I really hope people aren't tilting US due to recency

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Noobvestor
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I really hope people aren't tilting US due to recency

Post by Noobvestor » Tue May 21, 2013 11:04 pm

Image

I am not suggesting anyone should be tilting toward international, but the US has had a nice run and these things do turn around now and again ... Buy, hold, rebalance, and don't trick yourself into thinking you're lowering your international allocation because you want to 'reduce currency risk' or whatnot.
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Re: I really hope people aren't tilting US due to recency

Post by MGBGTV8 » Tue May 21, 2013 11:14 pm

Been considering going more International Stock lately...

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Re: I really hope people aren't tilting US due to recency

Post by fundtalker123 » Wed May 22, 2013 12:38 am

100% emerging markets timber?

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Re: I really hope people aren't tilting US due to recency

Post by FlyingMoose » Wed May 22, 2013 2:54 am

Is there a US High Quality stock index?

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Re: I really hope people aren't tilting US due to recency

Post by lwfitzge » Wed May 22, 2013 3:24 am

where's the projections of Danish tulips? I hear they may be big again :)

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Re: I really hope people aren't tilting US due to recency

Post by Valuethinker » Wed May 22, 2013 3:38 am

Recency effect is precisely what we are seeing.

Ex post justification of home country bias. The US is now leading the developed world out of recession, so it's easy to be more optimistic-- but the stock markets have already moved on that.

Flip side of 'sell US debt and invest in (less well understood) foreign bonds etc. because US is heading for hyperinflation'. Ie ignoring all the issues that countries like the Eurozone have.

Excessive pessimism nor optimism is never justified.

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Re: I really hope people aren't tilting US due to recency

Post by Valuethinker » Wed May 22, 2013 3:39 am

FlyingMoose wrote:Is there a US High Quality stock index?

If you do a search on discussions of GMO and Jeremy Grantham's forecasts, lots of discussion how to proxy it.

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Re: I really hope people aren't tilting US due to recency

Post by The Wizard » Wed May 22, 2013 4:29 am

lwfitzge wrote:where's the projections of Danish tulips? I hear they may be big again :)
Dutch, not Danish...
Attempted new signature...

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Re: I really hope people aren't tilting US due to recency

Post by bpp » Wed May 22, 2013 4:32 am

I need to buy some US stocks because they have been lagging behind recently, but that's just rebalancing, not tilting.

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Re: I really hope people aren't tilting US due to recency

Post by Valuethinker » Wed May 22, 2013 4:35 am

The Wizard wrote:
lwfitzge wrote:where's the projections of Danish tulips? I hear they may be big again :)
Dutch, not Danish...
Danish hogs ;-). Lester Nessman would have been Danish.

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Re: I really hope people aren't tilting US due to recency

Post by Valuethinker » Wed May 22, 2013 4:36 am

bpp wrote:I need to buy some US stocks because they have been lagging behind recently, but that's just rebalancing, not tilting.
Japan is up something like 66%? Of course you have 'lost' most of that on the currency, but a phenomenal performance. Stop investing, and start spending! That's what the radical liquidity injection is trying to make you do.

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Re: I really hope people aren't tilting US due to recency

Post by bpp » Wed May 22, 2013 4:43 am

Valuethinker wrote:
bpp wrote:I need to buy some US stocks because they have been lagging behind recently, but that's just rebalancing, not tilting.
Japan is up something like 66%? Of course you have 'lost' most of that on the currency, but a phenomenal performance. Stop investing, and start spending! That's what the radical liquidity injection is trying to make you do.
Unfortunately, I'm very bad at following orders. ;)
Have an overpowering urge to rebalance instead.

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Re: I really hope people aren't tilting US due to recency

Post by TomatoTomahto » Wed May 22, 2013 6:03 am

The Wizard wrote:
lwfitzge wrote:where's the projections of Danish tulips? I hear they may be big again :)
Dutch, not Danish...
This time is different; they're Danish :D

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Re: I really hope people aren't tilting US due to recency

Post by livesoft » Wed May 22, 2013 6:05 am

By recency, you mean the last few months. You certainly don't mean 2012. :twisted:
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Re: I really hope people aren't tilting US due to recency

Post by Tigermoose » Wed May 22, 2013 6:12 am

I've always tilted US - no recency bias here. And I'm loving it.

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Re: I really hope people aren't tilting US due to recency

Post by nisiprius » Wed May 22, 2013 6:20 am

I hope nobody's doing anything due to recency.

I hope nobody's increased their U.S. allocation due to the last six months... or the last five years. (International dropped further in 2008-2009 and hasn't yet made up for it).

I hope nobody's decreased their U.S. allocation due to the last ten years.

This "asset class diversification" stuff is subtle. Larry Swedroe says "diversification is always working; sometimes you will like the results and sometimes you won't." It can't be proved or disproved by results from 1, 3, 5 or 10 years. All this asset class stuff is like that. At best, it's just an edge, it shows up only in long-term data, it is measured in basis points, and if you're going to go in for it you have to be decide in advance to be patient.

2003-2008: International rules! Go international! Yeah! No "lost decade for me!"

Image

But to get to that good stuff, you had to get through the bad stuff. 1996-2002: International sux! U! S! A! U! S! A!

Image

And here's why:

Image
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Re: I really hope people aren't tilting US due to recency

Post by HardKnocker » Wed May 22, 2013 6:31 am

Ride the wave!

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Re: I really hope people aren't tilting US due to recency

Post by InvestorNewb » Wed May 22, 2013 7:02 am

I think I will keep my international allocation at 30%. It takes this index too darn long to recover. It also has a risk rating of 5 - which is the highest among Vanguard's criteria.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)

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Re: I really hope people aren't tilting US due to recency

Post by topper1296 » Wed May 22, 2013 7:14 am

Valuethinker wrote:
FlyingMoose wrote:Is there a US High Quality stock index?

If you do a search on discussions of GMO and Jeremy Grantham's forecasts, lots of discussion how to proxy it.
Has GMO ever not recommended US high quality stocks?

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Re: I really hope people aren't tilting US due to recency

Post by IlliniDave » Wed May 22, 2013 8:25 am

Lately I've been thinking a lot about "worldwide" reversion to the mean and how it might affect my investment decisions. The problem I run into is the world is historically a violent and chaotic place whose mean reversion could easily be away from universality and widespread stability. Perhaps we've reached the tipping point where nearly global cooperation and peaceful interaction between nations across continents becomes the new mean, or it may just be a recency bias of sorts.

Recent returns or guesses at future returns don't affect my decisions as much the increased peace-of-mind I get keeping most of my capital in the economy I participate in (which isn't "just any" economy in my view). I'm rather tepid in my ex-US, ~25%, and that seems to be a good balance for me between recognizing/pursuing overseas opportunity and comfort.
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Re: I really hope people aren't tilting US due to recency

Post by stemikger » Wed May 22, 2013 8:31 am

Posted by Noobvestor
I am not suggesting anyone should be tilting toward international, but the US has had a nice run and these things do turn around now and again ... Buy, hold, rebalance, and don't trick yourself into thinking you're lowering your international allocation because you want to 'reduce currency risk' or whatnot.
Hey Noob. Unless you do as John Bogle suggests and never held international in the first place. : )

I know we had many great debates on this, and always appreciated your knowledge, but that is where I'm at, so it's one less temptation I have to deal with.

And as you know as of late, I have been being a pest about this bond debate. However, I'm still listening to John Bogle when it comes to that too.

I still feel I get all the international diversification I need through the S&P 500 index fund.
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Re: I really hope people aren't tilting US due to recency

Post by staythecourse » Wed May 22, 2013 8:53 am

topper1296 wrote:
Valuethinker wrote:
FlyingMoose wrote:Is there a US High Quality stock index?

If you do a search on discussions of GMO and Jeremy Grantham's forecasts, lots of discussion how to proxy it.
Has GMO ever not recommended US high quality stocks?
I am assuming they run a GMO fund that proxies it and are trying to publicize it. It doesn't pass my sniff test of common sense that "hight quality" stocks would do so much better then large cap blend unless one is doing active security selection (which we know how that turns out in the long run).

They also run a TMO for timber so that explains why they always push timber.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: I really hope people aren't tilting US due to recency

Post by staythecourse » Wed May 22, 2013 8:57 am

Noob,

I think many folks like to tilt to U.S., but not for recency bias. Likely, from home country bias.

As I mentioned in another thread some folks get the difference between strategy and outcome. Since U.S. has done so well from WWII many American investors assume their strategy is doing well just because the outcome has been good.... that is not correct. Some get it and many, many don't.

As a famous person once said (paraphrasing) the problem with diversification is it works even when you don't want it to.

Good luck.
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Re: I really hope people aren't tilting US due to recency

Post by Valuethinker » Wed May 22, 2013 9:12 am

IlliniDave wrote:Lately I've been thinking a lot about "worldwide" reversion to the mean and how it might affect my investment decisions. The problem I run into is the world is historically a violent and chaotic place whose mean reversion could easily be away from universality and widespread stability. Perhaps we've reached the tipping point where nearly global cooperation and peaceful interaction between nations across continents becomes the new mean, or it may just be a recency bias of sorts.

Recent returns or guesses at future returns don't affect my decisions as much the increased peace-of-mind I get keeping most of my capital in the economy I participate in (which isn't "just any" economy in my view). I'm rather tepid in my ex-US, ~25%, and that seems to be a good balance for me between recognizing/pursuing overseas opportunity and comfort.
The correlation with your own labour market and consumption activities is an argument *against* a home country bias-- less diversification.

By many measures Japan has been more stable than the USA the last 30 years. Low levels of violent crime (fraction of USA), stable government, stable prices, ethnic homogeneity, low unemployment etc.

Yet the last 22 years in Japanese stocks has been disastrous.

Similarly Australia and Canada have had a better 20th Century arguably than the USA- -they, along with New Zealand, have had attributes of stability the US has not always had. The Australian stockmarket did, in fact, outperform the US one, but there is not much in it.

The point is not that the US is a bad place to invest. The point is that how successful a country is is not fully correlated with the success of its stockmarket.

A quick perusal of international stock indices will show you world leading, world beating non US companies. TSMC. Samsung. Nestle. Glaxo Smithkline. A host of mining companies the US just does not have like BHP and Rio Tinto. HSBC.

According to historical data, for a US investor, the gains from international equity diversification have been between 20-30% of portfolio. Which is where you are at. International equities add volatility as well as diversification gains, and the tradeoff appears to be optimal, historically at that level. For a non US investor, a home country bias is more dangerous.

Just as long as you realize that your rationale is the classic reasoning for home country bias.

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Re: I really hope people aren't tilting US due to recency

Post by Clivus1 » Wed May 22, 2013 9:19 am

The US equity market represents a bit less than 40 percent of the global equity market. My equity allocation is slowly moving to match the global market composition. I'm currently 55% international.

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Re: I really hope people aren't tilting US due to recency

Post by IlliniDave » Wed May 22, 2013 10:27 am

Valuethinker wrote:
IlliniDave wrote:Lately I've been thinking a lot about "worldwide" reversion to the mean and how it might affect my investment decisions. The problem I run into is the world is historically a violent and chaotic place whose mean reversion could easily be away from universality and widespread stability. Perhaps we've reached the tipping point where nearly global cooperation and peaceful interaction between nations across continents becomes the new mean, or it may just be a recency bias of sorts.

Recent returns or guesses at future returns don't affect my decisions as much the increased peace-of-mind I get keeping most of my capital in the economy I participate in (which isn't "just any" economy in my view). I'm rather tepid in my ex-US, ~25%, and that seems to be a good balance for me between recognizing/pursuing overseas opportunity and comfort.
The correlation with your own labour market and consumption activities is an argument *against* a home country bias-- less diversification.

By many measures Japan has been more stable than the USA the last 30 years. Low levels of violent crime (fraction of USA), stable government, stable prices, ethnic homogeneity, low unemployment etc.

Yet the last 22 years in Japanese stocks has been disastrous.

Similarly Australia and Canada have had a better 20th Century arguably than the USA- -they, along with New Zealand, have had attributes of stability the US has not always had. The Australian stockmarket did, in fact, outperform the US one, but there is not much in it.

The point is not that the US is a bad place to invest. The point is that how successful a country is is not fully correlated with the success of its stockmarket.

A quick perusal of international stock indices will show you world leading, world beating non US companies. TSMC. Samsung. Nestle. Glaxo Smithkline. A host of mining companies the US just does not have like BHP and Rio Tinto. HSBC.

According to historical data, for a US investor, the gains from international equity diversification have been between 20-30% of portfolio. Which is where you are at. International equities add volatility as well as diversification gains, and the tradeoff appears to be optimal, historically at that level. For a non US investor, a home country bias is more dangerous.

Just as long as you realize that your rationale is the classic reasoning for home country bias.
I have no "rationale" in a mathematical sense. The reason I am willing to risk 25% of my equity capital in overseas markets is actually because of a longer-scale 'recency' phenomenon that includes much of what you point out. But I'm looking at longer timeframes in my musings on worldwide reversion to the mean than just the last 30 years or even the entire post WWII period. Maybe it's a silly example, but go back to say 1910, what would have happened to a worldwide market-weighted investment portfolio in the next 40 years? Probably pretty ugly. Nations and markets come and go, wars happen, governments and peoples vacillate in their relationships between friend and foe.

If the US as we know it falls apart, I'll have bigger things to worry about than my paper assets. If we begin to have a Japan-like bubble in stocks I'll probably rethink my allocation. I understand there's risks inherent to every market. But any assets I have committed in a nation in which I'm not a citizen I feel carry a certain risk that my domestic assets do not, and historically those risks can manifest themselves quickly and on wide scales.

I don't consider that a "bias" but rather balancing risks while choosing to include some risks in my thinking that financial mathematical models don't include. It's not like I've shunned the rest of the world (I've invested a good deal of money in the international markets and have done so for the last 20 years) or believe the US is inherently superior. I heard someone say (or read) once that if your portfolio causes you to lose sleep you have the wrong portfolio. Mine causes no sleeplessness, so I suppose it's good for me. I don't consider my approach better than that of someone who wants to to devote twice as much or more to overseas markets than I do. We all have to juggle risks in a way that suits ourselves. I'm not trying to convert anyone to my way of thinking and appreciate the opportunity to hear the thoughts of others. Thanks!
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Re: I really hope people aren't tilting US due to recency

Post by Grt2bOutdoors » Wed May 22, 2013 10:34 am

staythecourse wrote:
topper1296 wrote:
Valuethinker wrote:
FlyingMoose wrote:Is there a US High Quality stock index?

If you do a search on discussions of GMO and Jeremy Grantham's forecasts, lots of discussion how to proxy it.
Has GMO ever not recommended US high quality stocks?
I am assuming they run a GMO fund that proxies it and are trying to publicize it. It doesn't pass my sniff test of common sense that "hight quality" stocks would do so much better then large cap blend unless one is doing active security selection (which we know how that turns out in the long run).

They also run a TMO for timber so that explains why they always push timber.

Good luck.
GMO runs many different strategies, amongst them is a High Quality fund. I don't find Grantham to be a carnival barker in the same sense that mutual funds advertising to the retail market or retirement market are. GMO was hawking their strategy long before everyone else found it to be fashionable like the latest style. They also put out a white paper on Quality vs. other strategies that was fair and objective. I will say this, currently reading the book - The Great Depression, A Diary - interesting thing about it is the fellow who wrote the diary continued to make notations that in his words "quality" companies outpeformed other kinds of companies during the market declines and when the market did start to recover, they were among the leaders. Guess there is something to be said of "low beta" equities, but then much has been written about it by others.
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Re: I really hope people aren't tilting US due to recency

Post by Grt2bOutdoors » Wed May 22, 2013 10:40 am

topper1296 wrote:
Valuethinker wrote:
FlyingMoose wrote:Is there a US High Quality stock index?

If you do a search on discussions of GMO and Jeremy Grantham's forecasts, lots of discussion how to proxy it.
Has GMO ever not recommended US high quality stocks?
They run many different strategies - nearly all of them for high net worth or institutional money. If you sign up on their website you can see the many different strategies they offer and they follow GIPS reporting standards as you may be able to see in their quarterly disclosures. Not all of their strategies produce positive alpha, though I do believe the quality strategy has recently begun to bear fruit. Almost all of the companies in that fund are household names and the top ten represent almost 40% of overall holdings giving credence to placing concentrated bets on investments.
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Re: I really hope people aren't tilting US due to recency

Post by Grt2bOutdoors » Wed May 22, 2013 10:43 am

Noobvestor wrote:Image

I am not suggesting anyone should be tilting toward international, but the US has had a nice run and these things do turn around now and again ... Buy, hold, rebalance, and don't trick yourself into thinking you're lowering your international allocation because you want to 'reduce currency risk' or whatnot.
If you really iike taking a contrarian view, you should be picking up Emerging Markets right now. I've been tilted to International since early last year, more so than previously allocated and picking up some higher yielding MBS in the form of mortgage principle paydown. :wink:
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Re: I really hope people aren't tilting US due to recency

Post by fedsocprof » Wed May 22, 2013 10:48 am

Noobvestor wrote:Image

I am not suggesting anyone should be tilting toward international, but the US has had a nice run and these things do turn around now and again ... Buy, hold, rebalance, and don't trick yourself into thinking you're lowering your international allocation because you want to 'reduce currency risk' or whatnot.
Perhaps tilting toward the US is the wise move:
"The investment visionary who coined the term 'emerging markets' and helped launch the first funds to invest in developing countries thinks he has spotted what you might call the next great emerging market.

It is called 'the United States.'

Antoine van Agtmael is arguably the founding father of emerging-markets investing. He still is an evangelist for investing in parts of Africa, Asia, Latin America and other less-developed regions, where he thinks the future remains bright. But he believes the U.S. is at the beginning of an industrial revitalization that most analysts only have begun to recognize."
http://online.wsj.com/article/SB1000142 ... 51840.html

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Re: I really hope people aren't tilting US due to recency

Post by nisiprius » Wed May 22, 2013 11:12 am

Clivus1 wrote:The US equity market represents a bit less than 40 percent of the global equity market.
No, it doesn't.

Image

And, the whole point of the thread, it has even gone up just a little bit from that... recently.
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Re: I really hope people aren't tilting US due to recency

Post by VictoriaF » Wed May 22, 2013 11:18 am

Valuethinker wrote:
The Wizard wrote:
lwfitzge wrote:where's the projections of Danish tulips? I hear they may be big again :)
Dutch, not Danish...
Danish hogs ;-). Lester Nessman would have been Danish.
Hamlet was Danish. He was the one who asked, "To bet or not to bet?"

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Re: I really hope people aren't tilting US due to recency

Post by dewey » Wed May 22, 2013 11:42 am

Valuethinker wrote:
The Wizard wrote:
lwfitzge wrote:where's the projections of Danish tulips? I hear they may be big again :)
Dutch, not Danish...
Danish hogs ;-). Lester Nessman would have been Danish.
Or a Danish Danish :P
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Re: I really hope people aren't tilting US due to recency

Post by Clivus1 » Wed May 22, 2013 11:55 am

The precise percentage may vary with the source used.

The World Bank lists the US as just less than 40% of global equity.

http://data.worldbank.org/indicator/CM. ... play=graph

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Re: I really hope people aren't tilting US due to recency

Post by jay22 » Wed May 22, 2013 12:42 pm

So, what's the conclusion? 30% International from now on, or 50? ;-)

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Re: I really hope people aren't tilting US due to recency

Post by Investing is boring » Wed May 22, 2013 12:50 pm

I am 50/50 International / US. All I have been buying this year has been bonds and international equities. I will continue to do so to maintain my balance.

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Re: I really hope people aren't tilting US due to recency

Post by staythecourse » Wed May 22, 2013 1:00 pm

jay22 wrote:So, what's the conclusion? 30% International from now on, or 50? ;-)
The answer is anything less then the world market cap is TILT away from the market cap. Just like tilting to small and value. Funny, but tilting away from market cap in world equities actually make NO sense as their is no U.S. premium which rewards one to tilt in that direction as opposed to small or value (which if you believe it or not is well documented).

Just like I would say in any other thread it is okay to tilt as NO ONE holds a true market cap. Just don't fool yourself thinking "I hold u.s. stocks by market cap so I am holding market cap".

Personally, I think Vanguard's paper on international equity diversification is a good guideline: Basically anything from 20- market cap makes sense. Pick one that you are comfortable with and stick to it.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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