John Bogle on International Investing

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John Bogle on International Investing

Postby VINNY » Fri Dec 03, 2010 1:16 am

In an interview on CNBC's web site, dated Nov. 24, Bogle stated to stick to the United States and invest internationaly if you feel like you need to , words to that effect. I believe the article was titled, "Don't trust Wall St". I saw it on 403bwise and it provided a link.

Is his current belief that we should not invest abroad? and stick to Index funds like VTSMX? Or any group of funds as long as they are domestic?
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Re: John Bogle on International Investing

Postby Langkawi » Fri Dec 03, 2010 2:40 am

VINNY wrote:Is his current belief that we should not invest abroad?

Which part don't you understand?
Q: Many investors have been adding more international investments, expecting better growth. Do you think that's smart?

A: If you invest in a diversified international fund, your largest investment will be in Japan, which doesn't look so good to me now. And your second-largest will be in Britain, which is in worse shape than the U.S. Your third-largest investment will be in France, where they don't want to seem to work anymore. I don't see any great attractiveness to that.

I think the message should be, "Stick with the U.S. and add an international component to your portfolio if you want it."
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Postby Leif » Fri Dec 03, 2010 3:16 am

John Bogle suggests 0-20% in international.

Home country bias, IMO. This is very common. Studies have shown that a country's residents typically invest the bulk of their money in their home country.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore
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Re: John Bogle on International Investing

Postby MekongTrader » Fri Dec 03, 2010 3:59 am

Langkawi wrote:
VINNY wrote:Is his current belief that we should not invest abroad?

Which part don't you understand?
Q: Many investors have been adding more international investments, expecting better growth. Do you think that's smart?

A: If you invest in a diversified international fund, your largest investment will be in Japan, which doesn't look so good to me now. And your second-largest will be in Britain, which is in worse shape than the U.S. Your third-largest investment will be in France, where they don't want to seem to work anymore. I don't see any great attractiveness to that.

I think the message should be, "Stick with the U.S. and add an international component to your portfolio if you want it."


I don't agree with J. Bogle on that one but anyway that's his opinion. Not only home bias but also recency bias about Japan. Who knows may be Japan market will outperform the other developed countries for the next couple of years.

He doesn't think too highly of the French as well! Classic! :lol:

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Postby Adrian Nenu » Fri Dec 03, 2010 5:13 am

Let's see how the big bet on the US stock market turned out over the last 10 years as average annual returns:

Total Stock Market Index - 1.96%

Total International Index - 4.68%


If you can't predict which region or country will have the highest returns or largest losses, use the global index or something very close to it. Diversify, diversify, diversify!

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Postby stemikger » Fri Dec 03, 2010 7:13 am

I am with Mr. Bogle all the way on this.

If you invest in the S&P 500 you already have enough built in international diversification.

Here is a video of Mr. Bogle explaining his reasons and I think they make perfect sense.

http://www.youtube.com/watch?v=J4utq_jiKjA

However, like many on these boards have told me and I definitely agree. Don't sweat this part. As long as your Equities and Bond AA is where it should be this should not be a deal breaker in the long run.
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Postby Beantown85 » Fri Dec 03, 2010 8:27 am

I've seen alot of reasons given why investing only in the US should be sufficient. I haven't really seen alot of good reasons to NOT invest internationally. It isn't as if fees are outrageously higher, or there is no way to capture market returns as a whole abroad.

I understand that investing in the SP500 gets a great amount of revenue from abroad. I guess outside of a strong belief that the US will greatly outperform the rest of the world, I can't see a good reason not to also invest in international companies directly as well.
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Postby ResNullius » Fri Dec 03, 2010 9:42 am

Bogle says.... I guess this means there's a new gospel out there. I have great respect for Mr. Bogle, and I totally agree with his current position on foreign investing. It hasn't, however, always been his position. I believe in buying/investing American because the whole world can't be wrong. After all, where does the world at large put it's money in times of uncertainty and discord? America, that's where, and that's where I put my money.
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Postby Opponent Process » Fri Dec 03, 2010 10:16 am

Image
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Re: John Bogle on International Investing

Postby YDNAL » Fri Dec 03, 2010 10:16 am

.
.
Some wise-man* previously said...
YDNAL wrote:This is one of the debates - like the Energizer bunny - that keeps on going!


*or is it wise-something else? :)
Last edited by YDNAL on Fri Dec 03, 2010 5:03 pm, edited 1 time in total.
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Postby TrustNoOne » Fri Dec 03, 2010 12:05 pm

I haven't got a dog in this fight. I'm still stuck on whether investing in stocks at all is a good idea at all. My view:

Investing in stocks - betting on speculative investments.

Investing in international stocks - betting on speculative investments and foreign exhange rates.
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Postby Indices » Fri Dec 03, 2010 12:14 pm

Leif Eriksen wrote:John Bogle suggests 0-20% in international.

Home country bias, IMO. This is very common. Studies have shown that a country's residents typically invest the bulk of their money in their home country.


He may be suffering from home bias, but you may be suffering from recency bias, i.e. international has done better recently so I'd better performance chase into it. The key reason why he and I both invest solely in America is because it is cheaper to do so. Costs matter and I can actually predict them going forward unlike being able to predict which countries will do well going forward.
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Postby Indices » Fri Dec 03, 2010 12:22 pm

Morgan wrote:
Beantown85 wrote:I've seen alot of reasons given why investing only in the US should be sufficient. I haven't really seen alot of good reasons to NOT invest internationally. It isn't as if fees are outrageously higher, or there is no way to capture market returns as a whole abroad.

I understand that investing in the SP500 gets a great amount of revenue from abroad. I guess outside of a strong belief that the US will greatly outperform the rest of the world, I can't see a good reason not to also invest in international companies directly as well.


Reasons to invest internationally.

1. We don't know what the future will hold.



But we do know what is cheaper to invest in, and it is cheaper to invest domestically.
2. Although the real average is about 6%, there are seriously varied results depending on what country and time period we're talking about. Remember, you're only comfortable with the 10% nominal return idea because you've been told that repeatedly. However that is 1 market, and so that impression has to be survival-biased. See the graph above for evidence of this.


I've seen no evidence of averages this high. I think they are actually quite a bit lower, particularly in countries outside the US.

3. Varied currencies, taxation systems, political systems and currencies in your portfolio make it much more resilient against black swan events (or even the less dramatic but just as damaging 'slow swan' events like continued high inflation).


We both know this isn't true as all markets collapsed after the US market did. Some bounced back faster than others but how would you know ahead of time to invest in those? At the time everyone was panicking to get out of equities altogether.

All the arguments in favour of international investing are about primarily diversification. Not gaining excess returns (unless we're talking about EM, but that's a different kettle of fish altogether). That should cause anyone to take a dim view of the rationalizations brought against it from the very onset!


You forget that foreign investing adds currency risk to your portfolio. To take advantage of emerging markets over the long run, you'd have to have a high inflation rate in your home country as EMs have high growth and high inflation. But high inflation in your home country would be terrible for many reasons. Investing in other developed markets doesn't help either because they're all closely correlated. IF you invest domestically you still get foreign exposure and NO currency risks. Seems like a no-brainer.
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Postby tractorguy » Fri Dec 03, 2010 1:15 pm

I've got about 20% of my equities invested in International funds and am reluctant to go higher. Two of the 3 primary reasons have already been mentioned (currency risk and higher costs). However, the biggest reason is proven governmental stability in the U.S. In the last ~30 years, the U.S. governmental system has suffered presidential asassination, impeachment, and a very close election that was settled by a recount in Florida. We've fought unpopular wars that resulted in a change of ruling party. Despite all this, the basic rules of law haven't changed, the economy has continued to tick along, and all power changes followed the rules of law. The same cannot be said for the dominant emerging markets.

The rumblings in North Korea are pretty good evidence that a dictatorship political system is very fragile.

In bad economic times, most political leaders are desperate for some means to take the masses minds off the bad effect his decisions are having on their daily lives. It is highly tempting for him to nationalize industries and distribute the money. It can be especially tempting if the industries are owned by foreign devils. U.S. leaders have these temptations but we have a strong court system that generally prevents them from being acted on. China and many South American countries do not.
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Postby Noobvestor » Fri Dec 03, 2010 2:31 pm

Let's start by debunking some of the common misconceptions I see here over and over again.

Myth 1: Higher Costs - yes, maybe slightly over TSM, but .2%... high? Really, at this point, the argument is wearing thin. Foreign tax credit, low turnover, etc... the point is all but outdated, IMHO

Myth 2: US is diversified internationally already - endlessly debatable, but history has shown between 20 to 40 percent international has provided better diversification (in terms of correlation) pretty consistently in efficient-frontier terms

Myth 3: Going international is based on recency bias. I'd argue just the opposite: recent events can, should and in some cases have woken people up to the fact that the US can, does and will under-perform at times.

Myth 4: Currency risk is a one-way street If the US slowly runs itself down to a second-class country with a weaker currency, I would prefer to have some foreign currency exposure. Conversely, if it remains a powerhouse, my job is safer and my US equity investments will presumably return more. I prefer not to 'bet' all on one currency, thanks.

Myth 5: Jack Bogle is infallible Look, I think he may be the greatest man alive and smartest man in investing, but that does not mean he cannot be wrong about some things sometimes. He has a long-standing horse in this race, and I think it clouds his judgment in this case.

ResNullius wrote:I believe in buying/investing American because the whole world can't be wrong. After all, where does the world at large put it's money in times of uncertainty and discord? America, that's where, and that's where I put my money.


Recently a lot of people moved money to the bond market in general and EM stocks specifically - did you follow their lead? The 'whole world' bought into the tech bubble, and then the real estate bubble. Was that wise? What you just wrote seems about as un-Boglehead as it gets. Low cost diversification = free lunch. If you extend your argument outward, it would suggest that global investors should 'start' with investing in the US because it is the 'safest and best' and only tilt to their own countries based on currency-risk reasons. Does that really make sense to you?

TrustNoOne wrote:I haven't got a dog in this fight. I'm still stuck on whether investing in stocks at all is a good idea at all. My view:

Investing in stocks - betting on speculative investments.

Investing in international stocks - betting on speculative investments and foreign exhange rates.


Folks like Swedroe aptly point out that if you diversify style factors as well as internationally, etc... you can actually reduce your equity holdings and increase your bond holdings without impacting expected return. In short: if you're worried about having too much in the market, it's all the more appealing to have some of what little you do put in be diversified in developed/emerging non-US markets IMHO.

Indices wrote:We both know this isn't true as all markets collapsed after the US market did. Some bounced back faster than others but how would you know ahead of time to invest in those? At the time everyone was panicking to get out of equities altogether.


This is a very narrow way of looking at things. First, yes, you are right, when things hit the fan, yes they do tend to correlate more - some go down more than others (showing (a) incomplete correlation and (b) a rebalancing opportunity):

Image

However, for a buy-and-hold, Boglehead-type investor, this highly-correlated dip - in which EM looks to have done 'worse' when we zoomed in - still didn't bring it below the high point of the S&P during the last few years. Yes, some of this has to do with currencies:

Image

No, I'm not saying 'switch to EM!' - the positions could be reversed and the point would be the same: just because equities correlate at the 'wrong time' doesn't mean that over the *long term* their differences don't give you a diversification benefit regardless. And just to sober up anyone who thinks 'oh, I should be all in EM!':

Image

If you have full faith that America can buck all of history and remain on top forever, I would contend you may wish to seek treatment for your condition (perhaps a history book?). Moreover, I would assert that you are exhibiting behavior that is fundamentally contrary to the Boglehead mantra of holding the whole market in low-cost index funds, now easier than ever with Vanguard's Total International Admiral Shares.

Morgan wrote:International Diversification for the win. I 100% agree with about 90% of what Bogle thinks about markets, and then 100% vehemently disagree on the other 10%. It is as clear as daylight to me that diversifying internationally, whatever asset class you're choosing, is the right choice.


Couldn't have put it better myself. He (Jack) is right on so much, but this appears to be a painfully clear blind spot in his thinking.

Morgan wrote:Spin the wheel folks, it's a new century this time.


Priceless! I want that on a t-shirt!

Look folks, few people here are purists - I have tilts as do many others, not to mention a personalized AA based on age and other factors. However, the most 'Boglehead' approach is, I believe, to start with the 'whole world market' in the equities side, then tilt toward one's home country based on concerns about currency, volatility, etc... When people ask why (at 50/50 US/intl) I'm so tilted to foreign, I respond, of course: heck no! I am a bit tilted toward the US though.

tl;dr Even if Bogle shows home-base bias, it doesn't mean the rest of us should
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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Postby Noobvestor » Fri Dec 03, 2010 2:48 pm

tweedlw wrote:I've got about 20% of my equities invested in International funds and am reluctant to go higher. Two of the 3 primary reasons have already been mentioned (currency risk and higher costs). However, the biggest reason is proven governmental stability in the U.S. In the last ~30 years, the U.S. governmental system has suffered presidential asassination, impeachment, and a very close election that was settled by a recount in Florida. We've fought unpopular wars that resulted in a change of ruling party. Despite all this, the basic rules of law haven't changed, the economy has continued to tick along, and all power changes followed the rules of law. The same cannot be said for the dominant emerging markets.

The rumblings in North Korea are pretty good evidence that a dictatorship political system is very fragile.

In bad economic times, most political leaders are desperate for some means to take the masses minds off the bad effect his decisions are having on their daily lives. It is highly tempting for him to nationalize industries and distribute the money. It can be especially tempting if the industries are owned by foreign devils. U.S. leaders have these temptations but we have a strong court system that generally prevents them from being acted on. China and many South American countries do not.


At one point, things got so bad in the US that the government forcibly confiscated gold from its citizens - effectively nationalizing it, repricing it and profiting from it in order to keep things afloat.

Moreover, what you mention are far from being black-swan-level events. What if a terrorist sets off dirty bombs in a bunch of major cities in the US in a coordinated terrorist attack (I love Jericho - great TV series!)? Sure, all markets will suffer, but I'd wager ours will suffer most.

History’s best-case scenario was the Roman Empire, which survived more or less intact for about seven centuries (if you ignore the odd sackings of the capital after 200 A.D.).

A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.


Pop quiz: who wrote that? Hint: EfficientFrontier.com (specifically http://www.efficientfrontier.com/ef/901/hell3.htm ). This isn't some fringe nutjob predicting the end of the world ... it's William Berstein pointing out what should be obvious to anyone who has studied world history.
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Postby Opponent Process » Fri Dec 03, 2010 3:52 pm

noobvester wrote:Let's start by debunking some of the common misconceptions I see here over and over again.


each of these points has been debunked forever, back to the old Morningstar forum, and surely before that. all that's left is bias. everybody know it's bias, it's well documented here and in every other country. you can't argue against it. you can only try to overcome one emotional position with another emotional argument. I think for the benefit of new investors it's noble to keep up the good fight, but don't think this will be the last time you'll be responding to these points. it's interesting to note that both you and I also have a little bit of home-country bias in our equity positions.

and Jack Bogle is indeed mortal, he has a mortal brain susceptible to bias. but some will always need to appeal to authority, it's just how they process information. it would be interesting to see if they are also susceptible to corresponding ad hominem fallacies, which may incidentally explain some of their home-country bias. at any rate, these good folks will never be persuaded.
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Postby Noobvestor » Fri Dec 03, 2010 4:32 pm

Opponent Process wrote:
noobvester wrote:Let's start by debunking some of the common misconceptions I see here over and over again.


each of these points has been debunked forever, back to the old Morningstar forum, and surely before that. all that's left is bias. everybody know it's bias, it's well documented here and in every other country. you can't argue against it. you can only try to overcome one emotional position with another emotional argument. I think for the benefit of new investors it's noble to keep up the good fight, but don't think this will be the last time you'll be responding to these points. it's interesting to note that both you and I also have a little bit of home-country bias in our equity positions.

and Jack Bogle is indeed mortal, he has a mortal brain susceptible to bias. but some will always need to appeal to authority, it's just how they process information. it would be interesting to see if they are also susceptible to corresponding ad hominem fallacies, which may incidentally explain some of their home-country bias. at any rate, these good folks will never be persuaded.


You are absolutely right - if anything, this arguments are (hopefully) useful for newer investors, as those with a long-standing AA are indeed very unlikely to change the minds of those fully convinced either way ... and, well, staying the course has something strong to be said for it too. I would like at some point to put these points up (including both pro/con FAQ) somewhere (and open them up to criticism/editing of course) as appropriate in the the Wiki - no doubt I will need to refer to them again ... and again ... and again. :roll:

The simplest I can boil it down to, I think, is this: new (US) investors should realize that the *starting point* is not 'Total US Stock Market' but rather 'Total World Stock Market'. Everyone shifts and tilts as they wish from this starting point, of course, based on factors they deem worthwhile, but even if they end up wanting to hold all US at the end of the day, well, I just hope they realize that that is a (risky and conscious) tilting choice, not a (safe and standard) default position.

Anyway, it is interesting to note that almost all of the threads pertaining to international investing (or rather: not international investing!) contain references (usually right in the title) to Bogle. And you're right - we both tilt the same toward the US - for me (and likely, I suspect, for you) it is partly the simplicity of a 50/50 split, but also (for me at least) because I do recognize some home/foreign-related risks (e.g. currency).
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Postby KyleAAA » Fri Dec 03, 2010 4:46 pm

I believe not investing internationally is foolish. To me, it's the same argument as whether or not a 25 year old should own bonds. Most on this forum would agree that even very young investors should own at least a tiny bond allocation, just in case. Same with foreign stocks, even if it's just 10% of your portfolio. I have never once heard a reasonable argument for excluding foreign exposure completely. I've heard plenty of reasonable arguments for limiting foreign exposure to something below 20%, but never for completely excluding it.
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Postby Indices » Fri Dec 03, 2010 4:52 pm

noobvester wrote:Let's start by debunking some of the common misconceptions I see here over and over again.
Myth 1: Higher Costs - yes, maybe slightly over TSM, but .2%... high? Really, at this point, the argument is wearing thin. Foreign tax credit, low turnover, etc... the point is all but outdated, IMHO


Outdated but still true.

Myth 2: US is diversified internationally already - endlessly debatable, but history has shown between 20 to 40 percent international has provided better diversification (in terms of correlation) pretty consistently in efficient-frontier terms


So obviously going forward this will be true as well? We all know past performance does not equal future performance.
Myth 3: Going international is based on recency bias. I'd argue just the opposite: recent events can, should and in some cases have woken people up to the fact that the US can, does and will under-perform at times.


This is ridiculous. Recency bias, which you are obviously suffering from, has everything to do with performance chasing and which is why you are running away from the US and towards what you think has a better future.
Myth 4: Currency risk is a one-way street If the US slowly runs itself down to a second-class country with a weaker currency, I would prefer to have some foreign currency exposure. Conversely, if it remains a powerhouse, my job is safer and my US equity investments will presumably return more. I prefer not to 'bet' all on one currency, thanks.


You have no currency risk if you invest solely in the US. Are you planning on retiring to Europe? Or an emerging market? If not there is no reason whatsoever for you to invest in foreign equities. No one is saying currency risk can't help you. What we are saying is that currency risk can be eliminated if you simply invest in one currency, namely your own.

Myth 5: Jack Bogle is infallible Look, I think he may be the greatest man alive and smartest man in investing, but that does not mean he cannot be wrong about some things sometimes. He has a long-standing horse in this race, and I think it clouds his judgment in this case.


No one said this. You are creating a straw man.
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Postby ResNullius » Fri Dec 03, 2010 4:58 pm

I shouldn't be extending this discussion, since foreign investing seems like a religion for many folks. If you only put 20% or less of your portfolio into foreign, it's not going to make that much difference in the event the US market tanks while the rest of the world churns along. At best, we're talking about the dog's tail.
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Postby stemikger » Fri Dec 03, 2010 5:06 pm

Posted by Resnullius
I shouldn't be extending this discussion, since foreign investing seems like a religion for many folks. If you only put 20% or less of your portfolio into foreign, it's not going to make that much difference in the event the US market tanks while the rest of the world churns along. At best, we're talking about the dog's tail.


:lol Well said. I totally agree.
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Postby Indices » Fri Dec 03, 2010 5:20 pm

KyleAAA wrote:I believe not investing internationally is foolish. To me, it's the same argument as whether or not a 25 year old should own bonds. Most on this forum would agree that even very young investors should own at least a tiny bond allocation, just in case. Same with foreign stocks, even if it's just 10% of your portfolio. I have never once heard a reasonable argument for excluding foreign exposure completely. I've heard plenty of reasonable arguments for limiting foreign exposure to something below 20%, but never for completely excluding it.


Just because you haven't seen it doesn't mean it's foolish. Here's one argument: higher taxes. The more funds you have and the more rebalancing you do, the higher the taxes you pay in a taxable account.
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Postby KyleAAA » Fri Dec 03, 2010 5:25 pm

Indices wrote:
KyleAAA wrote:I believe not investing internationally is foolish. To me, it's the same argument as whether or not a 25 year old should own bonds. Most on this forum would agree that even very young investors should own at least a tiny bond allocation, just in case. Same with foreign stocks, even if it's just 10% of your portfolio. I have never once heard a reasonable argument for excluding foreign exposure completely. I've heard plenty of reasonable arguments for limiting foreign exposure to something below 20%, but never for completely excluding it.


Just because you haven't seen it doesn't mean it's foolish. Here's one argument: higher taxes. The more funds you have and the more rebalancing you do, the higher the taxes you pay in a taxable account.


Or the lower taxes you pay, if you make effective use of tax-loss harvesting. There's a greater chance of having off-setting winners/losers the more funds you own while still having room to shift enough cash around to even things out. Or if you use new funds to rebalance, there are no tax consequences. Or if you make good use of tax-advantaged space.

Besides, it's unwise to let the tax tail wag the asset allocation dog.
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Postby bilperk » Fri Dec 03, 2010 6:19 pm

ResNullius wrote:Bogle says.... I guess this means there's a new gospel out there. I have great respect for Mr. Bogle, and I totally agree with his current position on foreign investing. It hasn't, however, always been his position. I believe in buying/investing American because the whole world can't be wrong. After all, where does the world at large put it's money in times of uncertainty and discord? America, that's where, and that's where I put my money.


Huh? Mr. Bogle has held to the same "no more than 20% in international" since at least 1994. It is hardly a new gospel. It is, and has been for two decades, his opinion that international is not necessary and adds additional risks.

I you believe more is warranted, I'm sure he doesn't care if you invest as much of your money as you want to in international funds.
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Postby digit8 » Sat Dec 04, 2010 10:39 am

I keep to 20% on the theory that the perfect is the enemy of the good. If American stock collapses to the point where that proves to be a mistake in the time it takes me to retire, things are worse than the grimmest picture painted by the most pessimistic on these boards.
My son, I may well suggest he invest differently when he gets to that age, however.
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Postby Leif » Sat Dec 04, 2010 7:45 pm

Indices wrote:
Leif Eriksen wrote:John Bogle suggests 0-20% in international.

Home country bias, IMO. This is very common. Studies have shown that a country's residents typically invest the bulk of their money in their home country.


He may be suffering from home bias, but you may be suffering from recency bias, i.e. international has done better recently so I'd better performance chase into it. The key reason why he and I both invest solely in America is because it is cheaper to do so. Costs matter and I can actually predict them going forward unlike being able to predict which countries will do well going forward.


Really? I thought the US was doing better recently with all of Europe's problems. If fact, I don't track the performance between US and Intl porition of my portfolio very closely. I bought into an approx. 50/50 split a long time ago based on my readings from Swedroe and from Merriman (fundadvice.com).

So, no, your wrong.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore
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Postby meckaneck » Sun Dec 05, 2010 12:19 am

Adrian Nenu wrote:Let's see how the big bet on the US stock market turned out over the last 10 years as average annual returns:

Total Stock Market Index - 1.96%

Total International Index - 4.68%


If you can't predict which region or country will have the highest returns or largest losses, use the global index or something very close to it. Diversify, diversify, diversify!

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It depends on one's portfolio strategy. If using only stocks and bonds then yes one likely has to diversify internationally although IMHO this is not diversification. If using the Permanent Portfolio then a simple total US market index is fine.
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Postby Indices » Sun Dec 05, 2010 12:25 am

Leif Eriksen wrote:
Indices wrote:
Leif Eriksen wrote:John Bogle suggests 0-20% in international.

Home country bias, IMO. This is very common. Studies have shown that a country's residents typically invest the bulk of their money in their home country.


He may be suffering from home bias, but you may be suffering from recency bias, i.e. international has done better recently so I'd better performance chase into it. The key reason why he and I both invest solely in America is because it is cheaper to do so. Costs matter and I can actually predict them going forward unlike being able to predict which countries will do well going forward.


Really? I thought the US was doing better recently with all of Europe's problems. If fact, I don't track the performance between US and Intl porition of my portfolio very closely. I bought into an approx. 50/50 split a long time ago based on my readings from Swedroe and from Merriman (fundadvice.com).

So, no, your wrong.


Europe is not the only "international". There are also emerging markets which have done quite well recently. And I think you meant "you're".
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Postby Leif » Sun Dec 05, 2010 2:05 pm

Indices wrote:
Leif Eriksen wrote:
Indices wrote:
Leif Eriksen wrote:John Bogle suggests 0-20% in international.

Home country bias, IMO. This is very common. Studies have shown that a country's residents typically invest the bulk of their money in their home country.


He may be suffering from home bias, but you may be suffering from recency bias, i.e. international has done better recently so I'd better performance chase into it. The key reason why he and I both invest solely in America is because it is cheaper to do so. Costs matter and I can actually predict them going forward unlike being able to predict which countries will do well going forward.


Really? I thought the US was doing better recently with all of Europe's problems. If fact, I don't track the performance between US and Intl porition of my portfolio very closely. I bought into an approx. 50/50 split a long time ago based on my readings from Swedroe and from Merriman (fundadvice.com).

So, no, your wrong.


Europe is not the only "international". There are also emerging markets which have done quite well recently. And I think you meant "you're".


You are you correct on you're. You are wrong on EM recency. My EM AA has changed little (down a bit over time). My AA changes 2%/year as I age (less equity and more bonds). That's it, regardless of market action. If, and I say "if", I was a timer, it would be a contrarian.

I hope we don't have an experience like Japan over the last 20 years. If we do you may regret your home country bais, as I presume many Japanese have over the last 20 years.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore
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Postby Coyote22 » Mon Dec 06, 2010 12:16 pm

Look at all of the Vanguard Target funds. They allocate 20% of their equity position to the international index and I believe they have indicated that they are taking that up to 30% over the next few years.
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Re: John Bogle on International Investing

Postby YDNAL » Mon Dec 06, 2010 12:25 pm

Coyote22 wrote:Look at all of the Vanguard Target funds. They allocate 20% of their equity position to the international index and I believe they have indicated that they are taking that up to 30% over the next few years.


Vanguard adjusts international equity exposure in Target Retirement Funds and other balanced funds
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Postby Noobvestor » Mon Dec 06, 2010 2:57 pm

Indices wrote:
noobvester wrote:Let's start by debunking some of the common misconceptions I see here over and over again.
Myth 1: Higher Costs - yes, maybe slightly over TSM, but .2%... high? Really, at this point, the argument is wearing thin. Foreign tax credit, low turnover, etc... the point is all but outdated, IMHO


Outdated but still true.


By 'still true' you mean 'less true than before' though right? If we're quibbling over .2% in fees, then OK, I concede, international is still 'more expensive' ... so are bond funds. Sorry, but I don't think even the most hardcore Boglehead would base something like overall asset allocation on that kind of expense difference ... that, or people with poor fund options in 401Ks would be forced to hold crazy allocations, no?

Indices wrote:
Myth 2: US is diversified internationally already - endlessly debatable, but history has shown between 20 to 40 percent international has provided better diversification (in terms of correlation) pretty consistently in efficient-frontier terms


So obviously going forward this will be true as well? We all know past performance does not equal future performance.


No, we can't know what the future holds - that's the whole point of diversifying across geographical regions, sectors and styles in the first place. In other words: what you just wrote supports my point. Scenario (a) there is no correlation benefit, so we 'lost' the small expense premium paid to go abroad. Scenario (b) there is correlation benefit, so we gained by going abroad. I'm fine if (a) turns out to be true just like I accept my bonds can outperform my stocks or vise versa.

Indices wrote:
Myth 3: Going international is based on recency bias. I'd argue just the opposite: recent events can, should and in some cases have woken people up to the fact that the US can, does and will under-perform at times.


This is ridiculous. Recency bias, which you are obviously suffering from, has everything to do with performance chasing and which is why you are running away from the US and towards what you think has a better future.


No, I'm not, and I'd appreciate you not projecting motivations onto me like that. From the first time I was able to put money in the market I made (albeit stupid ones at that time) choices that put me in foreign markets - notably, this was during the US-driven tech boom. Thanks, but I've bene consistently international for longer than I've actually had a clue as to why - it just made intuitive sense to spread my investments. In fact, if I had to place a 'bet', I would wager the US will outperform most international markets in the next few years - but I'm not going to weight the US further as a result of that guess.

Indices wrote:
Myth 4: Currency risk is a one-way street If the US slowly runs itself down to a second-class country with a weaker currency, I would prefer to have some foreign currency exposure. Conversely, if it remains a powerhouse, my job is safer and my US equity investments will presumably return more. I prefer not to 'bet' all on one currency, thanks.


You have no currency risk if you invest solely in the US. Are you planning on retiring to Europe? Or an emerging market? If not there is no reason whatsoever for you to invest in foreign equities. No one is saying currency risk can't help you. What we are saying is that currency risk can be eliminated if you simply invest in one currency, namely your own.



Yes, I am indeed considering living for an extended period (perhaps permanently) in a foreign country. Most likely candidate would be Germany, though Australia and Canada are possibilities as well (note: I've already lived in two of those countries for long periods of time). However, the major point here is the same as before: we are all invested in our own currency through our jobs, our real estate, and all kinds of other things - there is a benefit to getting some additional diversification, in my opinion, within one's equity holdings.

Indices wrote:
Myth 5: Jack Bogle is infallible Look, I think he may be the greatest man alive and smartest man in investing, but that does not mean he cannot be wrong about some things sometimes. He has a long-standing horse in this race, and I think it clouds his judgment in this case.


No one said this. You are creating a straw man.


On this I partway agree - it was intended to be half humorous/sarcastic in the first place, but I have noted time and time again that people refer back to Bogle as a 'reason' for not investing more internationally. I really do believe he is a great man and a wise one too, but for someone who advocates a 'total market' approach I am repeatedly amazed that he cites the past (volatility) and uses biases to predict the future (e.g. 'The French don't seem to want to work hard') when it comes to international investing.
Last edited by Noobvestor on Mon Dec 06, 2010 3:12 pm, edited 1 time in total.
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Postby Noobvestor » Mon Dec 06, 2010 3:05 pm

Open-ended, food-for-thought question: if Jack Bogle were from anywhere else in the world (let's say: a developed nation), would he recommend having little to no money invested in foreign (i.e. non-home) markets?

Specific question for people who strongly believe in heavily overweighting the US: what are your reasons and how much to they 'tilt' you away from a global allocation? (e.g. currency risk, volatility, expenses, etc...) And did you consciously factor these (e.g. currency should tilt me by X%, etc...)

I realize there are reasons to tilt toward one's home country, but isn't it just a form of performance chasing based on the idea that, in the end, the US is strong and will continue to be the best place to invest?

Open to opinions, skeptical though I am.
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Re: John Bogle on International Investing

Postby cerfindeb » Sat Jan 19, 2013 4:15 am

He may be suffering from home bias, but you may be suffering from recency bias, i.e. international has done better recently so I'd better performance chase into it. The key reason why he and I both invest solely in America is because it is cheaper to do so. Costs matter and I can actually predict them going forward unlike being able to predict which countries will do well going forward.


Costs matter, but it's okay to pay more to diversify. Why? Because otherwise we should all hold individual stocks. Holding e.g. shares in Google carries no management fees. However, you are highly undiversified. If you pay to diversify in an index fund to get rid of company-specific risk, why not pay extra to get international diversification?

You forget that foreign investing adds currency risk to your portfolio.
No, investing globally decreases currency risk because you diversify across currencies. If you only invest in the US, what if the US dollar collapsed in value? If you had all your money in the S&P500 and the US dollar collapsed, you'd be poor. However, if you diversified globally, you'd suffer less and can move out of the US and live elsewhere.

I've got about 20% of my equities invested in International funds and am reluctant to go higher. Two of the 3 primary reasons have already been mentioned (currency risk and higher costs). However, the biggest reason is proven governmental stability in the U.S. In the last ~30 years, the U.S. governmental system has suffered presidential asassination, impeachment, and a very close election that was settled by a recount in Florida. We've fought unpopular wars that resulted in a change of ruling party. Despite all this, the basic rules of law haven't changed, the economy has continued to tick along, and all power changes followed the rules of law. The same cannot be said for the dominant emerging markets.
This is active management, not passive index investing. In the same way that Bogle claims you cannot select individual companies, e.g. Google over Microsoft you also cannot select one country over another. If you are invested in a globally diversified fund that is market cap based, the market would automatically select against poor performing countries. Do you think you can beat the market?
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Re: John Bogle on International Investing

Postby Caduceus » Tue Jan 21, 2014 4:59 am

Hmm, this is an old thread that has been resurrected, but it made for an interesting read.

Many "American" companies derive a great deal of their earnings from non-U.S. sources and in non-U.S. denominated currency, so someone who owns the Total U.S. Stock market is already investing in Europe, in emerging markets, and across the total investable universe really. This may not have been true 30 or 40 years ago, but it is true now.

The more I think about it, the more I wonder why we parcel out the world into "U.S.," "Europe," "Emerging Markets" when these are, properly speaking, designations about where companies are incorporated rather than where they generate their earnings. It's Coca-Cola, Walmart and McDonald's who are going to capture a great deal of the growth in emerging markets economies. Conversely, many "international" companies derive a good chunk of their earnings from the U.S. and in US dollars.

This also means that a lot of the historical data isn't particularly predictive or useful. Looking at the indexes based on countries will tell us very little about the quality and geographic distribution of those earnings.

Why does separating the investing universe into U.S./Europe/Emerging Markets make more sense than, say, a random division of the world's companies into various groupings? No matter how you cut the deck, the various divisions will end up with groups that have earnings that are fundamentally "international" in nature. It all seems a little arbitrary to me.

There are other possibilities, but these are not the kinds of defenses typically raised in favor of "international" investing. For instance, perhaps a focus on U.S. companies leaves particular sectors (metals/mining, etc.) under-represented. Or perhaps different tax regimes make one class of companies more tax-efficient than others.
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Re: John Bogle on International Investing

Postby JoMoney » Tue Jan 21, 2014 6:09 am

There are various tax consequences, expenses, and risks associated with international investing that a U.S. investor is not subjected to with domestic investments. With some "Emerging Market" countries, they do not have the commitment to open markets, enforcement of contracts, private property protections, and laws that people are accustom to in the U.S. (not that the U.S. is perfect in this regard). Some markets are doing everything they can to allow the free flow of foreign capital and financing in, but I have doubts about what happens when a time comes that investors try to move the capital out en masse (or even move the capital around to structure it in more profitable ways that may not appeal to the "crony capitalists" in those countries. When problems come, it's a lot easier to take it out on the foreign "rich" guys who have no say in the native countries politics and economy.
Benjamin Graham, The Intelligent Investor wrote:...But we do know that, if and when trouble should come, the owner of foreign obligations has no legal or other means of enforcing his claim...
John Bogle wrote:...The classic example of broadened diversification, of course, is the addition of foreign stocks to U.S. equity portfolios. The record is crystal clear that, if we accept standard deviation as our risk measure, the use of foreign equities reduces risk. The problem is that I’m not at all sure that it is proper to use standard deviation as a proxy for risk, and even less sure that we should use risk-adjusted return as a proxy for investment success. After all, over-simplifying ever so slightly, the Sharpe ratio for calculating risk-adjusted return equates an extra percentage point of return with an extra percentage point of risk. But this much must be clear: An extra percentage point of long-term return is priceless, and an extra percentage point of short-term standard deviation is meaningless. So what investment purpose is served by dividing the meaningless into the priceless, weighting both equally? ...
...So I emphasize that while diversifiers may serve a useful purpose, investors are unwise to diversify their equities ever more broadly merely for diversification’s sake. Rather, we must consider the tangential relationship between standard deviation and risk, the implications for long-term returns when we reduce short-term risks, and the amount of real risk we are assuming...
http://johncbogle.com/speeches/JCB_NE_Pension_4-00.pdf
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Re: John Bogle on International Investing

Postby Call_Me_Op » Tue Jan 21, 2014 7:13 am

JoMoney wrote:There are various tax consequences, expenses, and risks associated with international investing that a U.S. investor is not subjected to with domestic investments. With some "Emerging Market" countries, they do not have the commitment to open markets, enforcement of contracts, private property protections, and laws that people are accustom to in the U.S. (not that the U.S. is perfect in this regard). Some markets are doing everything they can to allow the free flow of foreign capital and financing in, but I have doubts about what happens when a time comes that investors try to move the capital out en masse (or even move the capital around to structure it in more profitable ways that may not appeal to the "crony capitalists" in those countries. When problems come, it's a lot easier to take it out on the foreign "rich" guys who have no say in the native countries politics and economy.


Aren't these issues priced-in? Surely, you are not the only person aware of these things. If you believe in efficient markets, the above is not a sound rationale for avoiding global diversification of equities.
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Re: John Bogle on International Investing

Postby JoMoney » Tue Jan 21, 2014 7:53 am

Call_Me_Op wrote:Aren't these issues priced-in? Surely, you are not the only person aware of these things. If you believe in efficient markets, the above is not a sound rationale for avoiding global diversification of equities.

I don't have a strong belief in "efficient markets", nor accept on faith that collectively everyone is pricing in persistent "risk premiums". Let alone that a global market is pricing in the various unique risks that may be completely different for investors located in different specific regions, currencies, or laws.
You don't have to accept my rationale. But I haven't found "sound rationale" that I accept for taking on the risks of Emerging Markets. I don't generally find the need to accept the additional risks of other developed markets either. There are different unique risks to international investing, I think the case needs to be stronger on why to accept those risks, and I haven't found it. To the extent I want to diversify my equity risk, there are bonds. To the extent I want to accept more equity risks looking for higher returns, there's plenty of opportunity in the U.S. market, in a system I feel I have at least some familiarity with...
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Re: John Bogle on International Investing

Postby Call_Me_Op » Tue Jan 21, 2014 8:00 am

JoMoney wrote:To the extent I want to accept more equity risks looking for higher returns, there's plenty of opportunity in the U.S. market, in a system I feel I have at least some familiarity with...


Might a Japanese investor have said the same thing in the early 1980's?
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Re: John Bogle on International Investing

Postby Caduceus » Tue Jan 21, 2014 1:46 pm

Might a Japanese investor have said the same thing in the early 1980's?


Are Japanese companies now still exposed to the same kind of home country risks that they were in the 1980s, or are their earnings more diversified across the globe? Take Honda, for instance. Japan accounts for only 5% of its revenue base, and its fasting growing sales location is actually North America, which grew by 15.3% (and which accounts for slightly less than 10% of its sales). Most of the motorcycles Honda produces are actually sold to India, Thailand, Brazil and Vietnam.

If we dig further into the annual report, we find that Honda derives the vast portion of the revenues (more than 95%) of its financial services business from ... North America.

The challenge with using historical data is that it is backward looking. I think there's a reason that correlations between "U.S." and "International" stocks are increasing and that this reflects the increasingly global operations of many companies. So the question is not if we should invest internationally but why we should invest internationally beyond the already international earnings produced by U.S.-based companies.
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Re: John Bogle on International Investing

Postby stemikger » Tue Jan 21, 2014 1:55 pm

VINNY wrote:In an interview on CNBC's web site, dated Nov. 24, Bogle stated to stick to the United States and invest internationaly if you feel like you need to , words to that effect. I believe the article was titled, "Don't trust Wall St". I saw it on 403bwise and it provided a link.

Is his current belief that we should not invest abroad? and stick to Index funds like VTSMX? Or any group of funds as long as they are domestic?


Hey VINNY, I didn't read the other replies yet, but you might want to read the chapter about global investing in John Bogle's book Common Sense on Mutual Funds. It is easy to understand why he feels this way and it is something he has stuck to but he always adds he wants us investors to make up our own mind when it comes to this particular area of investing. He simply advises us that we can lead a very happy investing life without adding international. Out of all the things I have read on the subject that chapter has made the most sense to me and covers every reason why you will be fine without it. I have been investing for 20 years now and I never felt the need to add international and so far I have not regretted that decision.

For the record, I have found most folks here don't agree with John Bogle on this and they also make very convincing arguments for adding it.

I find it funny that 20 years ago my company didn't even have an international fund to choose from anyway. So I'm staying the course with keeping my costs down buying the entire U.S. stock and bond market index. A guy named Warren Buffett also believes all us regular folks need is to invest in an index fund that buys all of America.

P.S. Sorry I didn't realize I already responded to this thread.
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Re: John Bogle on International Investing

Postby 720pete » Tue Jan 21, 2014 2:37 pm

I just rebalanced to 50/50 U.S./International.

Balls to the wall.
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Re: John Bogle on International Investing

Postby galeno » Tue Jan 21, 2014 2:57 pm

If a SP500 ETF costs 0.09% vs a TWM ETF at 0.25%. Is the extra cost worth it? I say yes. Others will say no.
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Re: John Bogle on International Investing

Postby Random Musings » Tue Jan 21, 2014 3:17 pm

Putting all of ones equity eggs in one country basket seems counterintuitive to the diversification theme. Especially since today's market offers many low-cost index/passive products that are relatively tax efficient.

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Re: John Bogle on International Investing

Postby airahcaz » Tue Jan 21, 2014 3:25 pm

Random Musings wrote:Putting all of ones equity eggs in one country basket seems counterintuitive to the diversification theme. Especially since today's market offers many low-cost index/passive products that are relatively tax efficient.

RM


The argument is that one is already diversifying across at least (depending which domestic index fund) 500 companies with global exposure and also minimizing MER
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Re: John Bogle on International Investing

Postby Call_Me_Op » Tue Jan 21, 2014 3:57 pm

Caduceus wrote: So the question is not if we should invest internationally but why we should invest internationally beyond the already international earnings produced by U.S.-based companies.


I find it odd that someone would use 1 country as the default, and then feel the need to justify why they should invest in (the stocks of) the other (say) 49 available countries. I would think you would start with the premise of broadly diversifying across all 50 countries, and then back-off from that only for very compelling reasons. Or is diversification only important some of the time.
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Re: John Bogle on International Investing

Postby MnD » Tue Jan 21, 2014 4:00 pm

I'd rather have Apple _and_ Samsung versus just Apple.
Likewise for Ford and GM _and_ Toyota _and_ Hyundai.

Given the huge US-centric stake I have outside of equities (bonds, human capital, social security, pension, real estate) I sleep like a baby with global market cap weighting on the equity side. I'd even be fine with 100% international in equities. International mega-corps have plenty of exposure to US markets, consumers, sales and profits.
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Re:

Postby stemikger » Tue Jan 21, 2014 4:12 pm

TrustNoOne wrote:I haven't got a dog in this fight. I'm still stuck on whether investing in stocks at all is a good idea at all. My view:

Investing in stocks - betting on speculative investments.

Investing in international stocks - betting on speculative investments and foreign exhange rates.


Now I know why you have the name TrustNoOne. LOL. I sometimes feel like this, but for the average working guy and/or girl, we don't have much of a choice. Most companies do not provide pensions and 99.9% of 401Ks basically give 3 choices. Stocks, bonds and CDs. So the only chance to beat inflation and have a nest egg in retirement is stocks.
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Re: John Bogle on International Investing

Postby JoMoney » Tue Jan 21, 2014 4:42 pm

Call_Me_Op wrote:I find it odd that someone would use 1 country as the default, and then feel the need to justify why they should invest in (the stocks of) the other (say) 49 available countries. I would think you would start with the premise of broadly diversifying across all 50 countries, and then back-off from that only for very compelling reasons. Or is diversification only important some of the time.

Once you've established your reasons to invest internationally, I would think it makes sense to start with considering the broadly diversified Total World type portfolio and then adjust from there if you have specific beliefs/preference/strategies... but I haven't found the compelling reasons to buy international securities. There's lots of different financial instruments offered for sale, just because they're offered doesn't immediately mean someone should buy them just for the sake of increasing diversification. I don't choose to invest in options/futures, commodities, preferred stocks, and more...
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