Can anyone convince me I need international stock in my portfolio?

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GaryA505
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Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

I know there's a lot of debate here about whether international stock is really needed in a portfolio. I've read a lot of it and I still don't know what I think. Looking at the last 30 years, except for a few short periods, international stocks would have just been a drag on overall portfolio returns. 30 years is a lot of history. Now, I know past performance doesn't predict future performance, but why would we assume the opposite, that international stocks would overperform US stocks at any time the future. On what basis would we assume that?

Ok, so Vanguard allocates 40% of equity to international in their Target Date funds. Why 40%? Fidelity Freedom and TRP Target Date funds seem to have about 1/3. Rick Ferri says about 1/3. The Bogleheads wiki 3-fund shows 20%. Bogle and Buffet say you don't need any. This drives me nuts.

Why do so many people think we need it, and what is the reason, other than just speculation?
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Re: Can anyone convince me I need international stock in my portfolio?

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Re: Can anyone convince me I need international stock in my portfolio?

Post by triceratop »

Thirty years is, in fact, not a lot of history. Diversification is the one free lunch of investing. I wouldn't want to pick a hot sector that outperformed, either. So, I buy the world.

Which of the many existing threads on International did you read? What questions did you feel were left unresolved?
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Re: Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

letsgobobby wrote:You will need it over the next thirty years if US stocks tread water or decline and/or the US dollar enters a long decline, but you won't know whether this has happened for approximately thirty years.
Exactly. And why do experts think this is any more likely than the opposite? I'd say either one is a guess.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by triceratop »

GaryA505 wrote:
letsgobobby wrote:You will need it over the next thirty years if US stocks tread water or decline and/or the US dollar enters a long decline, but you won't know whether this has happened for approximately thirty years.
Exactly. And why do experts think this is any more likely than the opposite? I'd say either one is a guess.
One might say this is a risk, and we should diversify against risk by investing in all stocks. Is this not the same calculus you make when you buy a Total US stock fund?
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Re: Can anyone convince me I need international stock in my portfolio?

Post by aegis965 »

Image
I may be biased.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

triceratop wrote:Thirty years is, in fact, not a lot of history. Diversification is the one free lunch of investing. I wouldn't want to pick a hot sector that outperformed, either. So, I buy the world.
But this assumes that all businesses in the world are equivalent as far as productivity, efficiency, and profitability. Could it just be that US businesses are just "better"? I work in the world-wide aerospace industry, and from my experience this is true.
triceratop wrote:Which of the many existing threads on International did you read? What questions did you feel were left unresolved?
I read enough to see that there is no compelling case for the need for international stock, or against it. I'm just not convinced yet, either way.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

triceratop wrote:
GaryA505 wrote:
letsgobobby wrote:You will need it over the next thirty years if US stocks tread water or decline and/or the US dollar enters a long decline, but you won't know whether this has happened for approximately thirty years.
Exactly. And why do experts think this is any more likely than the opposite? I'd say either one is a guess.
One might say this is a risk, and we should diversify against risk by investing in all stocks. Is this not the same calculus you make when you buy a Total US stock fund?
I'm just a noob here, but I'd say it isn't to same. Don't each of the stock categories perform well for some time periods and others for other periods? Isn't this why the 30/70 Larry Portfolio works better than a conventional 60/40 during some time periods and not so well during others? Larry says if it's underperforming, just wait and it will recover. In the case of international stock, I wonder if you could make a portfolio with heavily weighted intl stock that would work well, over any meaningful period of time. See, I'm just a noob so I can ask these dumb questions. And, if I'm wrong, it shouldn't take much evidence to prove it.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by dodecahedron »

GaryA505 wrote:
triceratop wrote:Thirty years is, in fact, not a lot of history. Diversification is the one free lunch of investing. I wouldn't want to pick a hot sector that outperformed, either. So, I buy the world.
But this assumes that all businesses in the world are equivalent as far as productivity, efficiency, and profitability. Could it just be that US businesses are just "better"? I work in the world-wide aerospace industry, and from my experience this is true.
Perhaps US businesses indeed are just "better," but efficient markets would take that into account in pricing stocks, so you wouldn't expect to get a higher risk-adjusted return from US company equities than from international equities. Diversification and the fact that the two asset types do not have perfectly correlated returns then makes a clear case for holding at least some of both.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by triceratop »

GaryA505 wrote:
triceratop wrote:Thirty years is, in fact, not a lot of history. Diversification is the one free lunch of investing. I wouldn't want to pick a hot sector that outperformed, either. So, I buy the world.
But this assumes that all businesses in the world are equivalent as far as productivity, efficiency, and profitability. Could it just be that US businesses are just "better"? I work in the world-wide aerospace industry, and from my experience this is true.
triceratop wrote:Which of the many existing threads on International did you read? What questions did you feel were left unresolved?
I read enough to see that there is no compelling case for the need for international stock, or against it. I'm just not convinced yet, either way.
It doesn't assume that. It assumes that the relative advantages and disadvantages of companies are reflected in their market prices. I mean you could make the same argument with a total market fund: are all stocks equally good? No, but a market sets prices in accordance with expectations of returns based on future growth expectations.

If you're not convinced either way that sounds like a good case to be a passive investor. Right now a passive investor would hold about 47% international, but this could vary going forward.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by aegis965 »

GaryA505 wrote:Could it just be that US businesses are just "better"? I work in the world-wide aerospace industry, and from my experience this is true.
So you're making investment decisions based on personal experience and conjecture?
I may be biased.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by LiveSimple »

There is no magical number in the assets allocation, it is about whether you can stick to the asset allocation numbers, thick and thin.

So, if you asset allocation to international is 0% so be it. Just hold on, do not increase that 0% to 25% after international did well.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by in_reality »

triceratop wrote:
GaryA505 wrote:
triceratop wrote:Thirty years is, in fact, not a lot of history. Diversification is the one free lunch of investing. I wouldn't want to pick a hot sector that outperformed, either. So, I buy the world.
But this assumes that all businesses in the world are equivalent as far as productivity, efficiency, and profitability. Could it just be that US businesses are just "better"? I work in the world-wide aerospace industry, and from my experience this is true.

It doesn't assume that. It assumes that the relative advantages and disadvantages of companies are reflected in their market prices. I mean you could make the same argument with a total market fund: are all stocks equally good? No, but a market sets prices in accordance with expectations of returns based on future growth expectations.

If you're not convinced either way that sounds like a good case to be a passive investor. Right now a passive investor would hold about 47% international, but this could vary going forward.
It absolutely doesn't assume that all businesses in the world are equivalent as far as productivity, efficiency, and profitability.

Anyway, if in 2016 the US had 41% of total aerospace exports, why ignore the companies with the majority of global aerospace exports?http://www.worldstopexports.com/aerospa ... y-country/

I understand that the US companies may be more profitable (and priced with higher multiples on earnings to reflect that) and maybe more innovative (and again priced with higher multiples on future earnings in expectation of that) and maybe more aggressive in cost cutting in downturns (again isn't this priced in), but I still believe in diversification especially knowing a strong dollar makes the US less competitive internationally, and that a weakening dollar will boost international returns. Granted it takes time for currency changes to have an impact as hedging contracts last months or possibly years. There is an interesting article on how a Canadian aerospace firm FTG now has a change to be low cost European supplier after a few years of currency devaluation. http://www.reuters.com/article/us-canad ... SKCN0WC09N

I'm not arguing you should invest internationally because it's your hard earned money and you care about it more than I do. That is for sure. All I am saying is that people like me who do invest internationally are on solid ground for doing so especially with the degree of internationalization that exists today.
Last edited by in_reality on Thu Jul 20, 2017 7:12 am, edited 1 time in total.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by runner540 »

My human capital, social capital, language and cultural skills are heavily weighted to my home country. Homeowners should add their house to the list of assets that are home country weighted.

I think it's important to balance that with some financial exposure to the rest of the world, at relatively low cost (viewing the currency and tax drag as the price of "insurance".) This might not matter as much for those already in retirement, but for those of us with longer timeframes, there is greater probability of a game change for US dominance, or a long period of weak USD or performance.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by stemikger »

GaryA505 wrote:I know there's a lot of debate here about whether international stock is really needed in a portfolio. I've read a lot of it and I still don't know what I think. Looking at the last 30 years, except for a few short periods, international stocks would have just been a drag on overall portfolio returns. 30 years is a lot of history. Now, I know past performance doesn't predict future performance, but why would we assume the opposite, that international stocks would overperform US stocks at any time the future. On what basis would we assume that?

Ok, so Vanguard allocates 40% of equity to international in their Target Date funds. Why 40%? Fidelity Freedom and TRP Target Date funds seem to have about 1/3. Rick Ferri says about 1/3. The Bogleheads wiki 3-fund shows 20%. Bogle and Buffet say you don't need any. This drives me nuts.

Why do so many people think we need it, and what is the reason, other than just speculation?
I'm not going to convince you because you don't need it. I'm 53 and have been investing since I was 30 and I never owned it.

You are asking this question to a group of very smart people, but as smart as they are I don't think they are smarter than John Bogle. Mr. Bogle never owned international and he has often said, the average investor really does not need it. He has put this advice in his books, he is all over Youtube saying it and in countless interviews. Use Jack's 68 years of experience and follow what he says. A simple two fund portfolio is all one needs. Stocks and bonds.

If you really want a detailed explanation, just read his book Common Sense on Mutual Funds. Here is a short video below.

https://www.youtube.com/watch?v=hvgptl5-Kcc
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Re: Can anyone convince me I need international stock in my portfolio?

Post by Ron Scott »

You don't need it, Bogle himself repeatedly recommends we don't do it, and you should not be convinced by arguments that require you to believe past performance is a key indicator of future results.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by JDCarpenter »

aegis965 wrote:Image
+1. (Although the nikkei has doubled since the chart ended in Sept. 2011, it just closed at 20,145, as opposed to the December 1989 high of 38915.87.)

Back to the OP's Question. The answer is No; no one can convince you.

Only you can determine if you want to diversify into international stocks--or if they represent a fool's errand in light of the past, unmatched performance of the US market.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by lostdog »

No one knows nothing. Jack Bogle said this right? I would think this is true for international. Just buy everything with Vanguard Total World Index for the long haul. There are compelling arguments on both sides. This will drive you nuts to no end. Stick with simplicity and diversification.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by oldcomputerguy »

Ron Scott wrote:You don't need it, Bogle himself repeatedly recommends we don't do it, and you should not be convinced by arguments that require you to believe past performance is a key indicator of future results.
Has Mr. Bogle actually said "don't invest in international"? It was always my understanding that his position was that it was not necessary, rather than that it was something one should not do.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by Iliketoridemybike »

International index YTD 19%
S&P about 10%

There's one reason.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by midareff »

The only free lunch in investing is diversification. Adding international adds diversification. Other than that, it's your money so invest it anyway you like. None of us are here to try to convince you of anything.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by aegis965 »

Ron Scott wrote:arguments that require you to believe past performance is a key indicator of future results.
Ironically, this is what I think US only people fall for. If US had experienced a 30-year bear market, I think it is unlikely that many people would have still recommended people to only invest in the US.
It is bewildering to me, a non-US investor, how pervasive home country bias is. It is bewildering that academic research, namely the academic research Boglehead's philosophy and principles are based on, is altogether ignored or, worse, turned on its head when it comes to justifying home country bias.
I may be biased.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by ulvazell »

Ron Scott wrote:You don't need it, Bogle himself repeatedly recommends we don't do it, and you should not be convinced by arguments that require you to believe past performance is a key indicator of future results.
Bogle recommends that IF you buy international it should not be more that 20% of your overall equity position...
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Re: Can anyone convince me I need international stock in my portfolio?

Post by indexonlyplease »

triceratop wrote:
GaryA505 wrote:
triceratop wrote:Thirty years is, in fact, not a lot of history. Diversification is the one free lunch of investing. I wouldn't want to pick a hot sector that outperformed, either. So, I buy the world.
But this assumes that all businesses in the world are equivalent as far as productivity, efficiency, and profitability. Could it just be that US businesses are just "better"? I work in the world-wide aerospace industry, and from my experience this is true.
triceratop wrote:Which of the many existing threads on International did you read? What questions did you feel were left unresolved?
I read enough to see that there is no compelling case for the need for international stock, or against it. I'm just not convinced yet, either way.
It doesn't assume that. It assumes that the relative advantages and disadvantages of companies are reflected in their market prices. I mean you could make the same argument with a total market fund: are all stocks equally good? No, but a market sets prices in accordance with expectations of returns based on future growth expectations.

If you're not convinced either way that sounds like a good case to be a passive investor. Right now a passive investor would hold about 47% international, but this could vary going forward.
Is that 47% of your stocks or total portfolio??
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Re: Can anyone convince me I need international stock in my portfolio?

Post by indexonlyplease »

ulvazell wrote:
Ron Scott wrote:You don't need it, Bogle himself repeatedly recommends we don't do it, and you should not be convinced by arguments that require you to believe past performance is a key indicator of future results.
Bogle recommends that IF you buy international it should not be more that 20% of your overall equity position...
Thats my number.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by goingup »

Here's a wonderful thread Taylor Larimore started last August on the subject of how much International to hold. viewtopic.php?t=196956

The suggestion is 20% International (of stocks) which suits many investors, especially agnostics.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by Da5id »

JDCarpenter wrote:
aegis965 wrote:Image
+1. (Although the nikkei has doubled since the chart ended in Sept. 2011, it just closed at 20,145, as opposed to the December 1989 high of 38915.87.)

Back to the OP's Question. The answer is No; no one can convince you.

Only you can determine if you want to diversify into international stocks--or if they represent a fool's errand in light of the past, unmatched performance of the US market.
While I think the Nikkei is very instructive, and a good argument against putting all ones eggs in one basket, I think those graphs (and numbers) are at least somewhat tendentious. The results are awful enough with dividends reinvested. But a graph/numbers shown without dividends reinvested really isn't a proper argument for anything IMHO, as total return should be the thing examined.

To OP, I don't know that it is worth trying to convince you of anything. You should read up on the subject, then do what makes you comfortable. I think this https://personal.vanguard.com/pdf/ISGGEB.pdf is a reasonable discussion and makes a case for 20-40% international. I went with 33% myself, based in part on that. Arguments like "Buffett says don't bet against the US" or even "Bogle says..." don't sway me much personally, but YMMV.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by reriodan »

One word: Japan.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by asif408 »

GaryA505 wrote:Now, I know past performance doesn't predict future performance, but why would we assume the opposite, that international stocks would overperform US stocks at any time the future. On what basis would we assume that? ?
The basis is in the real world performance, as seen here: https://www.fidelity.com/bin-public/060 ... chart2.jpg

Do you see any consistent, long-term, sustained US or international outperformance? I see mid 70s-late 80s international was the clear winner. The 90s were all US. The 2000s were international. Then the last 5-6 years have been US. In fact I don't see any period of outperformance longer than about 5-6 years for either one. So why would we expect that to change?
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Re: Can anyone convince me I need international stock in my portfolio?

Post by saltycaper »

GaryA505 wrote:
Why do so many people think we need it, and what is the reason, other than just speculation?
The onus is not on those who believe in holding a market-cap weighted portfolio of stocks to prove you need international, but rather on those who believe you should deviate from market weight. The demand should not be, "convince me I need international stocks" anymore than one would ask others to convince them only to invest in company's companies beginning with letters A through M. The question should be, "Is there a reason not to include international stocks in proportion to their market weight?"

IMO, Bogle's suggestions on percentages to hold are worthless. He frequently displays symptoms of home-country bias. He doesn't even try to hide it (though that may be a virtue). No matter one's opinion of Bogle in general, it's clear in this instance that he is playing the part of speculator.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by marti038 »

I own VWIGX and it's been the best performer in my portfolio this year; 11.44% over 5 years annualized.

Given the outlook for meager returns domestically over the next decade or so, seems reasonable to take a look overseas.

But you can always do what you want.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by bloom2708 »

Total US is 3,575 stocks. Total International is 6,700 stocks.

6,700 more companies to diversify your portfolio. Add 20 to 30% Total International.

Then you are "in" a more total market. :arrow:
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Re: Can anyone convince me I need international stock in my portfolio?

Post by Keiser2015 »

Would you rather own part of GM/Ford or Toyota/Honda? or both
Would you rather own part of BP/Shell or Exxon Mobil? or both
Would you rather own part of Hershey or Nestle? or both
Would you rather own part of Chase or ING? or both
Would you rather own part of Apple or Samsung? or both

The list goes on and on. When I go shopping I see all kinds of products from foreign companies. I would like to think I have "shares" in them also. It's not expensive or complex to own international stocks. Lifestyle funds/Target funds/Total World Fund/Total Interanational (and rebalance if you wish).
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Re: Can anyone convince me I need international stock in my portfolio?

Post by aegis965 »

asif408 wrote:
GaryA505 wrote:Now, I know past performance doesn't predict future performance, but why would we assume the opposite, that international stocks would overperform US stocks at any time the future. On what basis would we assume that? ?
The basis is in the real world performance, as seen here: https://www.fidelity.com/bin-public/060 ... chart2.jpg

Do you see any consistent, long-term, sustained US or international outperformance? I see mid 70s-late 80s international was the clear winner. The 90s were all US. The 2000s were international. Then the last 5-6 years have been US. In fact I don't see any period of outperformance longer than about 5-6 years for either one. So why would we expect that to change?
Even if international didn't outperform, it is still not a good reason why you should not have international in your portfolio. I'm not seeing people arguing that we should ditch bonds because they haven't outperformed stocks.
I think the better reason US only folks have is manifest destiny, at least it's unfalsifiable.
I may be biased.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by triceratop »

indexonlyplease wrote:
triceratop wrote:
GaryA505 wrote:
triceratop wrote:Thirty years is, in fact, not a lot of history. Diversification is the one free lunch of investing. I wouldn't want to pick a hot sector that outperformed, either. So, I buy the world.
But this assumes that all businesses in the world are equivalent as far as productivity, efficiency, and profitability. Could it just be that US businesses are just "better"? I work in the world-wide aerospace industry, and from my experience this is true.
triceratop wrote:Which of the many existing threads on International did you read? What questions did you feel were left unresolved?
I read enough to see that there is no compelling case for the need for international stock, or against it. I'm just not convinced yet, either way.
It doesn't assume that. It assumes that the relative advantages and disadvantages of companies are reflected in their market prices. I mean you could make the same argument with a total market fund: are all stocks equally good? No, but a market sets prices in accordance with expectations of returns based on future growth expectations.

If you're not convinced either way that sounds like a good case to be a passive investor. Right now a passive investor would hold about 47% international, but this could vary going forward.
Is that 47% of your stocks or total portfolio??
This entire thread should be assumed to discuss only the suballocation to equities.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by beardsworth »

Use of the forum search box at the top of each page shows that a thread very similar to this one, even down to a thread title in which the OP asked people to "convince" him about international, ran a couple years ago. There's not a whole lot new under the sun.

viewtopic.php?t=160438
Last edited by beardsworth on Thu Jul 20, 2017 8:40 am, edited 1 time in total.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by nisiprius »

In my personal opinion, Vanguard's paper, Considerations for investing in non-U.S. equities is very good and everybody thinking about the question should read it. Read it yourself and see if it convinces you that you "need" international.

My own convictions are that the "conventional wisdom" consensus among authorities I trust is so overwhelmingly in favor of holding some international that I do not and would not feel comfortable holding none at all; and my own explorations have failed to convince me that there is anything bad enough with international to make me avoid it. The combination of "authorities say yes" and "can't personally find a reason to say no" was enough to convince me to hold some, and not enough to convince me to hold it at anything close to global cap-weight.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by Da5id »

aegis965 wrote: I think the better reason US only folks have is manifest destiny, at least it's unfalsifiable.
I'd argue even if true, that isn't a great argument. You'd have to believe not only is the US a better place to invest for whatever reason (innovation, business climate, labor market, demographics, regulation, resources, manifest destiny, whatever), but moreover that the superiority is better judged by you than by the market price. i.e. that the superior US returns going forward are not reflected in current valuations.

I could buy the idea that the US has better prospects than other countries in aggregate(not arguing it is true, but it is certainly not unreasonable). I have lots more trouble with the notion that my views on that are particularly insightful and that they aren't baked into valuations...
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Re: Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

triceratop wrote: If you're not convinced either way that sounds like a good case to be a passive investor. Right now a passive investor would hold about 47% international, but this could vary going forward.
This hints at part of the reason for my original question. We seem to be "all over the map" on this. The intl stock is 47% of the the world. Vanguard Total World Index is 45% intl, so OK that agrees. Vanguard target date funds put 40% of equity in intl, Fidelity and TRP target date funds seem to be about 33%. Even Vanguard's Retirement Income fund is about 40%. But looking at Wellington Fund (yes I know it's not indexed so maybe not a good example), one of the oldest and most successful mutual funds on the world, only has 18%. Fidelity Growth & Income is only 8.5% and Fidelity Balanced is only 4%. Vanguard Balanced Index has about 1%. You see where I'm going here ....
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Re: Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

lostdog wrote:No one knows nothing. Jack Bogle said this right? I would think this is true for international. Just buy everything with Vanguard Total World Index for the long haul. There are compelling arguments on both sides. This will drive you nuts to no end. Stick with simplicity and diversification.
I'm already nuts, so have nothing to lose. :-)
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Re: Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

midareff wrote:The only free lunch in investing is diversification. Adding international adds diversification. Other than that, it's your money so invest it anyway you like. None of us are here to try to convince you of anything.
Is all diversification good? If that was true, wouldn't we all own REITs and commodities?
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Re: Can anyone convince me I need international stock in my portfolio?

Post by nisiprius »

GaryA505 wrote:...We seem to be "all over the map" on this...
You bet. It's the most salient thing about the situation.

The actual data provides very tenuous, very weak support for an small international benefit. Since it is tenuous, weak, and small, therefore the effect of our individual, flaky personal judgements has a disproportionately large effect. What you will see in various charts, including the one in the Vanguard paper I want you to read, are curves that form hills that a) are not very high, i.e. the benefit isn't huge, and b) are very broad, i.e. you can't tell where the peak is... and you can be pretty far from the peak and still get a lot of the benefit if there is one.

What the charts tend not to show is that all of the number fluctuate like crazy, the efficient frontier squirms around like a worm on a hot sidewalk, and you can get widely different answers for slightly different ranges of years.

Furthermore, the deal on diversification is this. Other things being equal, if two assets have about the same return and about the same standard deviation, and thus the same Sharpe ratio, then if they have low correlation the magic happens and a mix of the two is better than either one alone. In real life, what you usually see--and do see in the case of international--is that, first, the correlation isn't really low. You get numbers close to zero for stocks and bonds, numbers like 0.7 for international versus U.S. stocks. And, second, from the point of view of a U.S. investor experiencing currency risk in non-U.S. securities, the Sharpe ratio for international is lower than for the U.S.

For the particular period of time that shows up in PortfolioVisualizer, which happens to be Jan 1997 - Jun 2017, Vanguard Total Stock had a CAGR return of 8.09% and a standard deviation of 15.54%, and a Sharpe ratio of 0.45. Vanguard Total International had a much lower return, 4.96%, and yet a slightly higher standard deviation, 17.45%, and thus a much lower Sharpe ratio, 0.25.

During that time period, the correlation was 0.76. Diversification? I would say, not very much. In particular, over this particular time period the diversification benefit of adding international did not come close to outweighing the drag because of international having more risk and less return than the U.S.

Over this particular time period.
Last edited by nisiprius on Thu Jul 20, 2017 12:06 pm, edited 1 time in total.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by staythecourse »

GaryA505 wrote:I know there's a lot of debate here about whether international stock is really needed in a portfolio. I've read a lot of it and I still don't know what I think. Looking at the last 30 years, except for a few short periods, international stocks would have just been a drag on overall portfolio returns. 30 years is a lot of history. Now, I know past performance doesn't predict future performance, but why would we assume the opposite, that international stocks would overperform US stocks at any time the future. On what basis would we assume that?

Ok, so Vanguard allocates 40% of equity to international in their Target Date funds. Why 40%? Fidelity Freedom and TRP Target Date funds seem to have about 1/3. Rick Ferri says about 1/3. The Bogleheads wiki 3-fund shows 20%. Bogle and Buffet say you don't need any. This drives me nuts.

Why do so many people think we need it, and what is the reason, other than just speculation?
Some reading is in order. It is your money so do what you want with it.

Stating investing in the world is speculation vs. just believing based on past history America is the obvious choice sounds like there is a deficiency of financial knowledge.

Good luck.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by triceratop »

GaryA505 wrote:
triceratop wrote: If you're not convinced either way that sounds like a good case to be a passive investor. Right now a passive investor would hold about 47% international, but this could vary going forward.
This hints at part of the reason for my original question. We seem to be "all over the map" on this. The intl stock is 47% of the the world. Vanguard Total World Index is 45% intl, so OK that agrees. Vanguard target date funds put 40% of equity in intl, Fidelity and TRP target date funds seem to be about 33%. Even Vanguard's Retirement Income fund is about 40%. But looking at Wellington Fund (yes I know it's not indexed so maybe not a good example), one of the oldest and most successful mutual funds on the world, only has 18%. Fidelity Growth & Income is only 8.5% and Fidelity Balanced is only 4%. Vanguard Balanced Index has about 1%. You see where I'm going here ....
Vanguard Total World Index is 47.2% International.

I actually don't see at all where you are going; the information seems completely irrelevant. Why do you care what Wellington and Fidelity and target date funds do? You're a passive investor, no? Does it bother you when Bill Ackman makes a bet on or shorts an individual stock?
GaryA505 wrote:
midareff wrote:The only free lunch in investing is diversification. Adding international adds diversification. Other than that, it's your money so invest it anyway you like. None of us are here to try to convince you of anything.
Is all diversification good? If that was true, wouldn't we all own REITs and commodities?
If you own a total market index you do own REITs, yes.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
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Re: Can anyone convince me I need international stock in my portfolio?

Post by spdoublebass »

As a new investor, I faced the same question myself. Who am I to go against Mr. Bogle himself.
That being said, I'm the one who has to invest for the next 30 years. I'm no rocket scientist but this is what I did:

I looked back at how Total Stock and Total International did since 1997. This isn't a lot of time. What I did was look at each year individually, sometimes US was up and sometimes International was up. Personally I was surprised at how many times International was slightly ahead of US. In the years that International outperformed US, one would have been fine without any International because Total Stock did ok too. BUT, I know I'm gonna always be thinking the grass is always greener elsewhere. What I realized is that for myself, I would be happy with the average between the two. So that's what I did. I went with total World. Each year I looked at individually I would have been ok smack dab in the middle between the two.

I did go one step further and use VT (Total World), VBR (SCV), and VSS (International Small Cap). What I like about these three etf's is that there is no overlap between all 3. Even overweight me in REIT's.

Again, I'm new and yes, there are better portfolios, but this keeps me from having to ask the question of if I should do this or that.

To be clear, this was my rational, if you've stuck with US only for many years, just stay the course. Good luck.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by bigred77 »

I hold International at basically it's market weight.

I hold it for diversification.
I hold it because I believe in MPT.
I hold it because I believe in efficient markets (overall).
I hold it because I don't want to succumb to home country bias.
I hold it because I have no reason to speculate that the US market will outperform International markets over the next number of decades.

If you read through the previous discussions on the topic that have been had numerous times and you still aren't convinced one way or the other then just pick an allocation and stick with it. 100% US is probably OK. 100% International is probably OK. I think International at it's market cap is better but people can disagree. Pick 50%, pick 20%, pick 40%, just hold your choice long term and you'll probably be fine.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by H-Town »

GaryA505 wrote:I know there's a lot of debate here about whether international stock is really needed in a portfolio. I've read a lot of it and I still don't know what I think. Looking at the last 30 years, except for a few short periods, international stocks would have just been a drag on overall portfolio returns. 30 years is a lot of history. Now, I know past performance doesn't predict future performance, but why would we assume the opposite, that international stocks would overperform US stocks at any time the future. On what basis would we assume that?

Ok, so Vanguard allocates 40% of equity to international in their Target Date funds. Why 40%? Fidelity Freedom and TRP Target Date funds seem to have about 1/3. Rick Ferri says about 1/3. The Bogleheads wiki 3-fund shows 20%. Bogle and Buffet say you don't need any. This drives me nuts.

Why do so many people think we need it, and what is the reason, other than just speculation?
If you look back far enough, every great society rises and falls. If you have time, please read "The Four Pillars of Investing" by William J. Bernstein. That book has a great chapter that go back as far as one can remember. Putting all your money in one country/economy like the U.S. is more of speculation rather than diversification. You are betting the the U.S. stock market will continue to outperform other countries. You might get away with a short time-frame. This year, international funds leave S&P 500 in the dust. How do you feel missing out on this run-up by international stock funds?

But hey, life is short and we are lucky to live in the period that the U.S. economy is prospering. Enjoy it while it lasts.

I give up the quest to maximize returns of my investment a long time ago. As long as I continue bringing in higher income, saving more years after years, and investing in low cost, globally diversified funds, I consider it as a success in investing
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Re: Can anyone convince me I need international stock in my portfolio?

Post by whodidntante »

Can anyone convince me I need American stocks?
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Re: Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

I went back and re-read the previous thread started by Taylor Larimore. The first time I read it I was totally clueless, now I'm only about 80% clueless, so I'd say that's progress. viewtopic.php?t=196956

Anyway, thanks for all the replies. It would be great to get at least a loose consensus, but I can see that's not going to happen (at least probably not in my lifetime). I think the best we've got is a stand-off, and 20% would probably be the compromise. This seemed to be the case in Taylor Larimore's previous thread as well.

I'll pose one more question/comment though. It has occurred to me that if all bogleheads really believed they should be truly diversified and invest in intl stock according to market weight, they would invest at 55/45 US/intl, but they don't.
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Re: Can anyone convince me I need international stock in my portfolio?

Post by GaryA505 »

nisiprius wrote: My own convictions are that the "conventional wisdom" consensus among authorities I trust is so overwhelmingly in favor of holding some international that I do not and would not feel comfortable holding none at all; and my own explorations have failed to convince me that there is anything bad enough with international to make me avoid it. The combination of "authorities say yes" and "can't personally find a reason to say no" was enough to convince me to hold some, and not enough to convince me to hold it at anything close to global cap-weight.
This is the best conclusion I have read, and aligns with my personal way of thinking.
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