Why Wouldn't You Want International Stocks?

[rattlenap]

This question isn't for myself since I know the benefits of international investing. But more for the average investor and not a Boglehead. So if you're an average investor, will you do just fine in the long run with a simple two-fund portfolio of Total U.S. Stocks/U.S. Bonds? I just want to get your personal opinions on the matter and hear what you have to say. - Cheers!

[brad.clarkston]

No you don't it's just a diversification hedge.

[White Coat Investor]

As long as the future resembles the past, you'll do fine. The main reason I invest a significant portion of my equity overseas is because I think there is a reasonable chance that will not be the case. See Japan for the classic example.

[Toons]

You will be fine with a Balanced Index fund.

[mptfan]

So if you're an average investor, will you do just fine in the long run with a simple two-fund portfolio of Total U.S. Stocks/U.S. Bonds?

Yes. Nobody "needs" international stocks, or even domestic stocks for that matter.

[pkcrafter]

No you don't it's just a diversification hedge.

Yes, you do, it's just a diversification hedge.

Sorry brad, couldn't resist.

[rattlenap]

As long as the future resembles the past, you'll do fine. The main reason I invest a significant portion of my equity overseas is because I think there is a reasonable chance that will not be the case. See Japan for the classic example.

Oh, yes! I know about Japan. Yet can you expand upon your views as to why you think going forward will not be a repeat of the past, as far as U.S. stocks are concerned?

[brad.clarkston]

No you don't it's just a diversification hedge.

Yes, you do, it's just a diversification hedge.

Sorry brad, couldn't resist.

Thanks ! I'm at work whacking away at four different IM's and a bridge call. [OT comment removed by admin LadyGeek]

[Christine_NM]

^^ That Japan argument never made sense to me for two reasons:

1. I buy Japan in an intl fund to avoid what happened in Japan? OK, maybe if I feel gullible enough. But the second point makes intl strictly optional for me:

2. I buy an intl fund so as not to miss any Japan-like depression anywhere. Yes I get good stuff too, but I have to expose the portfolio to all the bad stuff to get any benefit at all.

Asset classes are stocks, bonds, RE, and cash. The rest is currency and flag-waving.

[pkcrafter]

Rattlenap, maybe a good question would be, Why wouldn't you want international?

Paul

[rattlenap]

Per a commenter I am changing the title to and asking "Why Wouldn't You Want International Stocks"?

[Trapper]

Why don't I want international?
1. Currency risk
2. Current US indexes have international exposure
3. US legal system, while flawed, is still the best in the world.
I have no issues with those that disagree.

[rattlenap]

Why don't I want international?
1. Currency risk
2. Current US indexes have international exposure
3. US legal system, while flawed, is still the best in the world.
I have no issues with those that disagree.

Just curios, but what does your U.S. portfolio look like?

[avalpert]

^^ That Japan argument never made sense to me for two reasons:

1. I buy Japan in an intl fund to avoid what happened in Japan? OK, maybe if I feel gullible enough.

No, you buy Japan to diversify against whatever the next 'Japan' may be recognizing it probably isn't Japan. It isn't about being gullible, it is about recognizing you don't know what market will go sideways and when so you don't want to lean to heavily on any one market (nobody in the 80s thought Japan was going to be that, they were going to buy up the US and own us).

2. I buy an intl fund so as not to miss any Japan-like depression anywhere. Yes I get good stuff too, but I have to expose the portfolio to all the bad stuff to get any benefit at all.

Or you could buy just one market and pray it is among the good stuff and not the bad

Asset classes are stocks, bonds, RE, and cash. The rest is currency and flag-waving.

And international equities makes up about 50% of the 'stocks' asset class.

[reriodan]

^^ That Japan argument never made sense to me for two reasons:

1. I buy Japan in an intl fund to avoid what happened in Japan? OK, maybe if I feel gullible enough.

No, you buy Japan to diversify against whatever the next 'Japan' may be recognizing it probably isn't Japan. It isn't about being gullible, it is about recognizing you don't know what market will go sideways and when so you don't want to lean to heavily on any one market (nobody in the 80s thought Japan was going to be that, they were going to buy up the US and own us).

2. I buy an intl fund so as not to miss any Japan-like depression anywhere. Yes I get good stuff too, but I have to expose the portfolio to all the bad stuff to get any benefit at all.

Or you could buy just one market and pray it is among the good stuff and not the bad

Asset classes are stocks, bonds, RE, and cash. The rest is currency and flag-waving.

And international equities makes up about 50% of the 'stocks' asset class.

+1. It's funny how people think it's illogical to buy a handful of stocks, yet perfectly logical to buy a handful of stocks US. If you only buy US, you ARE a stock picker.

[3PKWzh9]

As long as the future resembles the past, you'll do fine. The main reason I invest a significant portion of my equity overseas is because I think there is a reasonable chance that will not be the case. See Japan for the classic example.

What geographies do you prefer, WhiteCoat?

Or, alternately, which funds do you use?

[metalworking]

Why don't I want international?
1. Currency risk
2. Current US indexes have international exposure
3. US legal system, while flawed, is still the best in the world.
I have no issues with those that disagree.

Sums it up perfectly for me.

[triceratop]

Why don't I want international?
1. Currency risk
2. Current US indexes have international exposure
3. US legal system, while flawed, is still the best in the world.
I have no issues with those that disagree.

If you believe the US legal system is the best in the world should it be a positive to you that current US indices have significant international exposure via multinational corporations? Shouldn't you preferentially hold US domicile companies doing business primarily in US? Just curious.

[am]

I see these types of threads pop up from time to time questioning investing in what's cold.

When us stocks underperform, we will see threads about increasing international, why invest in US when we live and work here, international funds are more diversified, etc.

[aceoperations]

I see these types of threads pop up from time to time questioning investing in what's cold.

When us stocks underperform, we will see threads about increasing international, why invest in US when we live and work here, international funds are more diversified, etc.

+1. There seems to be recency bias involved when ever owning the international stock market comes up. At the end of the day, if owning international keeps you up at night, then you probably should stick to domestic US stock.

[Trapper]

Triceratop, if I understand your question...
Yes, I see it as a positive.
The US legal system allows US based multinational companies, many who are represented in index funds to pursue business opportunities abroad without subjecting the stock holding owners to less transparent non US legal systems.
The multinational US based corporations give me international exposure with reduced risk.

[happyisland]

3. US legal system, while flawed, is still the best in the world.

Two questions spring to mind:

- what criteria are you using to declare the US legal system to be "the best in the world"? That's a big claim.

- wouldn't the relative quality of the US legal system be priced into stocks by the sophisticated investors in the market?

[triceratop]

Triceratop, if I understand your question...
Yes, I see it as a positive.
The US legal system allows US based multinational companies, many who are represented in index funds to pursue business opportunities abroad without subjecting the stock holding owners to less transparent non US legal systems.
The multinational US based corporations give me international exposure with reduced risk.

So when a US corporation pursues business opportunities they expose themselves to none of the foreign countries' legal systems? Why do you think that?

[Trapper]

Triceratops, I think we misunderstand. US multinationals absolutely expose themselves to foreign legal systems/constraints/opportunities when they take advantage of off shore possibilities.
HappyIsland, I base my opinion on the US legal system on personal experience when I have had to plead my case if front of the judge. If you hold alternate thoughts, I would be interested in learning.

[triceratop]

Right, so if you believe that then you should preferentially own US stocks since you don't trust those foreign legal systems. And yet, I bet your portfolio is dominated by US multinationals with significant foreign exposure. Yes? Why do you do this?

[danaht]

Here are some more reasons to avoid international stocks:

1) In a tax advantaged account - the dividends are taxed by the foreign countries and it's almost impossible to get a deduction/credit (or reimbursement) from these taxes paid. (In a taxable account - you can at least get a US tax credit for the foreign taxes paid)
2) expense ratios for international index funds are usually a little higher than domestic funds.
3) In a taxable account - not all of the dividends are qualified. This is especially true for the emerging market funds.

Having said all that - I am mostly buying international equity (VEA, and VWO) right now - because I feel these are priced at a much better value compared to US equity. To me it appears that VEA and VWO still have not completely recovered from the 2008 crash - where US stocks have. I am also trying to slowly increase my international allocation to 30% (it's at 17% right now).

[Taylor Larimore]

Bogleheads:

This post may be helpful:

How much international stock? A suggestion.

Best wishes.
Taylor

[wije]

^^ That Japan argument never made sense to me for two reasons:

The Japan argument doesn't apply so much to the US because of globalism. If the US falls, most of the rest of the world will fall as well. On portfoliovisualizer.com, SPY has .92 correlation with VEU so there isn't fantastic diversification.

As much as Bogleheads might strongly protest, I think the best way to achieve int'l diversification is to select a basket of promising country ETFs, preferably emerging markets. Individually they have less correlation to the US than broad int'l funds. On the down side, it takes quite a bit of work to find the right countries, and even then you're increasing your risk. Also, country ETFs have much higher expense ratios.

[avalpert]

^^ That Japan argument never made sense to me for two reasons:

The Japan argument doesn't apply so much to the US because of globalism. If the US falls, most of the rest of the world will fall as well.

Honestly, this assertion is so short-sighted. It really isn't hard to imagine at all that the US goes through a period of isolationism that cuts itself off from the world eventually leading to anemic economic growth within the US but not elsewhere.

The idea that the global world of the last ~50 years is inevitable to last unless the entire world goes down is recency bias at its best.

[happyisland]

HappyIsland, I base my opinion on the US legal system on personal experience when I have had to plead my case if front of the judge. If you hold alternate thoughts, I would be interested in learning.

Do you have any experience pleading in courts located in the developed world outside the USA?

If you're interested in comparing the USA to the rest of the rich world, you might be interested to look into how (for example) patents, consumer protection, and corporate governance are handled.

[Jags4186]

If you believe that domestic stocks are going to perform better than international stocks in the long run, that's your reason not to own them. More diversification isn't always a good thing.

There are lots of asset classes that we choose not to own. For example I don't own precious metals. I don't own collectible stamps. I don't own artwork. That would increase my diversification, but unless I'm incredibly lucky, I'm not going to increase my returns.

[happyisland]

If you believe that domestic stocks are going to perform better than international stocks in the long run, that's your reason not to own them. More diversification isn't always a good thing.

There are lots of asset classes that we choose not to own. For example I don't own precious metals. I don't own collectible stamps. I don't own artwork. That would increase my diversification, but unless I'm incredibly lucky, I'm not going to increase my returns.

I think there's a bit of a difference between shares in profit-seeking companies and things like metals or collectibles.

[avalpert]

If you believe that domestic stocks are going to perform better than international stocks in the long run, that's your reason not to own them. More diversification isn't always a good thing.

Yes and if you believe energy companies are going to perform better than other sectors in the long run that's your reason not to own other sectors. Of course most here would probably suggest you really evaluate why you think the basis for your belief is stronger than the market consensus that has led to the current valuations.

[Christine_NM]

^^ That Japan argument never made sense to me for two reasons:

The Japan argument doesn't apply so much to the US because of globalism. If the US falls, most of the rest of the world will fall as well. On portfoliovisualizer.com, SPY has .92 correlation with VEU so there isn't fantastic diversification.

As much as Bogleheads might strongly protest, I think the best way to achieve int'l diversification is to select a basket of promising country ETFs, preferably emerging markets. Individually they have less correlation to the US than broad int'l funds. On the down side, it takes quite a bit of work to find the right countries, and even then you're increasing your risk. Also, country ETFs have much higher expense ratios.

Yes, I'd prefer a few single country ETFs and in fact have owned some in small amounts. But I never was willing to risk 20% of my stock allocation on single countries that are so much smaller than the US. I think maybe a hedged international fund that did not insist on being everywhere at once would be acceptable to me. I haven't seriously looked for such a fund.

And by Dunn's Law, when active international funds do well, an international index fund will do better.

[jhfenton]

I would sleep much less soundly with an all-US equities portfolio. I sleep very well at 50/50 US/ex-US.

[ClevrChico]

Here's the top 10 holdings of VTIAX:

1 Royal Dutch Shell plc
2 Nestle SA
3 Novartis AG
4 Samsung Electronics Co. Ltd.
5 Roche Holding AG
6 HSBC Holdings plc
7 Toyota Motor Corp.
8 Taiwan Semiconductor Manufacturing Co. Ltd.
9 Tencent Holdings Ltd.
10 BP plc

Do you want to own those? I sure do.

[groovy9]

Rattlenap, maybe a good question would be, Why wouldn't you want international?
Paul

Because while the US leads the world hegemony, the game is effectively rigged in favor of the US?

That's why I dumped international, anyway.

[nisiprius]

It's hypothetical. I can answer the question "why wouldn't I want international stocks?" but it's hypothetical because about 20-25% of my stock holdings are international.

The reason why I wouldn't want international stocks is that there isn't a scintilla of evidence that it has ever made much difference one way or the other, and I believe in "the majesty of simplicity" (Bogle's phrase) and "When there are multiple solutions to a problem, choose the simplest one." (Bogle again). In other words, just as with Vanguard's dollar-hedged international bond fund, I think it's unneeded complexity that is unlikely to make much difference--and the difference is just about as likely to be in the direction of "a little worse" as "a little better."

So why do I hold them? Two reasons: it makes me nervous to be too far out of the mainstream, and by the time I started to get really skeptical about international I already had a holding, and "stay the course" was a stronger principle than "choose the simplest solution."

The unimportance of international stocks in the past is just glaringly obvious everywhere you look. This was a slightly harder argument to make at the end of the "lost decade," when the constant weakening of the dollar during 2002-2008 gave a useful boost to international stocks, and people scorned even a timid, hypothetical suggestion that the dollar could, of course, also strengthen.

The most amusing example of unimportance is the illustration in an investing book, which asserts that international stocks are the most important diversification on the equity side--while giving an illustration in which, due to the luck of the year the book was published, shows absolutely no difference in all, either in return or standard deviation, between the portfolio before and after adding international stocks.



Suggestions that international stock investing could help us escape if the US experiences a stock market event like Japan are unconvincing. When Japan crashed, the rest of the world didn't. However, the last time the US crashed, 2008-2009, it's not the case that the rest of the world didn't. The whole world crashed together: Pacific (VPACX, blue), Europe (VEURX, orange), US (VTSMX, green), and emerging markets (VEIEX, yellow). No harm, or not much harm, but no rescue, either.

Source

[jhawktx]

1. Higher expenses
2. Loss of foreign tax credit unless held in taxable account

[triceratop]

Suggestions that international stock investing could help us escape if the US experiences a stock market event like Japan are unconvincing. When Japan crashed, the rest of the world didn't. However, the last time the US crashed, 2008-2009, it's not the case that the rest of the world didn't. The whole world crashed together: Pacific (VPACX, blue), Europe (VEURX, orange), US (VTSMX, green), and emerging markets (VEIEX, yellow). No harm, or not much harm, but no rescue, either.

Unfortunately past is not prologue and we have no guarantee that going forward world crashes will coincide with US crashes. Some investors on this board are preparing for a 50-60 year investing career. No one knows if the state of the world economy will look the same in 50 years as today. Nor does anyone know the future causes of equity crises (the 2008 crisis was global; why must future ones be?). Maybe the US market will experience a stock market like Japan; or maybe not, but something similar with long-term zero-real returns. Anyway, here is a good post by siamond on the importance of international stocks to a Japanese investor. Certainly nothing like the Japan crash happened before it did.

It is strange to me that that example of the investing book shows identical returns is used to show that international stocks are unimportant. On the contrary, It is solid evidence that you should hold international stocks as a way to pare down tail risk, while keeping the expected return the same. The truly passive investor, who makes no pretension that they know what will occur, will invest in global equities at the market weight (less some amount determined by concerns over currency risk / foreign tax)

Your post, and the quoted section in particular reads like recency bias to this investor.

[avalpert]

Suggestions that international stock investing could help us escape if the US experiences a stock market event like Japan are unconvincing. When Japan crashed, the rest of the world didn't. However, the last time the US crashed, 2008-2009, it's not the case that the rest of the world didn't. The whole world crashed together: Pacific (VPACX, blue), Europe (VEURX, orange), US (VTSMX, green), and emerging markets (VEIEX, yellow). No harm, or not much harm, but no rescue, either.

I find this retort much more unconvincing - it essentially requires us to believe that the future is going to be like the past based on a relatively short period of history where the US happened to be both the dominant driver of global growth and highly interconnected with the world economy. The 2023 crash can very easily be contained to an isolated US which has dramatically reduced imports and exports as it made the strategic decision to become self-supporting rather than ship jobs overseas...

Not guarding against that possibility because a third fund is too complex to me is an obvious case of forgetting the second clause in Einstein's famous quote.

[FIREchief]

This Callan Periodic Table explains the whole issue:

https://www.americancentury.com/content ... _Table.pdf

It's like the picture they showed you in Psychology 101. It that a young woman or an old lady? Half said "young woman!" (i.e. you have to add international). The other half said "old lady!" (i.e. there is no reason to buy any international).

I'm a long term buy and hold investor (aren't you all?). I look at that chart and see 20 years of the S&P 500 and the Russell 2000 performing middle-of-the-road. Never the best. Never the worst. Compare that to EM which is just about always best or worst.

Others look at that chart and see that you have to diversify so that you always have something among the best (and, conversely, something among the worst).

I agree with Bogle and others who suggest that long term it probably doesn't make much difference.

Edit: here's the young lady versus old lady photo:

http://brainden.com/face-illusions.htm#prettyPhoto

[nedsaid]

^^ That Japan argument never made sense to me for two reasons:

1. I buy Japan in an intl fund to avoid what happened in Japan? OK, maybe if I feel gullible enough. But the second point makes intl strictly optional for me:

2. I buy an intl fund so as not to miss any Japan-like depression anywhere. Yes I get good stuff too, but I have to expose the portfolio to all the bad stuff to get any benefit at all.

Asset classes are stocks, bonds, RE, and cash. The rest is currency and flag-waving.

The idea isn't to buy Japan to avoid Japan. The idea is to own an internationally diversified portfolio to guard against a Japan scenario happening in the United States.

[pkcrafter]

Anyone think the answers and sentiment would be different if international was beating TSM?

Paul

[Nick341981]

As long as the future resembles the past, you'll do fine. The main reason I invest a significant portion of my equity overseas is because I think there is a reasonable chance that will not be the case. See Japan for the classic example.

Basically the exact opposite of what Warren Buffett thinks on the situation. Good luck with that one

[itstoomuch]

In the mid-seventies, I saw John Bogle on Wall Street Week with Louis Rukyser when he was introducing the Vanguard Total Market Index; He said 1) International isn't needed because the big US cap companies are International and have more transparency with less currency risk. 2) Bogle didn't like bonds either.
Maybe someone can scare up the transcripts from Maryland Public Broadcasting @OwenMills, Maryland Bogle was on WSW a couple of times then and seem to follow a couple of weeks after the Windsor and Wellington Funds which confused me .
YMMV

[FIREchief]

Anyone think the answers and sentiment would be different if international was beating TSM?

Paul

I'm sure there are many. I absolutely know that International will beat TSM over the next several years.....or that it won't, but then will for the next several years after that. Well, those who have paid attention already know all of that. It comes down to adopting a long term strategy that is smart and an investor can stick with. That Callan table is a great tool for those trying to sort this out for their own situation.

[Noobvestor]

For a forum of people who believe in total-market indexing I always find it weird when folks strongly defend holding only half the available market. Currency risk cuts both ways - could help or hurt, has been shown to be largely a wash over time. Political, economic and geographical risks may pay off even if you believe the US is 'safer' (in fact, if your argument is that the US is safer surely you should diversify internationally to get more risk/return!).

[Ari]

3. US legal system, while flawed, is still the best in the world.

Two questions spring to mind:

- what criteria are you using to declare the US legal system to be "the best in the world"? That's a big claim.

- wouldn't the relative quality of the US legal system be priced into stocks by the sophisticated investors in the market?

Quoting myself from a few months ago regarding the great US legal system:

I'm having a hard time taking this claim seriously. It's a pretty extraordinary claim, so it needs to be backed up by data. Not sure where to look, but we can look at a few indices published.

How about corruption? US is on 16th place according to Transparency International. That's not too bad, but it's a far cry from the best in the world.

A better place to look might be the World Bank's Ease of Doing Business Index. This index all in all is hardly a measure of investor protection. The US does pretty good in it, at 8th place, but that's largely due to outstanding marks in categories like "Ease of getting credit" — maybe not a great indicator of investor protection. How about looking at "Protecting Minority Investors"? Sounds like a pretty good proxy. The US is at 41st place in the world, behind countries like Nigeria, Pakistan, Turkey and Mongolia. How about "Enforcing contracts"? Seems like a pretty important piece, too. Here you're doing a bit better: we find the US at 20th place. Still worse than Georgia, Russia and China.

Now you might object that these measurements don't correspond to investor protections. Fine. But as the US is pretty far from the top in a lot of these measurements, the onus is on the person making the extraordinary claim to produce some data. Unless Bogle can back it up, I'll just chalk it down to American exceptionalism. Bogle thinks the US is the best thing since sliced bread; that's not news, and he's free to think that, but I don't think we should base our investment decisions on this sort of rose-tinted patriotism.

[TomCat96]

Anyone think the answers and sentiment would be different if international was beating TSM?

Paul

I would answer differently if international was beating TSM.
At the end of the day, not including international stocks is a judgment call. One big reason I don't include it is because of how it's performed in the past.

The market I point to in this case is Japan. Japan's nikkei has pretty much stagnated for over 20 years. To me that says there is something about the Japanese stock market that fundamentally differs from the US. We can speculate on what any number of possibilities as to why: decreasing population, increasing elderly population, different work cultures.

But at the end of the day, it's a judgment call on my part that I'm not afraid of making. Not every market is the same. In fact, not every market grows.
International markets have stagnated. They have not kept with with US returns over the long haul, having return 4.16% CAGR since 1996.

Bogleheads have this thing which goes something like that "how dare you profess to know anything about the market" And though I might be challenged with recency bias in my arguments, I have to balance out the factors.

1996 was 21 years ago. 21 years is enough evidence for me to indeed profess I know something about the markets. And what I profess is that international markets are fundamentally of a different character than US markets. The recent economic behavior surrounding China, Japan, and the Eurozone which i watch carefully have not convinced me that that character has changed.