Going 60+% international? (US resident)

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Nathan Drake
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Going 60+% international? (US resident)

Post by Nathan Drake »

I currently have 1:1 US to Intl investments, and given the recent turmoil in Europe and abroad as well as the somewhat non-recovery since 2007 for these markets (and as a result, their attractive valuations and dividend yields versus US stocks), I'm inclined to increase my allocation of future investments to tilt more towards international.

Granted, increasing to 60% would be roughly global market cap, but I'm sure many people already think my 50% allocation is way too high...and Bogle for instance wouldn't go higher than 20% (which seems like ridiculous advice to me, but he's still a legend in my eyes).

I just feel that valuations do matter, and that eventually European and Emerging Markets will recover from their funk and outperform US equities (which have already had a nice ride since 2009). International stocks are still nowhere near their 2007 highs, yet in the US we've eclipsed them.

This may sound like market timing to an extent, but I feel comfortable with a global market cap weight for my portfolio.
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Ged
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Re: Going 60+% international? (US resident)

Post by Ged »

There are reasons EU equities are not as fully valued as US equities. That includes lingering problems with EU bank capitalization.

I'd stay away from trying market timing at levels above normal AA into EU.
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Re: Going 60+% international? (US resident)

Post by chameleon »

I considered this at one point too.

There is some (limited) evidence to support such an allocation like:

http://www.gurufocus.com/global-market-valuation.php

The problem is that the Eurozone has a lot of drag to their economy as well. Many of those countries are going through a demographic crisis as well as debt problems. How that will manifest itself in pure economic performance is difficult to say.

It's a very speculative play.
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Nathan Drake
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Re: Going 60+% international? (US resident)

Post by Nathan Drake »

Ged wrote:There are reasons EU equities are not as fully valued as US equities. That includes lingering problems with EU bank capitalization.

I'd stay away from trying market timing at levels above normal AA into EU.
I guess that depends on what you consider normal, since roughly 60% could be a normal weight for a globally diversified portfolio.
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Re: Going 60+% international? (US resident)

Post by peppers »

FWIW, one of my sons has been investing regularly for ~14 years. He is 100% international.
Yes, we have had some interesting father - son conversations.
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Nathan Drake
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Re: Going 60+% international? (US resident)

Post by Nathan Drake »

chameleon wrote:I considered this at one point too.

There is some (limited) evidence to support such an allocation like:

http://www.gurufocus.com/global-market-valuation.php

The problem is that the Eurozone has a lot of drag to their economy as well. Many of those countries are going through a demographic crisis as well as debt problems. How that will manifest itself in pure economic performance is difficult to say.

It's a very speculative play.
True, but don't Eurozone equities do the majority of their business overseas, anyhow? I know they're still largely exposed to Europe, but could we see a situation where their stocks perform well despite lingering debt/demographic issues domestically? The US is in a similar boat (though not as bad), but their equities are priced much higher, still.
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chameleon
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Re: Going 60+% international? (US resident)

Post by chameleon »

Nathan Drake wrote:
chameleon wrote:I considered this at one point too.

There is some (limited) evidence to support such an allocation like:

http://www.gurufocus.com/global-market-valuation.php

The problem is that the Eurozone has a lot of drag to their economy as well. Many of those countries are going through a demographic crisis as well as debt problems. How that will manifest itself in pure economic performance is difficult to say.

It's a very speculative play.
True, but don't Eurozone equities do the majority of their business overseas, anyhow? I know they're still largely exposed to Europe, but could we see a situation where their stocks perform well despite lingering debt/demographic issues domestically? The US is in a similar boat (though not as bad), but their equities are priced much higher, still.
That's where the speculative part comes in..it's difficult to say. With that being said i'm personally more bullish on the emerging and developed countries in the asia-pacific region than I am with europe.
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Re: Going 60+% international? (US resident)

Post by Ged »

Nathan Drake wrote:
Ged wrote:There are reasons EU equities are not as fully valued as US equities. That includes lingering problems with EU bank capitalization.

I'd stay away from trying market timing at levels above normal AA into EU.
I guess that depends on what you consider normal, since roughly 60% could be a normal weight for a globally diversified portfolio.
Yes, you could say that. If it were just equities it would be a good argument. But currency is part of the picture too.
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Re: Going 60+% international? (US resident)

Post by G-Money »

Which is it: you want to replicate global weightings, or you want to chase valuations?

If the former, 50/50 is the global weight: https://personal.vanguard.com/us/funds/ ... =INT#tab=2

If the latter, good luck.
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Re: Going 60+% international? (US resident)

Post by Boglenaut »

Cost is higher. Assuming

VTSAX .05%
VTIAX .14%

So if you invest 100K, your weighted average goes up from $95 to $104 per year.

{Darn it Vanguard! This used to be my best argument against over-weighting international! ;) )
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Re: Going 60+% international? (US resident)

Post by pascalwager »

Larry Swedroe recommends no more than 50% int'l due to higher transaction costs.
VT 60% / VFSUX 20% / TIPS 20%
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Nathan Drake
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Re: Going 60+% international? (US resident)

Post by Nathan Drake »

G-Money wrote:Which is it: you want to replicate global weightings, or you want to chase valuations?

If the former, 50/50 is the global weight: https://personal.vanguard.com/us/funds/ ... =INT#tab=2

If the latter, good luck.
North America includes Canada and Mexico, which is part of international. I believe 60% ex-US is approximately correct.


Boglenaut wrote:Cost is higher. Assuming

VTSAX .05%
VTIAX .14%

So if you invest 100K, your weighted average goes up from $95 to $104 per year.

{Darn it Vanguard! This used to be my best argument against over-weighting international! ;) )
True, but they're both extremely low so I don't really factor that into my decision making.
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Re: Going 60+% international? (US resident)

Post by berntson »

One of the recent Credit Suisse yearbooks has a paper on overweighting countries with high dividend yields. It turns out that over the course of the last 110 odd years, buying countries with higher dividend yields produced significantly higher returns. So there is merit to the idea of overweighting international right now given the higher dividends (and generally lower valuations). Of course, there are no guarantees either.

Under normal circumstances, I hold a 50:50 split between domestic and international. Until valuations straighten out, I'll also hold closer to 60% international. Bogleheads need to do something to keep their boring portfolios exciting!
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Re: Going 60+% international? (US resident)

Post by letsgobobby »

Nathan I am right there with you. I have been 60% international since November 2013. Well, you can see how well that has worked. Nevertheless I believe at least 50% is right for a youngish accumulator so I'll be sticking with this for many years barring a radical reset in valuations.
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Re: Going 60+% international? (US resident)

Post by stemikger »

John Bogle in Common Sense on Mutual Funds reccomends no more than 20% if you must but also makes a good argument of not needing to add it at all. Warren Buffett says the average person will do very well investing in an index fund that buys America. He is also putting his money where his mouth is and doing that for his wife if he passes on before her. It is all going in the Vanguard 500 Index Fund. He also has said numerous times, you can't bet against America and win.

Yeah, but what do these old dinosaurs know? :P
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Re: Going 60+% international? (US resident)

Post by Nathan Drake »

letsgobobby wrote:Nathan I am right there with you. I have been 60% international since November 2013. Well, you can see how well that has worked. Nevertheless I believe at least 50% is right for a youngish accumulator so I'll be sticking with this for many years barring a radical reset in valuations.
Hasn't worked out all that well so far, but I guess I don't mind not holding the best hand at any given moment. I'm a patient, long term investor... I like to think that it's allowed me to buy more international shares for a cheaper price.

I suppose what I'll need to think about is rebalancing if my gut turns out to be correct and international outperforms, because it could potentially raise my international percentage much higher than 60%...so the question becomes when do you rebalance back into US?

I guess I'll have to decide if/when it comes to that.
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Re: Going 60+% international? (US resident)

Post by John3754 »

stemikger wrote:John Bogle in Common Sense on Mutual Funds reccomends no more than 20% if you must but also makes a good argument of not needing to add it at all. Warren Buffett says the average person will do very well investing in an index fund that buys America. He is also putting his money where his mouth is and doing that for his wife if he passes on before her. It is all going in the Vanguard 500 Index Fund. He also has said numerous times, you can't bet against America and win.

Yeah, but what do these old dinosaurs know? :P
This is a good example of argumentum ab auctoritate, a classic logically fallacy.
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Re: Going 60+% international? (US resident)

Post by stemikger »

John3754 wrote:
stemikger wrote:John Bogle in Common Sense on Mutual Funds reccomends no more than 20% if you must but also makes a good argument of not needing to add it at all. Warren Buffett says the average person will do very well investing in an index fund that buys America. He is also putting his money where his mouth is and doing that for his wife if he passes on before her. It is all going in the Vanguard 500 Index Fund. He also has said numerous times, you can't bet against America and win.

Yeah, but what do these old dinosaurs know? :P
This is a good example of argumentum ab auctoritate, a classic logically fallacy.
After reading it in Wikipedia, you may be right. However, for 20 years, I have been without international other than what I get indirectly through the S&P 500 Index and I don't feel I'm missing out.
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Re: Going 60+% international? (US resident)

Post by rj49 »

Buying low makes sense, unless you were investing internationally in the 1990s, when Japan dragged down the international indices. There's some cultural/home bias to rationalize all the underweighting of international, such as Europe being all geriatric socialist societies (when China, Japan, and even the US will also have a gray tsunami coming soon). One way to avoid all the angst is just to invest it the Total World Index (or ETF), and accept market weighting and rebalancing across the entire world market--Charles Ellis, one of the original indexing proponents, advocated such an approach in his last book with Burton Malkiel. The higher costs of international or the total world fund will probably be minor compared to differences in performance between a world portfolio and a US-centric one.

Another way to let the markets decide is to simply divide your equity allocation in half, and then never rebalance, except through withdrawals in retirement. That's my approach, with my Roth IRA entirely Total International, and my taxable equities all in TSM, with the Roth designated for late-life longevity insurance, so my international allocation should grow as the fund grows. Placement in a Roth account also makes it easier to tune out fears and world news and discomfort with individual countries within the index. In any case, it seems wiser to let the markets decide your international allocation, not demographic crystal balls or current valuations or even dividend rates (since EM and Japan don't pay out much yield, dividend-chasing would lead to overweighting Europe). Personally, I'm grateful that investing in markets around the world is comparatively cheap and comprehensive, and that so much of the world participates in stock market exchanges and capital markets.
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Re: Going 60+% international? (US resident)

Post by JoMoney »

stemikger wrote:... Warren Buffett says the average person will do very well investing in an index fund that buys America. He is also putting his money where his mouth is and doing that for his wife if he passes on before her. It is all going in the Vanguard 500 Index Fund. He also has said numerous times, you can't bet against America and win...
:D I don't know of an authority I'd rather appeal to than Warren Buffett...
A shameless patriotic plug:
http://www.usatoday.com/story/money/bus ... a/6173717/
More than five years have passed since Warren Buffett publicly proclaimed that he was buying American stocks for his personal account. The announcement came as investors were fearful of a complete financial meltdown and just a few months before stocks found a bottom. While many people doubt how much farther the bull market will run, Buffett is still bullish on America. ...

Buffett and Charlie Munger have always considered a bet on ever-rising U.S. prosperity to be "very close to a sure thing."

"Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country's present condition to that existing in 1776, you have to rub your eyes in wonder," said Buffett. "And the dynamism embedded in our market economy will continue to work its magic. America's best days lie ahead."
Although it's not really a part of my portfolio, I certainly wouldn't sell the International market short either... :beer

If you're looking for confirmation of investing in international and a timing system you need to look to Mebane Faber. I don't buy it, and I think anyone trying to sell you on the idea that there's some system to earning excess returns doesn't have your best interests in mind. People just can't seem to settle on the idea that there's no easy way to beat the market, FWIW here's a link to one of Faber's papers. Good Luck :
http://papers.ssrn.com/sol3/papers.cfm? ... id=2129474
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Re: Going 60+% international? (US resident)

Post by Chan_va »

Search over balancing on the forum.

I have tried this in the past and here is the problem. Its relatively easy to say you should be overweight international now, but the issue is, when do you correct back to market weight? I have been able to somewhat time the buy low, but have never timed the sell high. On balance my returns were the same or slightly worse than market weight with a lot more headache.
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Re: Going 60+% international? (US resident)

Post by nisiprius »

Nathan Drake wrote:...Granted, increasing to 60% would be roughly global market cap, but I'm sure many people already think my 50% allocation is way too high...t I feel comfortable with a global market cap weight for my portfolio.
Nathan, why do you think 60% international is market cap? I don't think it's terribly important but we should get the number right... I was thinking it had been 50/50 not too long ago and the U.S. has only lost around 3% since then, so international share should have only budged a couple of percentage points above 50.

Couple of quick reality checks. As of 6/30, Morningstar is showing that Vanguard Total World Stock Index Fund was
Image
was 48.51% U.S., 50.93% Non US, 0.26% Cash, 0.30% "other." If we throw out the "cash" and the "other" and calculate the relative percentages of U.S. and non U.S. alone, I make that out to be 51.22% international, 48.78% U.S.

Now, since 6/30, $10,000 each in Vanguard Total International and Vanguard Total [U.S.] Stock Market would have "grown" to
Image
$9,689.30 and $9,826.19 respectively. That is to say,

International lost 3.11%,
U.S. lost 1.74%.

Yes, the rest of the world lost a bit more than the U.S. did, meaning the current ratio is closer to 50/50 than on 6/30.

That means that a cap-weighted split as of 6/30, i.e. $5,122 international, 4,878 U.S. would now be

$5,122 x .9689 = $4963 today
$4,878 x .9826 = $4793 today,

which works out to be

50.87% international, 49.13% U.S.

This makes my head spin, but I think because of possible currency movements between 6/30 and today the "update from 6/30" calculation theoretically could be very slightly off but I think it's close enough.

I think "cap weighted" is 51% international, 49% U.S.

Why do you think it's 60/40?
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Re: Going 60+% international? (US resident)

Post by nisiprius »

OK. Nathan, I read your posting to say that you believe that your current allocation underweights international, and that your intention is to move to cap-weighting. You believe that to do this you need for your international stock allocation to be 10% more of your portfolio than it already is.

Remembering that I am an international skeptic, with < 25% international stock, who believes that a) there isn't a shred of evidence that the difference between U.S. and international matters much, and that b) if we had a single global currency the optimum allocation would be cap-weighted, but that the effect of relative currency volatility makes international stocks objectively slightly worse than home-currency stocks, and that c) currency volatility has zero expected return and therefore can NOT improve a portfolio through low correlation...

...you're proposing a small move, a gradual move, and what you are proposing is to move to full global cap-weighting.

Well, I've already said I don't think it matters much. I don't even think a portfolio is going to stand or fall on whether it is 25% international or 50% international. I certainly don't think it's going to stand or fall on whether it's 50% international or 60% international. It's not a huge change. I think any small change is, at worst, mostly harmless. I think what you're really doing is nudging the pointer a little bit because you're worried we're seeing the start of a U.S. stock market crash. Well, if nudging the pointer a little bit scratches the itch and makes it easier not to do anything big, what can I say but I do that kind of thing too? Keep it small, don't do it too often...

Second, I don't agree with them but some experts I respect favor full cap-weighting, so it's certainly not a crazy thing to. Vanguard says "from 20% up to full cap-weighting" so we would both fall within that range.

Third, if there's any fantasy in the back of anybody's mind of a U.S. collapse in which others are sleeping on the street because they were 50% international while they are safe, warm, and protected because they were 60%... it takes a much bigger commitment than that to be a doomsday prepper.

So if you propose to go to global cap-weighting and stay the course there, I think that's a personal decision that's well within the range of reasonable things a sane person could do.

I do NOT personally think it is possible for me to judge the valuations of whole countries, continents, or hemispheres. Nor do I think that grand macroeconomic predictions should be acted on. So I have reservations about that. Are you really going to stay the course when we hit a period where the U.S. outperforms the rest of the world?

But get the correct numbers on what cap-weighting amounts to. It seems as if it would be reasonable for you to put your entire stock allocation into Vanguard Total World Stock Market index and then leave it alone.
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Re: Going 60+% international? (US resident)

Post by papito23 »

When I first found Bogleheads.org, I obsessed about these things. Still trying to break free of minutiae.

Let's say you made this change 15 years ago (having Taylor Larimore's recent post in mind) and compare it with your leave-it-at-50/50-default:

$250,000 split 50/50
$125,000 in Total US Stock. 5.28% annualized return for 15 yrs: $270,457
$125,000 in Int'l Stock. 4.98% for 15 yrs: $259,125
Total stack of $529,582

Let's say you did split it 60/40 in favor of Int'l.
$100,000 in Total US Stock. 5.28% annualized return for 15 yrs: $216,366
$150,000 in Int'l Stock. 4.98% for 15 yrs: $310,949
Total stack of $527,315

That leaves you $2267 short. OR if you had chosen correctly (the opposite), $2267 richer. This is roughly equivalent to saving (or spending) $8.74 per month for 15 yrs. That is, you are 4 tenths of 1% richer having made this decision, after 15 yrs.

Keep in mind, that is a normal day's worth of fluctuation on Wall Street. It probably matters more to your total net worth if you analyze the results of this decision on a Wednesday vs. a Thursday.

Of course, the difference of the 15 year returns come 2029 could very well be more than 0.30% annualized. But since we cannot predict the future, this is a silly calculation on my part & doesn't matter. Neither does a shift from 50/50 to 60/40.

(***trying to tell myself this as I meticulously allocate new contributions to the US or Int'l fund that is, say, +/- 2.4% off in my pre-set allocation***)
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Re: Going 60+% international? (US resident)

Post by InvestorNewb »

If it's a long-term investment, it probably doesn't matter very much if you overweight US or international. Over time, the returns have been pretty similar and as globalization increases, probably even more so.

Even though VXUS paid a nice dividend on 06/30/2014 at $0.60400, the next one is likely to be lower. So I wouldn't use that dividend rate in your decision-making process, because historically it isn't the norm.
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Re: Going 60+% international? (US resident)

Post by nisiprius »

papito23 wrote:When I first found Bogleheads.org, I obsessed about these things. Still trying to break free of minutiae.

Let's say you made this change 15 years ago (having Taylor Larimore's recent post in mind) and compare it with your leave-it-at-50/50-default:

$250,000 split 50/50
$125,000 in Total US Stock. 5.28% annualized return for 15 yrs: $270,457
$125,000 in Int'l Stock. 4.98% for 15 yrs: $259,125
Total stack of $529,582

Let's say you did split it 60/40 in favor of Int'l.
$100,000 in Total US Stock. 5.28% annualized return for 15 yrs: $216,366
$150,000 in Int'l Stock. 4.98% for 15 yrs: $310,949
Total stack of $527,315

That leaves you $2267 short. OR if you had chosen correctly (the opposite), $2267 richer. This is roughly equivalent to saving (or spending) $8.74 per month for 15 yrs. That is, you are 4 tenths of 1% richer having made this decision, after 15 yrs.

Keep in mind, that is a normal day's worth of fluctuation on Wall Street. It probably matters more to your total net worth if you analyze the results of this decision on a Wednesday vs. a Thursday.

Of course, the difference of the 15 year returns come 2029 could very well be more than 0.30% annualized. But since we cannot predict the future, this is a silly calculation on my part & doesn't matter. Neither does a shift from 50/50 to 60/40.

(***trying to tell myself this as I meticulously allocate new contributions to the US or Int'l fund that is, say, +/- 2.4% off in my pre-set allocation***)
+10. :beer Hear, hear!
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Re: Going 60+% international? (US resident)

Post by ladders11 »

Ged wrote:There are reasons EU equities are not as fully valued as US equities. That includes lingering problems with EU bank capitalization.
This is exactly what almost everyone said about US banks in February-March 2009.

You have probably heard some distillation of a rumor about a problem, like anyone else, and the tragedy of this argument is that it seems to, but does not, mean anything about what will happen in the future. Are you actually suggesting that the problems are worse than the market currently anticipates?

When you suggest that low valuations are justified, you are failing to consider that similar problems have been and will be resolved. A value investor knows that, and sees comments like yours as case in point for doing what they do.

I think the market cap benchmark is fine, but so is a value benchmark. If your philosophy calls for more international stocks, so be it, provided that it is historically grounded in results and efficient to administer.
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Re: Going 60+% international? (US resident)

Post by berntson »

nisiprius wrote:...currency volatility has zero expected return and therefore can NOT improve a portfolio through low correlation...
Nisiprius: I don't understand the currency risk argument against international stocks. You seem convinced, so maybe you can help. :)

Here is why I'm confused. The currency-risk argument usually proceeds on the assumption that the US dollar has none of the "currency risk" that US investors want to avoid. Maybe that would be true if the value of the US dollar was tied to gold or some other sort of commodity. But actual dollars are not indexed to inflation, so the real value of the US dollar bounces up and down all the time. Likewise for the yen, euro, pound, and kroner. So the sensible thing to do, it seems to me, is to diversify between currencies rather than owning just one. Investors can accomplish this by holding an internationally diversified portfolio.

Think about it this way if it helps. Suppose that Apple stock suddenly became legal tender for things like buying groceries and paying rent. Some people might decide to own only Apple stock and avoid other stock because "we can pay our expenses in Apple stock." But this is obviously misguided. The fact that someone can buy things with Apple stock without first trading it for something else has no bearing on how risky it is to own Apple stock. And it certainly would not mean that investors should stop diversifying their stock portfolios!

Likewise, the fact that I can buy things with dollars without first trading them for something else has no bearing on whether dollars are more or less risky than euros. All currencies are risky, and that's why it makes sense to diversify between them. Holding just one means taking on unnecessary risk.

What am I missing? I must be missing something. Thanks in advance! :beer
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Re: Going 60+% international? (US resident)

Post by DaufuskieNate »

Moving from 50/50 to 60/40 based on valuations is a variant of tactical asset allocation. I'm not a fan because I don't feel I can make these calls accurately over a long investing timeframe. Having said that, if you are going to do some tactical AA I would recommend treating Developed Markets and Emerging Markets as two separate and distinct areas with separate economic and demographic drivers. Good luck!
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Re: Going 60+% international? (US resident)

Post by ogd »

berntson wrote:Here is why I'm confused. The currency-risk argument usually proceeds on the assumption that the US dollar has none of the "currency risk" that US investors want to avoid. Maybe that would be true if the value of the US dollar was tied to gold or some other sort of commodity. But actual dollars are not indexed to inflation, so the real value of the US dollar bounces up and down all the time. Likewise for the yen, euro, pound, and kroner. So the sensible thing to do, it seems to me, is to diversify between currencies rather than owning just one. Investors can accomplish this by holding an internationally diversified portfolio.
berntson: it's not like that at all! Currencies change relative values drastically, and quickly, without inflation in either country.

It's counter-intuitive perhaps, if you imagine a globalized world, but prices and salaries can be stable in both currencies while the currencies fluctuate by as much as 100%. This has actually happened with the USD and Euro in the first part of the 2000's, let alone with smaller currencies. The reason is that people are not willing to either move (to get higher salaries) or tolerate large price increases of imports. It's for this reason that the same BMW is massively more expensive in Germany, right outside the factory it was produced in, than in the US. This situation shows no signs of stabilizing, btw. Prices in Europe still seem about twice too high for the grumbling American tourist -- and, I'm sure, for the European investor who was heavily into US stocks before the currency turnaround.

The dollar is less risky for you (remember, it's not an absolute) because your prices, rent, etc will be more stable in dollars than in any other currency. It's the way the global economy works. If prices in Apples had similar stickiness, you'd be very much justified to call Apple low-risk.
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Re: Going 60+% international? (US resident)

Post by denovo »

pascalwager wrote:Larry Swedroe recommends no more than 50% int'l due to higher transaction costs.
I think this advice is no longer valid. Total US market has a .05 expense ratio, total intl market is .18. It shoudn't be a factor.I think once you set up a us/intl number you should stick to it, so OP stick to what you have.
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Re: Going 60+% international? (US resident)

Post by countmein »

A friendly challenge for Nathan Drake, Letsgobobby, and Berntson (or whomever else wants it):

Can you prove that International is attractively valued compared to the US? How did you make that determination? What are your numbers (valuation + expected return of US and International vs historical) and how did you do the calculations? Where did you get the data? Details please!

I call it a "challenge" because I wonder to what extent we take the shortcut of believing it's true before proving it to ourselves. At least, I have caught myself doing this. Attempting to correct this mistake, I have made some effort to verify that International is "cheaper" but have thus far not been able to locate sufficient data to confirm.
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Re: Going 60+% international? (US resident)

Post by denovo »

countmein wrote:A friendly challenge for Nathan Drake, Letsgobobby, and Berntson (or whomever else wants it):

Can you prove that International is attractively valued compared to the US? How did you make that determination? What are your numbers (valuation + expected return of US and International vs historical) and how did you do the calculations? Where did you get the data? Details please!

I call it a "challenge" because I wonder to what extent we take the shortcut of believing it's true before proving it to ourselves. At least, I have caught myself doing this. Attempting to correct this mistake, I have made some effort to verify that International is "cheap" but have thus far not been able to locate sufficient data to confirm.

Hi Countmein,

People like to look at P/E values to determine stock valuations. I look at Price / E (ttm) that is earnings over the last 12 months. finance.yahoo.com has this data. TDAmeritrade also has it.

When you check that out you get this
US TOTAL Market: 18
Emerging: 12
Pac/Asia: 14
Europe: 16

Edited to add: That being said I don't make tactical asset allocation decisions, but if I had to make a bet, I'd say that this portends better returns for intl as opposed to us going forward.
Last edited by denovo on Sat Aug 09, 2014 3:35 pm, edited 1 time in total.
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Re: Going 60+% international? (US resident)

Post by nisiprius »

berntson wrote:
nisiprius wrote:...currency volatility has zero expected return and therefore can NOT improve a portfolio through low correlation...
Nisiprius: I don't understand the currency risk argument against international stocks. You seem convinced, so maybe you can help. :)

Here is why I'm confused. The currency-risk argument usually proceeds on the assumption that the US dollar has none of the "currency risk" that US investors want to avoid. ...
I'm going to explain once and then not respond further as this is frequently debated. First off, I thought I was very careful and used the phrase "relative currency volatility" in order to avoid the sometimes-loaded word "risk." (I'm also going to use the word "uncertainty" in its usual everyday meaning--not the specialized way Frank Knight did).

"Currency risk" has a meaning. It does NOT mean "the risk that a nation's currency will collapse due to mismanagement." It means "the uncertainty you experience when planning a trip a year from now in not knowing how much your dollars are going to buy."

The issue I am speaking of has nothing to do with U.S. currency being more or less sound than the competition. It is an issue experienced by anyone buying transborder in a currency foreign to them versus buying in their own home currency.

Everybody agrees that there's fluctuation in the relative value of currencies.

Everyone agrees that when a German buys German stock, he experiences fluctuation in the Euro value of that stock, but if an American buys the same stock, he experiences two layers of fluctuation--fluctuation in the number of euros the each share is worth, and on top of that uncertainty in the number of dollars each of those euros is worth.

Everyone agrees that the act of buying in a foreign currency adds extra volatility, risk, uncertainty to the intrinsic risk of the stock itself. This show up clearly enough in Vanguard pegging Total International at "risk potential 5" versus Total Stock at 4. Or, more quantitatively, a 15-year standard deviation of 18.41 for Total International versus 15.87.

Most people agree that the long-term expected return of foreign currencies is zero--it's cash, it doesn't earn dividends, it doesn't pay interest, it flows across borders, sooner or later the values need to equalize. So, currency fluctuation doesn't hurt return. But it increases volatility without increasing return. This is a bad thing. 18.41 isn't much bigger than 15.87 so maybe it isn't a very bad thing, but it's bad. Other things being equal, if you can get the same return with 15.87 SD as you can with 18.41 SD, this is not a neutral choice, you should prefer the lower-volatility investment.

Everyone agrees that international stocks do not have perfect correlation with U.S. stocks and thus add some diversification benefit. This is a good thing. It's not all that low a correlation so maybe it isn't a hugely good thing, but it's good.

The debate is how big these effects are and how they balance off against each other.
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Re: Going 60+% international? (US resident)

Post by Ketawa »

Nathan Drake wrote:
G-Money wrote:Which is it: you want to replicate global weightings, or you want to chase valuations?

If the former, 50/50 is the global weight: https://personal.vanguard.com/us/funds/ ... =INT#tab=2

If the latter, good luck.
North America includes Canada and Mexico, which is part of international. I believe 60% ex-US is approximately correct.
Scroll down further. USA was 49.2% of the fund on 6/30/14. Also, Mexico is in the Emerging Markets slice of the pie.
Last edited by Ketawa on Sat Aug 09, 2014 3:41 pm, edited 1 time in total.
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Re: Going 60+% international? (US resident)

Post by denovo »

nisiprius wrote:
berntson wrote:
nisiprius wrote: Everyone agrees that when a German buys German stock, he experiences fluctuation in the Euro value of that stock, but if an American buys the same stock, he experiences two layers of fluctuation--fluctuation in the number of euros the each share is worth, and on top of that uncertainty in the number of dollars each of those euros is worth.

Everyone agrees that the act of buying in a foreign currency adds extra volatility, risk, uncertainty to the intrinsic risk of the stock itself. This show up clearly enough in Vanguard pegging Total International at "risk potential 5" versus Total Stock at 4. Or, more quantitatively, a 15-year standard deviation of 18.41 for Total International versus 15.87.

The debate is how big these effects are and how they balance off against each other.
I think this is really not a big deal, or barely important for a couple of reasons.

1. The common refrain is that what you consume in dollars if you are an American . More and more of what we buy are "tradable goods" that have one price across the world less adjustments for taxes, shipping, and regulation. Think oil, many foodstuffs , and automobiles. When the price of oil goes up, it goes up everywhere in the world.

2. Even investing the US stock market will give you exposure to foreign currencies as a lot of American companies do business overseas and you can reverse that argument for foreign companies. Moreover, my impression is that public companies are not consistent in whether or not they hedge contracts or sales that they receive in foreign currencies. Some do, some don't.
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Re: Going 60+% international? (US resident)

Post by countmein »

denovo wrote:
countmein wrote:A friendly challenge for Nathan Drake, Letsgobobby, and Berntson (or whomever else wants it):

Can you prove that International is attractively valued compared to the US? How did you make that determination? What are your numbers (valuation + expected return of US and International vs historical) and how did you do the calculations? Where did you get the data? Details please!

I call it a "challenge" because I wonder to what extent we take the shortcut of believing it's true before proving it to ourselves. At least, I have caught myself doing this. Attempting to correct this mistake, I have made some effort to verify that International is "cheap" but have thus far not been able to locate sufficient data to confirm.

Hi Countmein,

People like to look at P/E values to determine stock valuations. I look at Price / E (ttm) that is earnings over the last 12 months. finance.yahoo.com has this data. TDAmeritrade also has it.

When you check that out you get this
US TOTAL Market: 18
Emerging: 12
Pac/Asia: 14
Europe: 16

Edited to add: That being said I don't make tactical asset allocation decisions, but if I had to make a bet, I'd say that this portends better returns for intl as opposed to us going forward.
Thanks Denovo. Yes, I have those numbers too but I don't think it's sufficient data. Maybe those regions are often at those multiples or at low multiples relative to the US. What are PE10s for these regions and their mean historical PE/1s and PE/10s? What are their historical/projected earnings growth rates? How are we calculating international expected return and how does it compare to historical Intl returns as well as current US expected returns?
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Re: Going 60+% international? (US resident)

Post by denovo »

countmein wrote:
Thanks Denovo. Yes, I have those numbers too but I don't think it's sufficient data. Maybe those regions are often at those multiples or at low multiples relative to the US. What are PE10s for these regions and their mean historical PE/1s and PE/10s? What are their historical/projected earnings growth rates? How are we calculating international expected return and how does it compare to historical Intl returns as well as current US expected returns?
You can make things as complicated or simple as you like. Personally, I could care less about projected earnings or returns, that's speculation. That's why i like ttm earnings. I should add that GMO, which publishes 7 year returns forecasts, probably using more sophisticated data, comes to the same conclusion.

http://www.claroadvisors.com/documents/ ... 96f652.pdf
Real Returns
Emerging: 4.3
Intl Large: 1.0
US: -1.3
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Re: Going 60+% international? (US resident)

Post by arcticpineapplecorp. »

denovo wrote:
pascalwager wrote:Larry Swedroe recommends no more than 50% int'l due to higher transaction costs.
I think this advice is no longer valid. Total US market has a .05 expense ratio, total intl market is .18. It shoudn't be a factor.I think once you set up a us/intl number you should stick to it, so OP stick to what you have.

correction--total international stock market index fund's expense ratio (for admiral shares) is .14%, not .18%.
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Re: Going 60+% international? (US resident)

Post by countmein »

Denovo,

PE/1 (ttm) does not alone provide an expected return calculation. Are those PE/s above or below the mean? Perhaps they are above the mean and above their historical levels relative to the US. Can you show otherwise?

I agree that if we are unable to calculate it for ourselves, following GMO's lead might be the best alternative (I think this is what Robert T does, for instance). But I still think someone here can do better than just tossing up PE/1s from yahoo and calling it case closed, and I would shudder to think that anyone would make significant changes or install TAA rules based on that alone / in the absence of any other context .
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Re: Going 60+% international? (US resident)

Post by denovo »

arcticpineapplecorp. wrote:
denovo wrote:
pascalwager wrote:Larry Swedroe recommends no more than 50% int'l due to higher transaction costs.
I think this advice is no longer valid. Total US market has a .05 expense ratio, total intl market is .18. It shoudn't be a factor.I think once you set up a us/intl number you should stick to it, so OP stick to what you have.

correction--total international stock market index fund's expense ratio (for admiral shares) is .14%, not .18%.
I guess I should have specified, I was referring to the ETF class.
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Re: Going 60+% international? (US resident)

Post by berntson »

nisiprius wrote: "Currency risk" has a meaning. It does NOT mean "the risk that a nation's currency will collapse due to mismanagement." It means "the uncertainty you experience when planning a trip a year from now in not knowing how much your dollars are going to buy."
Thanks nisiprius. I realize that you probably don't want to continue the discussion, but just a few thoughts for others who may be reading along.

I was thinking that my use of "currency risk" to mean "real currency risk" is exactly the sense of "planning a trip and not knowing how much your dollars are going to buy." Say that I'm planning a road trip to Florida next year. I don't know how much $100 will buy because I don't know what hotel, food, and gas prices will be in dollars (I don't know what inflation will be). If I instead plan a trip to Norway, I also don't know what $100 will buy because I don't know what hotel, food, and gas prices will be in dollars.

I agree that there is an extra step for foreign stocks. Investors ultimate care about converting (say) stocks into things like groceries. When converting German stocks into groceries, I need to convert the stocks to euros, the euros to dollars, and the dollars to groceries. When I convert US stocks into groceries, I just convert them to dollars and then convert the dollars to groceries. What is usually ignored is that the euros to dollars conversion and the dollars to groceries conversion are not independent. The euro often rises against the dollar because the dollar is falling against groceries (because the dollar has higher relative inflation).
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Re: Going 60+% international? (US resident)

Post by BogleBoogie »

This proposed shift in your AA is based on:

1. Speculation
2. Market Timing
3. An attempt to be better than "average"
4. And defies Lord Bogle's caution to not go above 20%

Having said that, I don't see where it would be supported by the majority of folks posting on this site...
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Re: Going 60+% international? (US resident)

Post by JoMoney »

denovo wrote:
pascalwager wrote:Larry Swedroe recommends no more than 50% int'l due to higher transaction costs.
I think this advice is no longer valid. Total US market has a .05 expense ratio, total intl market is .18. It shoudn't be a factor.I think once you set up a us/intl number you should stick to it, so OP stick to what you have.
The costs of a mutual fund go beyond expense ratios, with international investing there are tax considerations, and all sorts of other fees in the various minutia of market spreads, currency exchanges, bank fees for handing the requirements for ADR's (if the shares are being bought on a U.S. exchange), bank fees for holding the securities at some foreign depository, and host of other things that most probably don't add up to a lot... but they do exist.
In particular though, I want to point out that "transaction costs" are not included as part of "expense ratio". Not all the costs are easily quantified, but some costs like brokerage fees can be quantified:
Vanguard wrote: From the SAI
... Although an advisor will endeavor to achieve the most favorable execution costs for a fund’s portfolio transactions in foreign securities under the circumstances, commissions and other transaction costs are generally higher than those on U.S. securities. In addition, it is expected that the custodian arrangement expenses for a fund that invests primarily in foreign securities will be somewhat greater than the expenses for a fund that invests primarily in domestic securities. ...

Total International Stock Index Fund paid the following approximate amounts in brokerage commissions:
2013: $8,716,000
2012: $6,295,000
(There was an increase in portfolio transactions in order to implement the transition to a new index for the Fund in 2013. This resulted in an
increase in brokerage commissions for the fiscal year ended October 31, 2013.)
According to the annual report, the fund had total assets at the end of 2013 of $107,782,446,000 ... making the brokerage commissions like .008% ... all of these other various fees are relatively trivial, if they added up to much I'm sure you'd have heard more about it by now, but they do exist - they're just a very trivial argument (but that doesn't stop me from raising the point from time to time).
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Re: Going 60+% international? (US resident)

Post by countmein »

BogleBoogie wrote: 4. And defies Lord Bogle's caution to not go above 20%
I don't get this. You're saying a person with some money who seeks investment, who has a look at international stocks and decides that their expected return vs risk makes sense to their personal financial context and proceeds to make the investment ALSO has an obligation to make similar investments in US stocks?
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Re: Going 60+% international? (US resident)

Post by JoMoney »

countmein wrote:
BogleBoogie wrote: 4. And defies Lord Bogle's caution to not go above 20%
I don't get this. You're saying a person with some money who seeks investment, who has a look at international stocks and decides that their expected return vs risk makes sense to their personal financial context and proceeds to make the investment ALSO has an obligation to make similar investments in US stocks?
I don't get it either. I believe his moniker is Saint Jack .
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Re: Going 60+% international? (US resident)

Post by Ged »

ladders11 wrote:
Ged wrote:There are reasons EU equities are not as fully valued as US equities. That includes lingering problems with EU bank capitalization.
This is exactly what almost everyone said about US banks in February-March 2009.

You have probably heard some distillation of a rumor about a problem, like anyone else, and the tragedy of this argument is that it seems to, but does not, mean anything about what will happen in the future. Are you actually suggesting that the problems are worse than the market currently anticipates?

When you suggest that low valuations are justified, you are failing to consider that similar problems have been and will be resolved.
I am suggesting that there are sound reasons for EU stocks to be valued where they are. As wrote my comment there was a bank failure in Portugal resulting in losses to stockholders and junior bond holders in the news. Example incidents of bank failures are not rumors.

As far as resolution of these reasons and adjusting portfolio asset allocations based on the prediction that these questions will be favorably resolved resulting in improved valuations, you are assuming that your judgement is superior to the market as a whole.
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Re: Going 60+% international? (US resident)

Post by JoMoney »

Ged wrote:...I am suggesting that there are sound reasons for EU stocks to be valued where they are. As wrote my comment there was a bank failure in Portugal resulting in losses to stockholders and junior bond holders in the news. Example incidents of bank failures are not rumors.

As far as resolution of these reasons and adjusting portfolio asset allocations based on the prediction that these questions will be favorably resolved resulting in improved valuations, you are assuming that your judgement is superior to the market as a whole.
...and not just about one narrow situation with one particular bank in one particular location (which I'm inclined to believe that someone somewhere may actually have an above-average expert opinion on), we're talking about the sum of all these situations across several broad markets.
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Re: Going 60+% international? (US resident)

Post by BogleBoogie »

countmein wrote:
BogleBoogie wrote: 4. And defies Lord Bogle's caution to not go above 20%
I don't get this. You're saying a person with some money who seeks investment, who has a look at international stocks and decides that their expected return vs risk makes sense to their personal financial context and proceeds to make the investment ALSO has an obligation to make similar investments in US stocks?

Re: Jack Bogle on International Investing at Bogleheads 11
by FrugalInvestor » Thu Oct 25, 2012 7:58 pm

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

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

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

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

So not don't but not too much due to increased risk.
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Re: Going 60+% international? (US resident)

Post by BogleBoogie »

JoMoney wrote:
countmein wrote:
BogleBoogie wrote: 4. And defies Lord Bogle's caution to not go above 20%
I don't get this. You're saying a person with some money who seeks investment, who has a look at international stocks and decides that their expected return vs risk makes sense to their personal financial context and proceeds to make the investment ALSO has an obligation to make similar investments in US stocks?
I don't get it either. I believe his moniker is Saint Jack .

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