Not seeing the diversification benefits

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BoggledHead2
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Joined: Tue Jun 12, 2018 6:50 pm

Not seeing the diversification benefits

Post by BoggledHead2 » Fri Dec 07, 2018 11:20 am

So ... Total US and Total Int’l, not really seeing the “benefit” of my diversification

Seems like they both either go up or down together - is this just a recent trend or basically a waste of time / higher ER to be “diversified”.

Has Total Int’l outperformed Total US some years? I know US has ... I was a big fan of mirroring global market cap/weight but I’m just not seeing the point

Not sure if this is a semi recent trend (2 years) or is this just the norm?

livesoft
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Re: Not seeing the diversification benefits

Post by livesoft » Fri Dec 07, 2018 11:25 am

Everything you know about investing is wrong at some point in time.

You can read all the books and watch all the TV shows and take to heart all the Bogleheads' tenets, but at various points in time and for various lengths of time, they will all be wrong in the future.

So one just has to get used to being wrong. That's all there is to it.
Last edited by livesoft on Fri Dec 07, 2018 11:38 am, edited 1 time in total.
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cheezit
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Re: Not seeing the diversification benefits

Post by cheezit » Fri Dec 07, 2018 11:34 am

BoggledHead2 wrote:
Fri Dec 07, 2018 11:20 am
So ... Total US and Total Int’l, not really seeing the “benefit” of my diversification

Seems like they both either go up or down together - is this just a recent trend or basically a waste of time / higher ER to be “diversified”.

Has Total Int’l outperformed Total US some years? I know US has ... I was a big fan of mirroring global market cap/weight but I’m just not seeing the point

Not sure if this is a semi recent trend (2 years) or is this just the norm?
With regards to the section which I bolded for emphasis, if you look at the frequency domain rather than the time domain this is true for the high frequency component but not the low frequency component, which is less correlated. I don't have the time to run a bunch of data through low- and high-pass filters to compare correlation coefficients right now, but look at these charts for 1986-1995, 1996-2005 and 2006-2015 (US in blue, ex-US in red) and note how the movements over short time scales line up a lot better than the muti-year or whole-decade movements:

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mhadden1
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Re: Not seeing the diversification benefits

Post by mhadden1 » Fri Dec 07, 2018 11:37 am

You can look at the "Callan Periodic Table of Investment Returns" to see ranked returns for various asset classes, year by year. It shows that international returns exceeded US in the recent past, e.g., 2017.

One thing that seems obvious from looking at the table is that it's pretty hard to predict which asset classes will be better in a given year.

It may be that US and international markets have been getting more correlated over time.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

BoggledHead2
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Joined: Tue Jun 12, 2018 6:50 pm

Re: Not seeing the diversification benefits

Post by BoggledHead2 » Fri Dec 07, 2018 11:49 am

Thank you all. Those charts attached as well as the table referenced (I’ve come across that table before, but a lovely reference none the less) were a nice reminder to just shut up and stay the course

I’m also viewing this under a 1.5-2 year scope, was just a little surprised at how rarely 1 “balances” the other

I guess to a certain extent it does as both don’t seem to rise or fall the exact same %, and I have seen days where the funds do “balance” (very small percentage points) as far as 1 rising / 1 falling.

Anyone I talk to continues to tell me fundamentals are sound ... seems like a whole lot of “noise” (to put it lightly) is creating the volatility

At least I know I’m fine with my AA, none of this has caused me to even consider selling. Thanks again all!

SarahS
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Re: Not seeing the diversification benefits

Post by SarahS » Fri Dec 07, 2018 11:53 am

Looking at the graphs above, it looks like US beat Intl for each of the last three decades. Interesting since Intl has a higher risk profile.

MotoTrojan
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Re: Not seeing the diversification benefits

Post by MotoTrojan » Fri Dec 07, 2018 11:59 am

BoggledHead2 wrote:
Fri Dec 07, 2018 11:49 am
Thank you all. Those charts attached as well as the table referenced (I’ve come across that table before, but a lovely reference none the less) were a nice reminder to just shut up and stay the course

I’m also viewing this under a 1.5-2 year scope, was just a little surprised at how rarely 1 “balances” the other

I guess to a certain extent it does as both don’t seem to rise or fall the exact same %, and I have seen days where the funds do “balance” (very small percentage points) as far as 1 rising / 1 falling.

Anyone I talk to continues to tell me fundamentals are sound ... seems like a whole lot of “noise” (to put it lightly) is creating the volatility

At least I know I’m fine with my AA, none of this has caused me to even consider selling. Thanks again all!
Yup. Many will point to the fact that US & Ex-US are more correlated than ever. Correlation is strongly based on moving the same direction at the same time, but not necessarily the same magnitude. This is what you are seeing by reviewing the daily trends, but then when you look at a 1, 3, 5, 10, 20 year plot it becomes very obvious the diversification you are getting.

Also diversification is meant to protect against the off-nominal, such as the US becoming the next Japan.

I'm happy with my 25% International and comfortable holding it for life.

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vineviz
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Re: Not seeing the diversification benefits

Post by vineviz » Fri Dec 07, 2018 12:51 pm

SarahS wrote:
Fri Dec 07, 2018 11:53 am
Looking at the graphs above, it looks like US beat Intl for each of the last three decades. Interesting since Intl has a higher risk profile.
Some of this is dependent on the times you choose for start and end dates. Not saying those were chosen purposefully, but different periods produce different charts.

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"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

cheezit
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Re: Not seeing the diversification benefits

Post by cheezit » Fri Dec 07, 2018 1:23 pm

vineviz wrote:
Fri Dec 07, 2018 12:51 pm
Some of this is dependent on the times you choose for start and end dates. Not saying those were chosen purposefully, but different periods produce different charts.
As you may have guessed, my periods were picked out of laziness - 1986 is the first year of data that PV has for Global ex-US TSM, and you can get three full decades of data between then and today. As you probably inferred from the text of my post, I was trying to illustrate the difference in correlation between short-term and long-term movements rather than to make a point about the relative past or future returns of US vs ex-US.

Also, how did you get the MCSI data from the '70s and '80s into PV? And how granular is the data?






A final, marginally related complaint to the universe: determining what happened in the past (much less guessing at future performance) is obnoxiously difficult. Besides the choice of time periods/endpoints mattering, other things will screw with the results you get charting US vs ex-US. Using large-cap or all-cap indices for US and ex-US changes your results, sometimes dramatically. Going with currency-hedged ex-US for the period of 2010-present (not shown above but commonly cited elsewhere) narrows the gap between US and ex-US considerably even after eating the cost of hedging, if memory serves. Different indices (FTSE, MCSI, etc) are weighted differently and have different selection criteria and thus give different results over time. Even within the US, different indices for the same market cap bucket can have >1.5% differences in CAGR for a decade or longer.

BoggledHead2
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Re: Not seeing the diversification benefits

Post by BoggledHead2 » Fri Dec 07, 2018 2:16 pm

Welp, looks like they both suck currently

Anyone know any cheap engagement ring sites so I don’t have to waste money on that BS and can buy some cheaper shares?

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