Jack Bogle on International Investing at Bogleheads 11

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galeno
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby galeno » Fri Jul 15, 2016 10:38 am

+1

dnaumov wrote:Own Vanguard Total World Stock (VT) and forget about it.
AA = 60/35/5. Expected CAGR = 5.7%. GSD = 16%. USD inflation = 2.0%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.9%. Term = 37 yr. FI Duration = 4.7 yr. Portfolio survival probability = 88%.

Engineer250
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Engineer250 » Fri Jul 15, 2016 12:00 pm

staythecourse wrote:I am sure I will get some flak for this, but I see definite xenophobia in international investing based on two factors: 1. Age of the investor (the older folks are brought up as patriots and ideally believe America is special) and 2. If they are U.S. or foreign in heritage. Folks who are not U.S. born have a more natural world view vs. those who have never lived outside the confines of the U.S.


I'm not sure this is so black and white. I am a youngin' but consider myself a strong patriot and absolutely believe in American exceptionalism. Maybe the thing I don't believe in is perfect markets. Why did the S&P500 drop the two days after Brexit? Why did the US housing market collapse in 2007 cause foreign banks to go under? I entirely agree % of international is a personal decision like Mr. Bogle states. Same as your stock v. bond allocation, it has to work for you. You could make two arguments with globalization 1) US companies are incredibly globalized these days, and owning pure US stock will still get you exposure to the international market -OR- 2) Due to globalization, an investor shouldn't limit themselves to their home market and should consider owning international as a part of their portfolio to increase diversification and reduce overall volatility.

I also notice a lot of the numbers being brought up include the MSCI EAFE index only. Since this is developed countries only (and missing Canada and Korea) investing in just that and just the US market means you have no international small cap, and no emerging markets. This is a familiar problem for me since I am in the TSP I-Fund which mirrors the MSCI EAFE. I grab international small cap and emerging markets in my Roth IRA, but since Vanguard thinks South Korea is developed I'm still missing it (and Canada) in my portfolio. Oh well.

clip651
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Re: Jack Bogle on International Investing at Bogleheads 11

Postby clip651 » Fri Jul 15, 2016 1:35 pm

Engineer250 wrote:
I also notice a lot of the numbers being brought up include the MSCI EAFE index only. Since this is developed countries only (and missing Canada and Korea) investing in just that and just the US market means you have no international small cap, and no emerging markets. This is a familiar problem for me since I am in the TSP I-Fund which mirrors the MSCI EAFE. I grab international small cap and emerging markets in my Roth IRA, but since Vanguard thinks South Korea is developed I'm still missing it (and Canada) in my portfolio. Oh well.


I don't know about the TSP-I fund, but Vanguard's developed markets fund (VTMGX for admiral, VEA for the ETF) is now all caps and does include Canada. That's a recent change in the past year or so. Korea also shows up at 4%:
https://personal.vanguard.com/us/funds/ ... =INT#tab=2

cj

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Engineer250 » Fri Jul 15, 2016 4:00 pm

clip651 wrote:
Engineer250 wrote:
I also notice a lot of the numbers being brought up include the MSCI EAFE index only. Since this is developed countries only (and missing Canada and Korea) investing in just that and just the US market means you have no international small cap, and no emerging markets. This is a familiar problem for me since I am in the TSP I-Fund which mirrors the MSCI EAFE. I grab international small cap and emerging markets in my Roth IRA, but since Vanguard thinks South Korea is developed I'm still missing it (and Canada) in my portfolio. Oh well.


I don't know about the TSP-I fund, but Vanguard's developed markets fund (VTMGX for admiral, VEA for the ETF) is now all caps and does include Canada. That's a recent change in the past year or so. Korea also shows up at 4%:
https://personal.vanguard.com/us/funds/ ... =INT#tab=2

cj


Correct if you are all-in at Vanguard their definitions for developed vs emerging all match one another. Since the vast majority of my money is in my TSP I'm not going to buy the developed markets fund at Vanguard and overweight that just to get a little bit of Canada and Korea. I mostly wanted to point out all the returns on various scenarios above did not include emerging markets since they were using the MSCI EAFE fund and either the S&P 500 or a total US stock market fund for comparison.

On a side note, let me know if anyone would like to start a hedge fund or index fund company with me where one of the first indicies will be the Canada & Korea Large Cap Fund that contains only large cap funds from Canada and Korea, market weighted to one another of course. There are a lot of federal employees out there who are missing this crucial piece of the world market, just need to get the word out.

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby hoops777 » Fri Jul 15, 2016 4:27 pm

I can think of a lot of reasons why one would prefer to invest only in the US.The US has been blessed with so many advantages in terms of location natural resources,waterways for shipping and diversity of people,combined with so many wanting to move and work here.No country in the world has these advantages and they cannot be created or duplicated.Luck of the draw.I will gladly place my bets here.I would also add it is not like we live in a vacuum in this global economy,which I understand is not the same as investing in Europe or wherever.
K.I.S.S........so easy to say so difficult to do.

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby soboggled » Fri Jul 15, 2016 4:44 pm

To me it's got nothing to do with the innate superiority of the US.
Some pertinent questions: Is it desirable to decouple your investing prospects from the US economy? Why expose yourself to extraneous risks in the hopes of gaining an edge over other US investors? Are foreign governments and the companies themselves for that matter who are run by foreigners more likely to make decisions based on what is good for their native investor class or those in the US? How effective are the dollar hedging strategies employed by US international mutual funds? To what degree does investment in US companies provide exposure to international markets?
PS: For diversification, I hold international about 20% of equities but I am not at all convinced it is desirable, especially after seeing the 10 year CAGR of US markets 5 times that of international. Hoping for long term reversion to mean but not about to bet big on it.

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sun Aug 14, 2016 11:39 pm

packer16 wrote:I think there are some advantages to certain economic systems versus others and these may or may not be reflected in stock prices. I think the assumption that they are reflected in stock prices like the US, UK or other Anglo-Dutch market systems is a large assumption and based upon the assumption that the markets are like Anglo-Dutch systems.


Except that you're suddenly jumping from assuming markets are relatively efficient domestically to assuming they are totally irrational abroad. Investing is a global business - if you think the 'market' (which is global) can price US securities fairly but not international ones ... well, what evidence do you have to support that assertion?

If the markets are too 'dumb' to figure out mispriced securities because foreign laws are too hard to understand there are clear advantages for active investors looking abroad (from wherever), which in turn undermines the entire idea of passive indexing, US or otherwise. Basically: risk and reward become decoupled and the rest of the theory goes out the window (international has risks that aren't compensated).

Rule 1 of passive investing is that the only free lunch is diversification ... there is no reason to expect that rule to stop at international borders.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sun Aug 14, 2016 11:47 pm

soboggled wrote:To me it's got nothing to do with the innate superiority of the US.


Your subsequent questions suggest otherwise.

soboggled wrote:Some pertinent questions: Is it desirable to decouple your investing prospects from the US economy? Why expose yourself to extraneous risks in the hopes of gaining an edge over other US investors? Are foreign governments and the companies themselves for that matter who are run by foreigners more likely to make decisions based on what is good for their native investor class or those in the US? How effective are the dollar hedging strategies employed by US international mutual funds? To what degree does investment in US companies provide exposure to international markets?


Do you have any reason to expect those additional risks aren't going to be compensated? Full stop.


soboggled wrote:PS: For diversification, I hold international about 20% of equities but I am not at all convinced it is desirable, especially after seeing the 10 year CAGR of US markets 5 times that of international. Hoping for long term reversion to mean but not about to bet big on it.


Betting on recent results is no way to win long-term. Again, this is passive investing 101. If you made your future bets on/against international based on 2000-2010 results ... well, you'd hold basically no domestic stocks (international doubled, domestic lost after inflation). Incidentally my international investments are performing more than twice as well as my domestic ones so far this year (especially emerging markets).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sun Aug 14, 2016 11:52 pm

hoops777 wrote:I can think of a lot of reasons why one would prefer to invest only in the US.The US has been blessed with so many advantages in terms of location natural resources,waterways for shipping and diversity of people,combined with so many wanting to move and work here.No country in the world has these advantages and they cannot be created or duplicated.Luck of the draw.I will gladly place my bets here.I would also add it is not like we live in a vacuum in this global economy,which I understand is not the same as investing in Europe or wherever.


I will say this just one more time then I'll stop, but: do you seriously think the markets are too dumb to price this all in? That audaciousness borders on hubris in my opinion, but OK, let's play it out ...

I mean you could lobby for how amazing the advantages are of being a small versus large company, a value versus growth company, yet if you wouldn't bet the farm on knowing those were better than the other size/style segments (on a risk-adjusted basis) ... why would you even think of doing it for national markets? If you know better, then great, go all-in for small/value and skip the total market.

If you want to bet on a market that has great natural resources, though, with a solid history of returns and so forth I suggest Australia (which beat the US for 100 years in the 1900s). But that's not what we're about as indexers ... is it?! I'm glad to hold some AU, but not banking on it. I mean I always figured higher risk would lead to higher expected return, but if you have a model that suggests otherwise I really want to know about it!
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby njboater74 » Mon Aug 15, 2016 12:11 am

Noobvestor wrote:I will say this just one more time then I'll stop, but: do you seriously think the markets are too dumb to price this all in?


I hope you'd be willing to educate me on this. I've read on this forum over many threads folks saying "the markets have priced this all in". I must admit, I'm not 100% sure I understand the full implications of this.

I think I understand that the markets have considered the economic and political conditions in various countries, and the price of International stocks reflects this. What I'm not quite grasping is how this affects expected returns.

Let's say, for the sake of argument, that the economic and political situation in Latin America looks grim, and the market has appropriately priced in these conditions in the stock price of Latin American companies. So I understand how I can buy the stocks cheaper, but if the situation is grim, how is my expected return comparable to that of US companies or companies that are in a more promising economic environment?

I hope you understand what I'm asking. Thanks in advance.

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Valuethinker » Mon Aug 15, 2016 3:17 am

njboater74 wrote:
Noobvestor wrote:I will say this just one more time then I'll stop, but: do you seriously think the markets are too dumb to price this all in?


I hope you'd be willing to educate me on this. I've read on this forum over many threads folks saying "the markets have priced this all in". I must admit, I'm not 100% sure I understand the full implications of this.

I think I understand that the markets have considered the economic and political conditions in various countries, and the price of International stocks reflects this. What I'm not quite grasping is how this affects expected returns.

Let's say, for the sake of argument, that the economic and political situation in Latin America looks grim, and the market has appropriately priced in these conditions in the stock price of Latin American companies. So I understand how I can buy the stocks cheaper, but if the situation is grim, how is my expected return comparable to that of US companies or companies that are in a more promising economic environment?

I hope you understand what I'm asking. Thanks in advance.


If the market was not efficient, ie had not "priced this in" then:

- you could long the US market say &

- short sell the Latin American markets (bet on them going down)

And make a pure profit-- pure arbitrage profit, in the jargon.

Eventually enough fund managers would do that, and the valuation anomaly would disappear (Lat Am would fall, US would rise).

In essence what the market has done is put a Price to Earnings Ratio (the price of $1.00 of earning per share/ profit after tax per share) on every company which reflects its market position, past track record, countries it operates in, management, debt load etc.

So in that sense, the US is on a higher PE than other markets (generally true) reflecting in large part the high percentage of high growth tech cos in the US market-- Apple, Alphabet (Google), Amazon etc. And greater attention to shareholder returns generally.

So the US is the Mercedes of stock markets if you will, but you pay a Mercedes price. It's also possible to buy a Dacia (Romanian made, owned by Renault) SUV or a Kia rather than a Mercedes.

What efficient market theory tells us is that knowing that the US has better governance than say Argentina, doesn't tell us which stock market will outperform *from the current valuation*. You are paying 2-3x as much for $1.00 of US earnings (even if earned by a Latin American subsidiary) as you are for an Argentine company listed in Buenos Aires.

Now Emerging Markets have special volatility risk due to macroeconomic factors (currency etc.). But developed markets, why would you?

- own P&G but not Unilever or Nestle
- not own Diageo (Guinness and Johnnie Walker), Pernod Ricard ?
- own Exxon but not BP & Shell ?
- own Ford and GM but not BMW & Mercedes
- own Boeing but not Airbus (EADS) ?
- own American Airlines but not IAG (BA + Iberica)?
- own US Steel but not Mittal Arcelor?
- not want to own Tata (world's largest computer outsourcing group, plus 100+ companies in other areas like tea, cars (Jaguar Land Rover)
- own Intel but not Samsung or TSMC (Korea and Taiwan are sometimes emerging markets, sometimes not)
- own Pfizer but not Roche GSK Astra Zeneca?
- own JP Morgan but not HSBC?

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby njboater74 » Mon Aug 15, 2016 7:57 am

Valuethinker wrote:What efficient market theory tells us is that knowing that the US has better governance than say Argentina, doesn't tell us which stock market will outperform *from the current valuation*. You are paying 2-3x as much for $1.00 of US earnings (even if earned by a Latin American subsidiary) as you are for an Argentine company listed in Buenos Aires.

Thanks, this makes sense.

So if I understand correctly, the (hypothetical) grim forecast for Latin American companies is priced in. Therefore when the performance of Latin American companies actually do come in negative or weak earnings, then it shouldn't have much of an impact on the stock price, since this was in line with expectations.

On the other hand, if the outlook for the US was strong, and US companies were expected to benefit from this outlook. If they actually came in with the same negative or weak earnings as Latin American companies, then you should expect a more substantial drop on the stock price.

I think I'm getting this! :idea:

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby Noobvestor » Sat Aug 20, 2016 7:03 pm

njboater74 wrote:
Valuethinker wrote:What efficient market theory tells us is that knowing that the US has better governance than say Argentina, doesn't tell us which stock market will outperform *from the current valuation*. You are paying 2-3x as much for $1.00 of US earnings (even if earned by a Latin American subsidiary) as you are for an Argentine company listed in Buenos Aires.

Thanks, this makes sense.

So if I understand correctly, the (hypothetical) grim forecast for Latin American companies is priced in. Therefore when the performance of Latin American companies actually do come in negative or weak earnings, then it shouldn't have much of an impact on the stock price, since this was in line with expectations.

On the other hand, if the outlook for the US was strong, and US companies were expected to benefit from this outlook. If they actually came in with the same negative or weak earnings as Latin American companies, then you should expect a more substantial drop on the stock price.

I think I'm getting this! :idea:


Right. It is really tempting to have a thought, like 'healthcare is booming!' and to make the mistake of translating that into 'I know better than the market that healthcare is booming!' - there is a lot of of agnosticism to indexing ;)

The catch/caveat is that risk tends to go with reward ... so for instance if healthcare (or: US stocks or bonds) is perceived as being 'less risky' then jumping on the bandwagon may bring down reward along with risk. Personally (and others share this view) I expect international and emerging to pay more over the long haul precisely because they are riskier. So in designing a portfolio, US versus international and stocks versus bonds are all things to consider in optimizing your own risk/reward targets (but ideally while always maintaining some in each category for diversification).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Jack Bogle on International Investing at Bogleheads 11

Postby tooluser » Sat Aug 20, 2016 7:25 pm

When I switched much of my portfolio to the Vanguard LifeStrategy funds, I went from wondering what the next decade will bring, to knowing I had it covered. It's still fun to tilt, but that's not my core approach.


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