Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

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Topic Author
arengarajsug88
Posts: 33
Joined: Fri Jan 04, 2019 2:55 pm

Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by arengarajsug88 » Fri Jan 11, 2019 5:43 pm

Hello folks,

I read an article where vanguard recommends investors to increase their international (non-US) holdings to 40% as it appears below in the Bloomberg article.

https://www.bloomberg.com/news/articles ... ings-to-40

What are your thoughts on this? Is it a legitimate prediction by Vanguard that international funds would outperform US funds? Which international fund(s) would you pick? I do not have a good international funds option in my 401K, so if I were to use all my roth IRA ($6k) to pick one international fund, which should it be?

Thanks.

Typ997S
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Joined: Fri Apr 06, 2012 12:36 pm

Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Typ997S » Fri Jan 11, 2019 5:49 pm

This isn't really new news...Vanguard wrote a white paper a few years ago suggesting that 40% was a good target for international equities, but stated that it impossible to say a priori what the optimum percentage is. Since then, there's been hundreds, if not thousands of posts here debating the best allocation. I would say the consensus is that 40% seems a little high, but some advocate 50+%, in line with global market cap. At the other extreme, some argue that an international allocation is unnecessary.

For me, I'm convinced 30% is just right, and optimal. (Sarcasm)

GRP
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Fri Jan 11, 2019 5:56 pm

If we agree that 40% is a good value then we might as well just hold the global market weight and drop all of this ridiculous rigmarole.

No one knows what country will perform the best in the future, but we do know who thing: all of the constant rebalancing through the years back to the target percentage will put a drag on returns. Taxes, bid-ask spreads, and transaction costs will accumulate -- that is the only certainty. Performance is transitory, costs are forever.

Let's just hold the market and be done with it. :sharebeer

H-Town
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by H-Town » Fri Jan 11, 2019 5:59 pm

arengarajsug88 wrote:
Fri Jan 11, 2019 5:43 pm
Hello folks,

I read an article where vanguard recommends investors to increase their international (non-US) holdings to 40% as it appears below in the Bloomberg article.

https://www.bloomberg.com/news/articles ... ings-to-40

What are your thoughts on this? Is it a legitimate prediction by Vanguard that international funds would outperform US funds? Which international fund(s) would you pick? I do not have a good international funds option in my 401K, so if I were to use all my roth IRA ($6k) to pick one international fund, which should it be?

Thanks.
Do you have target date retirement funds in your 401k? If so, look into it. It should have a healthy allocation to international.

Personally, I increase my international exposure from 30% to 40% just because I want to buy the dip - my favorite guilty pleasure.

Valuethinker
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Valuethinker » Fri Jan 11, 2019 6:00 pm

GRP wrote:
Fri Jan 11, 2019 5:56 pm
If we agree that 40% is a good value then we might as well just hold the global market weight and drop all of this ridiculous rigmarole.

No one knows what country will perform the best in the future, but we do know who thing: all of the constant rebalancing through the years back to the target percentage will put a drag on returns. Taxes, bid-ask spreads, and transaction costs will accumulate -- that is the only certainty. Performance is transitory, costs are forever.

Let's just hold the market and be done with it. :sharebeer
Do US investors pay a bid ask spread on mutual funds?

And no load mutual funds have no transaction charges?

Don't mutual funds use unitary pricing?

Or did you mean on ETFs?

Valuethinker
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Valuethinker » Fri Jan 11, 2019 6:01 pm

Typ997S wrote:
Fri Jan 11, 2019 5:49 pm
This isn't really new news...Vanguard wrote a white paper a few years ago suggesting that 40% was a good target for international equities, but stated that it impossible to say a priori what the optimum percentage is. Since then, there's been hundreds, if not thousands of posts here debating the best allocation. I would say the consensus is that 40% seems a little high, but some advocate 50+%, in line with global market cap. At the other extreme, some argue that an international allocation is unnecessary.

For me, I'm convinced 30% is just right, and optimal. (Sarcasm)
50 per cent would be an overweighting for a US investor?

GRP
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Fri Jan 11, 2019 6:08 pm

Valuethinker wrote:
Fri Jan 11, 2019 6:00 pm
GRP wrote:
Fri Jan 11, 2019 5:56 pm
If we agree that 40% is a good value then we might as well just hold the global market weight and drop all of this ridiculous rigmarole.

No one knows what country will perform the best in the future, but we do know who thing: all of the constant rebalancing through the years back to the target percentage will put a drag on returns. Taxes, bid-ask spreads, and transaction costs will accumulate -- that is the only certainty. Performance is transitory, costs are forever.

Let's just hold the market and be done with it. :sharebeer
Do US investors pay a bid ask spread on mutual funds?

And no load mutual funds have no transaction charges?

Don't mutual funds use unitary pricing?

Or did you mean on ETFs?
Well, the fund investor will bear the burden of underlying frictional costs and bid-offer spreads even if they aren't paying them upfront. It would just cut into the total return of the fund. Quite pernicious unfortunately. :(

Typ997S
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Typ997S » Fri Jan 11, 2019 6:17 pm

Valuethinker wrote:
Fri Jan 11, 2019 6:01 pm
Typ997S wrote:
Fri Jan 11, 2019 5:49 pm
This isn't really new news...Vanguard wrote a white paper a few years ago suggesting that 40% was a good target for international equities, but stated that it impossible to say a priori what the optimum percentage is. Since then, there's been hundreds, if not thousands of posts here debating the best allocation. I would say the consensus is that 40% seems a little high, but some advocate 50+%, in line with global market cap. At the other extreme, some argue that an international allocation is unnecessary.

For me, I'm convinced 30% is just right, and optimal. (Sarcasm)
50 per cent would be an overweighting for a US investor?
My apologies if my post was a little unclear/inaccurate. It looks like as of 12/31/18, the FTSE All-Cap Index is about 54% US, so any International weighting above 46% is over-weighting for a US domiciled investor. That'll teach me to go from memory!

l1am
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by l1am » Fri Jan 11, 2019 6:19 pm

Past performance is not an indicator to future results - but how far do you take this?

US vs INTL

Image

GRP
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Fri Jan 11, 2019 6:44 pm

I see what you're saying, and I respect your perspective.

I personally agree with Cliff Asness' reasoning that countries can be viewed basically as large companies. Countries where the entire market is selling at a low P/B ratio tend to outperform countries where their entire market is selling at a high P/B ratio. Countries are very much like large firms. Even factors like the value premium apply to macro scale.

Global indexing follows the same logic as single country indexing. Overweighting on countries due to recent outperformance is like overweighting a single stock because it has outperformed its peers.

Country picking is therefore equivalent to stock picking. If we agree with the logic that indexing the entire U.S. market is the best choice, then we must also agree that indexing the world is the best choice. Because all the same passive investing arguments we have for index funds apply to all of the world's countries.

If we continue to overweight U.S. then we might as well abandon indexing altogether and pick and choose individual stocks or do factor investing. One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.

Topic Author
arengarajsug88
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by arengarajsug88 » Fri Jan 11, 2019 6:50 pm

l1am wrote:
Fri Jan 11, 2019 6:19 pm
Past performance is not an indicator to future results - but how far do you take this?

US vs INTL

Image
Is blue color US and red INTL in your graph?

Topic Author
arengarajsug88
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by arengarajsug88 » Fri Jan 11, 2019 6:51 pm

H-Town wrote:
Fri Jan 11, 2019 5:59 pm
arengarajsug88 wrote:
Fri Jan 11, 2019 5:43 pm
Hello folks,

I read an article where vanguard recommends investors to increase their international (non-US) holdings to 40% as it appears below in the Bloomberg article.

https://www.bloomberg.com/news/articles ... ings-to-40

What are your thoughts on this? Is it a legitimate prediction by Vanguard that international funds would outperform US funds? Which international fund(s) would you pick? I do not have a good international funds option in my 401K, so if I were to use all my roth IRA ($6k) to pick one international fund, which should it be?

Thanks.
Do you have target date retirement funds in your 401k? If so, look into it. It should have a healthy allocation to international.

Personally, I increase my international exposure from 30% to 40% just because I want to buy the dip - my favorite guilty pleasure.
I do have target date funds in my 401k but I'd like to invest in specific mutual funds.

s8r
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by s8r » Fri Jan 11, 2019 9:26 pm

GRP wrote:
Fri Jan 11, 2019 6:44 pm
One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
My thoughts exactly. I am an engineer and I apply engineering logic also in my financial decisions. :D

samsdad
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by samsdad » Fri Jan 11, 2019 10:01 pm

GRP wrote:
Fri Jan 11, 2019 6:44 pm
I see what you're saying, and I respect your perspective.

I personally agree with Cliff Asness' reasoning that countries can be viewed basically as large companies.

...

Country picking is therefore equivalent to stock picking. If we agree with the logic that indexing the entire U.S. market is the best choice, then we must also agree that indexing the world is the best choice. Because all the same passive investing arguments we have for index funds apply to all of the world's countries.

If we continue to overweight U.S. then we might as well abandon indexing altogether and pick and choose individual stocks or do factor investing. One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
Well, the Vanguard total international fund only invests in 50ish countries out of 195ish. What happened to the other 145 or so? To get “the rest of the story,” as Paul Harvey would say, you then have to invest in primary emerging markets, secondary emerging markets, and frontier markets, cause we’re not “country picking,” right? I’d wager that even after investing in those markets you’d still be short some countries, which you’d likely have to make up with individual country ETFs. I’m going to look for the North Korea ETF after I post this.

Or are we okay with choosing 50 or so favorites and acting like we’re invested in “the world”? Why? Beause it’s representative of the world as a whole? Really? You don’t think there would be a corruption performance drag if we included the other 145ish countries? Any cost drag to include them?

GRP
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Fri Jan 11, 2019 10:11 pm

samsdad wrote:
Fri Jan 11, 2019 10:01 pm
GRP wrote:
Fri Jan 11, 2019 6:44 pm
I see what you're saying, and I respect your perspective.

I personally agree with Cliff Asness' reasoning that countries can be viewed basically as large companies.

...

Country picking is therefore equivalent to stock picking. If we agree with the logic that indexing the entire U.S. market is the best choice, then we must also agree that indexing the world is the best choice. Because all the same passive investing arguments we have for index funds apply to all of the world's countries.

If we continue to overweight U.S. then we might as well abandon indexing altogether and pick and choose individual stocks or do factor investing. One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
Well, the Vanguard total international fund only invests in 50ish countries out of 195ish. What happened to the other 145 or so? To get “the rest of the story,” as Paul Harvey would say, you then have to invest in primary emerging markets, secondary emerging markets, and frontier markets, cause we’re not “country picking,” right? I’d wager that even after investing in those markets you’d still be short some countries, which you’d likely have to make up with individual country ETFs. I’m going to look for the North Korea ETF after I post this.

Or are we okay with choosing 50 or so favorites and acting like we’re invested in “the world”? Why? Beause it’s representative of the world as a whole? Really? You don’t think there would be a corruption performance drag if we included the other 145ish countries? Any cost drag to include them?
I see what you are saying. It's a valid point of contention.

I still think the logic of my original argument holds. Those countries that are not considered investable are much like the individual stocks that are excluded from domestic "total market" funds. They usually don't meet the requirements for liquidity or size or are subject to some other practical hurdle.

I see these countries you are referring to as basically being equivalent to those such stocks that are uninvestable.

samsdad
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by samsdad » Fri Jan 11, 2019 10:17 pm

GRP wrote:
Fri Jan 11, 2019 10:11 pm
samsdad wrote:
Fri Jan 11, 2019 10:01 pm
GRP wrote:
Fri Jan 11, 2019 6:44 pm
I see what you're saying, and I respect your perspective.

I personally agree with Cliff Asness' reasoning that countries can be viewed basically as large companies.

...

Country picking is therefore equivalent to stock picking. If we agree with the logic that indexing the entire U.S. market is the best choice, then we must also agree that indexing the world is the best choice. Because all the same passive investing arguments we have for index funds apply to all of the world's countries.

If we continue to overweight U.S. then we might as well abandon indexing altogether and pick and choose individual stocks or do factor investing. One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
Well, the Vanguard total international fund only invests in 50ish countries out of 195ish. What happened to the other 145 or so? To get “the rest of the story,” as Paul Harvey would say, you then have to invest in primary emerging markets, secondary emerging markets, and frontier markets, cause we’re not “country picking,” right? I’d wager that even after investing in those markets you’d still be short some countries, which you’d likely have to make up with individual country ETFs. I’m going to look for the North Korea ETF after I post this.

Or are we okay with choosing 50 or so favorites and acting like we’re invested in “the world”? Why? Beause it’s representative of the world as a whole? Really? You don’t think there would be a corruption performance drag if we included the other 145ish countries? Any cost drag to include them?
I see what you are saying. It's a valid point of contention.

I still think the logic of my original argument holds. Those countries that are not considered investable are much like the individual stocks that are excluded from domestic "total market" funds. They usually don't meet the requirements for liquidity or size or are subject to some other practical hurdle.

I see these countries you are referring to as basically being equivalent to those such stocks that are uninvestable.
Fair enough.

nix4me
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by nix4me » Fri Jan 11, 2019 10:25 pm

my past holdings were 0% international.

future holdings 0% international.

International was popular in the 80's and 90's

SovereignInvestor
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by SovereignInvestor » Fri Jan 11, 2019 10:43 pm

I think holding international stocks is dangerous when one wants to retire spending US dollars. Why add forex risk to the equation?

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galeno
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by galeno » Fri Jan 11, 2019 11:02 pm

VT holds 55.5% USA, 9.4% EM, and 35.1% non-USA developed. So Vanguard is recommending more and more non-USA as time goes on.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by fennewaldaj » Fri Jan 11, 2019 11:02 pm

l1am wrote:
Fri Jan 11, 2019 6:19 pm
Past performance is not an indicator to future results - but how far do you take this?

US vs INTL

Image
When I see this chart all I see is the the US has massively outperformed since 2011. Looks more or less the same up until then. So not really a 21 year trend it is a 7 year trend.

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galeno
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by galeno » Fri Jan 11, 2019 11:06 pm

Bogleheads believe in "reversion to the mean". Non-USA equities have lower valuations and thus higher expected returns over the next 10 years. If I were going to "tilt" I'd tilt AWAY from USA equities.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Vulcan
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Vulcan » Fri Jan 11, 2019 11:07 pm

Those that know something the market doesn't can select an arbitrary allocation to intentional and rationalize it here every two weeks.

For the rest of us, Vanguard will introduce admiral shares of Total World Index Fund next week :beer
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by fennewaldaj » Fri Jan 11, 2019 11:08 pm

samsdad wrote:
Fri Jan 11, 2019 10:01 pm

Well, the Vanguard total international fund only invests in 50ish countries out of 195ish. What happened to the other 145 or so? To get “the rest of the story,” as Paul Harvey would say, you then have to invest in primary emerging markets, secondary emerging markets, and frontier markets, cause we’re not “country picking,” right? I’d wager that even after investing in those markets you’d still be short some countries, which you’d likely have to make up with individual country ETFs. I’m going to look for the North Korea ETF after I post this.
Most of the countries not included have very small equity markets or non at all. We are talking about leaving out 1-2% of market cap. The most significant omission is lack of China A shares as they are actually a large market. The Bond market does cover more countries so those of us with emerging market bonds do have exposure to more countries.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by OldSport » Fri Jan 11, 2019 11:45 pm

I looked at this a lot and have posted a lot and decided to go with 30% International. But I will not just hold 30% Total International, I will do 10% Total, 10% EM, and 10% Small Cap. The drag on 70% Total US with 30% of the slice and dice Int'l was minimal vs 100% US. Higher than 30% Intl the drag gets considerably more meaningful.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by whodidntante » Fri Jan 11, 2019 11:48 pm

40% seems a bit light to me.

phantom0308
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by phantom0308 » Fri Jan 11, 2019 11:55 pm

SovereignInvestor wrote:
Fri Jan 11, 2019 10:43 pm
I think holding international stocks is dangerous when one wants to retire spending US dollars. Why add forex risk to the equation?
Currency volatility accounts for only a small part of international equity volatility. Vanguard has a paper on hedging and its effects on ones portfolio.
https://advisors.vanguard.com/iwe/pdf/I ... omain=true

Currency exposure also guards against tail risk assuming that all of the rest of your assets are in your local currency. If your currency strongly depreciates and you can’t buy as much, your international returns will be boosted. If your currency strongly appreciates and you can buy a lot, your international returns will be depressed. It’s not that bad of a trade off.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Sat Jan 12, 2019 12:34 am

I think that the arguments that U.S. centric indexers levee against individual stock pickers are the exact same arguments that global indexers can leave against U.S. centric indexers, almost without any modification. The arguments have almost perfect transitivity.

U.S. only indexing reduces diversification, increases idiosyncratic risk, and decreases expected return at the moment (with international valuations being lower now). Additionally, having a target and underweighted allocation to international also introduces extra transaction costs from rebalancing and taxes.

We all recognize that we can’t predict ahead of time what companies and managers will outperform, and when they do outperform that is not an indication they will continue to outperform. That argument applies to a whole country.

If we believe that being domiciled in the U.S. constitutes a common “factor” for outperforming companies, then why don’t we invest in other factors too? Why not invest in the value factor or size factor?

I personally don't even think the foreign tax argument holds that much water. If we are to avoid investing in international companies due to potentially higher tax burden, it doesn't seem to logically follow that U.S. centric indexing is the answer. If one is that concerned about taxes, why not go and invest in a U.S. growth fund that has minimal dividends, thus reducing the tax burden even further?

A potential corruption drag has also been mentioned from time to time. I think the same transitive arguments apply here too. If corruption is indeed a negative factor internationally, then why would that not apply domestically? If this is indeed the case we should seek to invest all of our money into an ESG or Socially Responsible Index fund rather than a total U.S. fund. Presumably, corruption should affect overseas companies as badly as it affects domestic ones.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by HEDGEFUNDIE » Sat Jan 12, 2019 12:40 am

fennewaldaj wrote:
Fri Jan 11, 2019 11:08 pm
samsdad wrote:
Fri Jan 11, 2019 10:01 pm

Well, the Vanguard total international fund only invests in 50ish countries out of 195ish. What happened to the other 145 or so? To get “the rest of the story,” as Paul Harvey would say, you then have to invest in primary emerging markets, secondary emerging markets, and frontier markets, cause we’re not “country picking,” right? I’d wager that even after investing in those markets you’d still be short some countries, which you’d likely have to make up with individual country ETFs. I’m going to look for the North Korea ETF after I post this.
Most of the countries not included have very small equity markets or non at all. We are talking about leaving out 1-2% of market cap. The most significant omission is lack of China A shares as they are actually a large market. The Bond market does cover more countries so those of us with emerging market bonds do have exposure to more countries.
ASHR is up 6% since I told the board to buy some:

viewtopic.php?t=267740

You’re welcome Bogleheads.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Valuethinker » Sat Jan 12, 2019 9:27 am

HEDGEFUNDIE wrote:
Sat Jan 12, 2019 12:40 am
fennewaldaj wrote:
Fri Jan 11, 2019 11:08 pm
samsdad wrote:
Fri Jan 11, 2019 10:01 pm

Well, the Vanguard total international fund only invests in 50ish countries out of 195ish. What happened to the other 145 or so? To get “the rest of the story,” as Paul Harvey would say, you then have to invest in primary emerging markets, secondary emerging markets, and frontier markets, cause we’re not “country picking,” right? I’d wager that even after investing in those markets you’d still be short some countries, which you’d likely have to make up with individual country ETFs. I’m going to look for the North Korea ETF after I post this.
Most of the countries not included have very small equity markets or non at all. We are talking about leaving out 1-2% of market cap. The most significant omission is lack of China A shares as they are actually a large market. The Bond market does cover more countries so those of us with emerging market bonds do have exposure to more countries.
ASHR is up 6% since I told the board to buy some:

viewtopic.php?t=267740

You’re welcome Bogleheads.
Top tip.

If you are good at this you go to it professionally.

You know when a fund manager is doing poorly because they start bragging about their wins.

Unless they are trying to manipulate a stock price they do *not* talk about it when they are winning.

Think Valleant. Fund managers should not get married to their calls.

Here is just a lousy place to brag. ;-)

TBillT
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by TBillT » Sat Jan 12, 2019 10:19 am

To me it's a little like saying Vanguard Life Strategy Moderate or Growth fund is a good choice, which it may be. The idea is semi-equivalent to the Sharpe recommendation to hold a total market portfolio. US/Int Stocks/Bonds. And since it seems down a bit for the year, possible good time to buy low (sorry for the anti-Boglehead emotion to time the market).

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by ruralavalon » Sat Jan 12, 2019 10:27 am

arengarajsug88 wrote:
Fri Jan 11, 2019 5:43 pm
Hello folks,

I read an article where vanguard recommends investors to increase their international (non-US) holdings to 40% as it appears below in the Bloomberg article.

https://www.bloomberg.com/news/articles ... ings-to-40

What are your thoughts on this? Is it a legitimate prediction by Vanguard that international funds would outperform US funds? Which international fund(s) would you pick? I do not have a good international funds option in my 401K, so if I were to use all my roth IRA ($6k) to pick one international fund, which should it be?

Thanks.
This is not new at all.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

AlphaLess
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by AlphaLess » Sat Jan 12, 2019 10:45 am

From a passive portfolio point of view, only 3 types of weights make sense, ex ante:

1. US:100%, Intl: 0%,
2. US:0%, Intl:100%,
3. Market cap weights.

In reality, there are other considerations:
- intl is in a different currency,
- currency risk is uncompensated (can hedge, but ...),
- intl indexes change a lot.

Ex post, it is a totally different story. Overfitted weight allocations will be galore.
"You can get more with a kind word and a gun than with just a kind word." George Washington

AlphaLess
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by AlphaLess » Sat Jan 12, 2019 10:45 am

ruralavalon wrote:
Sat Jan 12, 2019 10:27 am
arengarajsug88 wrote:
Fri Jan 11, 2019 5:43 pm
Hello folks,

I read an article where vanguard recommends investors to increase their international (non-US) holdings to 40% as it appears below in the Bloomberg article.

https://www.bloomberg.com/news/articles ... ings-to-40

What are your thoughts on this? Is it a legitimate prediction by Vanguard that international funds would outperform US funds? Which international fund(s) would you pick? I do not have a good international funds option in my 401K, so if I were to use all my roth IRA ($6k) to pick one international fund, which should it be?

Thanks.
This is not new at all.
I disagree. It's new because he just posted about it.
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Fclevz
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Fclevz » Sat Jan 12, 2019 10:48 am

Vulcan wrote:
Fri Jan 11, 2019 11:07 pm
Those that know something the market doesn't can select an arbitrary allocation to intentional and rationalize it here every two weeks.

For the rest of us, Vanguard will introduce admiral shares of Total World Index Fund next week :beer
Have they actually announced a firm date for Total World Stock Index Admiral Shares?

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Vulcan
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Vulcan » Sat Jan 12, 2019 2:45 pm

Fclevz wrote:
Sat Jan 12, 2019 10:48 am
Vulcan wrote:
Fri Jan 11, 2019 11:07 pm
Those that know something the market doesn't can select an arbitrary allocation to intentional and rationalize it here every two weeks.

For the rest of us, Vanguard will introduce admiral shares of Total World Index Fund next week :beer
Have they actually announced a firm date for Total World Stock Index Admiral Shares?
The prospectus was filed on Nov 19th with proposed effective date 60 days after filing.
https://www.sec.gov/Archives/edgar/data ... merged.htm
Last edited by Vulcan on Sat Jan 12, 2019 2:57 pm, edited 2 times in total.
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by lukestuckenhymer » Sat Jan 12, 2019 2:51 pm

Vanguard's LifeStrategy/Target Retirement funds have had 40% ex-US stock since 2015. Were we not to take that as a recommendation? I know I did.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by jackholloway » Sat Jan 12, 2019 3:27 pm

s8r wrote:
Fri Jan 11, 2019 9:26 pm
GRP wrote:
Fri Jan 11, 2019 6:44 pm
One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
My thoughts exactly. I am an engineer and I apply engineering logic also in my financial decisions. :D
I do not think this is contradictory. My assets, my spending, my legal protections/treaties, and my returns are essentially denominated in dollars. I do hold 10% of the total, about 15% of stocks, in international as a tail risk hedge, but that serves a different purpose than my primary investment pool.

An alternative IPS that argued that the economy is global, and the leading companies are global, would suggest that my spending, etc, is already multi currency, which makes the case for a global market weight portfolio.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by ruralavalon » Sat Jan 12, 2019 3:45 pm

s8r wrote:
Fri Jan 11, 2019 9:26 pm
GRP wrote:
Fri Jan 11, 2019 6:44 pm
One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
My thoughts exactly. I am an engineer and I apply engineering logic also in my financial decisions. :D
In investing sometimes actual observed facts and logical consistency lead to different ideas of what is better. Investing is not governed by principles of physics.

Historically there has been no diversification benefit to going higher than 40% of stocks in international stocks.

Historically 30% of stocks in international stocks would have captured about 99% of the diversification benefit, and 20% of stocks in international stocks would have captured about 85% of the maximum diversification benefit.

Please see the Vanguard paper "Considerations for Investing in non-U.S. Equities", p.6.
Last edited by ruralavalon on Sat Jan 12, 2019 3:47 pm, edited 1 time in total.
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by raven15 » Sat Jan 12, 2019 3:46 pm

SovereignInvestor wrote:
Fri Jan 11, 2019 10:43 pm
I think holding international stocks is dangerous when one wants to retire spending US dollars. Why add forex risk to the equation?
Forex exposure has generally reduced risk, with 25% of total allocation or 35% of stock allocation being the lowest risk overall historically. Put those together and you get a 45% US Stock, 25% international stock, 30% bond portfolio. I would have no problem recommending that to a retiree as safer than a portfolio that neglected international investments entirely.
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Dottie57 » Sat Jan 12, 2019 3:50 pm

I can’t stomach 40% and barely tolerate 20%.

yousha
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by yousha » Sat Jan 12, 2019 3:52 pm

20% is my holding and I will not increase it!

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Sat Jan 12, 2019 3:54 pm

We will have to agree to disagree then, my friends.

Respectfully, I stand by my original statement. If you eschew international then you are giving up the diversification that those foreign companies and currencies provide.

Either way, a global fund will have your returns denominated in dollars.

Putting it another way, I think it maybe useful to note that a U.S. indexer and a global investor will both have foreign currency exposure, it's just a matter of form over substance. The global indexer will have currency exposure at the fund level, while the U.S. indexer has currency exposure at the company level.

Half of the sales of the large cap companies in the U.S. are overseas. There is already currency exposure there, just in a different form. So, if currency risk is something you want to reduce, then why invest in a total U.S. index? Why not invest in a Russell 2000 index which gets substantially all of its sales domestically?

The decision to not accept currency exposure on the fund level, but to accept it on the company level is an arbitrary one.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Northern Flicker » Sat Jan 12, 2019 4:13 pm

arengarajsug88 wrote:
Fri Jan 11, 2019 5:43 pm
Hello folks,

I read an article where vanguard recommends investors to increase their international (non-US) holdings to 40% as it appears below in the Bloomberg article.

https://www.bloomberg.com/news/articles ... ings-to-40

What are your thoughts on this? Is it a legitimate prediction by Vanguard that international funds would outperform US funds? Which international fund(s) would you pick? I do not have a good international funds option in my 401K, so if I were to use all my roth IRA ($6k) to pick one international fund, which should it be?

Thanks.
This has nothing to do with predicting future returns and the recommendation has been in place for about four years. The recommendation is with respect to reducing short-term variance of returns.

If you look at figure 3 in the article they have on their web site explaining the research they did, it looks to me like 30% int’l minimized variance in their particular data sample of 100% equity portfolios and the variance graph was virtually flat from 30% to 40% for 60% or 80% allocations to equities so I’m not sure why Vanguard chose 40% instead of 30% based on their data. And even at 25% int’l the difference in sample variance from 40% equities is likely not statistically significant.

But there is a much more fundamental issue. Is minimizing short-term variance the most important objective of investing internationally? It is not for me. Hedging inflation risk and hedging the risk of long-term underperformance of US equities and avoiding taking excessive currency risk are what I view as important.
Taking a break from Bogleheads.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Sat Jan 12, 2019 4:25 pm

ruralavalon wrote:
Sat Jan 12, 2019 3:45 pm
s8r wrote:
Fri Jan 11, 2019 9:26 pm
GRP wrote:
Fri Jan 11, 2019 6:44 pm
One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
My thoughts exactly. I am an engineer and I apply engineering logic also in my financial decisions. :D
In investing sometimes actual observed facts and logical consistency lead to different ideas of what is better. Investing is not governed by principles of physics.

Historically there has been no diversification benefit to going higher than 40% of stocks in international stocks.

Historically 30% of stocks in international stocks would have captured about 99% of the diversification benefit, and 20% of stocks in international stocks would have captured about 85% of the maximum diversification benefit.

Please see the Vanguard paper "Considerations for Investing in non-U.S. Equities", p.6.
Indeed, Vanguard has been fairly vocal on this. With all due to respect to Vanguard, the threshold of 40% being the maximum benefit for international diversification is nothing more than a historical accident. The numbers could just as easily have gone another way.

Either way, the global market cap weighting must win in the long run. For the same reasons that the total U.S. market cap index will beat U.S. active managers in the long run. The global index will hold the market with the least amount of movement and frictional costs. Targeting a set percentage of international (say 20%) will engender frictional costs from rebalancing over the years and must lose over time, especially because the continued outperformance of the U.S. is not guaranteed. Just like how an active manager that bet on a certain sector cannot outperform indefinitely, and his buying and selling causes frictional cost. Markets don't allow persistent free lunches either.

Again, I could take the argument you have posited about international and apply it to the U.S. I could say something like:

"Historically there has been no diversification benefit to going higher than 40% in health care stocks."

Historically 30% of stocks in health care would have captured about 99% of the diversification benefit, and 20% of stocks in health care would have captured about 85% of the maximum diversification benefit.

Please see the Vanguard paper "Considerations for Investing in health care equities", p.6."

Nobody would accept that argument. The past is not prologue, and past performance is not a guarantee of future returns. The same applies to international in my humble opinion.

Just my perspective, with all due deference.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Artsdoctor » Sat Jan 12, 2019 6:24 pm

What Vanguard as an institution says and what Vanguard administrators do are two different things. It's true that LifeStrategy funds have a 40% international stake in the equity portion of the fund, but there are many, many interviews with multiple Vanguard advisors, administrators, and veterans who would not have a 40% stake in international [for equity holdings]. Home bias remains strong, even at Vanguard, for US investors. I don't anyone would argue strongly against a market cap stake but there's plenty of room for variability. The one thing Vanguard will continually say is that you should pick your subclass allocation and stick with it.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by HAL 9000 » Sat Jan 12, 2019 7:04 pm

I think I'm at 22% world vs 78% us equities and targeting 20%, but it is a hedge to me and 4:1 seems like a reasonable ratio. 40% seems risky to me and I don't like risk. The major red flag with foreign equities (and foreign bonds) are that I think they aren't from stable societies and I don't align with most of their agendas and ideals. I would rather invest in the USA than in a communist country, military dictatorship, or a single party 'democracy'. Can you really trust a Mordorvian copper mining companies numbers? :oops: ???

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by TropikThunder » Sat Jan 12, 2019 7:22 pm

samsdad wrote:
Fri Jan 11, 2019 10:01 pm
Or are we okay with choosing 50 or so favorites and acting like we’re invested in “the world”? Why? Beause it’s representative of the world as a whole? Really? You don’t think there would be a corruption performance drag if we included the other 145ish countries? Any cost drag to include them?
There are 193 member states in the UN, not counting The Vatican and Palestine or the 11 "other states" whose sovereignty is disputed in some way (like Kosovo and Taiwan). Of the 193, MSCI classifies 23 Developed Markets, 24 Emerging Markets, 24 Frontier Markets, and 11 Standalone Markets for a total of 82 investable markets. According to MSCI, this
provide(s) detailed equity market coverage for more than 80 countries across developed, emerging and frontier markets, representing 99% of these investable opportunity sets.
https://www.msci.com/market-cap-weighted-indexes
Limiting to DM and EM, the MSCI ACWI covers 85% of the investable world. The cost to include FM and stand-alone indexes is likely prohibitive in the same way that extending the a Total US Index all the way down to microcaps and pink sheets has been cost-prohibitive. I don't hear people complain about not including microcaps or pink sheets since including them at market weight wouldn't measurably affect returns.

[actually, Taiwan and Palestine are investable markets per MSCI but not Member States in the UN, so the investable world per MSCI encompasses 82 out of 195 states]
Well, the Vanguard total international fund only invests in 50ish countries out of 195ish. What happened to the other 145 or so? To get “the rest of the story,” as Paul Harvey would say, you then have to invest in primary emerging markets, secondary emerging markets, and frontier markets, cause we’re not “country picking,” right? I’d wager that even after investing in those markets you’d still be short some countries, which you’d likely have to make up with individual country ETFs. I’m going to look for the North Korea ETF after I post this.
How does a fund invest in a country that does not have a stock market?

With all due respect, your opposition to all things international is noted, but there are legitimate reasons to not include international equities in one's portfolio, there are irrational reasons, and then there's just plain silly.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Northern Flicker » Sat Jan 12, 2019 7:44 pm

https://awealthofcommonsense.com/2017/05/think-global-to-avoid-the-shrinking-u-s-stock-market/ wrote: According to CRSP data, there were more than 9,100 U.S.-listed public companies in 1997. Today, that number is down to slightly more than 5,700. The Wilshire 5000, an index used as a proxy for all U.S. securities with readily available pricing data, holds just over 3,600 stocks as of the start of this year, down from more than 7,500 in 1998.
...
According to Dimensional Fund Advisors, the number of companies listed on global stock market exchanges has increased from about 23,000 in 1995 to 33,000 by the end of last year. So while the number of companies in the U.S. has shrunk the number of companies worldwide has exploded.
...
Emerging markets now account for greater than 50 percent of global gross domestic product but only around 10 percent of stock market capitalization. China makes up 15 percent of world GDP but just 3 percent of world stock market capitalization. India makes up around 1 percent of global stock market cap but accounts for more than 3 percent of worldwide GDP.
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by J G Bankerton » Sat Jan 12, 2019 7:48 pm

Typ997S wrote:
Fri Jan 11, 2019 5:49 pm
At the other extreme, some argue that an international allocation is unnecessary.
Mr. Bogle was very frank in his reasoning to avoid foreign stocks.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Sat Jan 12, 2019 9:23 pm

J G Bankerton wrote:
Sat Jan 12, 2019 7:48 pm
Typ997S wrote:
Fri Jan 11, 2019 5:49 pm
At the other extreme, some argue that an international allocation is unnecessary.
Mr. Bogle was very frank in his reasoning to avoid foreign stocks.
Those two guys are my biggest business heroes. I will concede that Bogle and Buffett's recommendation of being U.S. centric in one's investments is the one thing that gives me the most pause.

And this is coming from someone who is ardent about investing globally.

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