Is International Equity a "Factor"?

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mindboggling
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Is International Equity a "Factor"?

Post by mindboggling » Thu Jan 15, 2015 10:22 pm

I lean mostly toward pure Boglehead principles and don't slice-and-dice. However, I wonder why allocating a part of the equity portion of one's portfolio to various "factors" such as small-cap value, etc. is considered "tilting", while investing in international equity seems not to be. Has investing in international equity become so mainstream and so much a part of conventional wisdom that it is not considered "tilting"? Thoughts, anyone?

Steve
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mosu
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Re: Is International Equity a "Factor"?

Post by mosu » Thu Jan 15, 2015 10:26 pm

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Last edited by mosu on Thu Mar 12, 2015 9:11 pm, edited 1 time in total.

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sunnywindy
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Re: Is International Equity a "Factor"?

Post by sunnywindy » Thu Jan 15, 2015 10:32 pm

International investing is all about diversification. It is not a factor. (A factor usually has some sort of size, style, or risk attribute or factor. International is just stocks from other countries.
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Kevin M
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Re: Is International Equity a "Factor"?

Post by Kevin M » Thu Jan 15, 2015 10:49 pm

mindboggling wrote:Has investing in international equity become so mainstream and so much a part of conventional wisdom that it is not considered "tilting"? Thoughts, anyone?
Steve
Tilting refers to deviating from "the market" portfolio. If you think in global terms, the market portfolio would reflect global cap weighting, and the broad US stock market would be somewhere around half of the stock part of the portfolio. So to the extent you have more than about half of your stocks in the US, you are tilting toward US stocks.

This is referred to as "home bias". There are some rational reasons to tilt toward your domestic market, but one of the more common, irrational reasons is familiarity.

Kevin
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lack_ey
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Re: Is International Equity a "Factor"?

Post by lack_ey » Thu Jan 15, 2015 10:57 pm

The tilting you're talking about is a deviation from the plain vanilla, market capitalization weighted index. If you're looking at the entire U.S. stock market and want a greater percentage of REITs or small companies than the actual market composition, you could perhaps start with a total stock market index fund and add in more of the other stuff to create a tilt.

For what it's worth, if you look at the world of readily investable securities, there is a certain amount of U.S. company stock out there and a certain amount of non-U.S. company stock. If you want a global stock allocation in equal percentages, you would have to include international stocks. It's roughly in the neighborhood of about half and half. In fact, if you look at all the bonds available, you would have to include international bonds too. Moreover, if you're really dedicated at market cap weighting, you might hold a stock/bond split that matches the ratio of stocks to that of bonds out there globally. You might call the default 60/40 three-fund portfolio a tilt away from international stocks, some kind of heavy tilt away from international bonds (so heavy you throw them out entirely), and a tilt toward equities at the expense of bonds.

Now, whether or not doing everything by market cap is a good idea is up for debate. Probably it isn't, if for no reason other than extra risk as a result of the currency exchange rate fluctuation—and there are other reasons. And any given stock/bond split may well not make sense for your objectives either.

cromwell
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Re: Is International Equity a "Factor"?

Post by cromwell » Thu Jan 15, 2015 10:59 pm

mindboggling wrote:I lean mostly toward pure Boglehead principles and don't slice-and-dice. However, I wonder why allocating a part of the equity portion of one's portfolio to various "factors" such as small-cap value, etc. is considered "tilting", while investing in international equity seems not to be. Has investing in international equity become so mainstream and so much a part of conventional wisdom that it is not considered "tilting"? Thoughts, anyone?

Steve
This maybe too simplistic but here's how I see it: equities are comprised of small mid and large caps in US and rest of World. You can either buy your own chosen size pieces or cap weighted indexes of the whole thing. I prefer the latter. Cordially

mindboggling
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Re: Is International Equity a "Factor"?

Post by mindboggling » Thu Jan 15, 2015 11:21 pm

Thanks for your responses. Currently, I have about 5% of my equity portfolio in international. I am partially retired, and although I am technically still in the accumulation phase, I can't add enough to my portfolio to move the needle. I'm not ready to do a massive asset transfer to increase my international equity. I've been adding to international when I can with my limited amount of new money because of relative valuations.

Steve
In broken mathematics, We estimate our prize, --Emily Dickinson

cromwell
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Re: Is International Equity a "Factor"?

Post by cromwell » Fri Jan 16, 2015 12:24 am

mindboggling wrote:Thanks for your responses. Currently, I have about 5% of my equity portfolio in international. I am partially retired, and although I am technically still in the accumulation phase, I can't add enough to my portfolio to move the needle. I'm not ready to do a massive asset transfer to increase my international equity. I've been adding to international when I can with my limited amount of new money because of relative valuations.

Steve
Small moves are usually better than big IMO. If you haven't already considered,you could use some dividends on current holdings as new money for adding to international. Best Wishes

YDNAL
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Re: Is International Equity a "Factor"?

Post by YDNAL » Fri Jan 16, 2015 11:27 am

mindboggling wrote:I lean mostly toward pure Boglehead principles and don't slice-and-dice. However, I wonder why allocating a part of the equity portion of one's portfolio to various "factors" such as small-cap value, etc. is considered "tilting", while investing in international equity seems not to be. Has investing in international equity become so mainstream and so much a part of conventional wisdom that it is not considered "tilting"? Thoughts, anyone?

Steve
Steve, Stocks are an asset class, not a factor. We need to first consider all *investable* Stocks in the World.

According to FTSE Global all cap index, International Equities (non-US Stocks) are 47.3% of the total.
https://personal.vanguard.com/us/funds/ ... =INT#tab=2

Code: Select all

Canada       3.5%
Emerging     8.8%
Europe      21.5%
Middle East  0.2%
Pacific     13.3%
U.S.        52.7%
Total      100.0%
So, actually, anything other than Global Market Weights would represent "tilting" from such weights.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

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