Could John Bogle Be Right About International Stock?

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spirogruf
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Could John Bogle Be Right About International Stock?

Post by spirogruf »

I've heard the arguments from all of the professionals that allocating a portion of your portfolio to International stocks is a good thing. It prevents recency bias (think Japan) plus International Stocks did provide better returns than U.S. stocks between the dot com crash and the crash of 2008-2009. I also understand that markets are far more global now than they were even 15 years ago.

However, is there a possibility that John Bogle just might be right, that you don't need them and you will do just fine investing strictly in the United States?
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Re: Could John Bogle Be Right About International Stock?

Post by dh »

Possibly. Warren Buffet suggests that just the S&P 500 is enough (at least in his wife's future portfolio). I think everyone needs to create a plan and stick to it. I made the decision to spread risk and go global (50% US / 50% International). Is that best/optimal? I believe that is the wrong question. I think the focus should be to create a plan and stick to it.
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Re: Could John Bogle Be Right About International Stock?

Post by timboktoo »

It's unknowable. If history plays out like the past, then you'd do fine just holding Vanguard Balanced Index. There are a lot of foreign earnings already baked into large US companies. If the next 30 years are like the previous 30, it will play out just fine for a person without international exposure.

The problem with trying to solve an unsolvable problem is... it's unsolvable. We have no idea what's going to happen. I invest evenly in TSM, TBM and TISM because I see the merits in each one and because I don't know what the future has in store.

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Re: Could John Bogle Be Right About International Stock?

Post by livesoft »

spirogruf wrote: you will do just fine investing strictly in the United States?
I think the above is a true statement. You will do just fine using CDs, too. You will do just fine using costly variable annuities. You will do just fine paying 2% in expense ratios.

Please define what "do just fine" means. I think you can "do better" as well.
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Re: Could John Bogle Be Right About International Stock?

Post by lack_ey »

There are really two issues here,
(1) the actual results you will see in your investing lifetime from one choice versus another
(2) the range of possible outcomes that might be possible from this moment forward, and the likelihoods of each of them happening

The actual result we will see is just one of many possibilities. It is now unknowable. In many of these scenarios, you will do just fine investing strictly in the US, and in many of those, even better than if you split your money internationally. Maybe the US outperforms some more. It's also possible that you don't do fine no matter if you invest in the US or globally. Maybe stocks everywhere do pretty terribly. It is probably not all that likely but possible that you will not do fine investing strictly in the US but will if you invest globally. Think a 1990 Japan type of scenario, where they could have really used some global diversification, because their stocks still haven't gotten close to the peak seen then.

The likelihoods of all the scenarios are up for debate. In general, the point of diversification is that you don't know what's going to be best, so you hedge bets a little by going some with multiple options. Here, this is at the expense of some slightly higher costs, some extra currency risk, the risk of investing in countries with less mature markets and protections as the US has, and more. You have to decide for yourself whether or not it's worth it.
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Re: Could John Bogle Be Right About International Stock?

Post by John3754 »

Yes, it is possible that John Bogle is right. It is also possible that he is wrong. Unfortunately, knowing which is the case requires knowledge of the future, which nobody has.
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Re: Could John Bogle Be Right About International Stock?

Post by Northern Flicker »

Retirees in the US who need to cover expenses in USD need to consider short/medium-term currency risk as part of the evaluation, and probably set a maximum overall exposure to foreign currencies. Investors with a long horizon get the most benefit from international diversification.

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Re: Could John Bogle Be Right About International Stock?

Post by abuss368 »

I have learned a great deal from Mr. Bogle!

No one has any idea on future returns.
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"JACK BOGLE WAS RIGHT"

Post by Taylor Larimore »

deleted
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Re: "JACK BOGLE WAS RIGHT"

Post by CFM300 »

Taylor Larimore wrote:I went back 21 years to see if his advice was valid. These are the results of investing $10,000 in Vanguard Total U.S. Stock Market Index Fund (VTSMX) on 7/14/1994 compared with the same investment at the same time in Vanguard Total International Index Fund (VGTSX) [emphasis added]

Vanguard lists the inception date for VGTSX as 4/29/1996.
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Re: Could John Bogle Be Right About International Stock?

Post by Taylor Larimore »

CFM:

Thank you for the correction! I have deleted my post.

Best wishes.
Taylor
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Re: Could John Bogle Be Right About International Stock?

Post by biscuits222 »

Taylor Larimore wrote:CFM:

Thank you for the correction! I have deleted my post.

Best wishes.
Taylor
I think the point was still accurate, since Total International's nominal returns since the 1996 inception = 4.78% a year, probably much less than Total Stock Market's returns since 1996 (9.49% a year since 1992). Since 2005 the gap in returns has been similar too. Total International has been much more volatile as well, mostly because of currency shifts I imagine, so lower returns along with more volatility, not very appetising.

Total Stock Market:
https://personal.vanguard.com/us/funds/ ... IntExt=INT

Total International:
https://personal.vanguard.com/us/funds/ ... IntExt=INT

AWOCS discusses international exposure here:

http://awealthofcommonsense.com/how-muc ... necessary/
http://awealthofcommonsense.com/is-inte ... -the-risk/
Last edited by biscuits222 on Thu Jul 30, 2015 2:33 am, edited 3 times in total.
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Re: Could John Bogle Be Right About International Stock?

Post by Bogle_Feet »

What about the phrase that when the US stock market gets a cold, the world market gets pneumonia? If you're one who thinks that US stocks are over valued then maybe international is not a good choice right now.

Overall I don't think it makes any difference if you own international or not. Besides 46% of all S&P 500 index company revenue comes from outside of the United States. You're investing overseas whether you know it or not.
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Re: Could John Bogle Be Right About International Stock?

Post by 2comma »

I'm going to stick with the "old advice" and go with 20% of stock in international and I can't convince myself to get into international bonds. YMMV?
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Re: Could John Bogle Be Right About International Stock?

Post by jhfenton »

U.S. equities could outperform international for the next 20 years, and he would still have been wrong.
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Re: Could John Bogle Be Right About International Stock?

Post by asset_chaos »

spirogruf wrote:However, is there a possibility that John Bogle just might be right, that you don't need them and you will do just fine investing strictly in the United States?
Bogle is a great man who has made every investor everywhere better off with his creation of Vanguard and bringing index funds to the world. After 30 years my personal debt to him for index investing, just on fee savings alone, is getting on towards half a million dollars. But on this question of should everyone invest solely in their domestic market, he is obviously wrong. Just put yourself in the place of an investor from the UK, Sweden or Turkey with respectively order of magnitude domestic stock markets amounting to 10%, 1% and 0.1% of global stock market value---and the UK is the third largest stock market in the world. To people who say domestic only, do you take the advice you condemn others to and eschew total stock market index for just the 10 largest US stocks; that would give you around the same share of the global stock market as you say people in the UK should be content with, much less the many people with even smaller domestic stock markets, and probably be less costly over time than even total stock market index fund. Domestic only may be---just barely----acceptable for an American investor because of the size of our domestic market, but only if you're prevented somehow from diversifying globally. Bogle's advice to diversify, buy and hold at low cost usually through index funds to earn a fair share of market returns is wisdom for every age and every investor, worlds without end. Invest in only your domestic market, not even close.
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Re: Could John Bogle Be Right About International Stock?

Post by abuss368 »

jhfenton wrote:U.S. equities could outperform international for the next 20 years, and he would still have been wrong.
Why? Could you provide more explanation?
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Re: Could John Bogle Be Right About International Stock?

Post by FillorKill »

abuss368 wrote:
jhfenton wrote:U.S. equities could outperform international for the next 20 years, and he would still have been wrong.
Why? Could you provide more explanation?
Probably suggesting this: outcome v strategy. ex-ante (strategy) he's wrong, ex-post he may be "right" (outcome).
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Re: Could John Bogle Be Right About International Stock?

Post by Twins Fan »

spirogruf wrote: However, is there a possibility that John Bogle just might be right, that you don't need them and you will do just fine investing strictly in the United States?
Another...... Sure, there is a possibility he's right. There's a possibility he's wrong also. None of us know.

I don't hold international, so I tend to agree with Mr. Bogle there. I'm also a rare one around these parts. :happy

As someone mentioned, developing a plan that one can stick with and not change all the time is probably more important than to hold international or how much.
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Re: Could John Bogle Be Right About International Stock?

Post by Twins Fan »

asset_chaos wrote:But on this question of should everyone invest solely in their domestic market, he is obviously wrong.

Invest in only your domestic market, not even close.
I don't believe Mr. Bogle has ever said what you're suggesting here. His advice about the topic brought up is for the average US investor. Not people in Switzerland or Spain. I don't know what his advice would be for those folks.
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Re: Could John Bogle Be Right About International Stock?

Post by JoMoney »

He could be. Those of us who agree with him have done just fine so far. I think you can get an awful lot of exposure to international business if you're holding a diversified group of the large multi-nationals that dominate a U.S. index fund.
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Re: Could John Bogle Be Right About International Stock?

Post by longinvest »

John Bogle could be right or wrong. The prudent course of action, for a Boglehead, is not to bet it all on the prediction of any single person, regardless of who that person is.

A good Bogleheads rule of thumb is to invest at least 20% of one's stock allocation (not 20% of portfolio!), but no more than market capitalization (approximately 50%) into international stocks.
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Re: Could John Bogle Be Right About International Stock?

Post by dc81584 »

longinvest wrote:John Bogle could be right or wrong. The prudent course of action, for a Boglehead, is not to bet it all on the prediction of any single person, regardless of who that person is.

A good Bogleheads rule of thumb is to invest at least 20% of one's stock allocation (not 20% of portfolio!), but no more than market capitalization (approximately 50%) into international stocks.
+1
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Re: Could John Bogle Be Right About International Stock?

Post by dc81584 »

Bogle_Feet wrote:What about the phrase that when the US stock market gets a cold, the world market gets pneumonia? If you're one who thinks that US stocks are over valued then maybe international is not a good choice right now.

Overall I don't think it makes any difference if you own international or not. Besides 46% of all S&P 500 index company revenue comes from outside of the United States. You're investing overseas whether you know it or not.
Then again, what about emerging markets in the 70's and 80's? Surely, they did not contract pneumonia. Your second comment is partially accurate; however, the fact remains that U.S. companies are covered by so many analysts that it is not all that easy to find value anymore. There are still many companies that are largely ignored simply because they are not domiciled in the U.S. Therefore, I do not agree with the S&P 500 approach to international investing.
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Re: Could John Bogle Be Right About International Stock?

Post by alex_686 »

He is wrong for 2 reasons.

First, the S&P 500 is not a domestic US index. It is a index that is dominated by multinational corporations with world exposure that just happen to have their headquarters in the US. I am overstating my case a bit, but it is getting truer every day.

Second, the point of being a Bogglehead is to be a passive investor because we assume that the market is efficient. Yet we load up on Ford and GM and exclude VW and Toyota? We buy Proctor and Gamble but exclude Unilver? These stocks are efficiently priced and well integrated into our stock market. Why would we want to exclude them? Just because they are headquartered in a different country? I can't think of a single reason why a passive investor would not incorporate these companies.
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Re: Could John Bogle Be Right About International Stock?

Post by Twins Fan »

alex_686 wrote:He is wrong for 2 reasons.

First, the S&P 500 is not a domestic US index. It is a index that is dominated by multinational corporations with world exposure that just happen to have their headquarters in the US. I am overstating my case a bit, but it is getting truer every day.
Um, you pretty much confirm part of Mr. Bogle's reason for not needing international because many US companies have plenty of international exposure. Is he wrong about that and you are correct, or... :wink:
alex_686 wrote:Second, the point of being a Bogglehead is to be a passive investor because we assume that the market is efficient. Yet we load up on Ford and GM and exclude VW and Toyota? We buy Proctor and Gamble but exclude Unilver? These stocks are efficiently priced and well integrated into our stock market. Why would we want to exclude them? Just because they are headquartered in a different country? I can't think of a single reason why a passive investor would not incorporate these companies.
Because in the long run all those companies are probably going to do about the same. So, why bother?

I don't recall Bogle or Buffett ever guaranteeing a simple US only portfolio will outperform all others. I think they're simply saying the average US investor will get good returns with the US only portfolio, so why bother with bits and pieces of others.

Of course, not everyone realizes they're average. :happy
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Re: Could John Bogle Be Right About International Stock?

Post by alex_686 »

Twins Fan wrote:
alex_686 wrote:He is wrong for 2 reasons.

First, the S&P 500 is not a domestic US index. It is a index that is dominated by multinational corporations with world exposure that just happen to have their headquarters in the US. I am overstating my case a bit, but it is getting truer every day.
Um, you pretty much confirm part of Mr. Bogle's reason for not needing international because many US companies have plenty of international exposure. Is he wrong about that and you are correct, or... :wink:
But I think you are missing my point. We are picking large international companies. We pick GM and not VW? Why pick one but not the other? random flip of the coin? what is your justification? That they will do about the same. o.k. - we pick GM and Ford as part of the S&P 500. Why not flip a coin and pick one but not the other? If we pick GM and VW won't that offer about the same returns as GM and Ford?

In short, what is your rational argument for defining what goes into a index (and your portfolio) and what does not? Is it just where the CEO sleeps at night or is it something more fundamental?

His stance on US stocks seems arbitrary. Will my portfolio perform materially different? Maybe not. But I still have a problem with Boggle's position. Why not companies that are headquarter on the east coast verse the west coast?
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Re: Could John Bogle Be Right About International Stock?

Post by Twins Fan »

Some are getting way too nitpicky here. I, and I don't believe anyone on Bogleheads, picks what goes in the S&P 500 or an index fund. That's beyond our control. Why bring it up?

If I really wanted to choose between GM, Ford, VW... east coast or west coast, I would pick individual stock or actively managed funds that choose the stocks I like. I have no interest in individual stocks or actively managed funds, so I simply stick with index funds.

I fully admit to probably not even being average in this investing stuff. So, I keep it as absolutely simple as possible. My savings rate and sticking to a plan (stock/bond) far outweigh if I should hold a small percentage of international, SCV, REIT, or any of that.

I'm speaking as a little guy in all this. If I had a $5 million portfolio, I may look at it differently and spread my bets around more. That likely will not ever be a concern for me, so simplicity works great for me.

To each their own, is what this always comes down to.
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Re: Could John Bogle Be Right About International Stock?

Post by steve roy »

Here's the thing: Whatever your asset allocation is, twenty years from now it will not be optimal. That guy over there, the gent who had more Emerging Markets and Small Caps and more nominal bonds and fewer TIPs, who was 42% in fixed instruments rather than 52%, he'll be the person who had it exactly "right".

And you'll be able to look back and see this clearly (depending on the start date of your analysis). And then you can kick yourself around the block for not paying more attention to the advice of Paul Merriman or Larry Swedroe or whoever, and cry yourself to sleep at night for getting it "wrong."

Or you can shrug and say, "Well, I used the three-fund portfolio, I got pretty good returns, and by golly, I did well enough."
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Re: Could John Bogle Be Right About International Stock?

Post by itstoomuch »

+1 John Bogle.

If I want international/global I use, John Templeton's philosophy.
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Re: Could John Bogle Be Right About International Stock?

Post by Browser »

We always have discussions that don't distinguish between accumulation investors and investors who are living off their portfolio. U.S. investors who are spending down their portfolios are spending their money in U.S. dollars and should avoid currency risk, IMO. Since global investing exposes one to currency risk, it's probably not as good an idea for retirees as it might be for accumulators. The exception would be if your non-U.S. investments are currency-hedged back to U.S. dollars.
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Re: Could John Bogle Be Right About International Stock?

Post by Call_Me_Op »

spirogruf wrote:I've heard the arguments from all of the professionals that allocating a portion of your portfolio to International stocks is a good thing. It prevents recency bias (think Japan) plus International Stocks did provide better returns than U.S. stocks between the dot com crash and the crash of 2008-2009. I also understand that markets are far more global now than they were even 15 years ago.

However, is there a possibility that John Bogle just might be right, that you don't need them and you will do just fine investing strictly in the United States?
Sure, you might be fine investing in just one country. You might even do better. A Japanese investor in 1980 could have rationally come to the same conclusion. The question from my perspective is which is the more prudent course. I would go with the broadest diversification.
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Re: Could John Bogle Be Right About International Stock?

Post by alex_686 »

Twins Fan wrote:Some are getting way too nitpicky here. I, and I don't believe anyone on Bogleheads, picks what goes in the S&P 500 or an index fund. That's beyond our control. Why bring it up?
You are right that we can't pick what goes into the index but we can chose the index that we invest in. We could invest in the Dow Jones Industrial Average index. It's return would be kind of the same as investing in the S&P 500 or a international large cap index. However, I am going to guess that few of us do. Why? Well, the companies are kind of chosen in a arbitrary fashion so it is not a very good index. (plus other issues.)
Twins Fan wrote:If I really wanted to choose between GM, Ford, VW... east coast or west coast, I would pick individual stock or actively managed funds that choose the stocks I like. I have no interest in individual stocks or actively managed funds, so I simply stick with index funds.


VW and Toyota stock's are efficiently traded and well integrated from my US prospective, just like GM and Ford. As a passive index investor all of these stocks should be included in a equity index. Yet, if you invest in the S&P 500 you are actively choosing to included GM and Ford and excluding VW and Toyota. Why? As you say, keep it simple. Hold international as you hold international.
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Re: Could John Bogle Be Right About International Stock?

Post by alex_686 »

Browser wrote:U.S. investors who are spending down their portfolios are spending their money in U.S. dollars and should avoid currency risk, IMO. Since global investing exposes one to currency risk, it's probably not as good an idea for retirees as it might be for accumulators.
I am going to have to disagree. Equities are decent hedges against currency risk. They have a natural hedge for currency risk for the same reason they have a natural hedge against inflation – they are tied to real assets. For holding periods of about 3 years, currency risk tends to be reduced to statistical noise.

Country risk is the bigger issue.
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Re: Could John Bogle Be Right About International Stock?

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A vexing question even my PUM(Portfolio Under Management)manager cannot answer . In any event he, manager, stresses diversification by allocating about 40% of the whole pie to International stock and a bond funds though,..Am I queasy about this allocation, somewhat at first, but now accept the plan,...
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Re: Could John Bogle Be Right About International Stock?

Post by Sunny Sarkar »

spirogruf wrote:is there a possibility that John Bogle just might be right?
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Re: Could John Bogle Be Right About International Stock?

Post by alex_686 »

SeeMoe wrote:A vexing question even my PUM(Portfolio Under Management)manager cannot answer . In any event he, manager, stresses diversification by allocating about 40% of the whole pie to International stock and a bond funds though,..Am I queasy about this allocation, somewhat at first, but now accept the plan,...
A little off topic, but why did you fell queasy? And how did you come to accept the plan? My posts in this topic have dealt with logic and theory but they don't address the behavioral or emotional issues. I am just looking for a little personal insight here.
Last edited by alex_686 on Thu Jul 30, 2015 2:00 pm, edited 1 time in total.
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Re: Could John Bogle Be Right About International Stock?

Post by ShiftF5 »

steve roy wrote:Here's the thing: Whatever your asset allocation is, twenty years from now it will not be optimal. That guy over there, the gent who had more Emerging Markets and Small Caps and more nominal bonds and fewer TIPs, who was 42% in fixed instruments rather than 52%, he'll be the person who had it exactly "right".

And you'll be able to look back and see this clearly (depending on the start date of your analysis). And then you can kick yourself around the block for not paying more attention to the advice of Paul Merriman or Larry Swedroe or whoever, and cry yourself to sleep at night for getting it "wrong."

Or you can shrug and say, "Well, I used the three-fund portfolio, I got pretty good returns, and by golly, I did well enough."
+1

Very well said, sir.

It is unknowable what the exact perfect mix is for any given period of time, until that time has passed.

Set your SWAN portfolio and "Stay the Course".

Time will tell.
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Re: Could John Bogle Be Right About International Stock?

Post by Browser »

alex_686 wrote:
Browser wrote:U.S. investors who are spending down their portfolios are spending their money in U.S. dollars and should avoid currency risk, IMO. Since global investing exposes one to currency risk, it's probably not as good an idea for retirees as it might be for accumulators.
I am going to have to disagree. Equities are decent hedges against currency risk. They have a natural hedge for currency risk for the same reason they have a natural hedge against inflation – they are tied to real assets. For holding periods of about 3 years, currency risk tends to be reduced to statistical noise.

Country risk is the bigger issue.
Equities don't "hedge" currency risk -- they expose you to currency risk if you are investing in foreign stocks. Returns from foreign stocks have two risk components: equity risk and currency risk, so you are exposed to more aggregate risk. And it is uncompensated risk since there is no "currency risk premium". The best you can hope for is that currency risk is net-net cancelled out over time. But retirees who are drawing down their portfolios shouldn't be taking additional risks that are uncompensated. The denominated currency of foreign investments can be weak for years on end and dilute the equity returns from foreign stock investments, just as has been happening recently. You always have to consider the downside of any investment strategy in terms of potential portfolio drawdowns and "sequence of returns" in a retirement portfolio. Here's what Bogle said about the currency risk of investing in foreign stocks:
Bogle goes on to elaborate, “Why take the currency risk?” Currency risk is primarily about the Euro and the Yen. During 2014, the Euro and the Yen dropped 12.09% and 12.10%, respectively, against the dollar. As a result, foreign stocks as represented by iShares MSCI EAFE (EFA) were down 5.04% when measured in U.S. dollars, but the net index was up 5.67% when measured in their local currencies.Another one of the ten measures of economic freedom is monetary freedom which is measured by a stable secure currency. None of the six countries ranked as free have the Euro or the Yen as their currency, removing currency risk as a reason to avoid investing in the most economically free countries.
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Re: Could John Bogle Be Right About International Stock?

Post by stemikger »

dh wrote:Possibly. Warren Buffet suggests that just the S&P 500 is enough (at least in his wife's future portfolio). I think everyone needs to create a plan and stick to it. I made the decision to spread risk and go global (50% US / 50% International). Is that best/optimal? I believe that is the wrong question. I think the focus should be to create a plan and stick to it.
Well said. I don't think it is a matter of being right or wrong it is what helps you stick with a plan. I have been a broken record here because I have really taken to heart what Mr. Bogle says about international investing. In Common Sense on Mutual Funds, he lays it all out on the table in a very cogent way. I personally have never invested in international and I feel it is not needed and quite frankly would not feel comfortable doing so.

Jack does say that he may be wrong, but is still sticking to his guns. He feels if you want to add it, he would do no more than 20% and then adds, but make sure you know your risk.

Maybe's it's me, but when John Bogle and Warren Buffett agree on a topic, I feel pretty comfortable sticking to that advice.

This link is just from last year and is still saying the same thing about international investing.

http://www.bloomberg.com/news/2014-12-0 ... -u-s-.html

P.S. What concerns me is that Alan Greenspan was just talking about a bond bubble and Warren Buffett calls them dangerous. Jack still thinks we need them and likes a static 60/40 AA.
Last edited by stemikger on Thu Jul 30, 2015 2:53 pm, edited 1 time in total.
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Browser
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Re: Could John Bogle Be Right About International Stock?

Post by Browser »

Of course to be fully accurate, Bogle doesn't say you should avoid foreign stocks completely. Invest in them if you must, but no more than 20% of your equity allocation he says. So perhaps the argument boils down to which number between 20% and 50% seems comfortable to you.
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Re: Could John Bogle Be Right About International Stock?

Post by alex_686 »

Browser wrote:Equities don't "hedge" currency risk -- they expose you to currency risk if you are investing in foreign stocks. Returns from foreign stocks have two risk components: equity risk and currency risk, so you are exposed to more aggregate risk. And it is uncompensated risk since there is no "currency risk premium". The best you can hope for is that currency risk is net-net cancelled out over time. But retirees who are drawing down their portfolios shouldn't be taking additional risks that are uncompensated. The denominated currency of foreign investments can be weak for years on end and dilute the equity returns from foreign stock investments, just as has been happening recently. You always have to consider the downside of any investment strategy in terms of potential portfolio drawdowns and "sequence of returns" in a retirement portfolio.
FYI, I am framing this discussion in terms of stable developed markets.

I am not saying that there is no currency risk. But is it a risk that matters? Currency risk is not about the change in currency prices. Most of the change between currency prices are driven by different rates of inflation. From an investor viewpoint this predicable, boring, and does not have any effect on returns. The effects of local inflation is already priced into the foreign stock.

Currency risk is the risk posed by the unexpected strengthening / weakening of the local currency. However, this movement (upwards and downwards) is bounded by the concept of Purchasing Power Parity (PPP). If a currency gets to weak then cash will flow in to buy the bargains, strengthening the currency. If stocks drop 12% a year is there any reason why they can't drop 12% the next? No. If the Euro dropped 12% in real terms one year could it drop 12% the next? Probably not. (And then Greece is going to blow up and prove me wrong.) There is a reversion to PPP.

So, let us take a look at the real work. Look at a period of rolling 3 year holding period on equities. Can you spot the currency risk? Probably not. Normally market risk, which is by far the bigger risk, tends to swamp out the currency risk. Rarely does currency swing enough to be heard above the din of market risk.

Now, do the same thing with bonds. Here you can see currency risk. So, here we would be concerned about currency risk.
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Silence Dogood
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Re: Could John Bogle Be Right About International Stock?

Post by Silence Dogood »

Recency bias.

Would we be discussing this if international had been outperforming domestic over the past few months?

Stay the course!
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JoMoney
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Re: Could John Bogle Be Right About International Stock?

Post by JoMoney »

alex_686 wrote:He is wrong for 2 reasons.

First, the S&P 500 is not a domestic US index. It is a index that is dominated by multinational corporations with world exposure that just happen to have their headquarters in the US. I am overstating my case a bit, but it is getting truer every day.

Second, the point of being a Bogglehead is to be a passive investor because we assume that the market is efficient. Yet we load up on Ford and GM and exclude VW and Toyota? We buy Proctor and Gamble but exclude Unilver? These stocks are efficiently priced and well integrated into our stock market. Why would we want to exclude them? Just because they are headquartered in a different country? I can't think of a single reason why a passive investor would not incorporate these companies.
The fact that there is a lot of international exposure within the U.S. markets is among the reasons Bogle has suggested that having an international allocation isn't necessary, so that's not a point against his.
For your awareness, there's probably at least a dozen S&P500 companies that aren't even headquartered in the U.S.
https://en.wikipedia.org/wiki/List_of_S ... _companies

There's a variety of things Bogleheads believe that I don't see as being true, but I still follow Bogle's advice. Whether the market is efficient or not, I think indexing the broad U.S. market is a pretty good idea. Unless you think the market is full of suckers that you have some system to take advantage of, indexing might be even more compelling in an inefficient market. Some Bogleheads use EMH and models built around it to justify all sorts of strategies I think are silly.
The biggest reasons I don't find holding international compelling is that holding a broad U.S. index is already quite diversified, perhaps more than I might like it to be. Adding international for the sake of splitting holdings up into even smaller fractions of a percent isn't appealing to me, especially when I view it as predominately adding holdings that come with more risk. There's also the matter of expenses, which are higher in international and the 'expense ratio' doesn't capture all of it. When including foreign tax withholdings it could easily detract .5% from the returns of international over a U.S. index.
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Re: Could John Bogle Be Right About International Stock?

Post by friar1610 »

2comma wrote:I'm going to stick with the "old advice" and go with 20% of stock in international and I can't convince myself to get into international bonds. YMMV?
+1 except that it's 25% in my case. No plans to go higher. And no plans for international bonds (except for a small slice I have in a Life Cycle fund.)
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Re: Could John Bogle Be Right About International Stock?

Post by Twins Fan »

alex_686 wrote:
Twins Fan wrote:Some are getting way too nitpicky here. I, and I don't believe anyone on Bogleheads, picks what goes in the S&P 500 or an index fund. That's beyond our control. Why bring it up?
You are right that we can't pick what goes into the index but we can chose the index that we invest in. We could invest in the Dow Jones Industrial Average index. It's return would be kind of the same as investing in the S&P 500 or a international large cap index. However, I am going to guess that few of us do. Why? Well, the companies are kind of chosen in a arbitrary fashion so it is not a very good index. (plus other issues.)
Twins Fan wrote:If I really wanted to choose between GM, Ford, VW... east coast or west coast, I would pick individual stock or actively managed funds that choose the stocks I like. I have no interest in individual stocks or actively managed funds, so I simply stick with index funds.


VW and Toyota stock's are efficiently traded and well integrated from my US prospective, just like GM and Ford. As a passive index investor all of these stocks should be included in a equity index. Yet, if you invest in the S&P 500 you are actively choosing to included GM and Ford and excluding VW and Toyota. Why? As you say, keep it simple. Hold international as you hold international.
You're arguing just for the sake of arguing now, and it's about pointless. I don't think Bogle, Buffett, or anyone advises to invest in the DOW index. So again, why bring it up?

Again, I don't feel the need to hold VW or Toyota. I'm comfortable holding GM and Ford, or the US market, as I think they will all do about the same in the long run.

And, "Hold international as you hold international".... that doesn't sound very simple to me, as I don't understand what you're saying. :wink:

You seem to think there's only one way to invest? That is far from the case! Again, to each their own.
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Re: Could John Bogle Be Right About International Stock?

Post by terrabiped »

Browser wrote:
alex_686 wrote:
Browser wrote:U.S. investors who are spending down their portfolios are spending their money in U.S. dollars and should avoid currency risk, IMO. Since global investing exposes one to currency risk, it's probably not as good an idea for retirees as it might be for accumulators.
I am going to have to disagree. Equities are decent hedges against currency risk. They have a natural hedge for currency risk for the same reason they have a natural hedge against inflation – they are tied to real assets. For holding periods of about 3 years, currency risk tends to be reduced to statistical noise.

Country risk is the bigger issue.
Equities don't "hedge" currency risk -- they expose you to currency risk if you are investing in foreign stocks. Returns from foreign stocks have two risk components: equity risk and currency risk, so you are exposed to more aggregate risk. And it is uncompensated risk since there is no "currency risk premium". The best you can hope for is that currency risk is net-net cancelled out over time. But retirees who are drawing down their portfolios shouldn't be taking additional risks that are uncompensated. The denominated currency of foreign investments can be weak for years on end and dilute the equity returns from foreign stock investments, just as has been happening recently. You always have to consider the downside of any investment strategy in terms of potential portfolio drawdowns and "sequence of returns" in a retirement portfolio. Here's what Bogle said about the currency risk of investing in foreign stocks:
Bogle goes on to elaborate, “Why take the currency risk?” Currency risk is primarily about the Euro and the Yen. During 2014, the Euro and the Yen dropped 12.09% and 12.10%, respectively, against the dollar. As a result, foreign stocks as represented by iShares MSCI EAFE (EFA) were down 5.04% when measured in U.S. dollars, but the net index was up 5.67% when measured in their local currencies.Another one of the ten measures of economic freedom is monetary freedom which is measured by a stable secure currency. None of the six countries ranked as free have the Euro or the Yen as their currency, removing currency risk as a reason to avoid investing in the most economically free countries.
http://www.marottaonmoney.com/jack-bogl ... ed-states/
Very interesting. Especially the marottaonmoney link. It seems like there are a lot of unknown risks with international investing. When I invest in the US, I feel like I know what I'm getting myself into. I understand our culture, our government, our politics, our laws, our history, our level of corruption, our level of debt, etc. All the other countries of the world, not nearly so much.
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Re: Could John Bogle Be Right About International Stock?

Post by asset_chaos »

Twins Fan wrote:
asset_chaos wrote:But on this question of should everyone invest solely in their domestic market, he is obviously wrong.

Invest in only your domestic market, not even close.
I don't believe Mr. Bogle has ever said what you're suggesting here. His advice about the topic brought up is for the average US investor. Not people in Switzerland or Spain. I don't know what his advice would be for those folks.
Well, yes and no. Television interviews and articles are transmitted all over the world. He says US only frequently, almost always without any qualification. Only rarely have I ever read him add the qualification that his advice is only good for a US investor. And many non-US investors who have found this board have taken his advice to mean domestic stock markets. I've never heard or read him say, here's my advice that's good for all investors, and here's my special advice that only American investors should pay attention to. Not to mention that I don't think domestic only is good advice for even American investors. It's bad advice for American investors; it's terrible advice for everyone else.
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Re: Could John Bogle Be Right About International Stock?

Post by asset_chaos »

terrabiped wrote:It seems like there are a lot of unknown risks with international investing. When I invest in the US, I feel like I know what I'm getting myself into. I understand our culture, our government, our politics, our laws, our history, our level of corruption, our level of debt, etc. All the other countries of the world, not nearly so much.
Isn't that the definition of one of the cognitive bias that investors are subject to, assuming familiar equals safe?
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Re: Could John Bogle Be Right About International Stock?

Post by rgs92 »

Much ado about nothing. Mr. Bogle says it's fine to have a fifth of your stock allocation in international. In a healthy 50/50 portfolio, that's a total of 10% in foreign equities. So even a significant deviation in the pattern of foreign returns isn't going to be too important. So do it or don't do it. It really doesn't matter, and I think that's what Mr. Bogle is getting at.
He's like "go ahead if it makes you feel good" every time I heard him speak on this, usually with a shrug.
Last edited by rgs92 on Thu Jul 30, 2015 10:40 pm, edited 2 times in total.
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