Vanguard's email "The case for a global portfolio"

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
investingnoob2015
Posts: 74
Joined: Wed Apr 22, 2015 8:53 pm

Vanguard's email "The case for a global portfolio"

Post by investingnoob2015 »

Got an email today with the subject above...and the message for an upcoming webinar...

"You have a broadly diversified mix of U.S.-based stocks and bonds in your portfolio. So you're fully diversified, right? Maybe not. Vanguard researchers have found that investing in companies outside of the United States can offer exposure to a wider array of economic and market forces and can provide an added diversification benefit. Kahlilah Dowe of Vanguard Personal Advisor Services® and Fran Kinniry of Vanguard Investment Strategy Group will explain why you should consider adding a global component to your portfolio. Among the topics they'll discuss:
• Why Vanguard changed its recommended global allocations.
• How you can benefit from the diversification offered by investing globally.
• Why investing in U.S. multinational companies doesn't equate to investing globally."

I currently have 18.3% of my retirement portfolio in International stocks, and the previous allocation Vanguard recommended of 20-40% has now changed to 30-50%.

Thoughts on this change and your approach? I knew I'd be close to 20% and was going to hit that in the next few months to a year but to get to 30% I would likely have to rebalance a bit more of my US stock admiral funds into my International stock admiral fund.

Thanks.
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: Vanguard's email "The case for a global portfolio"

Post by nedsaid »

I am surprised that Vanguard upped the International Allocations for its Target Date and LifeStrategy Portfolios for both stocks and bonds. This would have been based on careful research, my guess is that Vanguard will say that a more global portfolio will be less volatile, giving investors a smoother ride than an all-US portfolio. There might be a small increase in returns as well.

To me the best argument for an increased International presence in the stock portion of the portfolios is that the United States has a shrinking share of the world stock market. If you want a truly global portfolio, your allocation to International Stocks should reflect that.

There is a point at which this argument doesn't make sense. For example, if you are a Canadian investor, a world portfolio would have two or three percent of stocks in the Canadian market. My bet would be that Canadian investors would want at least half of their stocks in their home country. It would seem unpatriotic to do otherwise.

What I would argue though is that a Canadian Investor should have more of their assets invested outside of Canada than a US Investor would invest outside the United States. The US Market is something like 45% or so of world market cap and the Canadian market is 2% to 3%.

In real life, probably 20% of stocks invested Internationally would be enough to give a US investor the diversification benefits of International Stocks. Anything between 20% to 50% allocation would probably work about the same. I would further guess that International diversification would sometimes reduce portfolio volatility and sometimes not. International diversification would sometimes boost return and sometimes not. Except for an unlikely event of the US becoming another Japan, over long periods of time an all US portfolio should perform about the same as a portfolio with an allocation to International Stocks.

I invest Internationally as a philosophical point. I want broad diversification as opposed to narrow diversification. I don't want all of my money invested in one country even if it is my own. In the event the US becomes another Japan, US investors would be very glad to own their International Stocks.
A fool and his money are good for business.
User avatar
WolfpackFan
Posts: 399
Joined: Mon Mar 08, 2010 1:18 pm

Re: Vanguard's email "The case for a global portfolio"

Post by WolfpackFan »

I believe they increased their international allocation in some of their target retirement funds also
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Vanguard's email "The case for a global portfolio"

Post by longinvest »

nedsaid wrote: What I would argue though is that a Canadian Investor should have more of their assets invested outside of Canada than a US Investor would invest outside the United States. The US Market is something like 45% or so of world market cap and the Canadian market is 2% to 3%.
As a Canadian, what I would argue is that a Canadian investor should have more of their assets invested inside Canada than Canada's weight in the world market cap. I am not willing to invest 96% to 98% of my portfolio in foreign countries. :happy
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Topic Author
investingnoob2015
Posts: 74
Joined: Wed Apr 22, 2015 8:53 pm

Re: Vanguard's email "The case for a global portfolio"

Post by investingnoob2015 »

nedsaid wrote:I am surprised that Vanguard upped the International Allocations for its Target Date and LifeStrategy Portfolios for both stocks and bonds. This would have been based on careful research, my guess is that Vanguard will say that a more global portfolio will be less volatile, giving investors a smoother ride than an all-US portfolio. There might be a small increase in returns as well.

To me the best argument for an increased International presence in the stock portion of the portfolios is that the United States has a shrinking share of the world stock market. If you want a truly global portfolio, your allocation to International Stocks should reflect that.

There is a point at which this argument doesn't make sense. For example, if you are a Canadian investor, a world portfolio would have two or three percent of stocks in the Canadian market. My bet would be that Canadian investors would want at least half of their stocks in their home country. It would seem unpatriotic to do otherwise.

What I would argue though is that a Canadian Investor should have more of their assets invested outside of Canada than a US Investor would invest outside the United States. The US Market is something like 45% or so of world market cap and the Canadian market is 2% to 3%.

In real life, probably 20% of stocks invested Internationally would be enough to give a US investor the diversification benefits of International Stocks. Anything between 20% to 50% allocation would probably work about the same. I would further guess that International diversification would sometimes reduce portfolio volatility and sometimes not. International diversification would sometimes boost return and sometimes not. Except for an unlikely event of the US becoming another Japan, over long periods of time an all US portfolio should perform about the same as a portfolio with an allocation to International Stocks.

I invest Internationally as a philosophical point. I want broad diversification as opposed to narrow diversification. I don't want all of my money invested in one country even if it is my own. In the event the US becomes another Japan, US investors would be very glad to own their International Stocks.
Thank you very much for your detailed response and insight. I agree on all fronts. I'm likely going to bump up my International exposure to 30% overtime, a 70/30 split seems like it's diversified to me. I may even go 65/35 down the road. Hoping it helps with returns as well. Over the last decade or so, international stocks haven't done so well...maybe they might a brighter future....let's hope...
Topic Author
investingnoob2015
Posts: 74
Joined: Wed Apr 22, 2015 8:53 pm

Re: Vanguard's email "The case for a global portfolio"

Post by investingnoob2015 »

WolfpackFan wrote:I believe they increased their international allocation in some of their target retirement funds also
Good catch, they did. My wife has VFIFX (2050) in her account for simplicity and Domestic went from 62% to 59%, and international went from 27% to 30%
Eric76
Posts: 224
Joined: Fri Nov 07, 2014 3:02 am

Re: Vanguard's email "The case for a global portfolio"

Post by Eric76 »

I wonder if Mr. Bogle gets irritated when he reads articles like these coming from Vanguard about increasing international exposure given his well known pov on the topic.
magneto
Posts: 1060
Joined: Sun Dec 19, 2010 9:57 am
Location: On Chesil Beach

Re: Vanguard's email "The case for a global portfolio"

Post by magneto »

nedsaid wrote: To me the best argument for an increased International presence in the stock portion of the portfolios is that the United States has a shrinking share of the world stock market. If you want a truly global portfolio, your allocation to International Stocks should reflect that.
One would suppose so, but perhaps surprisingly from data provided from a developed markets global fund, whereas US holding was 47.77% in Dec 2009, by Dec 2014 US holding had increased to 58.34%.
Seems to be reflection of the run up of US stocks versus international, with perhaps to a lesser extent the strong dollar.
'There is a tide in the affairs of men ...', Brutus (Market Timer)
normaldude
Posts: 803
Joined: Tue Jan 27, 2009 3:41 am

Re: Vanguard's email "The case for a global portfolio"

Post by normaldude »

Vanguard Total World Stock Index Fund (VTWSX) is about 50% US, 50% International.

https://personal.vanguard.com/us/funds/ ... =INT#tab=2

50/50 split seems reasonable to me.
Last edited by normaldude on Fri May 15, 2015 6:53 am, edited 1 time in total.
normaldude
Posts: 803
Joined: Tue Jan 27, 2009 3:41 am

Re: Vanguard's email "The case for a global portfolio"

Post by normaldude »

longinvest wrote:
nedsaid wrote: What I would argue though is that a Canadian Investor should have more of their assets invested outside of Canada than a US Investor would invest outside the United States. The US Market is something like 45% or so of world market cap and the Canadian market is 2% to 3%.
As a Canadian, what I would argue is that a Canadian investor should have more of their assets invested inside Canada than Canada's weight in the world market cap. I am not willing to invest 96% to 98% of my portfolio in foreign countries. :happy
My advice is that people should have at least 20% invested in their home country market. Otherwise, a person could literally get priced out of their own country.

For example, if a person in South Africa just invested in a total world index fund/ETF, thus only had 1% invested in South Africa, and then over the next 30 years, the rest of the world collapses, and South Africa skyrockets, the person would be broke, the local cost of living would likely have risen significantly, and they would be unable to afford to retire in the country they worked & lived in all their life, and helped to build.
rustymutt
Posts: 4001
Joined: Sat Mar 07, 2009 11:03 am

Re: Vanguard's email "The case for a global portfolio"

Post by rustymutt »

I've held international ETFs for years now, and have no plans to change that. Of my 60% equities, half that is international. I was taught that was a wise move, and I've seen it come through for my portfolio many times in the past. :sharebeer
Even educators need education. And some can be hard headed to the point of needing time out.
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Vanguard's email "The case for a global portfolio"

Post by Dandy »

Vanguard researchers have found that investing in companies outside of the United States can offer exposure to a wider array of economic and market forces and can provide an added diversification benefit

Wow! what a research breakthrough!! When did these researchers discover this amazing fact?

Some international equity exposure will add some diversification just by it's definition - you are adding something different. A case can be made for a global equity allocation and a case can be made that it isn't all that necessary.

Do international equities have more risk? Yes - according to Vanguard Total International Stock is rates a 5 risk rating and Total US stock market rates a 4. That isn't a show stopper - if it tends to zig when the US market zags. It is a bit more expensive too -yes - again not a show stopper.

I think the case is clear that some international is probably a good thing but not that a global equity (or bond) allocation is the best allocation. I'll underweight international equities and bonds at least for the foreseeable future.
Fclevz
Posts: 651
Joined: Fri Mar 30, 2007 11:28 am

Re: Vanguard's email "The case for a global portfolio"

Post by Fclevz »

normaldude wrote:For example, if a person in South Africa just invested in a total world index fund/ETF, thus only had 1% invested in South Africa, and then over the next 30 years, the rest of the world collapses, and South Africa skyrockets, the person would be broke...
But wouldn't the exact opposite also be true? And more likely?

As in: ...If a person in South Africa invested 99% in South Africa, and then over the next 30 years, the rest of the world skyrockets, and South Africa collapses, the person would be broke...
normaldude
Posts: 803
Joined: Tue Jan 27, 2009 3:41 am

Re: Vanguard's email "The case for a global portfolio"

Post by normaldude »

Dandy wrote:I'll underweight international equities and bonds at least for the foreseeable future.
The problem with putting most of your stock portfolio with one country is that that one country can implode badly, even over a long period of time.

For example, the Japanese stock market has declined about -50% over the last 25 years. A Japanese investor who steadily invested their paycheck into the Japanese stock market over the 25 years took an absolute beating, even as a long-term investor.
normaldude
Posts: 803
Joined: Tue Jan 27, 2009 3:41 am

Re: Vanguard's email "The case for a global portfolio"

Post by normaldude »

Fclevz wrote:
normaldude wrote:For example, if a person in South Africa just invested in a total world index fund/ETF, thus only had 1% invested in South Africa, and then over the next 30 years, the rest of the world collapses, and South Africa skyrockets, the person would be broke...
But wouldn't the exact opposite also be true? And more likely?

As in: ...If a person in South Africa invested 99% in South Africa, and then over the next 30 years, the rest of the world skyrockets, and South Africa collapses, the person would be broke...
I said 20%, not 99%.

So if the South African investor was 20% South Africa, 80% rest of the world, he'd be in better shape.
User avatar
nisiprius
Advisory Board
Posts: 52211
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Vanguard's email "The case for a global portfolio"

Post by nisiprius »

I wonder if financial firms have special grammar checkers that auto-hedge all statements to render them vacuously true?

Of course it "can provide an added diversification benefit." But will it? And how much? And will it be worth it? My personal opinion is "(shrug) Oh, hey, you know, sure, probably, I guess a little, maybe not."

Like Shakespeare:

"I can call spirits from the vasty deep."
"Why, so can I, or so can any man; But will they come when you do call for them?"

Almost any asset "can provide an added diversification benefit." Rough rice futures can provide an added diversification benefit. Collectible miniature coffee grinders can provide an added diversification benefit. Lottery tickets can provide an added diversification benefit.

If you own a total stock market index fund, I think there is only one asset on earth that cannot possibly provide an added diversification benefit, and that would be a different total stock market index fund.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
longinvest
Posts: 5682
Joined: Sat Aug 11, 2012 8:44 am

Re: Vanguard's email "The case for a global portfolio"

Post by longinvest »

normaldude wrote:My advice is that people should have at least 20% invested in their home country market. Otherwise, a person could literally get priced out of their own country.
Personally, I've settled at 50/50 Canada/Ex-Canada for my stock allocation. My bond allocation is 100% domestic as I am not comfortable with the use of derivative products to hedge currency in hedged international bonds, and I do not like the currency risks of unhedged international bonds.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
normaldude
Posts: 803
Joined: Tue Jan 27, 2009 3:41 am

Re: Vanguard's email "The case for a global portfolio"

Post by normaldude »

nisiprius wrote:If you own a total stock market index fund, I think there is only one asset on earth that cannot possibly provide an added diversification benefit, and that would be a different total stock market index fund.
I think by diversification benefit, they're talking about a risk/return relationship. Like reducing overall portfolio risk/volatility, without sacrificing expected return.

If you added lottery tickets (which have a negative expected return, zero beta, high residual risk), I think your overall investment portfolio would have a lower expected return, and higher overall volatility (sometimes you win a prize, and have a big windfall).
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Vanguard's email "The case for a global portfolio"

Post by Dandy »

The problem with putting most of your stock portfolio with one country is that that one country can implode badly, even over a long period of time.


True. That speaks for some international diversity -- not necessarily global equity allocation. It also speaks, in retirement, to having enough "safe" savings/investments to fully fund your retirement vs over reliance on equities. That is my approach to avoiding a US equity decade(s)? like Japan.

Also, why Japan was an economic powerhouse it had some size, resource,cultural and population issues that were/are somewhat unique. That doesn't mean it couldn't happen to the US just think it is less likely. Finally, I believe the US's share of the global economy is/was much larger than Japan's.
normaldude
Posts: 803
Joined: Tue Jan 27, 2009 3:41 am

Re: Vanguard's email "The case for a global portfolio"

Post by normaldude »

Dandy wrote:Also, why Japan was an economic powerhouse it had some size, resource,cultural and population issues that were/are somewhat unique. That doesn't mean it couldn't happen to the US just think it is less likely.
In 2004-2006, I warned people about a potential US housing crash. I referenced this 2004 Chart from Economist.com.

Most Americans told me that housing only goes up, and that a national housing decline was impossible.

I pointed out that Japan real estate had declined since 1990.

People dismissed my example by saying that US was not Japan, and the same could not happen to USA.

Americans want to believe that US is a special magical country. My view is more pragmatic. No empire lasts forever. Thus, diversification is a good idea.
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: Vanguard's email "The case for a global portfolio"

Post by nedsaid »

magneto wrote:
nedsaid wrote: To me the best argument for an increased International presence in the stock portion of the portfolios is that the United States has a shrinking share of the world stock market. If you want a truly global portfolio, your allocation to International Stocks should reflect that.
One would suppose so, but perhaps surprisingly from data provided from a developed markets global fund, whereas US holding was 47.77% in Dec 2009, by Dec 2014 US holding had increased to 58.34%.
Seems to be reflection of the run up of US stocks versus international, with perhaps to a lesser extent the strong dollar.
I am sure you are right. The dollar has been very strong recently so your comments make sense.
I am certainly not advocating that you constantly rebalance your US/International allocations every time the dollar zigs or zags a bit. Maybe once a year or so. What you are really getting with International Stocks is currency diversification. In fact, since the US share of the world market has increased in large part because of the dollar, it might be time to do the opposite and shift funds to the cheaper International Stocks and into cheaper currencies.

My International Stocks have fluctuated between 24% and 27% of my stocks. I have mostly let things ride.
A fool and his money are good for business.
Dandy
Posts: 6701
Joined: Sun Apr 25, 2010 7:42 pm

Re: Vanguard's email "The case for a global portfolio"

Post by Dandy »

In 2004-2006, I warned people about a potential US housing crash. I referenced this 2004 Chart from Economist.com.

Most Americans told me that housing only goes up, and that a national housing decline was impossible.

I pointed out that Japan real estate had declined since 1990.

People dismissed my example by saying that US was not Japan, and the same could not happen to USA.

Americans want to believe that US is a special magical country. My view is more pragmatic. No empire lasts forever. Thus, diversification is a good idea.


First let's agree that some international diversification is probably a good idea - the issue is does it have to match a global equity allocation. Second the prior issue was that the US could end up like Japan as far as having decade plus of equity plunge and stall. Again it is possible but I don't think it is as likely as Japan.

Both Japan and the US had great real estate bubbles. Which country's housing and equity market recovered more quickly??
I'm betting the US did. Not because it is magical - we have certain resource, cultural and economic differences that seem to enable us to adjust/recover more quickly. Will it work every time? No guarantees. Will it work for centuries? Almost nothing does. But, if I were a betting man - and equities are bets, I'm betting the US. with all its faults and issues will handle its economy better than most other options. Will Europe get it's fragmented act together? Will China be able to grow a modern society and still avoid dealing with the lack of freedoms? The middle east? South America? I'm sure most have possible great outcomes. I'll place some equity bets on all of them but put more chips on the US equity market.

I don't have to bet on the US for centuries - at age 67 a decade or two is more like my horizon.
User avatar
nedsaid
Posts: 19275
Joined: Fri Nov 23, 2012 11:33 am

Re: Vanguard's email "The case for a global portfolio"

Post by nedsaid »

nisiprius wrote:I wonder if financial firms have special grammar checkers that auto-hedge all statements to render them vacuously true?

Of course it "can provide an added diversification benefit." But will it? And how much? And will it be worth it? My personal opinion is "(shrug) Oh, hey, you know, sure, probably, I guess a little, maybe not."

Like Shakespeare:

"I can call spirits from the vasty deep."
"Why, so can I, or so can any man; But will they come when you do call for them?"

Almost any asset "can provide an added diversification benefit." Rough rice futures can provide an added diversification benefit. Collectible miniature coffee grinders can provide an added diversification benefit. Lottery tickets can provide an added diversification benefit.

If you own a total stock market index fund, I think there is only one asset on earth that cannot possibly provide an added diversification benefit, and that would be a different total stock market index fund.
I find myself smiling as I read this. One should not just add asset classes for the sake of adding asset classes. I am interested in owning asset classes that have real returns over time. Thus I have not done things like precious metals or commodities. I have made similar points, I am waiting for a fund company offering a "Money stuffed in mattresses" mutual fund. Minus expenses of course. A sure loser but it has zero correlation with stocks! You would be diversified because the money is stuffed in different mattresses.

But on the other hand, I was darned glad that I owned US small-cap/mid-cap, Value, REITS, Bonds, and International Stocks during the "lost decade" of the 2000's. I benefitted a lot from the diversification. I have been a bit of an asset class collector over the years but even I realize that there are limits to this.

By the way, I am pretty certain that Nisiprius is not arguing against diversification. He has posted that he owns International Stocks too.
A fool and his money are good for business.
Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: Vanguard's email "The case for a global portfolio"

Post by Erwin »

As an American living overseas, I realized rather quickly that money can also be made outside the US and that has been reflected in my stock allocation for a long time: 90% in Global Stock Index (50/50 US and rest)+ 10% in Emerging Markets Stock Index (because I feel that long term growth with come from these countries). After recently reading Swedroe's last book, "Reducing the Risk of Black Swans", I may also add a small amount of SV, US and International, at the expense of the Global Stock Index, which is mainly large caps.
Erwin
Topic Author
investingnoob2015
Posts: 74
Joined: Wed Apr 22, 2015 8:53 pm

Re: Vanguard's email "The case for a global portfolio"

Post by investingnoob2015 »

Great insights and perspectives all around, thank you to everyone for contributing to this thread and helping me understand more! Appreciate you Bogleheads all the time :)
SpideyIndexer
Posts: 866
Joined: Thu Apr 02, 2015 10:13 pm

Re: Vanguard's email "The case for a global portfolio"

Post by SpideyIndexer »

For quite some time Paul Merriman's portfolio has had a 50/50 split between US and International.
beardsworth
Posts: 2135
Joined: Fri Jun 15, 2007 4:02 pm

Re: Vanguard's email "The case for a global portfolio"

Post by beardsworth »

nedsaid wrote:To me the best argument for an increased International presence in the stock portion of the portfolios is that the United States has a shrinking share of the world stock market.
To me the best argument for an increased international portfolio presence, almost but not completely aside from the question of U.S. weight in world markets, is that, without exception, absolutely everything else in my financial life, whether asset or source of income, is already anchored in the United States.
User avatar
investorguy1
Posts: 543
Joined: Mon Nov 24, 2014 6:13 pm

Re: Vanguard's email "The case for a global portfolio"

Post by investorguy1 »

I was thinking about starting a thread on this topic a while back. I have felt for a long time that if you are to be a true indexer you should be holding more international stock than just 30% since international make up more like 50% of the market. You think Vanguard just woke up one day and said hey more diversification is better? Well hello we all knew that already. The fact that they are doing it now and not a long time ago gives me the impression that they think international stocks will do better than US in the mid to long term. US stocks have been doing a lot better since 2008 and maybe they think that is going to shift now. I just don't think they came across some sort of new research or made some new discovery regarding diversification I don't buy that.

I also added international bonds to my portfolio before they started there international bond fund there were no low cost options before the vanguard fund so I was happy about their fund. Now they you increasing international bonds from 20% to 30%. So that is interesting too. Maybe at some point they will add junk bonds, tips maybe even convertibles or floating rate bonds?
Topic Author
investingnoob2015
Posts: 74
Joined: Wed Apr 22, 2015 8:53 pm

Re: Vanguard's email "The case for a global portfolio"

Post by investingnoob2015 »

Investerguy wrote:I was thinking about starting a thread on this topic a while back. I have felt for a long time that if you are to be a true indexer you should be holding more international stock than just 30% since international make up more like 50% of the market. You think Vanguard just woke up one day and said hey more diversification is better? Well hello we all knew that already. The fact that they are doing it now and not a long time ago gives me the impression that they think international stocks will do better than US in the mid to long term. US stocks have been doing a lot better since 2008 and maybe they think that is going to shift now. I just don't think they came across some sort of new research or made some new discovery regarding diversification I don't buy that.

I also added international bonds to my portfolio before they started there international bond fund there were no low cost options before the vanguard fund so I was happy about their fund. Now they you increasing international bonds from 20% to 30%. So that is interesting too. Maybe at some point they will add junk bonds, tips maybe even convertibles or floating rate bonds?
Good call out on everything, if they believe International will do better in the mid to long-term compared to the US, 2015 sure is proving that so far...
Total International Stock Index Admiral Shares are at 11.11% YTD where as Total Stock Market Index Admiral Shares for US is only 4.09% YTD, maybe it's a sign for things to come who knows, all I know is in the past 10-15 years International has struggled (at least when looking at those hypothetical growth of $10k on the fund page charts). I will slowly be getting to 30%, if that means contributing my Roth IRA money towards International or rebalancing some of my existing funds from US large/mid/small cap into International.

I don't have any international bonds, I thought the Total Bond market would cover that but I guess now, will have to look into it further.
chessmannextmove
Posts: 278
Joined: Mon Feb 23, 2015 12:57 pm

Re: Vanguard's email "The case for a global portfolio"

Post by chessmannextmove »

Dandy wrote:Vanguard researchers have found that investing in companies outside of the United States can offer exposure to a wider array of economic and market forces and can provide an added diversification benefit

Wow! what a research breakthrough!! When did these researchers discover this amazing fact?

Some international equity exposure will add some diversification just by it's definition - you are adding something different. A case can be made for a global equity allocation and a case can be made that it isn't all that necessary.

Do international equities have more risk? Yes - according to Vanguard Total International Stock is rates a 5 risk rating and Total US stock market rates a 4. That isn't a show stopper - if it tends to zig when the US market zags. It is a bit more expensive too -yes - again not a show stopper.

I think the case is clear that some international is probably a good thing but not that a global equity (or bond) allocation is the best allocation. I'll underweight international equities and bonds at least for the foreseeable future.
Did you read the paper?
User avatar
DiscoBunny1979
Posts: 2054
Joined: Sun Oct 21, 2007 10:59 am

Re: Vanguard's email "The case for a global portfolio"

Post by DiscoBunny1979 »

investingnoob2015 wrote:I currently have 18.3% of my retirement portfolio in International stocks, and the previous allocation Vanguard recommended of 20-40% has now changed to 30-50%.

Thoughts on this change and your approach? I knew I'd be close to 20% and was going to hit that in the next few months to a year but to get to 30% I would likely have to rebalance a bit more of my US stock admiral funds into my International stock admiral fund.

I was looking up articles to determine what percentage of International Equities one should hold and came across this 2012 Vanguard Research Called "Considerations for investing in non-US equities". https://personal.vanguard.com/pdf/icriecr.pdf

Vanguard research suggests that while "As of December 31, 2011, U.S. equities accounted for 46% of the global equity market. Non-U.S. equities, including those of developed countries such as Germany, Japan, and the United Kingdom, plus those of emerging countries such as Brazil,India, and China, accounted for the remaining 54%", interpretation of data in the Article support 20% allocation as a "reasonable starting point". The article continues in the Conclusion by stating "Although finance theory dictates that an upper asset allocation limit should be based on the global market capitalization for international equities (currently approximately 58%), we have demonstrated that international allocations exceeding 40% have not historically added significant additional diversification benefits, particularly accounting for costs. For many investors, an allocation between 20% and 40% should be considered reasonable, given the historical benefits of diversification. Allocations closer to 40% may be suitable for those investors seeking to be closer to a market proportional weighting or for those who are hoping to obtain potentially greater diversification benefits and are less concerned with the potential risks and higher costs. On the other hand, allocations closer to 20% may be viewed as offering a greater balance among the benefits of diversification, the risks of currency volatility and higher U.S. to non-U.S. stock correlations, investor preferences, and costs."


So, that's the advice Vanguard has been giving to those clients wanting to pick and choose their own allocation. Internally, Vanguard might be moving moderate or riskier funds toward the middle/upper of the 20%-40% range for funds that seek as their goal market weighting; whereas some funds might stay at 20% if they are considered a conservative approach to diversification and concerned about volatility.
User avatar
nisiprius
Advisory Board
Posts: 52211
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Vanguard's email "The case for a global portfolio"

Post by nisiprius »

nedsaid wrote:...I am waiting for a fund company offering a "Money stuffed in mattresses" mutual fund. Minus expenses of course. A sure loser but it has zero correlation with stocks! You would be diversified because the money is stuffed in different mattresses...
Excellent! Back in 2008-2009 when I was getting slightly giddy from hyperventilating whistling past the graveyard, I posted this. But I missed the multiple-mattress concept and failed to point out the benefits of zero correlation. I also used an unreliable free image hosting service, which is why the images from my posts are all missing.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
Rx 4 investing
Posts: 735
Joined: Sat Apr 25, 2015 11:03 am

Re: Vanguard's email "The case for a global portfolio"

Post by Rx 4 investing »

Cliff Asness' (AQR) paper, "International Diversification Works (Eventually)" has some compelling rationale for international stocks in long-term portfolios:

"Abstract: Investors and financial economists have long debated the benefits of global equity market diversification. Fans argue that diversifying globally reduces portfolio risk without harming long-term return. Some critics counter with the observation that because markets get more correlated during downturns, most of the diversification occurs on the upside when you do not need it, and vanishes on the downside when you do. Certainly, recent events give support to the critics as all equity markets suffered at the same time. We argue that this observation, while true, misses the big picture. International diversification might not protect you from terrible days, months, or even years, but over longer horizons (which should be more important to investors) where underlying economic growth matters more to returns than short-lived panics, it protects you quite well."

https://www.aqr.com/library/journal-art ... eventually
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes
Topic Author
investingnoob2015
Posts: 74
Joined: Wed Apr 22, 2015 8:53 pm

Re: Vanguard's email "The case for a global portfolio"

Post by investingnoob2015 »

DiscoBunny1979 wrote:
investingnoob2015 wrote:I currently have 18.3% of my retirement portfolio in International stocks, and the previous allocation Vanguard recommended of 20-40% has now changed to 30-50%.

Thoughts on this change and your approach? I knew I'd be close to 20% and was going to hit that in the next few months to a year but to get to 30% I would likely have to rebalance a bit more of my US stock admiral funds into my International stock admiral fund.

I was looking up articles to determine what percentage of International Equities one should hold and came across this 2012 Vanguard Research Called "Considerations for investing in non-US equities". https://personal.vanguard.com/pdf/icriecr.pdf

Vanguard research suggests that while "As of December 31, 2011, U.S. equities accounted for 46% of the global equity market. Non-U.S. equities, including those of developed countries such as Germany, Japan, and the United Kingdom, plus those of emerging countries such as Brazil,India, and China, accounted for the remaining 54%", interpretation of data in the Article support 20% allocation as a "reasonable starting point". The article continues in the Conclusion by stating "Although finance theory dictates that an upper asset allocation limit should be based on the global market capitalization for international equities (currently approximately 58%), we have demonstrated that international allocations exceeding 40% have not historically added significant additional diversification benefits, particularly accounting for costs. For many investors, an allocation between 20% and 40% should be considered reasonable, given the historical benefits of diversification. Allocations closer to 40% may be suitable for those investors seeking to be closer to a market proportional weighting or for those who are hoping to obtain potentially greater diversification benefits and are less concerned with the potential risks and higher costs. On the other hand, allocations closer to 20% may be viewed as offering a greater balance among the benefits of diversification, the risks of currency volatility and higher U.S. to non-U.S. stock correlations, investor preferences, and costs."


So, that's the advice Vanguard has been giving to those clients wanting to pick and choose their own allocation. Internally, Vanguard might be moving moderate or riskier funds toward the middle/upper of the 20%-40% range for funds that seek as their goal market weighting; whereas some funds might stay at 20% if they are considered a conservative approach to diversification and concerned about volatility.
Great information - thank you for sharing!!
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Vanguard's email "The case for a global portfolio"

Post by JoMoney »

investingnoob2015 wrote:...all I know is in the past 10-15 years International has struggled (at least when looking at those hypothetical growth of $10k on the fund page charts)....
You really need to consider it over more rolling periods. Yes, U.S. stocks have been performing better the past couple years, that wasn't the case a few years back, and changes again a few years back from that.
Image
http://www.vanguard.com/funds/reports/q ... emode=none

If you start from a period when it looks like U.S. (or International) was under-performing as a relative start date, then pick an end date where it's outperforming, it's going to exaggerate the difference. When really it's gone back and forth quite a bit over the last 20 years.
Keep in mind you probably don't know the date you're going to be selling in the future, and it's even less likely anyone knows by how much U.S. or International will be relatively out-performing or under-performing at that unknown future date relative to the present. If you just pick an allocation that matches your "risk preference" and stay the course averaging over time, it's not likely to make much difference. When people insist on trying to time things and jump back and forth it creates opportunities where your performance might differ... maybe better, maybe worse, but unless you're really confident that you "know something" making changes to jump back and forth is really just adding additional risks you don't have to take to reap the returns owning those businesses will offer over the time period you hold them.

Below is a nice long time period over the past 15 years (cherry picked using the above Vanguard illustration). Look at various different time periods, consider the illustration above. International has not done poorly for someone who has been averaging in across time, and will average out over time.
Image
MS Link
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Vanguard's email "The case for a global portfolio"

Post by JoMoney »

Somewhere around half of the revenues in U.S. companies are earned over-seas. Adding additional international allocation may, in some manner be unnecessarily concentrating it outside the U.S. This is an argument I've heard Mr.Bogle suggest, others counter that a lot of international companies earn significant revenues in the U.S. ... make of it what you will ...
I think there are other "risks" to consider when determining your allocation, and while my opinion on that differs from most here, I think people can look it and figure it out for themselves. There's a lot of varying ideas and "preferences" when it comes to concepts of risk and uncertainties.

But something else to consider about International holdings:
According to the annual report, last year Vanguard's Total International fund had $4 Billion in net dividends, but another $500 Million was withheld for foreign taxes. Something close to 12% of the dividends. Dividends over this period (31-Oct-2013 through 2014) were 2.8% of the return
(.12 * .028 = .0033)
So this tax drag is similar to having an expense ratio of .33%, some of which a U.S. investor may be able to recoup with tax credits depending where they're holding these assets and what sort of deductions and filing status they use.

Foreign persons generally have no legal status and can't really expect any rights as an "owner" of equity in foreign lands. Through various derivative processes, banks are able to synthesize ownership by having a bank that is allowed to operate in the country "own" the stock, and then hold it for the benefit of some foreign person. But this service adds additional custody fees. For things like ADRs it's often a few cents per share, but (like any financial product) the more exotic the holding the more money an investment bank is going to try and make on it. These fees may not aggregate to a large amount for something primarily invested large developed market stocks, but can still add the equivalent of a few basis points in expenses.
Coupled with higher brokerage transaction fees and higher spreads on foreign markets, and issues related to pricing assets on markets that are closed during U.S. market hours, there's additional costs that create a drag.

Assuming a group of U.S. companies and International companies otherwise perform at par with each other, I don't think it's unreasonable to expect that a U.S. investor holding a "low cost" international fund would still see a lag of .30% to .50% over a U.S. investment, just from foreign tax and higher expenses.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
staythecourse
Posts: 6993
Joined: Mon Jan 03, 2011 8:40 am

Re: Vanguard's email "The case for a global portfolio"

Post by staythecourse »

I am one who has ALWAYS advocated for a more balanced international equity exposure closer to the world market cap so this argument is nothing new to me and many others who have been advocating the same.

The one hesitation I have in jumping on this now seemingly popular bandwagon is the fact international is outperforming this year. I ALWAYS advice not changing one's asset allocation when one wants to put more money into the currently well performing asset class. This often smells to me of market timing. If one wants to change asset allocation one should be wanting to put money in the recent losers.

I think more important then HOW much to allocate to U.S. and international is picking one and STICKING to it. Staying the course is the most important thing and hope folks are not losing sight of that.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Vanguard's email "The case for a global portfolio"

Post by Maynard F. Speer »

I don't think Vanguard are basing their recommendations on new research - it's clearly a risk and valuations-based decision ..

I suppose if 60:40-style portfolios with high concentrations of US stocks perform as poorly as some estimate they will (with asset prices buoyed by years of unusual monetary policy) then I'd suggest that puts pressure on Vanguard's business model ..

It is market timing, but I think in light of valuations, doing nothing isn't exactly impartial
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
User avatar
ankonaman
Posts: 91
Joined: Thu Feb 26, 2015 5:25 pm

Re: Vanguard's email "The case for a global portfolio"

Post by ankonaman »

I will probably get my head handed to me but here goes...

The US, Europe & Japan's population is aging. Manufacturing is moving to other regions. As our populations age and more people move into retirement, the masses of older retirees will be selling our assets to fund our retirement. The new younger buyers of those assets (because of the demographic age shift in our respective countries) will have to come from "other regions of the globe" otherwise our assets (stocks/bonds/etc) will devalue as demand decreases as we sell. I also envision a continued shift in mfg and service coming from other global regions. Also if we continue on our enlightened path of entitlement politics less companies will be able to withstand the ever increasing taxes, restrictions, etc. to succeed in the US. Emerging markets may be the place to be as a younger, eager population strives to better their living standards.
WhyNotUs
Posts: 2610
Joined: Sun Apr 14, 2013 11:38 am

Re: Vanguard's email "The case for a global portfolio"

Post by WhyNotUs »

I sort of agree with ankonaman.

The US consumer has carried much of the world economy over the last twenty years using their credit card in the absence of a raise. Other countries have built infrastructure for economic growth during that period and have growth oriented demographics.

It is not unreasonable to see that and want to increase exposure to lower cost, index based world economies. There is some reason for caution given different regulatory schemes, tax schemes, denomination, and reporting accuracy and that fact that expenses tend to be higher so most people, in the US at least, do not match the world economy in distribution of assets. In addition, corporations are less tied to nations these days and that complicates the thought process.

I am at 19% of equities Intl and look to increase that over time through new investment but do not feel a sense of urgency like many who see the US stock market as tired and are looking for near term profits overseas. It will take a long time before I hit 30% and that would be my upper limit today. I used to own Emerging Mkt Bond fun but after researching it more found that I did not find the reward matched the risk.
I own the next hot stock- VTSAX
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Vanguard's email "The case for a global portfolio"

Post by JoMoney »

There are studies that go along with the idea of an aging population and the return on equities, they seem to conclude a lack of any statistically significant relationship between them.
https://advisors.vanguard.com/iwe/pdf/I ... omain=true

There really hasn't been much decline in U.S. manufacturing, despite the fact that manufacturing itself has been making up a lower percentage of the world economy, the fact that other sectors have grown further/faster over recent decades doesn't spell doom.
http://www.forbes.com/sites/timworstall ... facturing/
I do have to point out though, that most of the manufacturing that continues is not labor intensive and requires fewer people with different skill sets, so it has impacted workers, but not necessarily "stocks".
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
nisiprius
Advisory Board
Posts: 52211
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Vanguard's email "The case for a global portfolio"

Post by nisiprius »

Do I truly, in my heart believe that U.S. businesses are just plain better than non-U.S. businesses? No.

Do I truly, in my heart believe that U.S. businesses are truly just plain worse than non-U.S. businesses? The other countries have all the smart people? No.

Do I truly, in my heart believe that the U.S. is so independent and decoupled from the rest of the world that U.S. and international stocks will have really low correlation going forward? No.

Do I truly, in my heart believe that the difference in diversification between 5,888 stocks and 3,814 stocks is big? No. (It's not a proportion thing... it's sort of like asking whether I should insist that the phlebotomist draw two vials of my blood instead of one so they can get a better sample).
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
Lee Saage
Posts: 213
Joined: Wed Jun 13, 2007 6:25 pm
Location: Georgetown, TX

Re: Vanguard's email "The case for a global portfolio"

Post by Lee Saage »

nisiprius wrote:Do I truly, in my heart believe that U.S. businesses are just plain better than non-U.S. businesses? No.
I've heard the argument that, in the case of European stocks, "Eurosclerosis" prevents the European economy from performing as well as the U.S. economy. Even if that is true, it is not a secret and European stocks would reflect that condition. I think it not unusual that poor economies can produce superior stock market performance.
Most of my money went to fast cars, fast living and good wine. The rest I just wasted.
User avatar
kenyan
Posts: 3015
Joined: Wed Jan 12, 2011 11:16 pm

Re: Vanguard's email "The case for a global portfolio"

Post by kenyan »

staythecourse wrote:
The one hesitation I have in jumping on this now seemingly popular bandwagon is the fact international is outperforming this year. I ALWAYS advice not changing one's asset allocation when one wants to put more money into the currently well performing asset class. This often smells to me of market timing. If one wants to change asset allocation one should be wanting to put money in the recent losers.
Indeed, but to be fair to Vanguard - they made the allocation change last year (or was it early this year?), when international had been getting beaten up for some time. Nevertheless, hopefully people don't attempt to market-time the latest winner. I'm a 50/50 investor, and am certainly reaping the benefits this year of a large international allocation, but you are correct that most people should just stay their chosen course.
Retirement investing is a marathon.
User avatar
M_to_the_G
Posts: 549
Joined: Mon Jan 21, 2013 8:57 am

Re: Vanguard's email "The case for a global portfolio"

Post by M_to_the_G »

Eric76 wrote:I wonder if Mr. Bogle gets irritated when he reads articles like these coming from Vanguard about increasing international exposure given his well known pov on the topic.
And he hasn't changed his mind since "Common Sense." I am at 20% of my portfolio, with no plans to increase that.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Vanguard's email "The case for a global portfolio"

Post by JoMoney »

kenyan wrote:...to be fair to Vanguard - they made the allocation change last year (or was it early this year?), when international had been getting beaten up for some time. Nevertheless, hopefully people don't attempt to market-time the latest winner. I'm a 50/50 investor, and am certainly reaping the benefits this year of a large international allocation, but you are correct that most people should just stay their chosen course.
Up to January 31, 2015 the LifeStrategy funds were still at 70%/30% U.S./International
From the press releases and blogs I've seen, "Portfolio changes are expected to occur gradually and be completed by the end of 2015. "

There timing of going from 20% to 30% was especially bad in 2010. Let's hope this change works out better (relatively speaking).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
Maynard F. Speer
Posts: 2139
Joined: Wed Mar 18, 2015 10:31 am

Re: Vanguard's email "The case for a global portfolio"

Post by Maynard F. Speer »

JoMoney wrote:There are studies that go along with the idea of an aging population and the return on equities, they seem to conclude a lack of any statistically significant relationship between them.
https://advisors.vanguard.com/iwe/pdf/I ... omain=true
Well I think it's a bit soon to draw that conclusion - the decline in birthrates is only just starting to lead to a booming retirement-age population .. In Japan it's certainly a looming economic problem - they're having to entice immigrants into the country by the boat-load

Image


Here's El-Erian's recommended asset allocation from When Markets Collide - which is about investing in a changing global economy

Image

(Assume the missing 2% is cash)
"Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." - John Maynard Keynes
Post Reply