Weighting US Stock vs Intl Stock

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polestar
Posts: 26
Joined: Wed Oct 28, 2020 3:26 pm

Weighting US Stock vs Intl Stock

Post by polestar »

The same question may have been posed on the forum numerous times but likely with a different title i.e., 2 (world stock+bond) vs 3 fund (us stock + intl stock + bond) portfolio. I have read a few of these threads but I did not really understand which of the following scenarios is a sound strategy for a long term investor.

1. Total World - Weights all global stocks by market cap and more diverse. Possible correlation when certain economies face recession. Low overall risk but does that strictly translate to lower reward than the alternative?
2. US Stock + Intl Stock - In a 3 fund portfolio, it is often recommended to add more weight to US stock due to recent performance (although no one explicitly states that) and to avoid the added risks with international equities.

However, as everyone knows past performance is not an indicator and history taught us humanity gets more civil over time and are less stringent with trade/sanctions and put more focus on progress. Doesn't that make the latter strategy riskier?

There are certainly other variables that I did not take into consideration such as international valuations, transparency, tax efficiency, etc. Do these variables outweigh the risk associated with little to no regional diversification?
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Kintora
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Joined: Sun Jan 12, 2020 5:21 pm
Location: Fargo, ND

Re: Weighting US Stock vs Intl Stock

Post by Kintora »

Here is my 2 cents from someone relatively new to DIY investing, so take it for whatever that is worth.

For equities, I invest in VTSAX and VTIAX. VTIAX is 20% of my equities allocation.

I am comfortable with being overweight US for the following reasons.
1. Jack Bogle stated international is not needed, but if desired, no more than 20%.
2. Warren Buffet recommends 100% US.
3. Jack Bogle and Warren Buffet are wiser investors than I will ever be.
4. We are a global economy with border lines blurring. Major US companies have a global presence.

I am comfortable with having 20% of my equities in international for the following reasons.
1. For the simple sake of additional diversification.
2. I have read that 20% international captures a decent amount of volatility reduction benefit.
3. I am not worried about someone at 55/45 (or global market cap) doing significantly better than me at 80/20 over the long term.
4. I am not worried about someone at 100/0 doing significantly better than me at 80/20 over the long term.

In my mind, 20% of equities in international is the goldilocks allocation. The truth is, no one can possibly know what will do best over the coming decades. I think picking a strategy and sticking with it for the long haul, as opposed to performance chasing is an important factor. Possibly more important than what number you land on for your international allocation.
Valuethinker
Posts: 41748
Joined: Fri May 11, 2007 11:07 am

Re: Weighting US Stock vs Intl Stock

Post by Valuethinker »

Kintora wrote: Wed Nov 11, 2020 12:29 am Here is my 2 cents from someone relatively new to DIY investing, so take it for whatever that is worth.

For equities, I invest in VTSAX and VTIAX. VTIAX is 20% of my equities allocation.

I am comfortable with being overweight US for the following reasons.
1. Jack Bogle stated international is not needed, but if desired, no more than 20%.
2. Warren Buffet recommends 100% US.
3. Jack Bogle and Warren Buffet are wiser investors than I will ever be.
4. We are a global economy with border lines blurring. Major US companies have a global presence.

I am comfortable with having 20% of my equities in international for the following reasons.
1. For the simple sake of additional diversification.
2. I have read that 20% international captures a decent amount of volatility reduction benefit.
3. I am not worried about someone at 55/45 (or global market cap) doing significantly better than me at 80/20 over the long term.
4. I am not worried about someone at 100/0 doing significantly better than me at 80/20 over the long term.

In my mind, 20% of equities in international is the goldilocks allocation. The truth is, no one can possibly know what will do best over the coming decades. I think picking a strategy and sticking with it for the long haul, as opposed to performance chasing is an important factor. Possibly more important than what number you land on for your international allocation.
We debate this endlessly here and it rapidly degenerates into an America is best/ not best discussion. Very little new insight emerges.

Your approach is sensible. The Vanguard data suggests anywhere between 20% & 40% for a US investor in international has led to lower volatility - ie a more efficient portfolio (in a mean-variance sense).

Depending on your sub-period chosen, and end dates, it has or has not led to lower returns. Certainly recently it has led to significantly lower returns than a 100% US strategy.
Valuethinker
Posts: 41748
Joined: Fri May 11, 2007 11:07 am

Re: Weighting US Stock vs Intl Stock

Post by Valuethinker »

polestar wrote: Tue Nov 10, 2020 11:47 pm The same question may have been posed on the forum numerous times but likely with a different title i.e., 2 (world stock+bond) vs 3 fund (us stock + intl stock + bond) portfolio. I have read a few of these threads but I did not really understand which of the following scenarios is a sound strategy for a long term investor.

1. Total World - Weights all global stocks by market cap and more diverse. Possible correlation when certain economies face recession. Low overall risk but does that strictly translate to lower reward than the alternative?
2. US Stock + Intl Stock - In a 3 fund portfolio, it is often recommended to add more weight to US stock due to recent performance (although no one explicitly states that) and to avoid the added risks with international equities.

However, as everyone knows past performance is not an indicator and history taught us humanity gets more civil over time and are less stringent with trade/sanctions and put more focus on progress. Doesn't that make the latter strategy riskier?

There are certainly other variables that I did not take into consideration such as international valuations, transparency, tax efficiency, etc. Do these variables outweigh the risk associated with little to no regional diversification?
There are threads hundreds of posts long on this, here.

Every market, even the USA, has political and economic risks. If for example there was a concerted anti Trust attack on Amazon & Facebook & Google, say (I am not suggesting there will be, but just that these are 3 of the largest stocks in the US index).

As per poster above, you are likely best off with between 20-40% of your equity portfolio in non-US stocks. The tradeoff curve is shallow, though, so the difference between 20% and 30% say, is not huge. Aim for the low end if you are uncertain.
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