John Bogle on International Investing

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stemikger
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John Bogle on International Investing

Post by stemikger »

Everytime the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum, I always want to post this You Tube video but I don't have time to find it. Jack admits, most don't agree with him, but I certainly do. For those who would like to hear John Bogle's views in this You Tube video, here it is.

http://www.youtube.com/watch?v=vMj4sHjF ... FcuZ7hFJ5p
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Re: John Bogle on International Investing

Post by oldzey »

Bookmarked - thanks for sharing, stemikger! :D

I always come back to this older video myself: http://www.morningstar.com/cover/videoc ... ?id=355647
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Re: John Bogle on International Investing

Post by anil686 »

I think Mr. Bogle makes the most coherent case I have ever heard about not investing internationally in Common Sense on Mutual Funds, 2nd Edition. Even then, he still thinks it is not a mistake to do so - just not necessary. His analysis of how corporations hedge their balance sheets for international revenue is enlightening and important as a way to mitigate currency risk without paying for it twice (i.e. US corporations in the SP500 already discount for currency risk reflected in their profits).

That being said, I invest like the VG white paper on international investing - about 33% equities international FWIW - which admittedly may not be much...

https://personal.vanguard.com/pdf/ISGGEB.pdf
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Re: John Bogle on International Investing

Post by John3754 »

Stemikger, I have a hypothetical question for you, with all due respect to Mr. Bogle. Lets say you have a doctor that you've been seeing all your life and you trust, and he/she tells you that you have a serious medical condition that is going to require an expensive and dangerous surgery. You believe this doctor as you've known him/her for a long time and trust his/her opinion, but before undergoing the procedure you decide to get a second opinion. You go to see a well respected specialist in the field and they tell you the diagnosis is incorrect and you don't need the procedure. You then see a third, fourth, and even fifth doctor and they too tell you that they disagree with the first doctor and you do not need the procedure. So now you have one doctor telling you that you need surgery and four telling you that you don't....what do you do?

This is the situation that I find myself in when it comes to this subject, I have a well respected authority that I follow and trust telling me that I should not invest in international equity...but countless other well respected "second opinions" telling me that I should. Does this mean that the "second opinions" are necessarily correct? No, it doesn't, but it does mean, for me at least, that the discussion shouldn't end at "Jack Bogle says A, therefore A must be correct".
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Re: John Bogle on International Investing

Post by Caduceus »

^^ Except the analogy here is more than a little off.

The difference between what Mr. Bogle and others recommend is more like the response to someone who wants to know what kind of vegetables would increase expected longevity. Mr. Bogle says that it is OK not to eat Kale and Spinach, that it is more important to decide to eat a good amount of veggies, and it is OK to stick with the good stuff you get from your local supermarket. Others say that you have to eat Arugula, Kale, and Spinach, because it will add 0.78493 years to your expected lifespan.

Meanwhile, everyone debates whether they should or should not eat arugula, or watch others on this forum debate whether or not they should eat arugula, instead of spending the time saving up to buy and eat more veggies.
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Re: John Bogle on International Investing

Post by stemikger »

John3754 wrote:Stemikger, I have a hypothetical question for you, with all due respect to Mr. Bogle. Lets say you have a doctor that you've been seeing all your life and you trust, and he/she tells you that you have a serious medical condition that is going to require an expensive and dangerous surgery. You believe this doctor as you've known him/her for a long time and trust his/her opinion, but before undergoing the procedure you decide to get a second opinion. You go to see a well respected specialist in the field and they tell you the diagnosis is incorrect and you don't need the procedure. You then see a third, fourth, and even fifth doctor and they too tell you that they disagree with the first doctor and you do not need the procedure. So now you have one doctor telling you that you need surgery and four telling you that you don't....what do you do?

This is the situation that I find myself in when it comes to this subject, I have a well respected authority that I follow and trust telling me that I should not invest in international equity...but countless other well respected "second opinions" telling me that I should. Does this mean that the "second opinions" are necessarily correct? No, it doesn't, but it does mean, for me at least, that the discussion shouldn't end at "Jack Bogle says A, therefore A must be correct".
Good point. I have listened to the other experts and in the end Jack makes the most sense to me. Is he right? In my view he is, but only time will tell. If he is wrong, I don't think it will be a deal breaker either way the same way it will be a deal breaker if you do. I just remember as a new investor starting out, this caused me much angst and confusion because my 401K did not offer international at that time. I just like putting it out there to show that investing can be as simple as two funds (the total stock index and the total bond index) for new investors or people like me who like to keep things as simple as possible.

What John Bogle does that I find amazing is talk about these complex ideas in a simple manner. Most of the other professionals and even people here make it seem harder then it is or do not have the ability to break it down like that. I wonder if they like to flex their intellect by using big words and complex theories to feed their own egos. Warren Buffett is the other brilliant man who has this same gift. So in the end, I go with two men who can explain this stuff to the non-professional and make it seem enjoyable.
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Re: John Bogle on International Investing

Post by dnaumov »

Every time "intenational investing" (from a US investor point of view) comes up, I always have the same argument. If you don't invest internationally, you are making a speculative country bet. At least admit that much to yourself. You are making a bet that the US will continue to be either the best of at least one of the best markets to invest in throughout your remaining lifetime.

When you look back in history, at times Egypt and Russia too, belonged to the group of largest and best-performing equity markets for a long period of time and were considered the safe and utterly obvious places to have your money in. Investors in those countries that didn't diverisfy, however, are still waiting for return OF capital (let alone ON capital).
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Re: John Bogle on International Investing

Post by stan1 »

It comes down to a tradeoff between two risks: diversification and currency. 20 years ago transaction cost could also be claimed as a reason for not investing internationally but today that's no longer true.

Choosing to only invest in the U.S. means you are making a conscious decision that there is a preference for holding U.S. domiciled companies like Exxon Mobil and Chevron over BP and Shell. Why would I choose to invest in only two of those companies? Increased diversification has value. Granted emerging market economies like Russia add some additional risks due to weaker corporate governance and corruption.

For me the right answer is somewhere in the middle between 100% US and world market capitalization. I accept that diversification and currency risks both need to be managed. I've chosen 2/3 domestic and 1/3 international to balance these risks. Analysts can come up with lots of historical data but since there's no way to predict the future there there is never going to be an optimal allocation.
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Re: John Bogle on International Investing

Post by Lax67 »

For me the conflict comes down to the simplicity espoused by Bogle versus the "what if" of international going forward. No matter what path is chosen, sitting on the sidelines and 'staying the course', presumably, will be enjoyable or filled with moments of regret. "Ah, I should have stuck with an all US portfolio" or "Ah, I should have added international". Which moment of doubt hurts less? Not sure anyone can know for sure.
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Re: John Bogle on International Investing

Post by nisiprius »

To me, the question is "where did the 'everyone needs international stocks' meme come from, who is promoting it, and why?"

Because I believe I can recognize a hard sell when I see it, and the push for international stocks has been disproportionate to the merits of the case. And it started rather suddenly, despite the fact that international stock mutual funds have been available since the 1960s or so.

There is just no good explanation of why, say, Burton Malkiel's would change his recommendation for an investor in his late sixties, from zero international stocks in 1990 to HALF international stocks in 2015. Not when the U.S. share of global cap is actually higher today than it was in 1990.

Yes, there is weak evidence that some international is probably a little helpful, and probably not harmful. But it's weak and the effect is small. It's a small thing that probably isn't very important, and it's being presented as a big deal that is absolutely essential.

My conspiratorial theory is that mutual fund companies think it is beneficial to them to become international, and that they wanted to develop their competence in large-scale international stock transactions... and funded the acquisition of that core competency by creating and marketing international stock funds.
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Re: John Bogle on International Investing

Post by stlutz »

To me, the question is "where did the 'everyone needs international stocks' meme come from, who is promoting it, and why?" B

Because I believe I can recognize a hard sell when I see it, and the push for international stocks has been disproportionate to the merits of the case
Replace everything you just said with "NASDAQ" (as opposed to "NYSE"). What is the difference?
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Re: John Bogle on International Investing

Post by arcticpineapplecorp. »

I have three guesses why international investing started to be recommended over the recent past:

1. the cost to invest internationally greatly diminished
2. the argument of greater diversification was being promoted (i.e., if U.S. style/sector/size diversification is good, then diversifying worldwide is even better)
3. the literature shows that since international sometimes beats U.S. (and vice versa), returns in the short term could be positively impacted, even if the long term results showed no difference in returns between U.S. and international. I.E., the U.S.'s so called "lost decade" (2000-2009) was not as lost if one diversified with international investments.

+1 to Stan1's comments.
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Re: John Bogle on International Investing

Post by gkaplan »

stemikger wrote:Everytime the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum, I always want to post this You Tube video but I don't have time to find it. Jack admits, most don't agree with him, but I certainly do. For those who would like to hear John Bogle's views in this You Tube video, here it is.

http://www.youtube.com/watch?v=vMj4sHjF ... FcuZ7hFJ5p
One of the main reasons "the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum" is that you cannot let a week go by without making this tiresome point.
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Re: John Bogle on International Investing

Post by Index Fan »

John3754 wrote:Stemikger, I have a hypothetical question for you, with all due respect to Mr. Bogle. Lets say you have a doctor that you've been seeing all your life and you trust, and he/she tells you that you have a serious medical condition that is going to require an expensive and dangerous surgery. You believe this doctor as you've known him/her for a long time and trust his/her opinion, but before undergoing the procedure you decide to get a second opinion. You go to see a well respected specialist in the field and they tell you the diagnosis is incorrect and you don't need the procedure. You then see a third, fourth, and even fifth doctor and they too tell you that they disagree with the first doctor and you do not need the procedure. So now you have one doctor telling you that you need surgery and four telling you that you don't....what do you do?

This is the situation that I find myself in when it comes to this subject, I have a well respected authority that I follow and trust telling me that I should not invest in international equity...but countless other well respected "second opinions" telling me that I should. Does this mean that the "second opinions" are necessarily correct? No, it doesn't, but it does mean, for me at least, that the discussion shouldn't end at "Jack Bogle says A, therefore A must be correct".
+1

With tremendous respect due to Jack Bogle, argument by authority started weakening in the Western World by the later Middle Ages, and Bogleheads who will debate very fine points of evidence don't wear that argument well.
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Re: John Bogle on International Investing

Post by abuss368 »

gkaplan wrote:
stemikger wrote:Everytime the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum, I always want to post this You Tube video but I don't have time to find it. Jack admits, most don't agree with him, but I certainly do. For those who would like to hear John Bogle's views in this You Tube video, here it is.

http://www.youtube.com/watch?v=vMj4sHjF ... FcuZ7hFJ5p
One of the main reasons "the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum" is that you cannot let a week go by without making this tiresome point.
Hi Gordon,

I thought you also avoided international stocks and followed the two fund Jack Bogle portfolio of Total Stock and Total Bond. Did you change.

Best.
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Re: John Bogle on International Investing

Post by Browser »

The strongest argument I can see for investing internationally is that "things might change" Japan-style. Although it hasn't meant a hoot since we started keeping records, it could all suddenly change. I guess it's impossible to rule out that possibility. We should learn at least one foreign language too, I think. Probably Chinese.
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Re: John Bogle on International Investing

Post by heartandsoul »

I suspect belief in the importance of international diversification is directly proportional to the size of drawdown your local stock market has had in the past and inversely proportional to how long ago that drawdown happened.
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Re: John Bogle on International Investing

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nisiprius wrote:To me, the question is "where did the 'everyone needs international stocks' meme come from, who is promoting it, and why?"
International got cheaper and more accessible. It is analogous to going to Total Stock over S&P 500, maybe, except in the case of that example the S&P covers the vast majority of the market (and still has the same country-specific geographical, political and economic risks, etc... as Total, but I digress).
nisiprius wrote:Yes, there is weak evidence that some international is probably a little helpful, and probably not harmful. But it's weak and the effect is small. It's a small thing that probably isn't very important, and it's being presented as a big deal that is absolutely essential.
It's a small thing? The effect is weak? This is entirely dependent on the time period and predicated on a presumption that the US cannot suffer a long-term downturn or flat market like Japan and other counties have (i.e. US exceptionalism). I think you mean to say it has historically been a weak or small effect, no?
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Re: John Bogle on International Investing

Post by Robert T »

.
Ken French wrote one of the early papers on home bias - http://www.nber.org/papers/w3609

Here's a Q&A with him on home bias - http://www.dimensional.com/famafrench/v ... -bias.aspx
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Re: John Bogle on International Investing

Post by fourwedge »

stan1 wrote:It comes down to a tradeoff between two risks: diversification and currency. 20 years ago transaction cost could also be claimed as a reason for not investing internationally but today that's no longer true.

Choosing to only invest in the U.S. means you are making a conscious decision that there is a preference for holding U.S. domiciled companies like Exxon Mobil and Chevron over BP and Shell. Why would I choose to invest in only two of those companies? Increased diversification has value. Granted emerging market economies like Russia add some additional risks due to weaker corporate governance and corruption.

For me the right answer is somewhere in the middle between 100% US and world market capitalization. I accept that diversification and currency risks both need to be managed. I've chosen 2/3 domestic and 1/3 international to balance these risks. Analysts can come up with lots of historical data but since there's no way to predict the future there there is never going to be an optimal allocation.

+1 this...Exactly as I do
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Re: John Bogle on International Investing

Post by Browser »

The fate of the Japanese investor following the crash of the Nikkei in 1989 and the protracted bear market is often raised as the exemplar of the undeniable benefits of international diversification. But how much would international diversification have really helped a Japanese investor with a 60% stocks / 40% bond portfolio, rebalanced annually, over a full 30-year accumulation period?

Jim Otar compiled compound portfolio returns over every 30-year historical period for a Japanese investor who either had all his equity allocation in Japanese stocks or held an allocation of 33% Nikkei, 12% S&P 500, 7% FTSE, and 8% SP/TSX. He found that for the top decile of 30-year return periods the internationally diversified portfolio underperformed the all-domestic portfolio by an average of 35%. For the lowest decile of 30-year return periods, the internationally diversified portfolio outperformed the all-domestic portfolio by an average of just 5%.

So in fact, over the entire scope of a 30-year accumulation horizon, international diversification worsened a Japanese investor's returns except during the unlucky periods, and even then didn't dramatically improve investment returns on average. He also studied this from the perspective of a U.S.investor, a UK investor, and a Canadian investor. His conclusion: International diversification has a weak and inconsistent effect on investment returns over the investment horizon in all the situations studied. Like Bogle, he doesn't believe international diversification is necessary and recommends no more than a 20% stake for those who deep down believe in the benefits of diversifying their equity holdings globally.
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Re: John Bogle on International Investing

Post by Angst »

Browser wrote:The fate of the Japanese investor following the crash of the Nikkei in 1989 and the protracted bear market is often raised as the exemplar of the undeniable benefits of international diversification. But how much would international diversification have really helped a Japanese investor with a 60% stocks / 40% bond portfolio, rebalanced annually, over a full 30-year accumulation period?

Jim Otar compiled compound portfolio returns over every 30-year historical period for a Japanese investor who either had all his equity allocation in Japanese stocks or held an allocation of 33% Nikkei, 12% S&P 500, 7% FTSE, and 8% SP/TSX. He found that for the top decile of 30-year return periods the internationally diversified portfolio underperformed the all-domestic portfolio by an average of 35%. For the lowest decile of 30-year return periods, the internationally diversified portfolio outperformed the all-domestic portfolio by an average of just 5%.

So in fact, over the entire scope of a 30-year accumulation horizon, international diversification worsened a Japanese investor's returns except during the unlucky periods, and even then didn't dramatically improve investment returns on average. He also studied this from the perspective of a U.S.investor, a UK investor, and a Canadian investor. His conclusion: International diversification has a weak and inconsistent effect on investment returns over the investment horizon in all the situations studied. Like Bogle, he doesn't believe international diversification is necessary and recommends no more than a 20% stake for those who deep down believe in the benefits of diversifying their equity holdings globally.
I suspect that limiting oneself to 30-year periods is distorting and minimizing the significance of the the years in question, i.e. the lost decades. Consider the graph below and the post/thread associated with it.

Image
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Re: John Bogle on International Investing

Post by Eric76 »

Perhaps my understanding of Mr. Bogle's point of view on this subject is simplistic, but I don't think he has ever said that investors shouldn't have international exposure. He just believes that an S&P 500 index fund gives you plenty of international exposure due to the global reach of the companies in the index.
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Re: John Bogle on International Investing

Post by Angst »

Eric76 wrote:Perhaps my understanding of Mr. Bogle's point of view on this subject is simplistic, but I don't think he has ever said that investors shouldn't have international exposure. He just believes that an S&P 500 index fund gives you plenty of international exposure due to the global reach of the companies in the index.
The rub is that the Nikkei is also full of huge companies with "plenty of international exposure".
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Re: John Bogle on International Investing

Post by heartandsoul »

browser wrote:The fate of the Japanese investor following the crash of the Nikkei in 1989 and the protracted bear market is often raised as the exemplar of the undeniable benefits of international diversification. But how much would international diversification have really helped a Japanese investor with a 60% stocks / 40% bond portfolio, rebalanced annually, over a full 30-year accumulation period?

Jim Otar compiled compound portfolio returns over every 30-year historical period for a Japanese investor who either had all his equity allocation in Japanese stocks or held an allocation of 33% Nikkei, 12% S&P 500, 7% FTSE, and 8% SP/TSX. He found that for the top decile of 30-year return periods the internationally diversified portfolio underperformed the all-domestic portfolio by an average of 35%. For the lowest decile of 30-year return periods, the internationally diversified portfolio outperformed the all-domestic portfolio by an average of just 5%.
If you want a Japanese-based example of how international diversification would have helped then you gotta pick the right period. Forget about 'the lost decade' and cast your research back a bit further;

https://www.globalfinancialdata.com/New ... eturns.doc

World War II devastated the country, and the inflation that followed World War II decimated stock values. Adjusted for inflation, Japanese equities lost over 95% of their value after World War II while bonds and bills lost 99% of their value. On average during the 1940s, equities lost 26% per annum, bonds 35% and bills 33%.
Last edited by heartandsoul on Mon Feb 09, 2015 9:14 am, edited 1 time in total.
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Re: John Bogle on International Investing

Post by Angst »

heartandsoul wrote:
Angst wrote:The fate of the Japanese investor following the crash of the Nikkei in 1989 and the protracted bear market is often raised as the exemplar of the undeniable benefits of international diversification. But how much would international diversification have really helped a Japanese investor with a 60% stocks / 40% bond portfolio, rebalanced annually, over a full 30-year accumulation period?

Jim Otar compiled compound portfolio returns over every 30-year historical period for a Japanese investor who either had all his equity allocation in Japanese stocks or held an allocation of 33% Nikkei, 12% S&P 500, 7% FTSE, and 8% SP/TSX. He found that for the top decile of 30-year return periods the internationally diversified portfolio underperformed the all-domestic portfolio by an average of 35%. For the lowest decile of 30-year return periods, the internationally diversified portfolio outperformed the all-domestic portfolio by an average of just 5%.
If you want a Japanese-based example of how international diversification would have helped then you gotta pick the right period. Forget about 'the lost decade' and cast your research back a bit further;

https://www.globalfinancialdata.com/New ... eturns.doc

World War II devastated the country, and the inflation that followed World War II decimated stock values. Adjusted for inflation, Japanese equities lost over 95% of their value after World War II while bonds and bills lost 99% of their value. On average during the 1940s, equities lost 26% per annum, bonds 35% and bills 33%.
You've edited my quote and Browser's quote to put my name above Browser's words. Please correct your post. Thank you.
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Re: John Bogle on International Investing

Post by gkaplan »

abuss368 wrote:
gkaplan wrote:
stemikger wrote:Everytime the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum, I always want to post this You Tube video but I don't have time to find it. Jack admits, most don't agree with him, but I certainly do. For those who would like to hear John Bogle's views in this You Tube video, here it is.

http://www.youtube.com/watch?v=vMj4sHjF ... FcuZ7hFJ5p
One of the main reasons "the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum" is that you cannot let a week go by without making this tiresome point.
Hi Gordon,

I thought you also avoided international stocks and followed the two fund Jack Bogle portfolio of Total Stock and Total Bond. Did you change.

Best.
You have me mixed up with someone else. I have never avoided international stocks. Just the opposite. Nor have I followed the portfolio to which you refer. I slice and dice and have for years.
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Re: John Bogle on International Investing

Post by Aptenodytes »

nisiprius wrote:To me, the question is "where did the 'everyone needs international stocks' meme come from, who is promoting it, and why?"

Because I believe I can recognize a hard sell when I see it, and the push for international stocks has been disproportionate to the merits of the case. And it started rather suddenly, despite the fact that international stock mutual funds have been available since the 1960s or so.

There is just no good explanation of why, say, Burton Malkiel's would change his recommendation for an investor in his late sixties, from zero international stocks in 1990 to HALF international stocks in 2015. Not when the U.S. share of global cap is actually higher today than it was in 1990.

Yes, there is weak evidence that some international is probably a little helpful, and probably not harmful. But it's weak and the effect is small. It's a small thing that probably isn't very important, and it's being presented as a big deal that is absolutely essential.

My conspiratorial theory is that mutual fund companies think it is beneficial to them to become international, and that they wanted to develop their competence in large-scale international stock transactions... and funded the acquisition of that core competency by creating and marketing international stock funds.
I noticed smart people talking about it around the water cooler in the early 1990s, when the world was going through rapid change -- collapse of Soviet Union, market reforms in China, writing-on-the-wall regarding decline of US economic supremacy. Prior to 1990 "international" meant primarily Western Europe and Japan. The rapid rise of China, along with access to equities there via a stock market, in particular is pretty hard to ignore for people committed to diversification of risk. I would never overweight China, but it doesn't feel right to say that logically I should be out of that market completely. And the US-companies-have-foreign-exposure argument doesn't ring true to me. That doesn't fit my sense of how risk is rewarded in equities -- I think you have to own shares. Could you imagine someone making the argument in reverse -- it is OK to own only international ex-US because those overseas companies have crazy-high exposure to the US market.

I don't buy the conspiracy theory. Mutual funds spin off new sector approaches constantly -- there are hundreds if not thousands of them. Virtually none of them end up as recommended assets in the pantheon of intelligent investment guides. Moreover, I don't think the mutual fund industry as a whole benefits from international funds at all -- if there were no such funds people would just hold more in domestic funds. They are driven to provide funds for competitive reasons, and the logic of competition more or less works, driving the marginal profit low and nudging the consumer surplus higher. The companies offer international funds to protect market share with respect to their competitors, not to gouge consumers.
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Re: John Bogle on International Investing

Post by Browser »

@Angst - thanks for that post. Data on this are hard to find. However, your chart illustrates only the fate of a lump sum investment during one period beginning in 1989. Otar looks at all the 30-year periods with different starting dates; over which there is quite a variation in ending portfolio values. He doesn't present the specific data for each; however, the impact of the Japanese market crash on ending portfolio values would be quite different if the starting date was 1959 vs.1989 for example. In the former instance, an investor would have enjoyed the immense runup in Japanese stocks before incurring the 1989 losses.

The chart also doesn't depict the internal rate of return, which is the portfolio return taking into account annual contributions to one's investment portfolio. For example, an investor starting in 1989 would have lost a relatively small amount because his portfolio size was quite small initially. Then he would have benefited greatly from making annual contributions during years when Japanese stock prices were in the toilet.

Unless you take account of the starting date and the IRR, investment returns can be misleading in terms of an accumulation portfolio. When Otar did this in his compilations, he finds that on average over all 30-year accumulation periods, on average the benefit of international equity diversification for a Japanese investor was far less than you might think looking at the horrible chart you shared.
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Re: John Bogle on International Investing

Post by backpacker »

I invest internationally because local stock markets can have wildly different returns even over long periods of time. I made the following chart using return data from the 2014 Credit Suisse Yearbook. The chart shows the real value (in local currency) of $10,000 invested in 1964 at the end of 2014.

Image

Some takeaways: (1) There was a huge dispersion in returns. A Swedish investor ended the period with 45x as much money as an Italian investor. (2) Japan was not the worst case scenario. Portugal, Austria, and Italy were all worse. (3) Contrary to popular opinion, the US was not even close to having the best performing stock market.
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Re: John Bogle on International Investing

Post by Aptenodytes »

backpacker wrote:I invest internationally because local stock markets can have wildly different returns even over long periods of time. I made the following chart using return data from the 2014 Credit Suisse Yearbook. The chart shows the real value (in local currency) of $10,000 invested in 1964 at the end of 2014.

Image

Some takeaways: (1) There was a huge dispersion in returns. A Swedish investor ended the period with 45x as much money as an Italian investor. (2) Japan was not the worst case scenario. Portugal, Austria, and Italy were all worse. (3) Contrary to popular opinion, the US was not even close to having the best performing stock market.
Thanks -- this graph is highly relevant and interesting. But for the sake of truth in advertising, what is most relevant is not how these various exchanges compared, but how a 100%-US portfolio compared to a global market-cap portfolio. Sweden's outsize gains are going to be offset by Italy's weak performance, and all the outliers are going to have their impacts heavily muted by low market cap.

I think the most compelling reason to invest at global market cap is not to chase the higher returns that are out there, but to get the diversification benefits.
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Re: John Bogle on International Investing

Post by pingo »

It is about philosophy, willingness, need and tolerance for risk. "No international" is what helps John Bogle stay the course. Here, John Bogle resonates with Stemikger, therefore Stemikger is more likely to stay the course.

In this instance, John Bogle does not resonate with me. Were I to follow the suggestion it is less likely that I would stay the course.

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Re: John Bogle on International Investing

Post by backpacker »

Aptenodytes wrote: Thanks -- this graph is highly relevant and interesting. But for the sake of truth in advertising, what is most relevant is not how these various exchanges compared, but how a 100%-US portfolio compared to a global market-cap portfolio.
Glad it's helpful! I agree that if we knew that the US would get similar returns to the global average, as they did over the last 50 years, there would be no need to invest internationally. Problem is, we don't know that any more than those hapless Italian, Austrian, Portuguese, and Japanese investors from 50 years ago. Our market could be one of the big losers of the next 50 years.

My crystal ball doesn't go out that far anyway. :happy
Last edited by backpacker on Mon Feb 09, 2015 2:57 pm, edited 2 times in total.
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Re: John Bogle on International Investing

Post by Browser »

I compared the 30-year portfolio accumulation values over all the 30-year periods from 1972-2014 (14) for the following three allocations, rebalanced annually.

#1: 60% US Stocks (TSM) / 40% Bonds (TBM)
#2: 30% US Stocks (TSM) / 30% EAFE / 40% Bonds (TBM)
#3: 30% US Stocks (TSM) / 30% Total International / 40% Bonds (TBM)

Portfolio 1-3 range from the least diversified globally (all US) to most diversified (US, Developed, and Emerging). I compared the internal rate of return (IRR) and Sharpe ratios for these three allocations assuming that the investor makes equal inflation-adjusted annual contributions to each over the 30-year accumulation periods.

Portfolio 1 had an average annual IRR of 9.8% with average Sharpe of 0.51
Portfolio 2 had an average annual IRR of 9.4% with average Sharpe of 0.49
Portfolio 3 had an average annual IRR of 9.7% with average Sharpe of 0.51

If global diversification had helped then you would expect the IRR and/or risk-adjusted returns to increase as you move from Portfolio 1 to Portfolio 3 (least to most diversified). But, as you can see, for all 30-year accumulation portfolios since 1972, there isn't any meaningful difference in the internal rate of return or risk-adjusted return between the all-US portfolio and globally diversified portfolios with the equity allocation split evenly between domestic and foreign stocks.

In fact, diversifying by adding EAFE actually diminished both the internal rate of return and risk-adjusted returns to a small degree. There was not a single period in which adding EAFE produced either a higher IRR or Sharpe ratio. Increasing diversification by adding Emerging Markets didn't improve either the internal rate of return or risk-adjusted return over being completely invested in US stocks.

As compelling as the case might be for global diversification, it's very difficult to "prove" with historical data that global diversification has helped US investors. Since the data are not compelling, we're left with opinions and one person's is as good as another's on this topic so we'll just keep debating it forever.
Last edited by Browser on Mon Feb 09, 2015 4:14 pm, edited 1 time in total.
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Re: John Bogle on International Investing

Post by abuss368 »

gkaplan wrote:
abuss368 wrote:
gkaplan wrote:
stemikger wrote:Everytime the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum, I always want to post this You Tube video but I don't have time to find it. Jack admits, most don't agree with him, but I certainly do. For those who would like to hear John Bogle's views in this You Tube video, here it is.

http://www.youtube.com/watch?v=vMj4sHjF ... FcuZ7hFJ5p
One of the main reasons "the subject of international investing comes around which it has been a few thousand times since I have been visiting this forum" is that you cannot let a week go by without making this tiresome point.
Hi Gordon,

I thought you also avoided international stocks and followed the two fund Jack Bogle portfolio of Total Stock and Total Bond. Did you change.

Best.
You have me mixed up with someone else. I have never avoided international stocks. Just the opposite. Nor have I followed the portfolio to which you refer. I slice and dice and have for years.
Hi Gordon,

Makes sense. Thank you for clearing that up.

Best.
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Re: John Bogle on International Investing

Post by abuss368 »

I think it is going to be interesting going forward regarding the subject of international bonds. I am aware of Jack Bogle and David Swensen's thoughts on the subject (even Warren Buffett), however, with Vanguard marketing this investment, I would expect more investors may allocate a percentage of their portfolio to this asset class.
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Re: John Bogle on International Investing

Post by JoMoney »

Despite the expenses being reduced in recent times, the costs of international investing are still higher. The costs extend beyond expense ratios of a mutual fund and there are more hidden expenses in things like taxes, higher brokerage fees, market spreads, and fees for various banks to hold and account for the depository receipts - something which raises questions about what legal rights an International investor actually has in regards to "ownership" and what is it they actually own (the conditions can vary quite a bit), and how those rights are protected (if at all).
There was a time when standards for what a prudent investment was relied heavily on judgement of what a reasonable person might assume are riskier companies, which inevitably led to very heavy investment by institutions in the same large prominent companies and probably aided home country preferences as well. In more recent times the standards shifted to lean on "diversification" as the standard in risk management, and for some to believe that further and further diversification is always less risky.
I think there are problems with both styles of trying to manage portfolio risk, my beliefs are somewhere in the middle, but I just don't believe that adding the additional risks that come with international to a portfolio serves to further reduce the risks a U.S. investors portfolio is exposed to, nor does it reduce the costs.
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Re: John Bogle on International Investing

Post by dnaumov »

The notion that adding international stocks to a US-only portfolio INCREASES risk instead of decreasing it is patently absurd.

"I am in this one great stock and it's been going up for many decades, over a century, in fact. It's also been less volatile than most other stocks and has performed better than average. The earnings of this company are also widely diversified across several industry sectors and various continents across the world. Why would I increase my risk by buying some other stocks for my portfolio"

Yes, you look THAT silly.
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Re: John Bogle on International Investing

Post by Browser »

In case anyone is interested, I ran the same analysis as above for decumulation portfolios, in which the investor is taking annual withdrawals instead of making annual contributions. I compared the same three portfolios with a 60% stock and 40% bond allocation, wherein the stock allocation was 60% US, 30% US / 30% EAFE, or 30% US / 30% Total International. The results for the 14 30-year periods during the 1972-2014 time period based on the "4% rule" were quite similar to the results for accumulation portfolios.

Specifically, the average residual value of the 30-year decumulation portfolios were all within 10% of one another, with the 30% US / 30% Total International portfolio having the highest residual value and the 30% US/30% EAFE portfolio having the lowest residual value. The average maximum drawdown for each of the portfolios over the 30-year periods were 24.3% for the all US portfolio, 24.7% for the US / Total International portfolio, and 24.9% for the US / EAFE portfolio. The average Sharpe ratios were .51 for the US and the US / Total International portfolios, and .49 for the US / EAFE portfolio. The bottom line is that there wasn't a meaningful difference in the performance of decumulation portfolios related to global equity diversification. The maximum drawdowns and risk-adjusted returns were virtually the same on average.

There was a slightly higher average residual value for the US / Total International portfolio, which was the most diversified portfolio. However, the least diversified portfolio with 60% US stocks had a higher average residual value than the US/EAFE allocation. So this result is not directly attributable to global diversification, per se; otherwise the US/EAFE allocation would have a higher average residual value than the US-only portfolio because it is more globally diversified.

The explanation is that the returns of US and Emerging Market stocks tended to be slightly lower than the correlation between the returns of US stocks and EAFE stocks during the period of time involved. Consequently, when EM stocks are added to US Stocks by including Total International, the Standard Deviation of annual returns is slightly smaller on average compared to the SD of US stocks alone or to US + EAFE. In a decumulation portfolio lower portfolio volatility, all other things being equal, will lead to higher residual portfolio values. It is really the slightly lower correlation of EM stocks to US stocks that directly explains the results, rather than global diversification.
Last edited by Browser on Tue Feb 10, 2015 8:41 am, edited 1 time in total.
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Re: John Bogle on International Investing

Post by Noobvestor »

Browser wrote:As compelling as the case might be for global diversification, it's very difficult to "prove" with historical data that global diversification has helped US investors. Since the data are not compelling, we're left with opinions and one person's is as good as another's on this topic so we'll just keep debating it forever.
While true, this misses the point entirely ... I don't care if you can prove that global diversification did (or didn't) help US investors historically, I care if (1) you can prove there's a reason not to invest internationally going forward, and/or (2) you can prove the US is a unique case that will remain special and different from other national markets indefinitely.

It always circles back to the same two issues: (1) assuming that just because international diversification didn't do that much in the past overall in aggregate when you cherry-pick a particular and long period and/or (2) assuming that the US is an exceptional case and can't lag other countries long-term, which is demonstrably false.

Anyone who really wants to dig into the data should be doing two things (1) considering a huge range of time periods, not just the last X years, and (2) considering a huge range of countries, not just the United States. Otherwise they need to just come out and say: I'm basing my home bias based on the last X years and based on my belief that the US is exceptional.

That, or we could take Boglehead philosophy and apply it - when in doubt, diversify. Or as Ken French noted in the link Robert provided above: Ken says the best approach is to start with a global market portfolio, then make adjustments based on personal preference. . The biggest mistake people make is 'starting' with a US portfolio and 'adding' international. The onus is on US-only investors to demonstrate why they would so radically tilt away from the global market when it provides low-cost geographical, political, economic and company diversification.

Further reading: http://www.bogleheads.org/forum/viewtopic.php?t=82254
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Re: John Bogle on International Investing

Post by JoMoney »

dnaumov wrote:The notion that adding international stocks to a US-only portfolio INCREASES risk instead of decreasing it is patently absurd.

"I am in this one great stock and it's been going up for many decades, over a century, in fact. It's also been less volatile than most other stocks and has performed better than average. The earnings of this company are also widely diversified across several industry sectors and various continents across the world. Why would I increase my risk by buying some other stocks for my portfolio"

Yes, you look THAT silly.
Maybe... It's certainly not a popular view, especially on this board.
I don't mind looking silly to what is perhaps a more contemporary view of "risk" and how best to manage it, there's a lot of ideas out there that look pretty silly to me.
As far as I can tell, the purported benefits of International repeatedly fail the quantitative risk measurements that are so often used by those selling it. They also look worse by most qualitative standards, the funds have legal disclosure statements regarding the various additional risks one assumes when buying them, the stuff sold as "emerging markets" would be viewed as "more risky" by most any reasonable idea ... and yet people want to claim that it reduces my risk to own more of that (and commensurately less of something that most would say is "less risky"). I think diversification is important and useful, but sometimes people take a good idea too far.
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Re: John Bogle on International Investing

Post by dnaumov »

Noobvestor wrote:
Browser wrote:As compelling as the case might be for global diversification, it's very difficult to "prove" with historical data that global diversification has helped US investors. Since the data are not compelling, we're left with opinions and one person's is as good as another's on this topic so we'll just keep debating it forever.
While true, this misses the point entirely ... I don't care if you can prove that global diversification did (or didn't) help US investors historically, I care if (1) you can prove there's a reason not to invest internationally going forward, and/or (2) you can prove the US is a unique case that will remain special and different from other national markets indefinitely.

It always circles back to the same two issues: (1) assuming that just because international diversification didn't do that much in the past overall in aggregate when you cherry-pick a particular and long period and/or (2) assuming that the US is an exceptional case and can't lag other countries long-term, which is demonstrably false.

Anyone who really wants to dig into the data should be doing two things (1) considering a huge range of time periods, not just the last X years, and (2) considering a huge range of countries, not just the United States. Otherwise they need to just come out and say: I'm basing my home bias based on the last X years and based on my belief that the US is exceptional.

That, or we could take Boglehead philosophy and apply it - when in doubt, diversify. Or as Ken French noted in the link Robert provided above: Ken says the best approach is to start with a global market portfolio, then make adjustments based on personal preference. . The biggest mistake people make is 'starting' with a US portfolio and 'adding' international. The onus is on US-only investors to demonstrate why they would so radically tilt away from the global market when it provides low-cost geographical, political, economic and company diversification.

Further reading: http://www.bogleheads.org/forum/viewtopic.php?t=82254
You've summed up my thoughts pretty much perfectly.
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Re: John Bogle on International Investing

Post by heartandsoul »

JoMoney wrote: the stuff sold as "emerging markets" would be viewed as "more risky" by most any reasonable idea ... and yet people want to claim that it reduces my risk to own more of that (and commensurately less of something that most would say is "less risky"). I think diversification is important and useful, but sometimes people take a good idea too far.
Remember that risk is not measured in isolation but as part of a portfolio. In the same way that inclusion of individually risky small caps can reduce risk for a diversified domestic portfolio so the inclusion of risky markets can reduce risk for an international portfolio.
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Re: John Bogle on International Investing

Post by dnaumov »

A lot of people seem stuck up on the idea of historical volatility being equal to risk for some reason
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Re: John Bogle on International Investing

Post by JoMoney »

heartandsoul wrote:
JoMoney wrote: the stuff sold as "emerging markets" would be viewed as "more risky" by most any reasonable idea ... and yet people want to claim that it reduces my risk to own more of that (and commensurately less of something that most would say is "less risky"). I think diversification is important and useful, but sometimes people take a good idea too far.
Remember that risk is not measured in isolation but as part of a portfolio. In the same way that inclusion of individually risky small caps can reduce risk for a diversified domestic portfolio so the inclusion of risky markets can reduce risk for an international portfolio.
Maybe... but the rationale behind that relies on acceptance of the mean-variance/Modern Portfolio Theory/CAPM theories, which have had quite a few holes poked in them.
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Re: John Bogle on International Investing

Post by Angst »

Thank you Browser for your reply above to my post (far above actually). I appreciate your examples and it all makes me think and gives me pause, which is healthy. The 30-yr time-frame still bothers me though. I'm concerned about the possibility that today, or any given point in time, is potentially the cusp of a "lost decade" (or two) which will also encompass my future retirement date. I can't see a 50-something year-old Japanese investor circa 1986 not being a whole lot better off at that point in time holding a good portion of non-Japanese equity. As Noobvestor alludes to above, it's from this moment on that he's most concerned with, i.e. the present, and so am I. If today could be (not predicting anything here at all of course) our "1986", I would not want to be 100% US equity, any 30-year retrospectives notwithstanding.
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Re: John Bogle on International Investing

Post by Browser »

Noob - I think the argument in favor of global investing always comes down to the one you presented. Essentially, "since we can't show that it hurts" then we should do it because, well, it improves diversification right? And more diversification is always a good thing. Let's ignore for the moment that historical data suggests that global investing doesn't actually add useful diversification for US investors. If it did, then adding EAFE to US stocks in your portfolio should improve absolute returns, risk-adjusted returns, drawdowns, volatility, or something useful - but it doesn't and hasn't except during short periods of relatively random variability.

To play Devil's Advocate, since historical data seem to be ambiguous on the issue and you've presented no hard evidence to refute that, then it's just as logical to suggest not diversifying globally isn't it? Do we act on the basis of past experience or supposition? Why in the absence of tangible evidence would you choose to do something that requires time, trouble, and taking additional risk? Well, it comes down to a debate doesn't it? And when it comes down to a debate, Jim Barksdale once said "If we have data, let's look at the data, but if all we have are opinions let's go with mine." I'm sort of in the Bogle camp on this one -- Iet's go with his.
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Re: John Bogle on International Investing

Post by randomguy »

Browser wrote:Noob - I think the argument in favor of global investing always comes down to the one you presented. Essentially, "since we can't show that it hurts" then we should do it because, well, it improves diversification right? And more diversification is always a good thing. Let's ignore for the moment that historical data suggests that global investing doesn't actually add useful diversification. If it did, then adding EAFE to US stocks in your portfolio should improve absolute returns, risk-adjusted returns, drawdowns, volatility, or something useful - but it doesn't and hasn't except during short periods of relatively insignificant random variation (probably related to currency fluctuations and nothing else).

To play Devil's Advocate, since historical data seem to be ambiguous on the issue and you've presented no hard evidence to refute that, then it's just as logical to suggest not diversifying globally isn't it? Do we act on the basis of past experience or supposition? Unless you have hard evidence that doing something is actually worthwhile then why take the time, trouble, and risk to do it? Well, it comes down to a debate doesn't it? And when it comes down to a debate, someone once wisely said "If we have data, let's look at the data, but if all we have are opinions let's go with mine." I'm sort of in the Bogle camp on this one -- Iet's go with his.
You realize that quote is just saying that the guy thinks his opinion is more valuable than yours.

To some extent it all comes down to you data set. Take the japanese investor or the european investor. It is pretty clear that they benefited from international diversification (i.e. buying the US) over the past 100 years (and the US investor sure did in the 70s). But yeah to a certain extent if you pick the winner, then diversifying hurts. The questions is will the last 100 years winner continue (fundamental advantages) or will their been mean reversion (I am guessing UK stocks in the 1800s did very well. Did that project forward for the next century?).

Would you be willing to make the same assumption about the other stock markets that have outperformed the US over the past 100 years. How much money are you willing to dump into Australian and South African stocks given they have been the US for the last 100 years.
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Re: John Bogle on International Investing

Post by Noobvestor »

Browser wrote:Noob - I think the argument in favor of global investing always comes down to the one you presented. Essentially, "since we can't show that it hurts" then we should do it because, well, it improves diversification right? And more diversification is always a good thing. Let's ignore for the moment that historical data suggests that global investing doesn't actually add useful diversification for US investors. If it did, then adding EAFE to US stocks in your portfolio should improve absolute returns, risk-adjusted returns, drawdowns, volatility, or something useful - but it doesn't and hasn't except during short periods of relatively random variability.
There is a tacit assumption in your argument that the US is exceptional - otherwise why would you focus on US investors holding international and ignore other countries' investors holding domestic versus international? So let's get that on the table: you believe the US is an exceptional case, correct? That it is somehow a unique player in the market? If you agree: can you elaborate on that? Is it a free lunch? Both why you believe it will persist and what form it takes would be helpful information.

What I find curious about US exceptionalism is that its proponents don't also pursue individual stock or sector exceptionalism. It seems to me a slippery slope - once we grant that we 'know' a country is 'better' than others, why not an industry or a corporation? I suspect I could find a sector that performed similarly to the US total market or S&P 500 over most 30-year periods ... but would that 'prove' I should limit myself to investing in that sector? I think not - the default should be the total and global market - it's not about having good reasons to 'add' international but about having good reasons to 'subtract' it.
Browser wrote:To play Devil's Advocate, since historical data seem to be ambiguous on the issue and you've presented no hard evidence to refute that, then it's just as logical to suggest not diversifying globally isn't it? Do we act on the basis of past experience or supposition? Why in the absence of tangible evidence would you choose to do something that requires time, trouble, and taking additional risk? Well, it comes down to a debate doesn't it? And when it comes down to a debate, Jim Barksdale once said "If we have data, let's look at the data, but if all we have are opinions let's go with mine." I'm sort of in the Bogle camp on this one -- Iet's go with his.
It's not ambiguous, it just happens to be that over a particularly limited set of periods (why not make it 20-year periods and see what happens? or break out results instead of averages?) and in a particular country (why not try the same experiment for a few other countries?) it didn't matter too much for a US investor if they had international or not. You can find plenty of countries and periods where it did matter if you look. You make it sound like you just looked at the data and the answer was 'it didn't matter' - in reality, you looked at a very small subset of available data and drew a much broader conclusion than that subset warranted. I'd also point out that international investing does not involve additional time, trouble or risk that I can see.

Imagine you were arguing this case from another country. If you happened to be in a country where adding international underperformed over a series of recent 30-year periods, would you then conclude that diversifying internationally was bad? Conversely, if you happened to be in a country where international outperformed, would you then conclude international diversification was good? Or, again, is the US exceptional in some way such that this analysis should be different and unique for us?

Did you read the response to Nis I made in the post I linked? It addresses exactly the same issue - picking out the last three decades or so of US vs. ex-US and focusing exclusively on them, not periods within or beyond them, or countries other than the US. Here, let me link to the exact post I'm talking about within the thread: http://www.bogleheads.org/forum/viewtop ... 7#p1176507 ... meanwhile, there are plenty of periods with pretty big and long divergences that I wouldn't care to be stuck on either side of: viewtopic.php?p=2234305#p2234305
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Re: John Bogle on International Investing

Post by Noobvestor »

JoMoney wrote:As far as I can tell, the purported benefits of International repeatedly fail the quantitative risk measurements that are so often used by those selling it. They also look worse by most qualitative standards, the funds have legal disclosure statements regarding the various additional risks one assumes when buying them, the stuff sold as "emerging markets" would be viewed as "more risky" by most any reasonable idea ... and yet people want to claim that it reduces my risk to own more of that (and commensurately less of something that most would say is "less risky"). I think diversification is important and useful, but sometimes people take a good idea too far.
There are different types of risk. One sector may be deemed less risky than another but I don't skip the latter for the former. Then there is the question of risk versus reward - the tacit assumptions you are making is that the market isn't pricing in the unique and different risks of emerging markets (so we know better and are more rational than the market) and that exposure to these additional risks is thus bad. I would argue that the market does know what geographic, political and economic risks are out there, prices them in, and that having exposure to different types of risks is good for a diversified portfolio. I say the more types of risk the less chance that any one type of risk will sink my portfolio and the more chance I have for different shots at reward.

Are emerging markets riskier on the whole? Probably. Should that risk be rewarded? Probably. If you don't like those particular risks but do like others, how do you pick and choose? Why stop with emerging markets? Why not skip risky sectors? Why not just pick less-risky stocks? Small and value are risky. Why not just hold large growth?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
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