Bogleheads

[gatorman]

Random Roger posted a blog entry in which he suggested owning individual country indexes might provide better diversification than owning something like EFA. Here is a link:

http://randomroger.blogspot.co....-down.html

He suggests:

[paulob]

[gatorman]

[Rick Ferri]

It is basically impossible to predict where the US equity market is going, let alone any individual foreign market. So, I don't see how picking individual countries is a wise decision. Remember the huge demand for red hot Chinese and Russian stocks last year? Where did that get anyone? Those markets are down more than 60% this year.

Rick Ferri

[stratton]

Normally I'd say don't bother with individual countries except for some that aren't really following Roger's version:

1. Canada. If you have MSCI (EAFE) indexes you're missing Canada, but its something like a 3% weight. If you have a $100K in foreign funds that $3,000. Probably best for the "bingo money" account. Better yet buy VEU and forget about it.

2. You're following Rick's example in All About Asset Allocation where he breaks it up into UK, Europe ex-UK, Japan, Pacific ex-Japan giving you the most currency breakout and control.

3. Our current TLH regime makes maintaining any of these expensive because of the number of funds.

Paul

[Robert T]

.
Ironically, using country indexes (instead of EAFE which is more stock cap weighted, than country weighted) may lead to a more concentrated portfolio. Why? Because the level of stock concentration in individual country markets can be large (see table below). For example in Finland the three largest stocks made up 79% of the market capitalization of the Finland country index at start of 2001 (the largest stock – Nokia, made up 70% of market capitalization). Something to consider.

[gatorman]

[nisiprius]

I'm convinced that 99% of investment writing consists of inventing something a little complicated and interesting that is new and different from what's been proposed before. The past performance of half of all such plans will do better than the boring old plans, half will be worse. Write about the ones that did better.

For example, consider the S&P companies whose ticker symbols begin with A through M. Over the last ten years, they must either have done better or worse than the S&P 500. If they did better, write an article about the "A-through-M strategy." If they did worse, N-through-Z must have done better, so write an article about the "N-through-Z strategy."
_________________
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.

[Taylor Larimore]

nisiprius wrote:

I'm convinced that 99% of investment writing consists of inventing something a little complicated and interesting that is new and different from what's been proposed before. The past performance of half of all such plans will do better than the boring old plans, half will be worse. Write about the ones that did better. For example, consider the S&P companies whose ticker symbols begin with A through M. Over the last ten years, they must either have done better or worse than the S&P 500. If they did better, write an article about the "A-through-M strategy." If they did worse, N-through-Z must have done better, so write an article about the "N-through-Z strategy."

Nisiprius:

Your post, above, is a classic. I agree that the "strategy" you describe is the basis for nearly all the "winning strategy" articles that are published.

Thank you and best wishes.
Taylor

[msi]

His point is that EFA overweights the UK and Japan which makes you less diversified than you may think you are.

He was not suggesting you make one large bet on a single country and leave it at that. Putting your whole equity allocation in VTI is also one large single country bet.

[lazyday]

In theory, perhaps you might reduce risk from greater diversification, and improve returns with a rebalancing bonus, by splitting into individual countries and rebalancing at the country level. In prior posts, some people have suggested weighting each country by GDP or population, instead of stock market cap. Or you might use some blend.

Of course the expense ratio and probably hidden costs are much higher for country funds, compared to a Vanguard fund. You could reduce those costs by starting with Vanguard index funds, and using ishares or other funds just as needed to fill in other countries. If you can trade for free or nearly free, you could also buy some ADRs yourself for some countries, but would have the concentration problem.

I also wonder if ADRs are a little overvalued since they have more access to capital. An alternative would be to use a good broker for trading overseas stocks, perhaps Interactive Brokers. Over time, you could even solve the concentration problem, and build your own semi-passive "fund".

Anyway, that's too much like work to me, and I haven't bothered... except I have bought a few Korean ADRs instead of the country ETF (remember "WEB" World Equity Benchmarks?) back when the ER was about .75%.

[stratton]

Random Roger mentioned this thread today. About halfway down.

[meckaneck]

The following is a link to Roger's site clarifying his position. As a longtime reader of his site I can say that he is very competent and would not classify him as totally active as he advocates broadly diversified portfolios built around ETf's and individual securities as proxies for his targeted sector weightings. He uses the 200 DMA as a guide to evaluate the health of the equity markets.

Rick Ferri has spoken at several conferences with him and anyone that has met Roger in this investment business will attest to his credibility and accumen.

Personally speaking I have been an index investor my entire life and am leaning towards Roger's strategy moreso each day.

http://www.randomroger.blogspot.com/

[ladders11]

If this is the weighting of EAFE:
Europe (excluding United Kingdom) 45.268%
United Kingdom 23.712%
Japan 22.555%
Asia-Pacific (excluding Japan) 8.465%
(as of 12/31/06)

Before you invest in EAFE, you should ask yourself if you want to invest 46% of your funds in the UK and Japan and only 9% in the rest of Asia.

I think many people can agree that the S&P 500 approximates the return of all US stocks, and that the premium received by picking individual stocks, for most people, will not exceed the excess fees and commissions paid. I certainly subscribe to this theory.

But internationally we have large differences (in governments, demographics, and economic circumstances); as a result, stock market returns should also be different, in the long run, to the extent of the structural differences.

Meanwhile, looking back on the 20th century returns of the standard US S&P 500 index, you could argue that the index returns were great - because the demographics and business environment in the US were very favorable. I think most people invest internationally because they're looking for the favorable conditions that we saw in the US 20th century and not seeing them in the US 21st. Where might these conditions exist? I personally don't know, but it might be China, Russia, India, Brazil, or a number of other places... I'm comfortable suggesting that it's not the UK.

This is my opinion, anyhow. I would argue that investing is not as simple as the old passive/active debate when you delve into international markets - even if you're a small investor. If you're investing overseas, why would you invest 24% in the UK? Does anyone have a rationale for that investment?

[DP]

Hi,
Interesting discussion. First I'll mention the subject of this article responded to some of the comments made here, in his latest blog, already posted but I'll repeat the link:
http://www.randomroger.blogspot.com/

Second, I think the idea of diversifying more equally among countries has merit, as long as the overall risk is still controlled, since increasing the weight of a number of small countries could increase the risk. And I think the same thing about large cap, medium cap, small cap. I would equally weight each index rather than use a total market fund ... IF, I thought it would make a significant difference. And that's the problem I have. While I think more equal weighting will make a difference, and backtests show it does, I don't think it is significant enough to be bothered with.

I am a big believer in the Pareto principle, which can be interpreted to say essentially that 80% of the results come from 20% of the effort. So I try to make sure I identify what's important and get that right, and I don't sweat the small stuff. (I may not be a true Boglehead but I think this is a principle where we have common ground).

For what it's worth I saw somewhere along the way in this post, or Roger's blog that the EFA correlation was about .9. The handy dandy asset correlation matrix appears to show an average country correlation of .85. Better but this didn't save anyone in this latest bear market.
http://www.assetcorrelation.com/user/countries/90

Third, I might be more interested in Roger's use of moving averages. Avoiding bear markets is one of the things that I do think is important. If anyone can post a link to Roger's discussion of that I would appreciate it. If anyone wants to discuss the merits (or lack of) re. market timing, there is already a thread on this here.
http://www.bogleheads.org/foru....hp?t=27460
I don't want to derail this discussion.

Lastly, in case anyone is interested, the book the Hedge Fund Edge describes a strategy that diversifies across countries, but it is definitely active management, using both market timing and momentum.

Don

[Lbill]

Global sector diversification does better than geographic diversification. Check this article
_________________
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." ~ Mark Twain
"Everyone has a plan, until they get hit." ~ Mike Tyson

[mephistophles]

Another good way to diversify is by raising livestock and vegetables.

[dumbmoney]

[msi]

[unclemick]

Hmmm - I suppose putting in the rookie and giving him a chance to play would be too boring - plus we would probably need to wait twenty years or so.

Vanguard Total World Index, VTWSX, 6/26/2008.



heh heh heh - I couldn't resist.

[lucky7]

What's the deal with Belgium? PE about 6.4 and a dividend yield over 13%. http://www.globalindices.stand....undamental
_________________
Scotty, beam me up.

[brswif00]

To use fewer funds but gain some additional control over allocation maybe use the Europe and Asia funds separately. The example case would be Japan in the 80s where you would have wanted to rebalance out of the Asia fund back to Europe as the bubble built. With EFA as your only international holding the rebalancing would not have been as effective.

[snray02]

Bogle had it right in his first book on mutual funds. He said you didn't need to invest in foreign stocks. Large cap domestic companies (P&G, JNJ, IBM, etc.) already are invested globally so the 500 Index has you covered. I realize Bogle modified these views in later books.

Sam

[stratton]

[EmergDoc]