How much do valuations matter to you? US vs Intl stocks

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durazno

How much do valuations matter to you? US vs Intl stocks

Post by durazno »

I just read http://www.bogleheads.org/forum/viewtop ... st=1504139 and noticed a few commented on the valuations of international stocks compared to US stocks.

How much do valuations matter to you when you are determining your stock ratio and making new contributions?

Thanks,
Iced Tea
yobria
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Re: How much do valuations matter to you? US vs Intl stocks

Post by yobria »

If you buy, hold, and rebalance, you will naturally take valuations into account, to the extent prices and earnings do not move in sync. I wouldn't recommend trying to game your US/Intl split beyond that. For one thing, different countries have different accounting practices, making such comparisons difficult.
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nisiprius
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Re: How much do valuations matter to you? US vs Intl stocks

Post by nisiprius »

They don't matter to me at all. How the heck would I know whether a Brazilian aircraft manufacturer's stock is properly valued or not? I assume that the markets are efficient enough that I personally am not capable of improving my investment results through my personal judgements of valuations.

To begin with, I think currency movements have a much bigger effect on the returns of international stocks than collective market judgements of valuation. While the dollar was strengthening from 1995-2002, international stocks did poorly. While it was weakening from 2002-2008, they did great. So if one were going to guide one's investments by any future-looking macro-economic deep-think--a bad practice, but if--it seems to one should be looking at "the dollar," not "valuations."

Second, what I really believe is that an international allocation doesn't make much difference. However, the theory on which I have an international allocation is diversification, meaning that the vagaries of how the market judges valuation will be different for U.S. and international stocks. There will be times when one or the other is up or down, and times when one or the other is being overvalued or undervalued. My reason for holding international is not to guess those times and surf the waves, but to hold both domestic and international in hopes that a catamaran will be slightly more stable than a canoe.
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Taylor Larimore
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Re: How much do valuations matter to you? US vs Intl stocks

Post by Taylor Larimore »

icedtea wrote:
How much do valuations matter to you when you are determining your stock ratio and making new contributions?
Iced Tea:

We use contributions and withdrawals for the purpose of maintaining our asset-allocation plan. We make no attempt to market-time using valuations.

Stay-the-course.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: How much do valuations matter to you? US vs Intl stocks

Post by Grt2bOutdoors »

They matter to me (bear with me) - if I hold a 65/35 split for domestic international (current allocation targets) and I add a certain amount each year, I would expect on average for those holdings to increase commensurately. Now, if domestic outperforms international, that is usually because valuations are increasing for domestic and it may be increasing at a slower rate or even decreasing for international. If that trend continues, I will rebalance according to my target by selling high in domestic and buying low in international. That said, I do not set up my allocation targets based on a valuation or market timing bet - it's based on my ability, need and willingness to accept a certain level of risk in pursuit of higher returns.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: How much do valuations matter to you? US vs Intl stocks

Post by Wagnerjb »

icedtea wrote:How much do valuations matter to you when you are determining your stock ratio and making new contributions?
Not at all.
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Re: How much do valuations matter to you? US vs Intl stocks

Post by mhc »

I make no decisions based on valuations.

I don't look at them, and even if I did, I don't know what I would do differently. I diversify with low cost passive funds. I take what the market gives me.
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Re: How much do valuations matter to you? US vs Intl stocks

Post by Default User BR »

The central tenet of my investing is that I don't know anything useful about the market, certainly nothing that would allow me to effectively time the market.


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Re: How much do valuations matter to you? US vs Intl stocks

Post by asset_chaos »

To set my asset allocation, I didn't look at relative valuations at all. But for rebalancing I do look at relative valuations when (1) I don't have enough fresh money on hand to rebalance everything fully all at once, and (2) the asset class doing well isn't so out of balance that I'm willing to sell and incur costs. Then I tend to invest more in the asset class that seems to be at that time the better value (cheaper valuation metrics). But really, this is fiddling at the margins. Morover, I don't have enough data to know for certain whether rebalancing this way adds value versus a more strictly mechanical rebalancing rule. I think it should, but I can't show that it does.

Best wishes in your quest for knowledge.
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Topic Author
durazno

Re: How much do valuations matter to you? US vs Intl stocks

Post by durazno »

Thanks all. How would you distinguish paying attention to valuations with buying low?
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Re: How much do valuations matter to you? US vs Intl stocks

Post by DSInvestor »

Do you have an asset allocation plan that you're comfortable with through all market conditions? If you do, follow the plan. If your plan calls for 60% stocks and you currently have 55% stocks, buy more stocks with new money. If you find that you already have 65% stocks, you don't need any more so buy more bonds with new money. If the stock market declines causing your stock holding to fall below target AA, following your AA plan will help you "buy low". If the stock market has big gains and your stocks are above target, following your AA plan will help you avoid buying stocks high and buy bonds instead.
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Re: How much do valuations matter to you? US vs Intl stocks

Post by nisiprius »

icedtea wrote:Thanks all. How would you distinguish paying attention to valuations with buying low?
I think the whole mantra of "buy low, sell high" is sort of wrong-headed. It's a kind of joke that, for some reason, people take seriously.

"Buy low, sell high" is a desired outcome, not an actionable strategy. It's not really possible to implement it any more than it's possible to implement Will Rogers' advice, "Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."

It's possible to make money without "buying low, selling high." The obvious case is a bond--it is worth no more than its face value at maturity, but you make money on it because it pays interest. The next most obvious case is any stock that pays dividends--even if the value per share does not change, you make money on the dividends.

If I believe that the market is reasonably efficient, I do not need to judge the valuation of stocks. I can let the market will do it for me, and it will do it accurately enough for me to make money in the long run. The stocks that do not pay out all their profits in dividends will grow, and the market will eventually take that into account in the stock price. That is, if you buy and hold a company that is doing a responsible job of using its earnings to grow, its stock price will tend to rise over time, and simply by waiting you will automatically be selling higher than you bought.

Consider Vanguard Wellington fund:
Image
In order to make money in that fund, is it essential to buy during the notches? Isn't it good enough to buy at any old time and just wait a reasonable length of time before selling?
Last edited by nisiprius on Wed Oct 03, 2012 4:13 pm, edited 2 times in total.
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.
Topic Author
durazno

Re: How much do valuations matter to you? US vs Intl stocks

Post by durazno »

Thanks Nisiprius. One of many compelling posts of yours I've read.

I'm in good shape and have an AA I'm working towards. My questions here are a bit more theoretical. I should have pointed that out initially. No need to worry about me investing without an AA.
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Re: How much do valuations matter to you? US vs Intl stocks

Post by Occupier »

Right now valuations are low in Europe and Japan compared to the US. If you started years ago and stuck to your allocation, Europe and Japan would seem to be laggards. On the other hand if your started in 1978 and looked at your valuations in 1990 Japan and Europe would be way ahead. Then if you started in 1990 and looked at your valuations in 2000 the US would be way ahead of Europe and Japan. I suppose valuations should not be ignored, but they are not the whole story. If I were to be starting now I would look market cap. which now is about 45% US and 55% rest of the world. Then I would look at valuations and adjust whether I would tilt to the US or Europe and Japan, and the rest of the world, and I would pick a figure. My pick would emphasize tilting toward one or the other. Experience teaches that tilting toward lower valuations pays off over the long run. Maybe you think I did not answer your question, but I have been investing since about 1970 and I have answered your question. Dave
PS If you can not make up your mind allocate based on weighting by market cap.
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Re: How much do valuations matter to you? US vs Intl stocks

Post by grap0013 »

I am one of those people in the thread the OP linked. Current valuations in Europe clearly favor higher expected returns than in the US. I just don't know how actionable this information is. How long will you have to wait to see it manifest? How much do you increase your Europe % to? Is it a permanent switch? If not, you need some rules to make the switch back eventually. Are you sellings bonds to buy Europe? Is this over your risk tolerance?

Too much work for me and Europe would have to outperform by a very large margin to make a tactical 10% switch worth my time.
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Re: How much do valuations matter to you? US vs Intl stocks

Post by azanon »

nisiprius wrote:In order to make money in that fund, is it essential to buy during the notches? Isn't it good enough to buy at any old time and just wait a reasonable length of time before selling?
Do you think anyone, including those who subscribe to inefficient markets, would be compelled by the lack of notches in a graph of a balanced fund over 90 years (~ 3 working careers worth of time)?

If i had more time, I'd dig up a 100% US stock fund, for just 30 years, and then we could gander at a few nice sized notches. And maybe besides that, we could throw up a ST treasury fund (what you could move in and out of), or perhaps a graph of Japan, for that nice contrast effect.
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Re: How much do valuations matter to you? US vs Intl stocks

Post by BYUvol »

azanon wrote:
nisiprius wrote:In order to make money in that fund, is it essential to buy during the notches? Isn't it good enough to buy at any old time and just wait a reasonable length of time before selling?
Do you think anyone, including those who subscribe to inefficient markets, would be compelled by the lack of notches in a graph of a balanced fund over 90 years (~ 3 working careers worth of time)?

If i had more time, I'd dig up a 100% US stock fund, for just 30 years, and then we could gander at a few nice sized notches. And maybe besides that, we could throw up a ST treasury fund (what you could move in and out of), or perhaps a graph of Japan, for that nice contrast effect.
Most people around here have a balanced portfolio consisting of both stocks and bonds, so it seems reasonable to use a balanced fund as a lose proxy. If you have 100% stocks or 100% bonds, much of what Nisi posts would likely not apply to you.
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Re: How much do valuations matter to you? US vs Intl stocks

Post by Jerilynn »

icedtea wrote:
How much do valuations matter to you when you are determining your stock ratio and making new contributions?
To quote John Wayne.."Not one bit."
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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