Good Reason to Hold Bonds and International Stocks - 1990's Japan

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lostdog
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by lostdog »

Da5id wrote: Wed Jun 23, 2021 5:21 pm
visualguy wrote: Wed Jun 23, 2021 5:14 pm
Da5id wrote: Wed Jun 23, 2021 4:47 pm If you feel you know as a fact that Europe and Japan's "stagnation" is not reflected in market valuations correctly, well, clearly you know more than I do. Congrats on that? I'll take what the market gives myself, as I know nothing of the sort.
We're back to the "it's all priced in, so returns should be about the same over time" argument. Well, that hasn't worked in the long run in this context before - returns have not been all that close for US and ex-US over the last 20, 30, 50, 120 years. One obvious issue with this argument as I mentioned on another thread is that new companies aren't really priced in. Google, Tesla, nVidia, etc. weren't somehow priced into other stocks before they emerged and flourished. As long as the US cranks these out, while Europe and Japan don't (they haven't done much of that in decades), there is no reason to expect similar returns.
Well in that case my 60% US will do well for me. I have less confidence in my ability to predict the future than some, good luck with your investments.
The good old crystal ball arguments from the anti-international crowd. Can I borrow your crystal balls?
visualguy
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by visualguy »

anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
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happyisland
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by happyisland »

Here are the top ten companies from the ex-US fund that all you USA-tilters are missing out on:

Taiwan Semiconductor Manufacturing Co Ltd
Tencent Holdings Ltd
Alibaba Group Holding Ltd ADR
Samsung Electronics Co Ltd
Nestle SA
ASML Holding NV
Roche Holding AG
LVMH Moet Hennessy Louis Vuitton SE
Novartis AG
Toyota Motor Corp
Nathan Drake
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

happyisland wrote: Wed Jun 23, 2021 5:45 pm Here are the top ten companies from the ex-US fund that all you USA-tilters are missing out on:

Taiwan Semiconductor Manufacturing Co Ltd
Tencent Holdings Ltd
Alibaba Group Holding Ltd ADR
Samsung Electronics Co Ltd
Nestle SA
ASML Holding NV
Roche Holding AG
LVMH Moet Hennessy Louis Vuitton SE
Novartis AG
Toyota Motor Corp
These aren’t in the US, therefore they are destined to underperform
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anon_investor
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by anon_investor »

visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
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anon_investor
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by anon_investor »

Nathan Drake wrote: Wed Jun 23, 2021 5:47 pm
happyisland wrote: Wed Jun 23, 2021 5:45 pm Here are the top ten companies from the ex-US fund that all you USA-tilters are missing out on:

Taiwan Semiconductor Manufacturing Co Ltd
Tencent Holdings Ltd
Alibaba Group Holding Ltd ADR
Samsung Electronics Co Ltd
Nestle SA
ASML Holding NV
Roche Holding AG
LVMH Moet Hennessy Louis Vuitton SE
Novartis AG
Toyota Motor Corp
These aren’t in the US, therefore they are destined to underperform
Yep, you got it. 8-)
Nathan Drake
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
visualguy
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by visualguy »

Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
Can you give us some examples of the US risk that you are so concerned about? What realistic disaster could happen in the US that wouldn't nail ex-US just as badly or worse (as we've seen in the past)?
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happyisland
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by happyisland »

anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Not sure that means what you think it means...
https://www.urbandictionary.com/define. ... nd%20Chill
tomsense76
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by tomsense76 »

Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
I hold international. In fact hold global weight equities.

Though wouldn't describe international as a safety blanket. Historically it seems to get crushed harder than the US on downturns. For example the subprime crisis saw a ~60% drawdown in international. Plus international leans more towards value, which has a habit of being beaten down and flatlining periodically. Ofc the future could always be different, but nothing here makes me think international is safe
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
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anon_investor
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by anon_investor »

happyisland wrote: Wed Jun 23, 2021 5:59 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Not sure that means what you think it means...
https://www.urbandictionary.com/define. ... nd%20Chill
I didn't come up with it. Please google "VTSAX and chill" and see what comes up.
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anon_investor
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by anon_investor »

Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
I much prefer my US treasury blanket.
absolute zero
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by absolute zero »

visualguy wrote: Wed Jun 23, 2021 5:58 pm
Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
Can you give us some examples of the US risk that you are so concerned about? What realistic disaster could happen in the US that wouldn't nail ex-US just as badly or worse (as we've seen in the past)?
He said risk not “disaster.” It does not take a disaster for stock returns to be disappointing for a decade or longer. In fact, there is a chance that the US stock market (or any other country’s stock market) could be flat for the next 10 years, and at the end of that period we could have no idea why it occurred.
visualguy
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by visualguy »

anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
VTSAX-only is fine, but it wasn't my intention to dismiss those countries. If I sliced and diced, I would probably invest in some EM stock markets, but it wouldn't be a large-enough portion of my portfolio to be worth the trouble.
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anon_investor
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by anon_investor »

visualguy wrote: Wed Jun 23, 2021 6:12 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
VTSAX-only is fine, but it wasn't my intention to dismiss those countries. If I sliced and diced, I would probably invest in some EM stock markets, but it wouldn't be a large-enough portion of my portfolio to be worth the trouble.
You are still right, because it wouldn't move the needle much, probably not worth it. VTSAX is probably good enough.
Nathan Drake
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

visualguy wrote: Wed Jun 23, 2021 5:58 pm
Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
Can you give us some examples of the US risk that you are so concerned about? What realistic disaster could happen in the US that wouldn't nail ex-US just as badly or worse (as we've seen in the past)?
I don’t have to look very far to see how awful the 00-09 period was

There doesn’t need to be a “disaster”, sentiment just needs to change.

I am not concerned too much about acute shocks, but longer term poor outcomes that are much more insidious
Nathan Drake
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

tomsense76 wrote: Wed Jun 23, 2021 6:03 pm
Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm
anon_investor wrote: Wed Jun 23, 2021 5:32 pm I am all US. But I also have time on my side, plus EF and I Bonds. I might be persuaded to buy EM ex-China though.
What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
I hold international. In fact hold global weight equities.

Though wouldn't describe international as a safety blanket. Historically it seems to get crushed harder than the US on downturns. For example the subprime crisis saw a ~60% drawdown in international. Plus international leans more towards value, which has a habit of being beaten down and flatlining periodically. Ofc the future could always be different, but nothing here makes me think international is safe
As mentioned, the concern isn’t for short term shocks…
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anon_investor
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by anon_investor »

Nathan Drake wrote: Wed Jun 23, 2021 6:40 pm
visualguy wrote: Wed Jun 23, 2021 5:58 pm
Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm
visualguy wrote: Wed Jun 23, 2021 5:45 pm

What countries do you like in EM ex-China?

If demographics is one of your criteria, then you may have an issue with Taiwan which is also aging fast... India? Brazil?
You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
Can you give us some examples of the US risk that you are so concerned about? What realistic disaster could happen in the US that wouldn't nail ex-US just as badly or worse (as we've seen in the past)?
I don’t have to look very far to see how awful the 00-09 period was

There doesn’t need to be a “disaster”, sentiment just needs to change.

I am not concerned too much about acute shocks, but longer term poor outcomes that are much more insidious
Who only invests for a 10 year period? Add the 10 years before or the 10 years after that period and the story is much different.
Nathan Drake
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

anon_investor wrote: Wed Jun 23, 2021 6:52 pm
Nathan Drake wrote: Wed Jun 23, 2021 6:40 pm
visualguy wrote: Wed Jun 23, 2021 5:58 pm
Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm
anon_investor wrote: Wed Jun 23, 2021 5:47 pm

You're right, stay the course VTSAX and chill.
Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
Can you give us some examples of the US risk that you are so concerned about? What realistic disaster could happen in the US that wouldn't nail ex-US just as badly or worse (as we've seen in the past)?
I don’t have to look very far to see how awful the 00-09 period was

There doesn’t need to be a “disaster”, sentiment just needs to change.

I am not concerned too much about acute shocks, but longer term poor outcomes that are much more insidious
Who only invests for a 10 year period? Add the 10 years before or the 10 years after that period and the story is much different.
I’d rather avoid any prolonged period of extremely poor performance
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anon_investor
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by anon_investor »

Nathan Drake wrote: Wed Jun 23, 2021 6:54 pm
anon_investor wrote: Wed Jun 23, 2021 6:52 pm
Nathan Drake wrote: Wed Jun 23, 2021 6:40 pm
visualguy wrote: Wed Jun 23, 2021 5:58 pm
Nathan Drake wrote: Wed Jun 23, 2021 5:49 pm

Will definitely be pretty chilly when risk shows up and you wish you had an international blanket
Can you give us some examples of the US risk that you are so concerned about? What realistic disaster could happen in the US that wouldn't nail ex-US just as badly or worse (as we've seen in the past)?
I don’t have to look very far to see how awful the 00-09 period was

There doesn’t need to be a “disaster”, sentiment just needs to change.

I am not concerned too much about acute shocks, but longer term poor outcomes that are much more insidious
Who only invests for a 10 year period? Add the 10 years before or the 10 years after that period and the story is much different.
I’d rather avoid any prolonged period of extremely poor performance
International only beat the US by about 2.5% annually during that time. The 10 years before and the 10 years after US soundly beat international. Bonds were a way better diversified. How much fixed income do you have?
visualguy
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by visualguy »

anon_investor wrote: Wed Jun 23, 2021 7:05 pm
Nathan Drake wrote: Wed Jun 23, 2021 6:54 pm
anon_investor wrote: Wed Jun 23, 2021 6:52 pm
Nathan Drake wrote: Wed Jun 23, 2021 6:40 pm
visualguy wrote: Wed Jun 23, 2021 5:58 pm

Can you give us some examples of the US risk that you are so concerned about? What realistic disaster could happen in the US that wouldn't nail ex-US just as badly or worse (as we've seen in the past)?
I don’t have to look very far to see how awful the 00-09 period was

There doesn’t need to be a “disaster”, sentiment just needs to change.

I am not concerned too much about acute shocks, but longer term poor outcomes that are much more insidious
Who only invests for a 10 year period? Add the 10 years before or the 10 years after that period and the story is much different.
I’d rather avoid any prolonged period of extremely poor performance
International only beat the US by about 2.5% annually during that time. The 10 years before and the 10 years after US soundly beat international. Bonds were a way better diversified. How much fixed income do you have?
+1

Right - US CAGR was -0.27% and ex-US was 2.29% for those 10 years. This was soundly dwarfed by US out-performance before and after. Doesn't seem to be a good example of "longer term poor outcomes that are much more insidious" unless it's referring to ex-US poor outcomes.
Johnathon Livingston
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Johnathon Livingston »

The case for including ex-US is significantly weaker than it used to be because ex-US is very correlated with large cap US performance with more exaggerated downside risk and a history of massively underperforming US going all the way back to 1920. The only reason I have ex-US at this point is because I bought into it over a decade ago and pretty much need to ride it out longer before I sell it off.

Read this:

https://www.morningstar.com/articles/95 ... ernational
JBTX
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by JBTX »

Johnathon Livingston wrote: Wed Jun 23, 2021 7:27 pm The case for including ex-US is significantly weaker than it used to be because ex-US is very correlated with large cap US performance with more exaggerated downside risk and a history of massively underperforming US going all the way back to 1920. The only reason I have ex-US at this point is because I bought into it over a decade ago and pretty much need to ride it out longer before I sell it off.

Read this:

https://www.morningstar.com/articles/95 ... ernational
It can't be both highly correlated have significantly divergent returns at the same time.
JBTX
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by JBTX »

Duplicate
Johnathon Livingston
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Johnathon Livingston »

JBTX wrote: Wed Jun 23, 2021 7:33 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 7:27 pm The case for including ex-US is significantly weaker than it used to be because ex-US is very correlated with large cap US performance with more exaggerated downside risk and a history of massively underperforming US going all the way back to 1920. The only reason I have ex-US at this point is because I bought into it over a decade ago and pretty much need to ride it out longer before I sell it off.

Read this:

https://www.morningstar.com/articles/95 ... ernational
It can't be both highly correlated have significantly divergent returns at the same time.
That’s not accurate. Ex-US has become extremely correlated since globalization in the 2000s until today. Yet it grossly underperforms. The strong correlation is driven significantly by its downturn when the US downturns. The small non-correlation is driven largely by the US massively outperforming it. It is literally one of the worst diversification assets you can buy.

From the article I cited:

“The index data we have access to goes back only to 1971, but a working paper published by the National Bureau of Economic Research in 1997 reviewed data going back to the 1920s for 39 global markets. After adjusting for inflation, the authors found the U.S. market’s 5% real rate of appreciation far outpaced the 1.5% average for other countries. The authors posit that the U.S. is “an exception in a global capital market frequently wracked by financial crisis, political upheaval, expropriation, and war.“
Last edited by Johnathon Livingston on Wed Jun 23, 2021 7:47 pm, edited 1 time in total.
Nathan Drake
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

anon_investor wrote: Wed Jun 23, 2021 7:05 pm
Nathan Drake wrote: Wed Jun 23, 2021 6:54 pm
anon_investor wrote: Wed Jun 23, 2021 6:52 pm
Nathan Drake wrote: Wed Jun 23, 2021 6:40 pm
visualguy wrote: Wed Jun 23, 2021 5:58 pm

Can you give us some examples of the US risk that you are so concerned about? What realistic disaster could happen in the US that wouldn't nail ex-US just as badly or worse (as we've seen in the past)?
I don’t have to look very far to see how awful the 00-09 period was

There doesn’t need to be a “disaster”, sentiment just needs to change.

I am not concerned too much about acute shocks, but longer term poor outcomes that are much more insidious
Who only invests for a 10 year period? Add the 10 years before or the 10 years after that period and the story is much different.
I’d rather avoid any prolonged period of extremely poor performance
International only beat the US by about 2.5% annually during that time. The 10 years before and the 10 years after US soundly beat international. Bonds were a way better diversified. How much fixed income do you have?

EM did much better

ExUS SCV as well

Regardless, what’s your point? I’ll take 2.5% annualized which is significant over a decade over negative real returns
JBTX
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by JBTX »

Johnathon Livingston wrote: Wed Jun 23, 2021 7:39 pm
JBTX wrote: Wed Jun 23, 2021 7:33 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 7:27 pm The case for including ex-US is significantly weaker than it used to be because ex-US is very correlated with large cap US performance with more exaggerated downside risk and a history of massively underperforming US going all the way back to 1920. The only reason I have ex-US at this point is because I bought into it over a decade ago and pretty much need to ride it out longer before I sell it off.

Read this:

https://www.morningstar.com/articles/95 ... ernational
It can't be both highly correlated have significantly divergent returns at the same time.
That’s not accurate. Ex-US has become extremely correlated since globalization in the 2000s until today. Yet it grossly underperforms. The strong correlation is driven significantly by its downturn when the US downturns. The small non-correlation is driven largely by the US massively outperforming it. It is literally one of the worst diversification assets you can buy.

From the article I cited:

“The index data we have access to goes back only to 1971, but a working paper published by the National Bureau of Economic Research in 1997 reviewed data going back to the 1920s for 39 global markets. After adjusting for inflation, the authors found the U.S. market’s 5% real rate of appreciation far outpaced the 1.5% average for other countries. The authors posit that the U.S. is “an exception in a global capital market frequently wracked by financial crisis, political upheaval, expropriation, and war.“
So the correlation is short term and not so correlated long term. If your goal is to greatly minimize the impact of a US a market crash, I'd agree, international likely won't help a lot short term. If your goal is to hedge against a 10-20 year flat or low single digit returns of the US, there is a greater likelihood international will help.

I'm always amazed that given international has underperformed given certain time periods, especially the last 10 years, that investors assume that will continue in perpetuity. I guess it could be it seems highly unlikely.

As I've said elsewhere the US has increased from 33% of world market cap in 1989 to 57% now. It just seems improbable that it will continue to increase at a rate anywhere close to that. Does it logically makes sense that the US eventually becomes 2/3, or even 3/4 of world stock market cap?
Triple digit golfer
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Triple digit golfer »

So we're still doing this, huh?

I don't like to pick stocks, sectors, styles, sizes, or geographic regions. Therefore, I don't. That means I hold roughly global market weight of equities. It is the logical starting point. Diverge if you must, but have a good reason for doing so. Most, but not all of the reasons I see are not good reasons, in my opinion.
Johnathon Livingston
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Johnathon Livingston »

JBTX wrote: Wed Jun 23, 2021 7:56 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 7:39 pm
JBTX wrote: Wed Jun 23, 2021 7:33 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 7:27 pm The case for including ex-US is significantly weaker than it used to be because ex-US is very correlated with large cap US performance with more exaggerated downside risk and a history of massively underperforming US going all the way back to 1920. The only reason I have ex-US at this point is because I bought into it over a decade ago and pretty much need to ride it out longer before I sell it off.

Read this:

https://www.morningstar.com/articles/95 ... ernational
It can't be both highly correlated have significantly divergent returns at the same time.
That’s not accurate. Ex-US has become extremely correlated since globalization in the 2000s until today. Yet it grossly underperforms. The strong correlation is driven significantly by its downturn when the US downturns. The small non-correlation is driven largely by the US massively outperforming it. It is literally one of the worst diversification assets you can buy.

From the article I cited:

“The index data we have access to goes back only to 1971, but a working paper published by the National Bureau of Economic Research in 1997 reviewed data going back to the 1920s for 39 global markets. After adjusting for inflation, the authors found the U.S. market’s 5% real rate of appreciation far outpaced the 1.5% average for other countries. The authors posit that the U.S. is “an exception in a global capital market frequently wracked by financial crisis, political upheaval, expropriation, and war.“
So the correlation is short term and not so correlated long term. If your goal is to greatly minimize the impact of a US a market crash, I'd agree, international likely won't help a lot short term. If your goal is to hedge against a 10-20 year flat or low single digit returns of the US, there is a greater likelihood international will help.

I'm always amazed that given international has underperformed given certain time periods, especially the last 10 years, that investors assume that will continue in perpetuity. I guess it could be it seems highly unlikely.

As I've said elsewhere the US has increased from 33% of world market cap in 1989 to 57% now. It just seems improbable that it will continue to increase at a rate anywhere close to that. Does it logically makes sense that the US eventually becomes 2/3, or even 3/4 of world stock market cap?
As Jack Bogle said, the trees don’t grow to the sky. At some point the US market will flatten, contract, correct, and/or crash. But it will come back. And there are diversification assets that offer better protection than ex-US.

The theory for including ex-US now that they are highly correlated is that correlation doesn’t fully capture performance and ex-US and US tend to trade outperformance/under performance over time. So, in theory you should have a more middle of the road experience instead of extreme highs followed by extreme lows. E.g. a smoother 10% instead of going from 15% to 5% to average out to 10%. I think that is the strongest theoretical argument for including them along with diversification over sectors as the US has become concentrated in technology. But, ex-US offers virtually no downside protection. The negligible reduction in volatility gained from including ex-US isn’t a good reason to include them. And, the original main reason to include them was low correlation, and that’s gone.

The problem with including them on the idea that markets will trade out performance is that the historical data on ex-US isn’t great. I just cited to a study showing ex-US has ALWAYS (back to 1920) under performed the US by a major margin. And ex-US out performance can be offset by currency risk that can erode the return. In theory, the currency risk balances out over very long periods of time.

But that’s just the problem — it’s all theory. It’s a freaking experiment. Ex-US today is not the neatly zagging line when the US is zigging like it was 1971-1999. Ex-US is now like a dysfunctional image of the US performance line. It tracks it but in the worst way—it goes down more and doesn’t go up as much but kinda looks just like the US line. How this will affect returns over the next several decades given its dysfunctional correlated performance is all based on theory and NO track record in this modern era of globalization.

Seeing ex-US PE ratios of about half the US for so very long yet there being so little demand for it has got to scare you. You will realize one day that all these years that ex-US had been so “cheap” and “underpriced” that the market was right all along. The market properly priced ex-US to account for the risk. As much as people don’t want to believe that the US is exceptional— it is.
visualguy
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by visualguy »

JBTX wrote: Wed Jun 23, 2021 7:56 pm As I've said elsewhere the US has increased from 33% of world market cap in 1989 to 57% now. It just seems improbable that it will continue to increase at a rate anywhere close to that. Does it logically makes sense that the US eventually becomes 2/3, or even 3/4 of world stock market cap?
Yes, it does make sense, at least up to the point where there are some hard constraints of some kind on the growth of the economy. We will naturally see increased world market cap share as long as major upcoming companies keep getting listed much more in the US than in foreign stock markets such as Europe and Japan.

As long as the US can keep siphoning off so much global talent, and provide a superior environment for innovation, entrepreneurship, and corporations, it will keep increasing its share of world market cap. I don't think anyone really expects Europe or Japan to be able to compete on this. Moreover, they aren't stimulating their economies anywhere near as much. Just compare the reactions to the financial crisis, or the COVID crisis. Take a look at the recent $250B tech and manufacturing bill.

That pretty much just leaves China which definitely has some strengths, but problematic stock markets and economic/political system. Also, they do not attract global talent as much. In fact they export a lot more talent than they import. Not to mention that too many countries (including the US) see them as an adversarial competitor, and are inclined to take economic steps against them.

It is actually very likely that the US will dominate world market cap even more going forward, at least during my lifetime. Who knows about the distant future, but I'll be long gone by then.
Nathan Drake
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

visualguy wrote: Wed Jun 23, 2021 8:37 pm
JBTX wrote: Wed Jun 23, 2021 7:56 pm As I've said elsewhere the US has increased from 33% of world market cap in 1989 to 57% now. It just seems improbable that it will continue to increase at a rate anywhere close to that. Does it logically makes sense that the US eventually becomes 2/3, or even 3/4 of world stock market cap?
Yes, it does make sense, at least up to the point where there are some hard constraints of some kind on the growth of the economy. We will naturally see increased world market cap share as long as major upcoming companies keep getting listed much more in the US than in foreign stock markets such as Europe and Japan.

As long as the US can keep siphoning off so much global talent, and provide a superior environment for innovation, entrepreneurship, and corporations, it will keep increasing its share of world market cap. I don't think anyone really expects Europe or Japan to be able to compete on this. Moreover, they aren't stimulating their economies anywhere near as much. Just compare the reactions to the financial crisis, or the COVID crisis. Take a look at the recent $250B tech and manufacturing bill.

That pretty much just leaves China which definitely has some strengths, but problematic stock markets and economic/political system. Also, they do not attract global talent as much. In fact they export a lot more talent than they import. Not to mention that too many countries (including the US) see them as an adversarial competitor, and are inclined to take economic steps against them.

It is actually very likely that the US will dominate world market cap even more going forward, at least during my lifetime. Who knows about the distant future, but I'll be long gone by then.
That’s a nice fictitious narrative to match your myopic world view. Sounds eerily similar to a Japanese proponent in the 80s

As Cliff Asness would say, Good luck.
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Beensabu »

BHawks87 wrote: Wed Jun 23, 2021 1:00 am *Charts and data are from portfoliocharts.com. The site creator posts here :happy
Do they have something like this for US stock and bonds? I bet that would be interesting to look at too.

Edit: They do! Charts > Heat Map. You can check out all sorts of portfolios. And there are a bunch of other cool chart tools. What a neat and aptly named site :)
Last edited by Beensabu on Wed Jun 23, 2021 11:58 pm, edited 1 time in total.
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

Johnathon Livingston wrote: Wed Jun 23, 2021 8:21 pm
JBTX wrote: Wed Jun 23, 2021 7:56 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 7:39 pm
JBTX wrote: Wed Jun 23, 2021 7:33 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 7:27 pm The case for including ex-US is significantly weaker than it used to be because ex-US is very correlated with large cap US performance with more exaggerated downside risk and a history of massively underperforming US going all the way back to 1920. The only reason I have ex-US at this point is because I bought into it over a decade ago and pretty much need to ride it out longer before I sell it off.

Read this:

https://www.morningstar.com/articles/95 ... ernational
It can't be both highly correlated have significantly divergent returns at the same time.
That’s not accurate. Ex-US has become extremely correlated since globalization in the 2000s until today. Yet it grossly underperforms. The strong correlation is driven significantly by its downturn when the US downturns. The small non-correlation is driven largely by the US massively outperforming it. It is literally one of the worst diversification assets you can buy.

From the article I cited:

“The index data we have access to goes back only to 1971, but a working paper published by the National Bureau of Economic Research in 1997 reviewed data going back to the 1920s for 39 global markets. After adjusting for inflation, the authors found the U.S. market’s 5% real rate of appreciation far outpaced the 1.5% average for other countries. The authors posit that the U.S. is “an exception in a global capital market frequently wracked by financial crisis, political upheaval, expropriation, and war.“
So the correlation is short term and not so correlated long term. If your goal is to greatly minimize the impact of a US a market crash, I'd agree, international likely won't help a lot short term. If your goal is to hedge against a 10-20 year flat or low single digit returns of the US, there is a greater likelihood international will help.

I'm always amazed that given international has underperformed given certain time periods, especially the last 10 years, that investors assume that will continue in perpetuity. I guess it could be it seems highly unlikely.

As I've said elsewhere the US has increased from 33% of world market cap in 1989 to 57% now. It just seems improbable that it will continue to increase at a rate anywhere close to that. Does it logically makes sense that the US eventually becomes 2/3, or even 3/4 of world stock market cap?
As Jack Bogle said, the trees don’t grow to the sky. At some point the US market will flatten, contract, correct, and/or crash. But it will come back. And there are diversification assets that offer better protection than ex-US.

The theory for including ex-US now that they are highly correlated is that correlation doesn’t fully capture performance and ex-US and US tend to trade outperformance/under performance over time. So, in theory you should have a more middle of the road experience instead of extreme highs followed by extreme lows. E.g. a smoother 10% instead of going from 15% to 5% to average out to 10%. I think that is the strongest theoretical argument for including them along with diversification over sectors as the US has become concentrated in technology. But, ex-US offers virtually no downside protection. The negligible reduction in volatility gained from including ex-US isn’t a good reason to include them. And, the original main reason to include them was low correlation, and that’s gone.

The problem with including them on the idea that markets will trade out performance is that the historical data on ex-US isn’t great. I just cited to a study showing ex-US has ALWAYS (back to 1920) under performed the US by a major margin. And ex-US out performance can be offset by currency risk that can erode the return. In theory, the currency risk balances out over very long periods of time.

But that’s just the problem — it’s all theory. It’s a freaking experiment. Ex-US today is not the neatly zagging line when the US is zigging like it was 1971-1999. Ex-US is now like a dysfunctional image of the US performance line. It tracks it but in the worst way—it goes down more and doesn’t go up as much but kinda looks just like the US line. How this will affect returns over the next several decades given its dysfunctional correlated performance is all based on theory and NO track record in this modern era of globalization.

Seeing ex-US PE ratios of about half the US for so very long yet there being so little demand for it has got to scare you. You will realize one day that all these years that ex-US had been so “cheap” and “underpriced” that the market was right all along. The market properly priced ex-US to account for the risk. As much as people don’t want to believe that the US is exceptional— it is.
Offering short-term downside protection is not the point of diversification. Nor is the point to reduce short-term volatility. The point is to reduce long-term grayswan or blackswan outcomes.

The study you continually bring up is of course cherry picked with the end dates in mind, which will always influence bias in one direction to whatever asset has greatly outperformed. You need to more thoroughly analyze rolling periods.

Investing is all just theory. It's all just a leap of faith. But I only have to look at Great Britain, Germany, Japan, etc. to know that regime changes occur. I only need to look at the US during certain periods of 60s-70s and 00s-09 to realize that America certainly isn't immune to speculative manias, unstable currency, or deep recessions. The world is not a static place. Companies that happen to have their headquarters in one region vs another aren't necessarily destined to perform similarly to the past.

To suggest that exUS tracks US in the worst way - more downside risk, less upside - as if this is some written rule of law despite being only present in a certain portion of your cherry picked data - is completely fallacious. And that's a line of reasoning that many US only proponents use as the basis of their strategy - that US doesn't have the risks of exUS but yet reaps all the rewards. This is completely false of course, it's just the risk component for US hasn't materialized in their short-term investment horizon leading to recency bias. And unfortunately the narrative that US exceptionalism has led to outsized returns is also mostly false - it's mostly a revaluation over decades from when exUS was overvalued to the pendulum swinging in the opposite direction.
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by anon_investor »

Triple digit golfer wrote: Wed Jun 23, 2021 8:08 pm So we're still doing this, huh?

I don't like to pick stocks, sectors, styles, sizes, or geographic regions. Therefore, I don't. That means I hold roughly global market weight of equities. It is the logical starting point. Diverge if you must, but have a good reason for doing so. Most, but not all of the reasons I see are not good reasons, in my opinion.
Yes!!! Use bonds to diversify, not more equities! VTSAX + EE/I Bonds = winning?
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Ocean77 »

If the US would indeed go the Japan path, then we should move our allocation from international to 100% US, so we can ride it up to the PE 100 that Japan had at the top. Somehow I don't think this will happen here, so I'll keep my international allocation.
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Da5id »

anon_investor wrote: Wed Jun 23, 2021 10:31 pm
Triple digit golfer wrote: Wed Jun 23, 2021 8:08 pm So we're still doing this, huh?

I don't like to pick stocks, sectors, styles, sizes, or geographic regions. Therefore, I don't. That means I hold roughly global market weight of equities. It is the logical starting point. Diverge if you must, but have a good reason for doing so. Most, but not all of the reasons I see are not good reasons, in my opinion.
Yes!!! Use bonds to diversify, not more equities! VTSAX + EE/I Bonds = winning?
Embrace the power of "and". Both bonds and international...
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by BabaWawa »

Actin wrote: Wed Jun 23, 2021 12:42 pm
Nathan Drake wrote: Wed Jun 23, 2021 12:23 pm
Actin wrote: Wed Jun 23, 2021 11:34 am Daily international coping thread

Alternative thread title.
"Why you should try to time the market"
Setting an appropriate allocation is now market timing and coping.

Interesting
OP's entire rationale is that Japan could happen to the US any day now. That's market timing.
You apparently don't understand the concept of market timing. The OP has shown the advantage of international diversification with charts over a 40 year period of time. This is a long term buy and hold portfolio. The OPs thread is tilted "good reason to hold" (not buy). There's no recency bias, there's no home country bias, just sound investment principles.
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by LeslieSmiley »

visualguy wrote: Wed Jun 23, 2021 7:21 pm
anon_investor wrote: Wed Jun 23, 2021 7:05 pm
Nathan Drake wrote: Wed Jun 23, 2021 6:54 pm
anon_investor wrote: Wed Jun 23, 2021 6:52 pm
Nathan Drake wrote: Wed Jun 23, 2021 6:40 pm

I don’t have to look very far to see how awful the 00-09 period was

There doesn’t need to be a “disaster”, sentiment just needs to change.

I am not concerned too much about acute shocks, but longer term poor outcomes that are much more insidious
Who only invests for a 10 year period? Add the 10 years before or the 10 years after that period and the story is much different.
I’d rather avoid any prolonged period of extremely poor performance
International only beat the US by about 2.5% annually during that time. The 10 years before and the 10 years after US soundly beat international. Bonds were a way better diversified. How much fixed income do you have?
+1

Right - US CAGR was -0.27% and ex-US was 2.29% for those 10 years. This was soundly dwarfed by US out-performance before and after. Doesn't seem to be a good example of "longer term poor outcomes that are much more insidious" unless it's referring to ex-US poor outcomes.
Since 2005, the S&P 500 has outperformed overseas stocks, posting a return of 176%. Meanwhile, emerging market stocks posted returns of 96%, and developed international stocks returned just 21% over the same time period.

Over the last decade, the S&P 500 has produced an annualized total return of 13.7%, nearly triple that of the 5.4% annualized total return of MSCI’s Europe, Australasia and Far East (EAFE) index.
Last edited by LeslieSmiley on Thu Jun 24, 2021 10:24 am, edited 1 time in total.
Johnathon Livingston
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Johnathon Livingston »

Nathan Drake wrote: Wed Jun 23, 2021 10:10 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 8:21 pm
JBTX wrote: Wed Jun 23, 2021 7:56 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 7:39 pm
JBTX wrote: Wed Jun 23, 2021 7:33 pm

It can't be both highly correlated have significantly divergent returns at the same time.
That’s not accurate. Ex-US has become extremely correlated since globalization in the 2000s until today. Yet it grossly underperforms. The strong correlation is driven significantly by its downturn when the US downturns. The small non-correlation is driven largely by the US massively outperforming it. It is literally one of the worst diversification assets you can buy.

From the article I cited:

“The index data we have access to goes back only to 1971, but a working paper published by the National Bureau of Economic Research in 1997 reviewed data going back to the 1920s for 39 global markets. After adjusting for inflation, the authors found the U.S. market’s 5% real rate of appreciation far outpaced the 1.5% average for other countries. The authors posit that the U.S. is “an exception in a global capital market frequently wracked by financial crisis, political upheaval, expropriation, and war.“
So the correlation is short term and not so correlated long term. If your goal is to greatly minimize the impact of a US a market crash, I'd agree, international likely won't help a lot short term. If your goal is to hedge against a 10-20 year flat or low single digit returns of the US, there is a greater likelihood international will help.

I'm always amazed that given international has underperformed given certain time periods, especially the last 10 years, that investors assume that will continue in perpetuity. I guess it could be it seems highly unlikely.

As I've said elsewhere the US has increased from 33% of world market cap in 1989 to 57% now. It just seems improbable that it will continue to increase at a rate anywhere close to that. Does it logically makes sense that the US eventually becomes 2/3, or even 3/4 of world stock market cap?
As Jack Bogle said, the trees don’t grow to the sky. At some point the US market will flatten, contract, correct, and/or crash. But it will come back. And there are diversification assets that offer better protection than ex-US.

The theory for including ex-US now that they are highly correlated is that correlation doesn’t fully capture performance and ex-US and US tend to trade outperformance/under performance over time. So, in theory you should have a more middle of the road experience instead of extreme highs followed by extreme lows. E.g. a smoother 10% instead of going from 15% to 5% to average out to 10%. I think that is the strongest theoretical argument for including them along with diversification over sectors as the US has become concentrated in technology. But, ex-US offers virtually no downside protection. The negligible reduction in volatility gained from including ex-US isn’t a good reason to include them. And, the original main reason to include them was low correlation, and that’s gone.

The problem with including them on the idea that markets will trade out performance is that the historical data on ex-US isn’t great. I just cited to a study showing ex-US has ALWAYS (back to 1920) under performed the US by a major margin. And ex-US out performance can be offset by currency risk that can erode the return. In theory, the currency risk balances out over very long periods of time.

But that’s just the problem — it’s all theory. It’s a freaking experiment. Ex-US today is not the neatly zagging line when the US is zigging like it was 1971-1999. Ex-US is now like a dysfunctional image of the US performance line. It tracks it but in the worst way—it goes down more and doesn’t go up as much but kinda looks just like the US line. How this will affect returns over the next several decades given its dysfunctional correlated performance is all based on theory and NO track record in this modern era of globalization.

Seeing ex-US PE ratios of about half the US for so very long yet there being so little demand for it has got to scare you. You will realize one day that all these years that ex-US had been so “cheap” and “underpriced” that the market was right all along. The market properly priced ex-US to account for the risk. As much as people don’t want to believe that the US is exceptional— it is.
Offering short-term downside protection is not the point of diversification. Nor is the point to reduce short-term volatility. The point is to reduce long-term grayswan or blackswan outcomes.

The study you continually bring up is of course cherry picked with the end dates in mind, which will always influence bias in one direction to whatever asset has greatly outperformed. You need to more thoroughly analyze rolling periods.

Investing is all just theory. It's all just a leap of faith. But I only have to look at Great Britain, Germany, Japan, etc. to know that regime changes occur. I only need to look at the US during certain periods of 60s-70s and 00s-09 to realize that America certainly isn't immune to speculative manias, unstable currency, or deep recessions. The world is not a static place. Companies that happen to have their headquarters in one region vs another aren't necessarily destined to perform similarly to the past.

To suggest that exUS tracks US in the worst way - more downside risk, less upside - as if this is some written rule of law despite being only present in a certain portion of your cherry picked data - is completely fallacious. And that's a line of reasoning that many US only proponents use as the basis of their strategy - that US doesn't have the risks of exUS but yet reaps all the rewards. This is completely false of course, it's just the risk component for US hasn't materialized in their short-term investment horizon leading to recency bias. And unfortunately the narrative that US exceptionalism has led to outsized returns is also mostly false - it's mostly a revaluation over decades from when exUS was overvalued to the pendulum swinging in the opposite direction.
The problem is that there is no longer a pendulum. There is an orb hurdling through space with a satellite tracking it while it erratically oscillates in orbit around the orb. The pendulum vanished with globalism. The result is that ex-US is a sub asset that largely tracks the US market but carries more risk, is more volatile, and moves in an exaggerated manner relative to the US. Here’s another analogy for you: ex-US is a distorted shadow of the US. There is some small diversification benefit for including it, but it’s just that—small. So, there is a reason to include it. But there are reasons to exclude it too.

I will say this too however. The traditional investor back in the day that was all US all the time, no questions asked, was also typically also invested in a healthy allocation to bonds. You made 10% on stocks, 5% on bonds and that was plenty of diversification. With bonds being so lousy now, the modern investor faces a diversification dilemma, which can make the small diversification benefit of ex-US all that more attractive as bond allocations diminish. And keep in mind that brokers that have doubled down on ex-US in their target date funds are also trapped in ex-US. They’ve been investing people’s money in them for a long time. They only have one direction available and that’s to ride it out.
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

Johnathon Livingston wrote: Thu Jun 24, 2021 10:07 am
Nathan Drake wrote: Wed Jun 23, 2021 10:10 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 8:21 pm
JBTX wrote: Wed Jun 23, 2021 7:56 pm
Johnathon Livingston wrote: Wed Jun 23, 2021 7:39 pm

That’s not accurate. Ex-US has become extremely correlated since globalization in the 2000s until today. Yet it grossly underperforms. The strong correlation is driven significantly by its downturn when the US downturns. The small non-correlation is driven largely by the US massively outperforming it. It is literally one of the worst diversification assets you can buy.

From the article I cited:

“The index data we have access to goes back only to 1971, but a working paper published by the National Bureau of Economic Research in 1997 reviewed data going back to the 1920s for 39 global markets. After adjusting for inflation, the authors found the U.S. market’s 5% real rate of appreciation far outpaced the 1.5% average for other countries. The authors posit that the U.S. is “an exception in a global capital market frequently wracked by financial crisis, political upheaval, expropriation, and war.“
So the correlation is short term and not so correlated long term. If your goal is to greatly minimize the impact of a US a market crash, I'd agree, international likely won't help a lot short term. If your goal is to hedge against a 10-20 year flat or low single digit returns of the US, there is a greater likelihood international will help.

I'm always amazed that given international has underperformed given certain time periods, especially the last 10 years, that investors assume that will continue in perpetuity. I guess it could be it seems highly unlikely.

As I've said elsewhere the US has increased from 33% of world market cap in 1989 to 57% now. It just seems improbable that it will continue to increase at a rate anywhere close to that. Does it logically makes sense that the US eventually becomes 2/3, or even 3/4 of world stock market cap?
As Jack Bogle said, the trees don’t grow to the sky. At some point the US market will flatten, contract, correct, and/or crash. But it will come back. And there are diversification assets that offer better protection than ex-US.

The theory for including ex-US now that they are highly correlated is that correlation doesn’t fully capture performance and ex-US and US tend to trade outperformance/under performance over time. So, in theory you should have a more middle of the road experience instead of extreme highs followed by extreme lows. E.g. a smoother 10% instead of going from 15% to 5% to average out to 10%. I think that is the strongest theoretical argument for including them along with diversification over sectors as the US has become concentrated in technology. But, ex-US offers virtually no downside protection. The negligible reduction in volatility gained from including ex-US isn’t a good reason to include them. And, the original main reason to include them was low correlation, and that’s gone.

The problem with including them on the idea that markets will trade out performance is that the historical data on ex-US isn’t great. I just cited to a study showing ex-US has ALWAYS (back to 1920) under performed the US by a major margin. And ex-US out performance can be offset by currency risk that can erode the return. In theory, the currency risk balances out over very long periods of time.

But that’s just the problem — it’s all theory. It’s a freaking experiment. Ex-US today is not the neatly zagging line when the US is zigging like it was 1971-1999. Ex-US is now like a dysfunctional image of the US performance line. It tracks it but in the worst way—it goes down more and doesn’t go up as much but kinda looks just like the US line. How this will affect returns over the next several decades given its dysfunctional correlated performance is all based on theory and NO track record in this modern era of globalization.

Seeing ex-US PE ratios of about half the US for so very long yet there being so little demand for it has got to scare you. You will realize one day that all these years that ex-US had been so “cheap” and “underpriced” that the market was right all along. The market properly priced ex-US to account for the risk. As much as people don’t want to believe that the US is exceptional— it is.
Offering short-term downside protection is not the point of diversification. Nor is the point to reduce short-term volatility. The point is to reduce long-term grayswan or blackswan outcomes.

The study you continually bring up is of course cherry picked with the end dates in mind, which will always influence bias in one direction to whatever asset has greatly outperformed. You need to more thoroughly analyze rolling periods.

Investing is all just theory. It's all just a leap of faith. But I only have to look at Great Britain, Germany, Japan, etc. to know that regime changes occur. I only need to look at the US during certain periods of 60s-70s and 00s-09 to realize that America certainly isn't immune to speculative manias, unstable currency, or deep recessions. The world is not a static place. Companies that happen to have their headquarters in one region vs another aren't necessarily destined to perform similarly to the past.

To suggest that exUS tracks US in the worst way - more downside risk, less upside - as if this is some written rule of law despite being only present in a certain portion of your cherry picked data - is completely fallacious. And that's a line of reasoning that many US only proponents use as the basis of their strategy - that US doesn't have the risks of exUS but yet reaps all the rewards. This is completely false of course, it's just the risk component for US hasn't materialized in their short-term investment horizon leading to recency bias. And unfortunately the narrative that US exceptionalism has led to outsized returns is also mostly false - it's mostly a revaluation over decades from when exUS was overvalued to the pendulum swinging in the opposite direction.
The problem is that there is no longer a pendulum. There is an orb hurdling through space with a satellite tracking it while it erratically oscillates in orbit around the orb. The pendulum vanished with globalism. The result is that ex-US is a sub asset that largely tracks the US market but carries more risk, is more volatile, and moves in an exaggerated manner relative to the US. Here’s another analogy for you: ex-US is a distorted shadow of the US. There is some small diversification benefit for including it, but it’s just that—small. So, there is a reason to include it. But there are reasons to exclude it too.

I will say this too however. The traditional investor back in the day that was all US all the time, no questions asked, was also typically also invested in a healthy allocation to bonds. You made 10% on stocks, 5% on bonds and that was plenty of diversification. With bonds being so lousy now, the modern investor faces a diversification dilemma, which can make the small diversification benefit of ex-US all that more attractive as bond allocations diminish. And keep in mind that brokers that have doubled down on ex-US in their target date funds are also trapped in ex-US. They’ve been investing people’s money in them for a long time. They only have one direction available and that’s to ride it out.
The idea that US drives the boat and exUS are just smaller ships paddling behind the wake with much larger gyrations is false. Worries of a Chinese hard landing and Brexit spooked markets across the board and US had a 20% correction.

Yes, the world catches a cold and so will the US. Any acute global event will universally impact all major markets. That is not the reason we diversify and never was.

The diversification benefits in periods of long term US drawdowns or are of course significant. We have seen that play out in the prior decade and 60s through 70s. Just because they haven’t played out this decade doesn’t mean they never have.

There are no “trappings” of diversification; you will always have some asset class lagging, sometimes for very long periods of time. Target funds don’t have a crystal ball for the future, so they set an appropriate allocation accordingly.
Da5id
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Da5id »

trueblueky wrote: Thu Jun 24, 2021 10:50 am
anon_investor wrote: Wed Jun 23, 2021 5:23 pm
Da5id wrote: Wed Jun 23, 2021 4:59 pm
anon_investor wrote: Wed Jun 23, 2021 4:54 pm
Da5id wrote: Wed Jun 23, 2021 4:47 pm

After stating his views on the superior prospect of US investing, Bogle noted in his book that



If you feel you know as a fact that Europe and Japan's "stagnation" is not reflected in market valuations correctly, well, clearly you know more than I do. Congrats on that? I'll take what the market gives myself, as I know nothing of the sort.
Lack of immigration and declining birth rates = stagnation. Pretty much covers Europe and Japan. This is happening in China now...
And you believe that their markets and prospective returns there don't reflect those well known trends? And were those demographic features really that different last time International outperformed US (say 2000-2010)? Maybe so. I don't believe I can analyze such trends or market valuations meaningfully personally, I guess others do.
Sure these are factored into the lower valuations. But in order for those markets to outperform, they need to surprise to the upside. The chances of that happening for a prolonged period is quite low because of those demographic issues. 2000 to 2010 was different, China was not aging out.
<bold added>
Or for the US to surprise to the downside.

Given the relative reliance of US indices on tech companies, it is not hard to invent scenarios in which tech valuations return to earth.

Imagine a Tesla vehicle runs over a Kardashian and video is available.
Or some of the regulatory/anti-monopoly/privacy related government actions (in many countries) against a number large US tech companies to impact their bottom line unexpectedly. etc. High valuations reflect high expectations, what if they aren't met?

Not predicting anything in particular, I have no idea what is to come in the US vs international arena, and don't worry about it either way.
nigel_ht
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by nigel_ht »

Nathan Drake wrote: Wed Jun 23, 2021 1:19 am Sarcasm aside, I agree that it can happen in the US, and that there’s never been a country in history that hasn’t eventually had its geopolitical power erode. I’m sure people thought it to be unfathomable during the height of the British empire as well.
Well, it took 2 world wars and the loss of the pound sterling as a primary reserve currency...so call it from 1914 to 1944 (Bretton Woods) or 1956 (Suez Crisis) or decolonization (1968)...somewhere from 30 to 50 years from height to...not. Perhaps 1997 with the turn over of Hong Kong marks the final end of the Empire.

I think we will have a bit of warning that we are truly waning. Plus we aren't a globally distributed empire with risk of indigenous uprisings. So it would likely take a civil war...at which point I suspect we would all have more immediate concerns than the state of our portfolios...
jrbdmb
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by jrbdmb »

ljford7 wrote: Wed Jun 23, 2021 10:15 am So the US had a great depression, bad inflation in the 70s, Black Monday, the Dot Com bubble, the Great Financial Crisis, etc.

Guess you shouldn't invest in the US either. :wink:
It seems as though some posters think those things couldn't happen here (even after they did). :confused
nigel_ht
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by nigel_ht »

Nathan Drake wrote: Wed Jun 23, 2021 8:58 pm
visualguy wrote: Wed Jun 23, 2021 8:37 pm It is actually very likely that the US will dominate world market cap even more going forward, at least during my lifetime. Who knows about the distant future, but I'll be long gone by then.
That’s a nice fictitious narrative to match your myopic world view. Sounds eerily similar to a Japanese proponent in the 80s

As Cliff Asness would say, Good luck.
Japan did not enjoy the benefits we do still. For one thing, we're the 3 largest land area and 3rd largest population...so lots of intrinsic advantages over Japan.

Whether we will continue to dominate global market cap is a different issue but there are huge differences between 1990s Japan and the US today.
Johnathon Livingston
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Johnathon Livingston »

jrbdmb wrote: Thu Jun 24, 2021 1:17 pm
ljford7 wrote: Wed Jun 23, 2021 10:15 am So the US had a great depression, bad inflation in the 70s, Black Monday, the Dot Com bubble, the Great Financial Crisis, etc.

Guess you shouldn't invest in the US either. :wink:
It seems as though some posters think those things couldn't happen here (even after they did). :confused
And if it happens here your ex-US will crash just as hard.
GordDownie
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by GordDownie »

I know we are not supposed to talk politics, but I think I can keep this comment to strictly speaking about the rational for diversification in the context of a political world.

I think one of the understated reasons for diversifying geographically is War; or even economic war. If the USA (or any other country for that matter) had a large political fallout with China, or with the EU, or a large trading partner and all American operations in that other country were nationalized or subjected to punishing tarrifs, it would be devastating.

Equally possible is that any one country could enact crippling economic policy upon itself by populist reforms.

Diversity in your holdings across multiple countries helps mitigate geopolitical risk
Johnathon Livingston
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Johnathon Livingston »

GordDownie wrote: Thu Jun 24, 2021 1:26 pm I know we are not supposed to talk politics, but I think I can keep this comment to strictly speaking about the rational for diversification in the context of a political world.

I think one of the understated reasons for diversifying geographically is War; or even economic war. If the USA (or any other country for that matter) had a large political fallout with China, or with the EU, or a large trading partner and all American operations in that other country were nationalized or subjected to punishing tarrifs, it would be devastating.

Equally possible is that any one country could enact crippling economic policy upon itself by populist reforms.

Diversity in your holdings across multiple countries helps mitigate geopolitical risk
Oh, I thought you were going to conclude with that’s why sticking with US only is best.
UpperNwGuy
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by UpperNwGuy »

nigel_ht wrote: Thu Jun 24, 2021 1:05 pm
Nathan Drake wrote: Wed Jun 23, 2021 1:19 am Sarcasm aside, I agree that it can happen in the US, and that there’s never been a country in history that hasn’t eventually had its geopolitical power erode. I’m sure people thought it to be unfathomable during the height of the British empire as well.
Well, it took 2 world wars and the loss of the pound sterling as a primary reserve currency...so call it from 1914 to 1944 (Bretton Woods) or 1956 (Suez Crisis) or decolonization (1968)...somewhere from 30 to 50 years from height to...not. Perhaps 1997 with the turn over of Hong Kong marks the final end of the Empire.

I think we will have a bit of warning that we are truly waning. Plus we aren't a globally distributed empire with risk of indigenous uprisings. So it would likely take a civil war...at which point I suspect we would all have more immediate concerns than the state of our portfolios...
Perhaps 1914 was the apex of the British Empire on paper, but their inability to defeat Germany without US help in World War I showed that the Empire was no longer as strong and powerful as it had been in the 1800s. Most of the largest colonies (the US, Canada, Australia, New Zealand, and South Africa) were already independent.
Nathan Drake
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by Nathan Drake »

nigel_ht wrote: Thu Jun 24, 2021 1:05 pm
Nathan Drake wrote: Wed Jun 23, 2021 1:19 am Sarcasm aside, I agree that it can happen in the US, and that there’s never been a country in history that hasn’t eventually had its geopolitical power erode. I’m sure people thought it to be unfathomable during the height of the British empire as well.
Well, it took 2 world wars and the loss of the pound sterling as a primary reserve currency...so call it from 1914 to 1944 (Bretton Woods) or 1956 (Suez Crisis) or decolonization (1968)...somewhere from 30 to 50 years from height to...not. Perhaps 1997 with the turn over of Hong Kong marks the final end of the Empire.

I think we will have a bit of warning that we are truly waning. Plus we aren't a globally distributed empire with risk of indigenous uprisings. So it would likely take a civil war...at which point I suspect we would all have more immediate concerns than the state of our portfolios...
Yes, it can happen over a long period of time. During that time, your investment returns could also be either good or bad. Nobody knows anything, but I wouldn’t want to invest in 100% US at all time cap weighted highs expecting that to continue to occur in perpetuity. The world is a large place.
nigel_ht
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Re: Good Reason to Hold Bonds and International Stocks - 1990's Japan

Post by nigel_ht »

UpperNwGuy wrote: Thu Jun 24, 2021 1:58 pm
nigel_ht wrote: Thu Jun 24, 2021 1:05 pm
Nathan Drake wrote: Wed Jun 23, 2021 1:19 am Sarcasm aside, I agree that it can happen in the US, and that there’s never been a country in history that hasn’t eventually had its geopolitical power erode. I’m sure people thought it to be unfathomable during the height of the British empire as well.
Well, it took 2 world wars and the loss of the pound sterling as a primary reserve currency...so call it from 1914 to 1944 (Bretton Woods) or 1956 (Suez Crisis) or decolonization (1968)...somewhere from 30 to 50 years from height to...not. Perhaps 1997 with the turn over of Hong Kong marks the final end of the Empire.

I think we will have a bit of warning that we are truly waning. Plus we aren't a globally distributed empire with risk of indigenous uprisings. So it would likely take a civil war...at which point I suspect we would all have more immediate concerns than the state of our portfolios...
Perhaps 1914 was the apex of the British Empire on paper, but their inability to defeat Germany without US help in World War I showed that the Empire was no longer as strong and powerful as it had been in the 1800s. Most of the largest colonies (the US, Canada, Australia, New Zealand, and South Africa) were already independent.
Well it’s not like they beat France solo during the Napoleonic War either. Or the Russians solo in the Crimean War. As primarily a Naval power they weren’t beating any of the major continental powers in a land war.

And it wasn’t just Germany but also Austria-Hungary…
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