much weaker for a US investor than a non-US investor though. Both the US stock market and the US economy are huge and diversified. A US investor in 100% TSM already owns around 50% of the global stock market, representing around 20% of global GDP. I agree that international diversification for a US investor is a good choice, especially at today's low ER's and low relative valuations of international. But I'm not convinced that the Credit Suisse data you provided is strong evidence of that.
berntson wrote:In fact, holding the global portfolio is much less risky than owning your country's domestic portfolio. The 2012 Credit Suisse Yearbook uses its 112 year database to look at the risks of international diversification.

Image

The average global investor would have experienced a standard deviation of 30 investing only in her home country. However, her investments would have been 1/3 less volatile if she had bought the global portfolio instead. While currency risk increases the standard deviation of the global portfolio from 17.8 to 20.6, this is insignificant compared to the nearly huge drop in standard deviation achieved by owing the global portfolio.
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Re: International investing. A good call by our mentor.

Post by staythecourse »

Umm.... NO. Another classic example of ex ante and ex post risk. Just because you look back and see that nothing bad happened being 100% in U.S., i.e. outcome, does not mean the strategy was sound. What if Mr. Bogle looked back at the 20 yr. period at the end of 1980's when Japan was kicking our butt?

Just like there is nothing wrong with buying home owners insurance even if one's house did not burn down after 20 yrs. of paying premiums there is nothing wrong with diversification even if the risk of not being diversified does not show up. Think of it as saying is there anything wrong with putting your eggs in more then one basket if the original basket carrying all the eggs did not tear in the first place retrospectively??

Don't confuse strategy and outcome. The reason we diversify is we can not control outcome, but we can control strategy!!

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: International investing. A good call by our mentor.

Post by Cody »

Maybe someone could create a survey on "How much do you have invested specifically in international equity, aside from any international investing that comes from owning Total Stock Market, if any."

Although it may be meaningless it is always interesting to me to see what Bogleheads actually do themselves.

Not sure how to create a survey (tried in the past but not so good at it somehow).

Thanks to someone! Anyone game?

cody
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Re: International investing. A good call by our mentor.

Post by JoMoney »

steve_14 wrote:
JoMoney wrote:It completely supports Mr.Bogle's opinion that for a U.S. investor, an international allocation doesn't (it didn't) really matter
It's just like putting 100% of your portfolio in GE stock - 90% of the time, investing in more than one company "won't really matter" over your time horizon. You diversify due to that other 10%.
Mr. Bogle has spoken his view several times, and I'll let people look it up and take it however they wish.
For myself, I don't think it's quite as extreme as you're putting it, it might be just another "risk preference" in the terms the tilters use. But I would probably put it more in the terms of the way Warren Buffett says "Diversification is protection against ignorance". It might be a bit arrogant to think someone can pick countries better than they can pick stocks, but I'm not trying to "beat the market" and I do think an average person can pick a portfolio of stocks that will average market performance. And I do think there's a point where reason and judgement can be helpful. I feel a lot of the political and sovereign risks U.S. investors say they want to use international diversification to avoid are actually increased by owning international stocks. I certainly don't think that's the case of every country around the world, but I do think the U.S. is in an excellent position that is quite advantageous for a U.S. investor. It could be a deluded view, but owning international stocks for a U.S. investor isn't diversifying the risk, it's "di-worse-ifying", and typically paying more for the privilege of doing so. I could be wrong, and in this case it's a risk I'm willing to take. I'm not forcing my view onto anybody else, but I don't believe in strictly ruling out any reasoning or judgement when it comes to my investing, and I think other people should think about what they're doing as well. Maybe some will have a different conclusion than me, and for some maybe their isn't a clear choice on whether they should or not - for them, if it helps them sleep at night or get over the paralyses of constantly trying to decide if they should or shouldn't, then they probably should - as Larry Swedroe says, "In the absence of clarity, diversification is the only logical strategy".
"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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Re: International investing. A good call by our mentor.

Post by jpmitchell »

Mr. Larimore,

I just read the Ferri/Benke study that you linked to, and while not directly related to the current discussion, I found the following bit quite amazing:
Several decisions were made about the mutual fund data used in this study. Sales loads and redemption fees were excluded from actively managed fund performance because the fees would have impeded portfolio performance. The index fund share class with the highest expense ratio was selected when two or more share classes of the fund existed. Pre-tax performance was used even though index funds tend to have better tax efficiency.
Ferri and Benke intentionally stacked the deck against index funds, and they still outperformed 90% of actively managed portfolios. Wow.

-jpmitchell
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Answer to question.

Post by abuss368 »

Hi Taylor,

Do you limit your Total International Stock Index Fund to 20% or equities or a different percentage of equity allocation?
Abuss:
Last January my international stock allocation was 19% of equities. I would prefer about 30%,* but I am not making contributions to my portfolio and I am locked into less than desirable stock allocations (all in a taxable account). If I exchanged other funds to achieve my desired 30% international allocation, it would trigger a large capital-gain tax (which will eliminated at my death).

* Global equities: Balancing, home bias and diversification

There is more than one road to Dublin.

Best wishes.
Taylor
John C. Bogle: “Simplicity is the master key to financial success."
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Re: International investing. A good call by our mentor.

Post by abuss368 »

ddb wrote: The data I posted above showed that a buy-hold-rebalance investor over the last 15 years would have earned approximately the same performance whether he had 0%, 20%, or 50% in foreign stocks, i.e. it didn't really matter. This neither supports nor refutes Bogle's advice.

- DDB
Hi DDB,

It feels as the years go by, more investors are allocating greater than 30% of equities (and up to 50% of equities) to international stocks. It certainly appears to be the easiest to manage.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: International investing. A good call by our mentor.

Post by abuss368 »

ddb wrote:A few points worth mentioning here:

1. Basing an investment strategy on a recent 15-year period of returns is probably a bad idea. Else, we should all invest entirely in long-term government bonds and small-cap value stocks.

2. Looking at annualized returns of each component is not particularly helpful, as we should be more interested in how adding a new asset class (in this case, foreign stocks) affects the overall risk and return characteristics of the entire portfolio. In this simple 2-asset class universe, we have the following annualized returns and standard deviations in annual returns for the 15-year period of 1999-2013:

Image

By going from 100% US stocks to 50% US stocks, you would have lost ~0.06% in annualized returns, or ~0.91% over the entire 15-year period. There was a similarly-negligible increase in portfolio volatility. I mean, let's call it a wash. Further, approximately ALL of the performance differential between 100% US and 50% US can be explained by what used to be a much larger difference in expense ratio between the two funds. BTW, as of now, the ETF variants of these funds, VTI and VXUS have an expense ratio differential of 0.09% per year, at 0.05% and 0.14%, respectively.

I believe that Mr. Bogle is wrong in advocating such a heavy US bias, however I acknowledge that it probably doesn't matter very much compared to other much more important decisions in developing a suitable asset allocation.

- DDB
Hi DDB,

Thank you for the chart. This is incredible and really puts international investing in better perspective. I would expect this begs the question as to why more Bogleheads do not go the simple route and divide equities 50% US and 50% International.

Best.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: International investing. A good call by our mentor.

Post by Austintatious »

CrossOverGuy wrote:Andrew Tobias in his classic book "The Only Investment Guide You'll Ever Need" makes a really good point.
Stock markets of different countries move up and down somewhat independent of each other. A U.S. investor in 1929 who was wise enough to place 50% in foreign stocks would have needed only five years to recover from the worst crash in American history. A Japanese investor in 1990 who had 50% of his money outside of Japan--likewise. ... The rest of the world has discovered capitalism in a big way, and there is no reason that you shouldn't try to profit from that while reducing your exposure to the dangers of a bear market here.
Of course, 50% international might be too much for some people, but having some diversification outside of the U.S. seems downright prudent according to this argument. I would add it also seems that adding some international bonds would provide further diversification to only having U.S. bonds as well.
Your comments make good sense, to me, CrossOverGuy. What Tobias has said here goes a very long way in demonstrating the value, maybe even the need, of having a meaningful portion of one's investments in the international business world. Why, if we so value the idea of owning the entire U. S. stock market in the name of prudent diversification, ought we, at the same time, discard the idea of owning the world's stock market. In the face of such a history lesson, why should a failure to diversify outside the U. S.it not be considered downright imprudent?
Last edited by Austintatious on Fri Aug 01, 2014 2:18 pm, edited 1 time in total.
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Re: International investing. A good call by our mentor.

Post by Crow Hunter »

abuss368 wrote:
ddb wrote:A few points worth mentioning here:

1. Basing an investment strategy on a recent 15-year period of returns is probably a bad idea. Else, we should all invest entirely in long-term government bonds and small-cap value stocks.

2. Looking at annualized returns of each component is not particularly helpful, as we should be more interested in how adding a new asset class (in this case, foreign stocks) affects the overall risk and return characteristics of the entire portfolio. In this simple 2-asset class universe, we have the following annualized returns and standard deviations in annual returns for the 15-year period of 1999-2013:

Image

By going from 100% US stocks to 50% US stocks, you would have lost ~0.06% in annualized returns, or ~0.91% over the entire 15-year period. There was a similarly-negligible increase in portfolio volatility. I mean, let's call it a wash. Further, approximately ALL of the performance differential between 100% US and 50% US can be explained by what used to be a much larger difference in expense ratio between the two funds. BTW, as of now, the ETF variants of these funds, VTI and VXUS have an expense ratio differential of 0.09% per year, at 0.05% and 0.14%, respectively.

I believe that Mr. Bogle is wrong in advocating such a heavy US bias, however I acknowledge that it probably doesn't matter very much compared to other much more important decisions in developing a suitable asset allocation.

- DDB
Hi DDB,

Thank you for the chart. This is incredible and really puts international investing in better perspective. I would expect this begs the question as to why more Bogleheads do not go the simple route and divide equities 50% US and 50% International.

Best.
I used to do the 50/50 and have since I started investing in 1997.

However, after a fairly significant inheritance that pushed me significantly closer to my number, I became somewhat concerned that I wasn't doing the right thing and that I might be more aggressive than I needed to be.

So I looked at what Vanguard was doing, since I figured they know more about it than I do and they have 30% in their Target Retirement. I changed from 80/20 50% to 70/30 30%.

I am debating adding what they have in foreign bonds right now but I haven't committed.

But I still have that niggling feeling that I should go back to 50/50.
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Re: International investing. A good call by our mentor.

Post by Leif »

Crow Hunter wrote:
So I looked at what Vanguard was doing, since I figured they know more about it than I do and they have 30% in their Target Retirement. I changed from 80/20 50% to 70/30 30%.
That is one way to look at. However, remember, Vanguard is hoping to "sell" this fund to public. Do you think they just might get some push back from the marketing folks if they went 50/50? Would some pass on the fund if it was 50/50?

I know they came out with a paper saying 20-50 was desirable. So they are covered on that front. From their paper:
Although there is no right answer for all investors, empirical and
practical considerations suggest a reasonable starting allocation
to non-U.S. stocks of 20%, with an upper limit based on global
market capitalization.
Image

https://personal.vanguard.com/pdf/icriecr.pdf

BTW, I have 40%, but I think 30%-50% is acceptable.
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Re: International investing. A good call by our mentor.

Post by Sunny Sarkar »

JoMoney wrote:Some people just can't embrace how simple it can be, and seem to want to try and push and pull their stocks hoping their efforts will somehow generate something extra.
The Search for the Holy Grail - Jack Bogle, 1998
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Re: International investing. A good call by our mentor.

Post by Louis Winthorpe III »

John3754 wrote:This seems to me like A) Confusing outcome with strategy, and B) Confirmation bias. Could I not pick time periods when international beat domestic? Or show that over certain time periods international did not perfectly correlate with domestic and therefore reduced volatility? I really just don't see how pointing out that international has beat out domestic by 0.3% over the past 15 years proves anything.
Well said. Sort of surprised by Taylor's OP.
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Re: International investing. A good call by our mentor.

Post by Louis Winthorpe III »

JoMoney wrote:
ddb wrote:...
John Bogle didn't make a call 15 years ago regarding the future performance of US vs. non-US stocks. He made a recommendation to limit non-US stock holdings to a maximum of 20% of one's equity portfolio.

The data I posted above showed that a buy-hold-rebalance investor over the last 15 years would have earned approximately the same performance whether he had 0%, 20%, or 50% in foreign stocks, i.e. it didn't really matter. This neither supports nor refutes Bogle's advice.

- DDB
It completely supports Mr.Bogle's opinion that for a U.S. investor, an international allocation doesn't (it didn't) really matter.
There's a huge difference between doesn't and didn't.
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Re: International investing. A good call by our mentor.

Post by Crow Hunter »

Leif wrote:
Crow Hunter wrote:
So I looked at what Vanguard was doing, since I figured they know more about it than I do and they have 30% in their Target Retirement. I changed from 80/20 50% to 70/30 30%.
That is one way to look at. However, remember, Vanguard is hoping to "sell" this fund to public. Do you think they just might get some push back from the marketing folks if they went 50/50? Would some pass on the fund if it was 50/50?

I know they came out with a paper saying 20-50 was desirable. So they are covered on that front. From their paper:
Although there is no right answer for all investors, empirical and
practical considerations suggest a reasonable starting allocation
to non-U.S. stocks of 20%, with an upper limit based on global
market capitalization.
Image

https://personal.vanguard.com/pdf/icriecr.pdf

BTW, I have 40%, but I think 30%-50% is acceptable.
I figured that since I was closer to my number I needed to become more conservative and part of the way to do that was by reducing international exposure.

So I reduced both my stock exposure and the international portion of it.

I could very well be wrong though.
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Re: International investing. A good call by our mentor.

Post by mosu »

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Last edited by mosu on Thu Mar 12, 2015 9:18 pm, edited 1 time in total.
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Re: International investing. A good call by our mentor.

Post by Leif »

Crow Hunter wrote:
I figured that since I was closer to my number I needed to become more conservative and part of the way to do that was by reducing international exposure.

So I reduced both my stock exposure and the international portion of it.

I could very well be wrong though.
I'm thinking the best way to become more conservative is to increase the sources of fixed income to replace a paycheck. For me that means a lower stock to bond ratio and more "certain" incomes such as CDs. I'm not trying to change my diversification as a way to become more conservative except to do a "bit" of fund reduction. My reasoning is that with less of my portfolio in equities having additional asset classes is less important. For example, since my % of equities declines each year with my glide path I'm selling my EAFE fund in my taxable account to fund CDs. Eventually I will get rid of my EAFE. However, I'll still have international SV and EM Value. I think those a better diversifying funds anyway.
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Re: International investing. A good call by our mentor.

Post by Twins Fan »

mosu wrote:Does this seem like absurd recency bias to anyone else due to the recent outperformance of US equities? It's only very recently true that U.S. equities outgained International equities over a 15-year period. I'll give Taylor the benefit of the doubt here since this forum is his baby, but this does not seem like a very good way to choose an investment strategy. I highly doubt we would have seen these types of threads from 2004-2007 when international stocks were outperforming. This and the "Why should anyone ever own bonds" threads are popping up daily.

Image
Well, since Mr. Bogle said this about international investing 15 years ago, I don't think he was taking 2013-2014 recency into account, right?

I'm pretty sure Taylor very often recommends the three fund portfolio, which includes international investing.

Also, I guess it depends on what one considers "recent". I have not been investing long at all, so I don't know how folks invested in the 1990's or whenever. But, I wonder how much international was included back then? Did that 2004 - 2011 ish time frame have anything to do with the love of international investing? I'd say that's still pretty recent. :happy
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Re: International investing. A good call by our mentor.

Post by mosu »

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Last edited by mosu on Thu Mar 12, 2015 9:18 pm, edited 1 time in total.
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Re: International investing. A good call by our mentor.

Post by galeno »

Yesterday I was bored so I did some simple calculations of net (of taxes) real expected returns of our portfolio's 5 equity ETFs.

1. non-USA large, EM large, USA small, and non-USA small = 7.8%

2. USA large = 6.8%

If I were in the mood to tilt, our tilt would be AWAY from lg USA stocks.
KISS & STC.
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Re: International investing. A good call by our mentor.

Post by JoMoney »

mosu wrote:
Twins Fan wrote: Well, since Mr. Bogle said this about international investing 15 years ago, I don't think he was taking 2013-2014 recency into account, right?
That's not my point. Jack Bogle's prediction was wrong until about late 2013. Sure, he's correct at the moment, but Taylor could not have made this post two years ago, as it would have shown that domestic equities underperfomed international equities.
It's true that international looked better from 1999-2007, but you could also go back to 1993-2007 (when "Bogle on Mutual Funds" was published) the end result changes again.
With all the waxing and waning (and "return to the mean"), you can find period dependent points that show different results, but for an investor that's averaging in and withdrawing over time, does it make a difference in the long run averaged out over time? I don't think there's a good argument showing that one has earned more or less than the other over time - (other than the greater expenses which have gone down considerably for international). I think the question is more on whether or not adding an international allocation reduces risk for a U.S. investor, and on that people can make up their own mind. If having an allocation to International (or not having one) is going to cause them increased fear that may otherwise keep them from "staying the course", then they probably should take that into account.
"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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