Vanguard CEO's comment

[Offshore]

So, I'm watching In The Vanguard on my computer, VG's Rebeca Katz is interviewing Tim Buckley and Bill McNabb. The program is titled "The Bond Bubble". Anyway, Bill McNabb says that Vanguard's position on asset allocation has changed (over the past 10 years). Now, they recommend "a higher exposure to non-US equities". He says VG recommends "30% of the stock allocation". I was quite surprised he actually committed to a number. The reason, he stated, is better diversification and the lower cost of investing outside the U.S..

Next comment came from Tim Buckley, who said "our principles have stayed the same, I just think it's a lot tougher to stick to you plan". Huh???

I am confused. I have stuck to my plan (AA) for a decade, since embracing index investing, only adjusting my bond allocation up as I age. Now I hear the heavy weights, suggesting in the same breath, to increase non-US equity exposure, but also, stick to my plan!

I am really confused. Would really appreciate a discussion. Thank you-

Jeff

[livesoft]

Your plan should change and you should stick to your new changed plan.

Think about this: If one had a plan before TIPS were invented, one's plan would not have any allocation to TIPS. Then TIPS were invented. Did one stick to their plan or did they add TIPS?

International index investing is different than it was even a few years ago. Is it possible that the changes in international index investing warrant that one change their plan?

[Toons]

John Bogle thoughts

"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"


http://www.financial-planning.com/fp_is ... 620-1.html

[Offshore]

Livesoft,

This is big deal because "changing one's plan" really is changing the asset allocation. Your example of TIPS I don't find to be comparable because in your example, you offer a new investment vehicle.

As a matter of fact, when VG rolled out the FTSE All World-ex US Small Cap, I did incorporate that into my AA, shifting some of the foreign holding into it, so as the total non-US exposure remained unchanged. I think that may be a better example of what you are trying to demonstrate.

What I am hearing, is the CEO's recommendation to get to 30% non-US exposure in on the equity side, if the portfolio is less than that currently. This would be change in AA for someone who holds less than 30%. This, he says, is new thinking that has evolved over the past 10 years. I am hoping to read some discussion on this before considering a change in AA.

Thanks,
Jeff

[pkcrafter]

Jeff, don't forget Vanguard did a study in 2012 on international allocation and they concluded optimum allocation was between 20% and 40%.

Paul

[Offshore]

Paul,
Excellent point. I will look for that white paper on their website. Don't know why Mr. McNabb would say 30%, when he could have said 20-40%. It came out so assuredly, causing me pause (big time)!

[dickenjb]

Jeff, don't forget Vanguard did a study in 2012 on international allocation and they concluded optimum allocation was between 20% and 40%.

Paul

Precisely why my international is set at 30%.

IIRC the first 20% gives a significant diversification benefit and there are diminishing benefits after that, such that above 40% you are adding risk rather than reducing risk.

[Mel Lindauer]

Paul,
Excellent point. I will look for that white paper on their website. Don't know why Mr. McNabb would say 30%, when he could have said 20-40%. It came out so assuredly, causing me pause (big time)!

Probably because 30% is right smack dab in the middle of 20-40%.

[g$$]

Vanguard whitepaper on International Stock:
https://institutional.vanguard.com/iam/ ... lbrief.pdf

-g$$

[Offshore]

G$$,
Helpful. Cheers!

[dbr]

Anytime you hear an investment manager or executive mumbling a specific number, you should turn off the broadcast. This is meaningless garbage.

[SSSS]

John Bogle thoughts

"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"

http://www.financial-planning.com/fp_is ... 620-1.html

Shouldn't the UK's, France's, and Japan's "large problems" already be reflected in the current market value of their stocks?

I'm also not sure that list of top countries is right -- I found a few different sources with a few different lists (Japan>China>UK>Canada>France, Japan>UK>China>Hong Kong>Canada>France, China>Japan>UK>Hong Kong>Canada>France, etc).

[Offshore]

dbr,
I've always considered your posts well thought through and insightful. Before you come down so hard on VG's CEO, have a look at the white paper (link above). It's referenced and appears academic.

In support of your skepticism, I do not believe it was peer reviewed.
Jeff

[dbr]

dbr,
I've always considered your posts well thought through and insightful. Before you come down so hard on VG's CEO, have a look at the white paper (link above). It's referenced and appears academic.

In support of your skepticism, I do not believe it was peer reviewed.
Jeff

The white paper is fine for what it is and shows that there is no specific recommendation for what fraction to own in international. There is analysis that gives broad guidelines for what might make sense. I think they say from 20% up to the market cap, in excess of 50% or more as a broad description of what that might be.

In the interview "VG recommends 30% of the stock allocation . . ." That IS garbage on any grounds and especially on the ground of their own paper. He could have said somewhere between a small fraction like 20% and up to the market cap of perhaps 60% (whatever numbers might best be in there). This would stop people from running around worrying that they have 20% or 40% and they are making a mistake because Vanguard says 30%. It would also stop people from running around trying to figure out why Vanguard has "changed their mind." The number and severity of situations where someone should truly "change their mind" about how to invest are few and far between and this is not one of them. The problem arises as a result of these "sound byte" formats where people think they have to say something simple and meaninglessly specific and other people actually listen to it.

[stlutz]

This is big deal because "changing one's plan" really is changing the asset allocation. Your example of TIPS I don't find to be comparable because in your example, you offer a new investment vehicle.

The most important part of asset allocation is one's stock/bond mix. Shuffling some nominal bonds to TIPS isn't a big deal one way or the other; shuffling some US stocks to international is a somewhat bigger deal, but still not huge as long as you're not performance chasing.

Suppose you have a 60/40 stock/bond split. You were following Bogle's recommendation of 20% in international. You now want to adopt the "new" VG recommendation of 30%. In terms of the whole portfolio, that's a shift of 6% of US stocks to Int'l stocks. Will that make a difference? Sure. Is that the same as abandoning your plan and switching to technical market timing signals? Far from it.

In the real world, circumstances change, and our investing philosophies will evolve over time. "Things change, people change, and both have changed us" is one song lyric that comes to mind. There really isn't any way to get out of this reality when it comes to investing.

[dbr]

This is big deal because "changing one's plan" really is changing the asset allocation. Your example of TIPS I don't find to be comparable because in your example, you offer a new investment vehicle.

The most important part of asset allocation is one's stock/bond mix. Shuffling some nominal bonds to TIPS isn't a big deal one way or the other; shuffling some US stocks to international is a somewhat bigger deal, but still not huge as long as you're not performance chasing.

Suppose you have a 60/40 stock/bond split. You were following Bogle's recommendation of 20% in international. You now want to adopt the "new" VG recommendation of 30%. In terms of the whole portfolio, that's a shift of 6% of US stocks to Int'l stocks. Will that make a difference? Sure. Is that the same as abandoning your plan and switching to technical market timing signals? Far from it.

In the real world, circumstances change, and our investing philosophies will evolve over time. "Things change, people change, and both have changed us" is one song lyric that comes to mind. There really isn't any way to get out of this reality when it comes to investing.

Except there wasn't enough basis in 20% in the first place to imagine that 30% now is any kind of a change. There wasn't enough basis in 20% then to say 30% then was different from 20% then. It is not a change, just a different choice.

[Taylor Larimore]

Jeff:

I am confused. I have stuck to my plan (AA) for a decade, since embracing index investing, only adjusting my bond allocation up as I age. Now I hear the heavy weights, suggesting in the same breath, to increase non-US equity exposure, but also, stick to my plan!

I am really confused. Would really appreciate a discussion.

There is more than one road to Dublin.

Best wishes.
Taylor

[Levett]

"It's referenced and appears academic."

Nonsense too often takes that form.

Saw it all too many times (speaking as a retired academic)

Lev.

[jwa]

Paul,
Excellent point. I will look for that white paper on their website. Don't know why Mr. McNabb would say 30%, when he could have said 20-40%. It came out so assuredly, causing me pause (big time)!

Probably because 30% is right smack dab in the middle of 20-40%.

Now I know why you are such a legend in the Boglehead world, a writer in business periodicals and a well known author! You're pretty smart.