Is This Correct About International Equities

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Is This Correct About International Equities

Postby OverTheHill » Wed May 22, 2013 3:09 pm

I've been following closely all the comments about the advantages of having international and/or foreign equities within a portfolio's equity allocation. I've looked closely at the Vanguard funds. It would appear to me that if you exclude funds with US stocks and emerging market stocks, then a true international fund has no advantage at all over the SP500. If you include emerging market funds, then there is some slight advantage, but only if you go out 10 years or more. Bottom line: The real advantage, if any, comes from including very risky emerging market stocks, which don't seem to have performed very well for quite some time. As to whether they might perform better in the future is anyone's guess. What am I missing here?
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Re: Is This Correct About International Equities

Postby FNK » Wed May 22, 2013 3:36 pm

Congratulations, you've discovered the historic correlation between US and Intl stocks. You've observed that past performance is not predictive. So the indexer's way is to go for more diversification.
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Re: Is This Correct About International Equities

Postby rmelvey » Wed May 22, 2013 3:46 pm

Check out the credit suisse 2012 year book and scroll towards the end. The US has an incredibly charmed history, but there are plenty of equity markets that have done terribly. Its possible that this could reverse going forward, who knows. Owning the entire world just means that you have one less thing to worry about (unless short term forex movements keep you up at night :D )

I like owning a little bit of everything so that I never feel like I am missing out on any of the action. I feel like owning the world means that I am more likely to get my "fair share" as Jack Bogle puts it.
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Re: Is This Correct About International Equities

Postby ogd » Wed May 22, 2013 3:48 pm

OverTheHill: you're missing country-specific risks that should be diversified away to some degree. I can think of a few:
  • Changing political climate. Even if you think that unlikely in the US, it might be as simple as improving political climate making another country very attractive. E.g. I'm hoping North Koreans get to break out of their prison soon and start making cheap cars and stuff.
  • Changing demographics
  • Natural catastrophe

The U.S. being very stable and very large (economically and geographically), the country risks aren't all that big. That's why people aren't adamant about holding market weight internationals, like they would for a sector fund for example. But why take those risks to an even higher degre than we do simply by living here?

The classic example of country risk hitting investors hard and seemingly forever is Japan in the early 90s.
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Re: Is This Correct About International Equities

Postby staythecourse » Wed May 22, 2013 3:49 pm

You are correct and more importantly it passes the smell test of common sense. In the globalized world we live in and money can flow ANYWHERE in the world why would one expect better returns in U.S. vs. Europe or Europe vs. U.S.?? I expect the same expected return with basically the same risk.

The reason to do it then?? It is a fundamental answer to the question, "What is the purpose of diversification?" The idea is to diversify risk. Adding international decreases geographical risk and political risk. U.S. investors have been lucky not to really need to pay attention to that since WWII, but nothing is set in stone that fundamentally the U.S. is different and can't go through the same thing. OR in smaller sense what has happened to Japan the last 10-20 yrs.

Good luck.
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Re: Is This Correct About International Equities

Postby kmok » Wed May 22, 2013 3:52 pm

A japanese in the late 80s might also see no points of investing overseas. That didn't end very well. Can the same "Loss Decades" happen in the US stock market? Absolutely.

You are less diversified if you only invest in US stocks in the equity portion of your portfolio, though I definitely cannot say you will have a higher return if you invest overseas.
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Re: Is This Correct About International Equities

Postby wesleymouch » Wed May 22, 2013 3:53 pm

Read William Bernstein about this is The Four Pillars of Investing. There are periods when the EFA outperforms the S and P and vice versa. Having multiple assets is useful.
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Re: Is This Correct About International Equities

Postby G-Money » Wed May 22, 2013 3:56 pm

What's your definition of "advantage"? If by "advantage" you mean increased return without increased risk, then I believe there has historically been higher annual returns from a mix of U.S. and EAFE with the same or lower standard deviation than from holding 100% of either one.

Also, there is something to be said for holding shares of 9,000 companies (holding TSM and TISM) then just 3,000 companies (TSM).

So I disagree with the premise that there is no "advantage" to holding developed international in addition to domestic equities. But perhaps you had a different meaning in mind.
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Re: Is This Correct About International Equities

Postby OverTheHill » Wed May 22, 2013 4:09 pm

staythecourse wrote:You are correct and more importantly it passes the smell test of common sense. In the globalized world we live in and money can flow ANYWHERE in the world why would one expect better returns in U.S. vs. Europe or Europe vs. U.S.?? I expect the same expected return with basically the same risk.

The reason to do it then?? It is a fundamental answer to the question, "What is the purpose of diversification?" The idea is to diversify risk. Adding international decreases geographical risk and political risk. U.S. investors have been lucky not to really need to pay attention to that since WWII, but nothing is set in stone that fundamentally the U.S. is different and can't go through the same thing. OR in smaller sense what has happened to Japan the last 10-20 yrs.

Good luck.

Following this logic, then the only sensible thing would be to have 100% or your equity allocation invested in a true world index fund. Anything else would be half measures. I'm not saying 100% in a true world index fund is wrong, only pointing this out to show the logical conclusion. Thus Jack Bogle is totally missing the boat by suggesting 20% to 70%, or whatever it was he said, because the only truly correct answer would be 100% equity invested in a trule world index.
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Re: Is This Correct About International Equities

Postby Call_Me_Op » Wed May 22, 2013 4:16 pm

Basing broad asset-class conclusions on observation of the past 10 years is a flawed approach.
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Re: Is This Correct About International Equities

Postby nisiprius » Wed May 22, 2013 4:19 pm

Call_Me_Op wrote:Basing broad asset-class conclusions on observation of the past 10 years is a flawed approach.

G-Money wrote:...I believe there has historically been higher annual returns from a mix of U.S. and EAFE with the same or lower standard deviation than from holding 100% of either one.

Image
Above, a noted author illustrates the effect of "the most important diversification on the equity side." The difference between Portfolio 1 and Portfolio 2 is that half of the S&P 500 allocation was replaced with the MSCI EAFE index. For this particular set of endpoints, 1975-2009, 35 years, look at the difference in return between the two portfolios... and the difference in standard deviation. Difference? There is no difference. No difference at all, not in average return, not in standard deviation.
Last edited by nisiprius on Wed May 22, 2013 4:24 pm, edited 1 time in total.
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Re: Is This Correct About International Equities

Postby ogd » Wed May 22, 2013 4:24 pm

OverTheHill wrote:Following this logic, then the only sensible thing would be to have 100% or your equity allocation invested in a true world index fund. Anything else would be half measures. I'm not saying 100% in a true world index fund is wrong, only pointing this out to show the logical conclusion. Thus Jack Bogle is totally missing the boat by suggesting 20% to 70%, or whatever it was he said, because the only truly correct answer would be 100% equity invested in a trule world index.


Well I don't quite agree with the purist approach either. US equities have some specific advantages for US investors: they are cheaper to trade and currency risk is less significant (only affecting imports), among other things. So if you are a US investor, it makes sense to be somewhat overweight US.

Also, VTSAX + VTIAX is slightly cheaper for reasons unknown. I do sort of think that one shouldn't rebalance much between them, if / when other countries catch up to the US.
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Re: Is This Correct About International Equities

Postby OverTheHill » Wed May 22, 2013 4:30 pm

nisiprius wrote:
Call_Me_Op wrote:Basing broad asset-class conclusions on observation of the past 10 years is a flawed approach.

G-Money wrote:...I believe there has historically been higher annual returns from a mix of U.S. and EAFE with the same or lower standard deviation than from holding 100% of either one.

Image
Above, a noted author illustrates the effect of "the most important diversification on the equity side." The difference between Portfolio 1 and Portfolio 2 is that half of the S&P 500 allocation was replaced with the MSCI EAFE index. For this particular set of endpoints, 1975-2009, 35 years, look at the difference in return between the two portfolios... and the difference in standard deviation. Difference? There is no difference. No difference at all, not in average return, not in standard deviation.

But there's a tendency to play "switcheroo" with claims about asset classes. The EAFE index, which goes back to 1975, was "international stocks." And books--like the one above--use it to show the diversification benefits of international stocks. But advocates of international investing say, O, that's a straw man, that's the (feh) EAFE, that stinky old thing, nobody ever uses that any more, I certainly never thought it was any good. It's international small value, and emerging markets. Which, conveniently, don't have indexes that go back even to 1975, so it's hard to tell how well that holds up over the long term.


Look, I'm really trying to understand this, rather than be a stick in the mud. I'm looking for some actual long-term data that supports the conclusion that putting "x" percentage in foreign/international is actually better than simply staying in the SP500 or the Total Market (US) with Vanguard. In looking at the data presented via Vanguard, I see a benefit (albeit not large) of having exposure to emerging markets, but then the data suggests that the effect hasn't been seen in the past 5 to 7 years, but only if you go out ten years. But, and a big but, I don't see any data to show what the effect is if you go out 15, 20, 30, or 40 years. Personally, I'm still on the side of staying with domestic, but I'm trying to understand the other side's view and see whether I should consider changing my stick in the mud ways.
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Re: Is This Correct About International Equities

Postby G-Money » Wed May 22, 2013 4:31 pm

OverTheHill wrote:
staythecourse wrote:You are correct and more importantly it passes the smell test of common sense. In the globalized world we live in and money can flow ANYWHERE in the world why would one expect better returns in U.S. vs. Europe or Europe vs. U.S.?? I expect the same expected return with basically the same risk.

The reason to do it then?? It is a fundamental answer to the question, "What is the purpose of diversification?" The idea is to diversify risk. Adding international decreases geographical risk and political risk. U.S. investors have been lucky not to really need to pay attention to that since WWII, but nothing is set in stone that fundamentally the U.S. is different and can't go through the same thing. OR in smaller sense what has happened to Japan the last 10-20 yrs.

Good luck.

Following this logic, then the only sensible thing would be to have 100% or your equity allocation invested in a true world index fund. Anything else would be half measures. I'm not saying 100% in a true world index fund is wrong, only pointing this out to show the logical conclusion. Thus Jack Bogle is totally missing the boat by suggesting 20% to 70%, or whatever it was he said, because the only truly correct answer would be 100% equity invested in a trule world index.

Not necesssarily. Diversification is simply reducing risk by investing in a variety of assets. You are diversified even if you allocate less than market-weight to another asset. 90% TSM + 10% TISM is more diversified than 100% TSM. Perhaps you could be more diversified by holding market weight of TSM and TISM, but holding some TISM with TSM is certainly more diversified than holding no TISM.
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Re: Is This Correct About International Equities

Postby G-Money » Wed May 22, 2013 4:33 pm

OverTheHill wrote:Look, I'm really trying to understand this, rather than be a stick in the mud. I'm looking for some actual long-term data that supports the conclusion that putting "x" percentage in foreign/international is actually better than simply staying in the SP500 or the Total Market (US) with Vanguard.

You're looking at a discrete period of time and seeing that the risk of concentrating your assets in a single country did not show up during that period. Never confuse strategy with outcome.
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Re: Is This Correct About International Equities

Postby OverTheHill » Wed May 22, 2013 4:36 pm

G-Money wrote:
OverTheHill wrote:Look, I'm really trying to understand this, rather than be a stick in the mud. I'm looking for some actual long-term data that supports the conclusion that putting "x" percentage in foreign/international is actually better than simply staying in the SP500 or the Total Market (US) with Vanguard.

You're looking at a discrete period of time and seeing that the risk of concentrating your assets in a single country did not show up during that period. Never confuse strategy with outcome.


I don'tmean this to be insulting, but "outcome" is fact, while "strategy" is theory. I'm looking for actual facts, and I'm not tying to tie things to a discrete period of time. I'm looking for long-term data, which shows that the strategy actually produces a favorable outcome over long periods of time.
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Re: Is This Correct About International Equities

Postby MnD » Wed May 22, 2013 4:41 pm

EAFE has a yield of 3% versus 2% for the S&P 500.
People around here go bonkers over saving or gaining 5 basis points on something or other - so 100 basis points seems significant. :mrgreen:
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Re: Is This Correct About International Equities

Postby G-Money » Wed May 22, 2013 5:03 pm

OverTheHill wrote:
G-Money wrote:
OverTheHill wrote:Look, I'm really trying to understand this, rather than be a stick in the mud. I'm looking for some actual long-term data that supports the conclusion that putting "x" percentage in foreign/international is actually better than simply staying in the SP500 or the Total Market (US) with Vanguard.

You're looking at a discrete period of time and seeing that the risk of concentrating your assets in a single country did not show up during that period. Never confuse strategy with outcome.


I don'tmean this to be insulting, but "outcome" is fact, while "strategy" is theory. I'm looking for actual facts, and I'm not tying to tie things to a discrete period of time. I'm looking for long-term data, which shows that the strategy actually produces a favorable outcome over long periods of time.

Outcome is what has happened. Strategy considers what could happen. The past is not necessarily prologue.

If you're only going to look at outcome/facts, then clearly you should have skipped investing in all domestic stocks and loaded up on Microsoft in 1990 and Apple in 2003. Since the outcome/facts of investing in those stocks provided a clear advantage over the strategy/theory of diversifying across all domestic equities, you should definitely just go with MSFT and AAPL instead. :oops:
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The Boglehead Investment Philosophy

Postby Taylor Larimore » Wed May 22, 2013 5:04 pm

Over the hill wrote:
I'm looking for long-term data, which shows that the strategy actually produces a favorable outcome over long periods of time.

Using past performance to predict future performance is such a lousy idea that the government requires mutual funds to tell you it's a lousy idea. It is much like using a rear-view mirror to tell us what's ahead (which no one knows).

My suggestion is to follow the Boglehead Investment Philosophy and you are almost certain to outperform the majority of individual and professional investors.

Mr. Bogle said it best: "The enemy of a good plan is the dream of a perfect plan."

Best wishes.
Taylor
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Re: Is This Correct About International Equities

Postby livesoft » Wed May 22, 2013 5:12 pm

OverTheHill wrote:....Bottom line: The real advantage, if any, comes from including very risky emerging market stocks, which don't seem to have performed very well for quite some time.

The Callan Periodic Table of Investment Returns has Emerging Markets as the best performing category for 2012. That doesn't seem to jive with the statement I've quoted.

http://www.callan.com/research/download ... %2F655.pdf
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Re: Is This Correct About International Equities

Postby whaleknives » Wed May 22, 2013 5:26 pm

From the Wiki:

Image
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Re: Is This Correct About International Equities

Postby FNK » Wed May 22, 2013 5:51 pm

OverTheHill wrote:Following this logic, then the only sensible thing would be to have 100% or your equity allocation invested in a true world index fund. Anything else would be half measures. I'm not saying 100% in a true world index fund is wrong, only pointing this out to show the logical conclusion. Thus Jack Bogle is totally missing the boat by suggesting 20% to 70%, or whatever it was he said, because the only truly correct answer would be 100% equity invested in a trule world index.

This is a very sensible thing indeed. That would be about 40/60 TSM/TISM.
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Re: Is This Correct About International Equities

Postby G-Money » Wed May 22, 2013 6:03 pm

FNK wrote:
OverTheHill wrote:Following this logic, then the only sensible thing would be to have 100% or your equity allocation invested in a true world index fund. Anything else would be half measures. I'm not saying 100% in a true world index fund is wrong, only pointing this out to show the logical conclusion. Thus Jack Bogle is totally missing the boat by suggesting 20% to 70%, or whatever it was he said, because the only truly correct answer would be 100% equity invested in a trule world index.

This is a very sensible thing indeed. That would be about 40/60 TSM/TISM.

As of 4/30/13, it's much closer to 50/50. If you believe the Vanguard Total World Fund is a reasonably good proxy for global market weights of US/Foreign (it's good enough for me), it's 47.4/52.6: https://personal.vanguard.com/us/funds/ ... =INT#tab=2
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Re: Is This Correct About International Equities

Postby Archie Sinclair » Wed May 22, 2013 9:05 pm

OverTheHill wrote:I don'tmean this to be insulting, but "outcome" is fact, while "strategy" is theory. I'm looking for actual facts, and I'm not tying to tie things to a discrete period of time. I'm looking for long-term data, which shows that the strategy actually produces a favorable outcome over long periods of time.

You don't understand the reference being made. Say I won thousands of dollars in the lottery yesterday. That was an excellent outcome. But the strategy of investing in lottery tickets is a terrible one, because it was much more likely that I would get nothing.

It's possible that owners of US stocks won the lottery over the past decade, or even over the past century. You can't draw precise conclusions from the past, since the future is likely to be different from the past. Instead you need a good strategy that draws general conclusions from the past, like global diversification.
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Re: Is This Correct About International Equities

Postby staythecourse » Wed May 22, 2013 9:26 pm

OverTheHill wrote:I don'tmean this to be insulting, but "outcome" is fact, while "strategy" is theory. I'm looking for actual facts, and I'm not tying to tie things to a discrete period of time. I'm looking for long-term data, which shows that the strategy actually produces a favorable outcome over long periods of time.


I applaud you for trying to understand the difference. I have learned VERY FEW actually understand the difference. I believe I made example in a previous thread (maybe to you in fact?).

Good strategy if you own a house would be to buy home owners insurance knowing that if there was a fire the costs would be overwhelming. You know in advance the chance is small, but if It happened you know it would be financially crippling. That is good financial strategy. Now when you look back 20 yrs. later most likely your house never caught on fire and didn't need the insurance. So in this example, the outcome was different then the strategy, but that does not mean that the strategy was bad.

If you took yourself as an investor through the beginning of time and was to invest would you have invested in majority in one country. That one country could have been the U.S. (thank yourself lucky for being born the U.S.) or could have been Egypt (once strong then went down the tubes), Japan now, Germany during the Weimer Republic, the hyperinflation in Argentina, etc...

So yes even the great Jack Bogle was just lucky in his home country bias. He would have a different outcome using the same strategy if born in some of these other countries.

Good luck.
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Re: Is This Correct About International Equities

Postby Tigermoose » Thu May 23, 2013 8:45 pm

"So yes even the great Jack Bogle was just lucky in his home country bias. He would have a different outcome using the same strategy if born in some of these other countries."

You are assuming that Mr. Bogle would have the same "home country bias" if he lived in a different country. I don't think that would necessarily be the case. Jack Bogle is an extremely smart man.
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Re: Is This Correct About International Equities

Postby staythecourse » Thu May 23, 2013 11:13 pm

Tigermoose wrote:"So yes even the great Jack Bogle was just lucky in his home country bias. He would have a different outcome using the same strategy if born in some of these other countries."

You are assuming that Mr. Bogle would have the same "home country bias" if he lived in a different country. I don't think that would necessarily be the case. Jack Bogle is an extremely smart man.


Really?? He was wrong that there is not a role for international equities years ago when he spoke his gospel. He was wrong about Gold not having a role in a portfolio. He was wrong about equally weighted indexes not having a role. He was wrong that small and value don't have a role. All these quick examples have only been in the last 30 yrs.

I have much respect for Mr. Bogle, but he is no all knowing individual. Folks on this site act like he knows everything. Guess what he doesn't as know everything, NO
ONE knows everything.

Good luck.
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Re: Is This Correct About International Equities

Postby Rodc » Fri May 24, 2013 7:48 am

whaleknives wrote:From the Wiki:

Image


This graph is a great illustration of the fact that if you look at things that are nearly identical under a microscope they look very different. This is also an illustration that basically comes right out of a wonderful little book from like the 40s or so called "How to lie with statistics".

If this graph were properly made with the origin at (0,0) we would see that international diversification over a very wide range of allocations made essentially no difference. The returns and standard deviation over about 30% to 70% had no material difference. You could argue that it had no material difference over an even larger range. A difference in return of a fraction of a percent when measured over only period is just noise: pick a different period and you are likely to see the reverse. A difference in SD of a percent or two is similarly meaningless.

Stocks are stocks especially in an increasingly interconnected world and especially within the developed world. Yes there are some differences but they are small compared to the difference between stocks and bonds, which is where portfolio diversification really comes into play.

BUT, why would I want to hold Ford and Chevy and skip Honda and Toyota if I could own them all at very low cost? I don't expect any great benefit from holding a wider low cost portfolio, but if I can do so at low cost why wouldn't I?
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Re: Is This Correct About International Equities

Postby Rodc » Fri May 24, 2013 11:40 am

OverTheHill wrote:Following this logic, then the only sensible thing would be to have 100% or your equity allocation invested in a true world index fund. Anything else would be half measures. I'm not saying 100% in a true world index fund is wrong, only pointing this out to show the logical conclusion. Thus Jack Bogle is totally missing the boat by suggesting 20% to 70%, or whatever it was he said, because the only truly correct answer would be 100% equity invested in a trule world index.


This supposes

1) you can invest around the world at the same cost (or close enough)

2) you do not care about effects of currency fluctuations

In the first case this is increasing the case. Certainly for large caps. Int small, emerging markets and REITS maybe or maybe not. If in a 401K it will depend on your plan.

In the second there has been a vigorous debate as to if you should care or not. Well meaning smart well informed folks come down on either side.

My personal feeling is there is no solid evidence that for a massive home country bias (for most of us that would be a heavy US tilt), but due to these factors one in the US might reasonably tilt modestly towards US.

Given the correlation in returns and similar expected magnitude of returns it is unlikely to matter very much over a very wide range of allocations so this is a more a question of ideology than a practical matter.
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Re: Is This Correct About International Equities

Postby grabiner » Fri May 24, 2013 9:32 pm

Rodc wrote:
OverTheHill wrote:Following this logic, then the only sensible thing would be to have 100% or your equity allocation invested in a true world index fund. Anything else would be half measures. I'm not saying 100% in a true world index fund is wrong, only pointing this out to show the logical conclusion. Thus Jack Bogle is totally missing the boat by suggesting 20% to 70%, or whatever it was he said, because the only truly correct answer would be 100% equity invested in a trule world index.


This supposes

1) you can invest around the world at the same cost (or close enough)

2) you do not care about effects of currency fluctuations

In the first case this is increasing the case. Certainly for large caps. Int small, emerging markets and REITS maybe or maybe not. If in a 401K it will depend on your plan.


Item 1 is pretty close now. Total Stock Market is 5 basis points, Total International is 16, and if you slice-and-dice your international, Tax-Managed International (developed large) is 10, Emerging Markets is 18, and FTSE All-World Ex-US Small-Cap is 25. (All costs are for ETF or Admiral shares.) The tax cost is higher for emerging markets and small-cap because a significant fraction of the dividends are not qualified.

The largest difference is for REITs; US is 10 basis points, and Global Real Estate is 32. There is also a tax loss of about 20 basis points to foreign taxes, since you need to hold both of these in IRAs and thus lose the foreign tax credit on Global Real Estate.
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Re: Is This Correct About International Equities

Postby Random Musings » Fri May 24, 2013 11:22 pm

With respect to international equities as part of one's equity position, Leonard McCoy said it best....

"Dammit Jim! I'm a diversifier, not a data miner".

I have no bones about that.

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Re: Is This Correct About International Equities

Postby Blues » Fri May 24, 2013 11:33 pm

Random Musings wrote:With respect to international equities as part of one's equity position, Leonard McCoy said it best....

"Dammit Jim! I'm a diversifier, not a data miner".

I have no bones about that.

RM


I see what you did there. :beer
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