Voilatility of international stocks, well in particular, VTIAX?

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fantasytensai
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Voilatility of international stocks, well in particular, VTIAX?

Post by fantasytensai » Wed Jan 18, 2017 11:33 pm

It is generally recommended that one carry international stocks to diversify one's portfolio. One of the popular suggestions is VTIAX. However, looking at VTIAX's 10 year performance, unlike its US counterpart VTSAX, VTIAX is very voilatile. It seems to be far from a safe "buy and hold" stock. I wonder why is it so recommended? Solely for diversification? But if US stock tumbles, there is a good chance international stocks will tumble as well.


Edit: a word.
Last edited by fantasytensai on Thu Jan 19, 2017 8:34 am, edited 1 time in total.

avalpert
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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by avalpert » Wed Jan 18, 2017 11:38 pm

Why don't you look at the 10 year performance for 2000 to 2010 and tell me what conclusion you draw as to what to invest in.

MorningstarFan
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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by MorningstarFan » Wed Jan 18, 2017 11:40 pm

Short answer: yes, international stocks are good diversifiers due to low correlation to US stocks. Also, the past performance, even looking at 10 years, does not predict the future.

I actually think that the international stocks are at a cheaper price level, on average. However, because I know I cannot predict the future, I will invest the broad international index, hence VTIAX.

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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by Erwin007 » Thu Jan 19, 2017 12:08 am

fantasytensai wrote:It is generally recommended that one carry international stocks to diversify one's portfolio. One of the popular suggestions is VTIAX. However, looking at VTIAX's 10 year performance, unless its US counterpart VTSAX, VTIAX is very voilatile. It seems to be far from a safe "buy and hold" stock. I wonder why is it so recommended? Solely for diversification? But if US stock tumbles, there is a good chance international stocks will tumble as well.
Why, if one is investing in "buy and hold stock", does one care about short term volatility? Buy and hold to me
implies greater than a 10-year horizon. What am I missing?

fantasytensai
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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by fantasytensai » Thu Jan 19, 2017 8:37 am

avalpert wrote:Why don't you look at the 10 year performance for 2000 to 2010 and tell me what conclusion you draw as to what to invest in.
How would I find this information? The sites that I browsed online only goes back 10 years. That's why I was basing my observation on it.

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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by triceratop » Thu Jan 19, 2017 8:49 am

fantasytensai wrote:
avalpert wrote:Why don't you look at the 10 year performance for 2000 to 2010 and tell me what conclusion you draw as to what to invest in.
How would I find this information? The sites that I browsed online only goes back 10 years. That's why I was basing my observation on it.
Try Morningstar for VGTSX
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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by nisiprius » Thu Jan 19, 2017 9:12 am

It's a frequently debated topic. These are my opinions, but (obviously) I don't think they're crazy.

1) International stocks in general, "and VTIAX in particular," have been a little more volatile than US stocks, but not a lot more volatile.

2) International stocks and US stocks have leapfrogged each other. The jumps have lasted for periods of five or ten years or so. That's pretty common among categories of stocks and it makes it difficult to think about, because five or ten years seems like forever, and because even, say, a twenty-year period may really only break down into a handful of these periods, and the performance over the whole period depends more on whether it happens to cover two good periods and one bad one, or two bad periods and one good one.

3) The only real index that goes back very far is the EAFE index; it's "the" international index in the same way that the S&P 500 is "the" US index. The MSCI website lets you chart it and compare it with a MSCI US index, and here's how it looks, 1969 to present... with some editorial comments by me.

I got so excited to find that I could get a chart of the EAFE itself that I didn't look too closely, I think these are price indexes, not total return (growth) indexes. But that's good enough for what I want to point out.

Source

Image

4) During 2000-2009, the "lost decade," all the people in the forum with higher international stock were pointing out that it hadn't been a lost decade for them. However, for the last five years or so, international has been underperforming and so we're getting posts from people wondering if they should ditch them.

5) The fact that US and international stocks perform differently means that international stocks are a diversifier for US stocks.

6) But people are apt to exaggerate how much diversification it really provides. It definitely didn't protect against the 2008-2009 crisis, an international allocation hurt a little, rather than helping. The overall correlation between US and international has been about 0.66. Worse yet, it's been about 0.9 for the last ten years or so. So there's always a debate on whether the correlation has changed. Even 0.66 isn't a very powerful amount of diversification. Because international stocks have had somewhat lower return and somewhat higher volatility, they have been somewhat less good than US stocks. Diversification, when the diversifier is less good, is a balancing act. in a global portfolio the diversification has helped, but the lower Sharpe ratio of international stocks (a measure of risk-adjusted return) and it's been amazingly close to a wash. The numbers you get depend on the length of time you choose to look it.

7) I would be skeptical about anyone who claims that the choice of international allocation matters hugely. It hasn't, in the past.

You are just going to have to be guided by yourself on this.

It's my opinion that 0% international isn't crazy, and full global cap-weighting (about 50% US, 50% international) isn't crazy, and nothing in between is crazy. People tend to be guided by their macroeconomic feelings and ideology, neither of which are reliable but may help in reaching a decision you can stick with. Whatever you pick it is certain that there will be times when you wish you had more international and times when you wish you had less.
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.

fantasytensai
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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by fantasytensai » Thu Jan 19, 2017 9:22 am

nisiprius wrote:It's a frequently debated topic. These are my opinions, but (obviously) I don't think they're crazy.

1) International stocks in general, "and VTIAX in particular," have been a little more volatile than US stocks, but not a lot more volatile.

2) International stocks and US stocks have leapfrogged each other. The jumps have lasted for periods of five or ten years or so. That's pretty common among categories of stocks and it makes it difficult to think about, because five or ten years seems like forever, and because even, say, a twenty-year period may really only break down into a handful of these periods, and the performance over the whole period depends more on whether it happens to cover two good periods and one bad one, or two bad periods and one good one.

3) The only real index that goes back very far is the EAFE index; it's "the" international index in the same way that the S&P 500 is "the" US index. The MSCI website lets you chart it and compare it with a MSCI US index, and here's how it looks, 1969 to present... with some editorial comments by me.

I got so excited to find that I could get a chart of the EAFE itself that I didn't look too closely, I think these are price indexes, not total return (growth) indexes. But that's good enough for what I want to point out.

Source

Image

4) During 2000-2009, the "lost decade," all the people in the forum with higher international stock were pointing out that it hadn't been a lost decade for them. However, for the last five years or so, international has been underperforming and so we're getting posts from people wondering if they should ditch them.

5) The fact that US and international stocks perform differently means that international stocks are a diversifier for US stocks.

6) But people are apt to exaggerate how much diversification it really provides. It definitely didn't protect against the 2008-2009 crisis, an international allocation hurt a little, rather than helping. The overall correlation between US and international has been about 0.66. Worse yet, it's been about 0.9 for the last ten years or so. So there's always a debate on whether the correlation has changed. Even 0.66 isn't a very powerful amount of diversification. Because international stocks have had somewhat lower return and somewhat higher volatility, they have been somewhat less good than US stocks. Diversification, when the diversifier is less good, is a balancing act. in a global portfolio the diversification has helped, but the lower Sharpe ratio of international stocks (a measure of risk-adjusted return) and it's been amazingly close to a wash. The numbers you get depend on the length of time you choose to look it.

7) I would be skeptical about anyone who claims that the choice of international allocation matters hugely. It hasn't, in the past.

You are just going to have to be guided by yourself on this.

It's my opinion that 0% international isn't crazy, and full global cap-weighting (about 50% US, 50% international) isn't crazy, and nothing in between is crazy. People tend to be guided by their macroeconomic feelings and ideology, neither of which are reliable but may help in reaching a decision you can stick with. Whatever you pick it is certain that there will be times when you wish you had more international and times when you wish you had less.
It's simply amazing how almost every question in this forum is answered by a well laid out, thoughtful and convincing argument like this. Thank you sir (or madam) very much for this.

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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by nisiprius » Thu Jan 19, 2017 9:31 am

Some other numbers, from PortfolioVisualizer.
Portfolio 1 is US only Vanguard Total Stock (VTSMX).
Portfolio 2 is international only, Vanguard Total International, VGTSX, I'm using it instead of VTIAX because sometimes the numbers for Admiral shares only go back to the time Vanguard began offering them. For looking at history, it's usually better to look at Investor shares.
Portfolio 3 is a 50/50 mix, so we can look for a diversification benefit.

Click here and play with the numbers yourself

Image

Over this particular past time period we see that:

International stocks (portfolio 2) were more volatile, but not an awful lot more volatile, 17.90% standard deviation compare to 15.90% for the US. Not too scary. It's not as if it were, say, emerging markets stock with a 25% standard deviation.

Adding international stocks (portfolio 3) did not show a powerful diversification effect. It did not, for example, have a lower standard deviation than US only. Here's where you see the effect. Without a diversification, you'd naively expect a 50/50 mix to be exactly halfway in between 15.90% and 17.90%, or 16.90%. But it's actually 16.28%, a bit lower. That's "diversification reducing risk," and, dare I say it? Big deal.

People talk a lot about diversification reducing risk, but it's not as if you could brew up a 100% stocks portfolio that would have a standard deviation of 3.48%, which is what the Total Bond Market Index Fund had over that time period.

Finally, the Sharpe ratio, the measure of risk-adjusted return which to me is a very important thing to look at, is highest for pure US, lowest for pure international... and in particular, the Sharpe ratio of the mix is not higher than that of US only. I can't put this in bold enough type, over this particular time period the diversification effect helped very little, and the situation was dominated by the simple fact that over this particular time period US had much higher returns than international.
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Re: Voilatility of international stocks, well in particular, VTIAX?

Post by asif408 » Thu Jan 19, 2017 9:44 am

fantasytensai wrote:
avalpert wrote:Why don't you look at the 10 year performance for 2000 to 2010 and tell me what conclusion you draw as to what to invest in.
How would I find this information? The sites that I browsed online only goes back 10 years. That's why I was basing my observation on it.
Here, I have done the work for you: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

As you can see, I cherry picked the start and end dates, but that is more to show what can happen. From 2002-2007, international returned about 150% vs 50% for the US, so basically 3 times as much. From 2002-2011 (basically a 10 year period), international returned twice as much as US stocks. Since then, we've been in a five year stretch where US has outperformed handily and international has actually had a negative return: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

What do you think people were saying about US stocks in 2002, international stocks in 2007 or 2010, and about US stocks now? I would venture to guess there was euphoria for US stocks in 2002, people were down on them in the late 2000s, and now euphoria about US stocks is high again.

So what conclusions do you draw about future returns? Personally, I see what nisiprius sees, 5-10 years of outperformance for each over the other and a cycling up and down.

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