John Bogle on International Investing

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Re: John Bogle on International Investing

Post by abuss368 » Fri Feb 13, 2015 10:51 pm

I enjoyed the chapters in Jack Bogle's many books regarding international investing that provided support that over time the return from currency fluctuations equate to zero.
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Re: John Bogle on International Investing

Post by Browser » Sat Feb 14, 2015 11:15 am

Here's the "Currency Risk 101" version. Currency risk, aka currency conversion risk, aka exchange rate risk occurs whenever an entity converts Currency A into Currency B and then back to Currency A. The risk is that the exchange rate will change between the first transaction and the second transaction. If Currency A becomes stronger vs. Currency B, then you'll end up with less of Currency A if nothing else has changed, and vice versa. Please remember this: it will be on the next pop quiz.

Recently, the USD has strenthened against many foreign currencies, and US investors in foreign stock funds have lost dollars due to currency risk. These losses have subtracted from any gains that might have otherwise occurred. The investor didn't have a choice in the matter unless he invested in a currency-hedged fund. Non-hedged funds do the currency conversion and reconversion implicitly by taking your money in USD, investing it in foreign-denominated securities (which requires conversion), and giving it back to you in USD (which requires reconversion).

The bottom line is this: if you eventually end up spending your money in USD for consumption, then any unhedged transactions that you conduct involving foreign assets will entail the currency conversion-reconversion process, directly or indirectly, which entails currency risk. There are complex ways to avoid or minimize currency risk, called currency hedging. Currency hedging is not a DIY operation and would entail considerable overhead expense for an individual. Foreign stock funds that incorporate currency hedging have an extra layer of expense in order to conduct these operations. Do not run out and add more foreign stocks to your portfolio because you think that is the same thing as currency hedging. It is not.
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Re: John Bogle on International Investing

Post by backpacker » Sat Feb 14, 2015 11:46 am

Browser wrote: Do not run out and add more foreign stocks to your portfolio because you think that is the same thing as currency hedging. It is not.
I'm planning a $5,000 CAD vacation to Canada in twelve months. Given current exchange rates, that's $4,000 USD. Why can't I hedge the risk that CAD goes up by buying $4,000 USD of Canadian stock?

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Re: John Bogle on International Investing

Post by Browser » Sat Feb 14, 2015 12:13 pm

backpacker wrote:
Browser wrote: Do not run out and add more foreign stocks to your portfolio because you think that is the same thing as currency hedging. It is not.
I'm planning a $5,000 CAD vacation to Canada in twelve months. Given current exchange rates, that's $4,000 USD. Why can't I hedge the risk that CAD goes up (increasing the cost of my vacation) by buying $4,000 USD of Canadian stock right now?
Why don't you go to your bank and convert $4000 USD into $5000 CAD right now? I used to do stuff like that when I worked in the CIBC in Toronto, because I could purchase Travellers Cheques in various currency denominations without charge. It might be more difficult, but maybe you could open a Canadian savings account or purchase a 12-month Canadian CD with $4,000 USD and earn some paltry interest until to go on your trip. Of course, you run the risk that the CAD/USD exchange rate will fall even further and you could have done better by waiting, so that isn't really hedging -- it's speculating. Currency hedging is intended to minimize the impact of any future changes in the exchange rate that on the value of your holdings denominated in the base currency (USD in this case). In your case, you intend to spend the money in Canada in CAD so you have no currency conversion risk, per se, since you're presumably spending the money in Canada and not going to reconvert back to USD.
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Re: John Bogle on International Investing

Post by backpacker » Sat Feb 14, 2015 1:05 pm

Browser wrote:
backpacker wrote:
Browser wrote: Do not run out and add more foreign stocks to your portfolio because you think that is the same thing as currency hedging. It is not.
I'm planning a $5,000 CAD vacation to Canada in twelve months. Given current exchange rates, that's $4,000 USD. Why can't I hedge the risk that CAD goes up (increasing the cost of my vacation) by buying $4,000 USD of Canadian stock right now?
Why don't you go to your bank and convert $4000 USD into $5000 CAD right now? [...] Of course, you run the risk that the CAD/USD exchange rate will fall even further and you could have done better by waiting, so that isn't really hedging -- it's speculating.
Ah, sure. Let's go with a straight cash exchange. :happy

I know my trip will cost $5,000 CAD. If I convert now, I know the trip will cost $4,000 USD. If I wait to covert, the trip could cost $3,000 USD (if the looney goes down) or $5,000 USD (if the looney goes up). The cost of the trip is uncertain if I wait but not if I convert now. Converting now eliminates that risk. Buying $4,000 USD in Canadian stock right now does essentially the same thing.

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Re: John Bogle on International Investing

Post by Browser » Sat Feb 14, 2015 2:11 pm

If you buy Canadian stock with USD, there would be a conversion into CAD at time of purchase. If the Canadian stock is held in an account where it can be liquidated in CAD and then you are spending the cash proceeds in CAD (not reconverting back to USD), it is a similar transaction to "buying" cash, CDs, or opening a savings account denominated in CAD with USD. The difference would be that you don't know what will happen to the price of the Canadian stock before you liquidate it. So you've added market risk to the equation. Not really the same thing as converting USD to cash, CDs, or savings accounts denominated in CAD.
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Re: John Bogle on International Investing

Post by swaption » Sat Feb 14, 2015 2:35 pm

Browser,

Thanks for the currency 101. i must say, a bit taken aback by the pretentiousness. We are not talking rocket science here. If the value of the dollar declines against other currencies, then the cost in dollars of imported goods goes up. These are not just finished products like cars or televisions, but also factors in the production of other goods, which could even be as basic as raw materials or commodities. At the end of the day, the common assumption is that it is inflationary in some form. Any confusion or debate here?

But the strength in other currencies would improve your dollar returns on international equities or other investments. The assumption is that to some extent this might offset the inflationary pressure due to the dollar weakness. Really, not much more complicated than that.

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Re: John Bogle on International Investing

Post by backpacker » Sat Feb 14, 2015 2:39 pm

Browser wrote:If you buy Canadian stock with USD, there would be a conversion into CAD at time of purchase. If the Canadian stock is held in an account where it can be liquidated in CAD and then you are spending the cash proceeds in CAD (not reconverting back to USD), it is a similar transaction to "buying" cash, CDs, or opening a savings account denominated in CAD with USD. The difference would be that you don't know what will happen to the price of the Canadian stock before you liquidate it. So you've added market risk to the equation. Not really the same thing as converting USD to cash, CDs, or savings accounts denominated in CAD.
Right. The idea is that this market risk is a good thing if you're a US investor. Say I'm planning my trip to Canada. If I sell $4,000 USD in US stock and use the money to buy Canadian stock, I'll have both (a) eliminated the currency risk of my planned vacation and (b) traded US equity risk for Canadian equity risk, thus adding diversification.

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Re: John Bogle on International Investing

Post by Browser » Sat Feb 14, 2015 2:49 pm

swaption wrote:Browser,

Thanks for the currency 101. i must say, a bit taken aback by the pretentiousness. We are not talking rocket science here. If the value of the dollar declines against other currencies, then the cost in dollars of imported goods goes up. These are not just finished products like cars or televisions, but also factors in the production of other goods, which could even be as basic as raw materials or commodities. At the end of the day, the common assumption is that it is inflationary in some form. Any confusion or debate here?

But the strength in other currencies would improve your dollar returns on international equities or other investments. The assumption is that to some extent this might offset the inflationary pressure due to the dollar weakness. Really, not much more complicated than that.
Sorry for the pretentiousness. I was just a little frustrated that I wasn't getting through about the meaning of currency, or currency conversion risk as it pertains to investments. No confusion about what you're saying about how the cost of imported goods might be affected by currency movements, but that is another topic and I don't believe it should be conflated with investment currency risk, which is what I thought was what we were talking about. Currency 102 deals with currencies and foreign trade...
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Re: John Bogle on International Investing

Post by swaption » Sat Feb 14, 2015 3:12 pm

Browser wrote:No confusion about what you're saying about how the cost of imported goods might be affected by currency movements, but that is another topic and I don't believe it should be conflated with investment currency risk, which is what I thought was what we were talking about.
No, it is the same thing. On one side you have risk, on the other side you have reward. Recently, the currency dynamic has been a negative for international investments. But just looking at one very basic import, oil for example, there has been an inflationary benefit. Put simply, a discussion about currency reward is also a discussion about currency risk.

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Re: John Bogle on International Investing

Post by Browser » Sat Feb 14, 2015 3:28 pm

backpacker wrote:
Browser wrote:If you buy Canadian stock with USD, there would be a conversion into CAD at time of purchase. If the Canadian stock is held in an account where it can be liquidated in CAD and then you are spending the cash proceeds in CAD (not reconverting back to USD), it is a similar transaction to "buying" cash, CDs, or opening a savings account denominated in CAD with USD. The difference would be that you don't know what will happen to the price of the Canadian stock before you liquidate it. So you've added market risk to the equation. Not really the same thing as converting USD to cash, CDs, or savings accounts denominated in CAD.
Right. The idea is that this market risk is a good thing if you're a US investor. Say I'm planning my trip to Canada. If I sell $4,000 USD in US stock and use the money to buy Canadian stock, I'll have both (a) eliminated the currency risk of my planned vacation and (b) traded US equity risk for Canadian equity risk, thus adding diversification.
Let me see if I have this straight. You feel that buying a Canadian stock ETF would be a good idea because it diversifies your equity risk, and you think it would be an even better idea because you're travelling to Canada in a year and you believe it will also eliminate the currency risk associated with that trip? Is this something you would propose to your customers if you were a travel agent? Anyone planning a trip to a particular country in a few months should buy a country-specific stock ETF which they can then liquidate later at the time of their trip in order to pay the expenses for that trip? This is a novel approach.
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Re: John Bogle on International Investing

Post by Browser » Sat Feb 14, 2015 3:43 pm

swaption wrote:
Browser wrote:No confusion about what you're saying about how the cost of imported goods might be affected by currency movements, but that is another topic and I don't believe it should be conflated with investment currency risk, which is what I thought was what we were talking about.
No, it is the same thing. On one side you have risk, on the other side you have reward. Recently, the currency dynamic has been a negative for international investments. But just looking at one very basic import, oil for example, there has been an inflationary benefit. Put simply, a discussion about currency reward is also a discussion about currency risk.
All I can do is say that it's not the same thing. Check back to my 101 post, where I defined currency, or currency conversion, risk and tell me where I mentioned anything about exports and imports. Currency risk only involves the risks associated with converting from assets denominated in one currency to assets denominated in another currency and then back to assets denominated in the initial (base) currency. That's it. It's really simple. Way back somewhere in this thread, it was mentioned that investing in foreign securities adds currency risk to one's USD returns. That is absolutely true. It is an extra risk with no expected reward, which anybody who invests internationally has to accept as part of the deal. They may believe that it's an acceptable risk because there may be benefits to international investment, such as greater diversification, the possibility of offsetting rising costs of imported goods with higher investment returns, etc. But these factors are completely distinct from currency risk. I appreciate the opportunity to clarify my own thinking about these matters in this discussion. I think I have a better understanding of currency risk than I did, even if nobody else does...
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Re: John Bogle on International Investing

Post by Noobvestor » Sat Feb 14, 2015 3:49 pm

Index Fan wrote:
Noobvestor wrote:They say diversification is the only free lunch - that's a big part of being a Boglehead - you're saying being less diversified is a free lunch. I just don't get it.

This board really needs an 'up vote' function. +1, Noobvestor!
Thanks, Index Fan - appreciate it!

:sharebeer
Browser wrote:Noob - not claiming a free lunch from being a US-centric investor; only lower major risks along several important dimensions than provided by foreign economies in general. If that means accepting lower expected returns, that's OK with me. The theory that you can invest in a grab bag of different countries and cancel out the generally higher geopolitical and economic risks that are embedded in those investments has a little bit of the scent of the subprime mortgage theory -- that you could pool a bunch of riskier securities and somehow the resulting product has lower risk. But we found out that at some point there's a limit to that, and you need to disassemble these things and take a look under the hood.
The analogy fails pretty fast. You're talking about junk-rated entities being intentionally mispriced by lying participants within a given segment of the economy. The scope is more limited, the parties different in scale and nature and the list goes on. But thanks for bringing that up, because if anything, you have just shown that ours (the 'best in the world!') is a flawed system and that bad things can happen here despite all our regulations, ultimately undermining your central point about US safety. And speaking of ratings and scale, if we're going to go based on government ratings, surprise, the United States is not even in the top ten, so why are you ignoring the rest of the better-rated ones? http://en.wikipedia.org/wiki/List_of_co ... dit_rating
Browser wrote:Yes indeed, the US might fall apart and it probably will go the way of all empires. But I'm not counting on that happening while I'm still around, although it could. I figure if the US were to go rotten within the next 2-3 decades I'll have a lot more problems than a having diversified into an international grab bag of stocks will be able to solve. [End of Rant]
As another poster aptly noted: that is precisely the kind of thinking that happens before the unthinkable changes it forever. Before the last crash, real estate was set to be a great investment forever ... then suddenly it wasn't. The point is to be cognizant of the limitations of our own thinking and diversify risks we may not even fully understand let alone know to expect (Black Swans).

I'll close with a favorite quote of mine from Bill Bernstein: "A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years .... So live a little, and enjoy your money, for tomorrow we may be consumed by the ghosts of Hitler, Lenin, and Attila the Hun."

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Re: John Bogle on International Investing

Post by JoMoney » Sat Feb 14, 2015 4:01 pm

Generally, currency risk is something that's pretty low on my list of risks with International. It's something that moves up and down so it has a standard deviation and numbers that people can play with and give discussions something more substantial to talk about... But is there anyone out there that argues that it's something other than a long-term zero-sum proposition? Does anyone believe there is value created from strictly trading currencies? Some people believe that anything that fluctuates and isn't perfectly correlated provides a benefit to stocks even if the holding has no return, I don't buy it, but whether or not there is a uncorrelated return that mystically creates value out of vibrations of the ether is another argument.
Sovereign risk on the other hand is another matter. I think there's some serious concerns there especially with the situation in the Euro, and concerns about if it will stay intact and what the fallout will be if it doesn't.
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Re: John Bogle on International Investing

Post by Browser » Sat Feb 14, 2015 4:30 pm

JoMoney wrote:Generally, currency risk is something that's pretty low on my list of risks with International. It's something that moves up and down so it has a standard deviation and numbers that people can play with and give discussions something more substantial to talk about... But is there anyone out there that argues that it's something other than a long-term zero-sum proposition? Does anyone believe there is value created from strictly trading currencies? Some people believe that anything that fluctuates and isn't perfectly correlated provides a benefit to stocks even if the holding has no return, I don't buy it, but whether or not there is a uncorrelated return that mystically creates value out of vibrations of the ether is another argument.
Sovereign risk on the other hand is another matter. I think there's some serious concerns there especially with the situation in the Euro, and concerns about if it will stay intact and what the fallout will be if it doesn't.
I believe that knowlegeable financial types have said that over the long run, changes in exchange rates pretty much work out as zero-sum. But it's not correct to infer that currency fluctuations are costless. They represent an uncompensated risk -- i.e., one with no expected reward. MPT teaches us that uncompensated risks are usually "bad" risks to take because they add to aggregate risk while not improving returns; they lower risk-adjusted returns and are inefficient. For example, for the period 1972-2014 the risk adjusted return from investing in the EAFE index and the Total International Index are both lower than that for the S&P 500. One could argue that one reason for this is the drag on risk-adjusted returns provided by currency risk.

In the absence of some expectation that one's overall risk profile is improved in spite of assuming currency risk, it should not be taken. Bogle, for example, agrees with you. He doesn't think that the argument for the "mythical" diversification benefit of foreign investing is very compelling. I also have shown that looking at returns since 1972, if anything you were better off just investing in the US -- but that is obviously subject to the criticism that the last 43 years of data are simply one snapshot of what could have happened and won't be repeated in the future. Bogle also assets that one is assuming more geopolitical, sovereign, and other risks by investing outside the US. For him, therefore, assuming currency risk is net-net a negative. But obviously people disagree about this.
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Re: John Bogle on International Investing

Post by backpacker » Sat Feb 14, 2015 5:23 pm

Browser wrote: Let me see if I have this straight. You feel that buying a Canadian stock ETF would be a good idea because it diversifies your equity risk, and you think it would be an even better idea because you're travelling to Canada in a year and you believe it will also eliminate the currency risk associated with that trip? Is this something you would propose to your customers if you were a travel agent? Anyone planning a trip to a particular country in a few months should buy a country-specific stock ETF which they can then liquidate later at the time of their trip in order to pay the expenses for that trip? This is a novel approach.
That's the idea. :happy

Most investors (including me) have more international stock than they would need if they were only hedging future international purchases. So when most investors take international trips, there's no need to buy foreign currency ahead of time or buy yet more international stock.

The main point I was trying to make earlier is that foreign travel isn't the only kind of international expense. All the imported merchandise I plan to buy in the future is like taking a trip to Canada. If international currency goes up, it will be more expensive in USD. If international currency goes down, it will be less expensive in USD. Converting USD to foreign currency now (by buying international stocks) eliminates this risk. And gives an investor extra diversification to boot.
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Re: John Bogle on International Investing

Post by backpacker » Sat Feb 14, 2015 5:32 pm

JoMoney wrote:Generally, currency risk is something that's pretty low on my list of risks with International. [...] Sovereign risk on the other hand is another matter. I think there's some serious concerns there especially with the situation in the Euro, and concerns about if it will stay intact and what the fallout will be if it doesn't.
Yes. Worrying about currency risk when picking a portfolio is a bit like worrying about the mosquitos when you're being chased by a bear. Yes, they're something to think about, but really? This is all great fun to argue about though. :D

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Re: John Bogle on International Investing

Post by investorguy1 » Sat Feb 14, 2015 9:27 pm

I draw the opposite conclusion from Bogle's point. The fact that we earn US dollars, spend US dollars retire with US dollars etc. means we need more diversification not less.

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Re: John Bogle on International Investing

Post by Browser » Sun Feb 15, 2015 11:03 am

Investerguy wrote:I draw the opposite conclusion from Bogle's point. The fact that we earn US dollars, spend US dollars retire with US dollars etc. means we need more diversification not less.
Being US only has worked over the last 4 decades, I believe. If I had to guess -- and it's anybody's guess -- it would be that being US only vs. globally diversified will be a wash going forward. No clear advantage for being US-centric, but not a clear loser either. I think global investing starts a half-step behind because you have to overcome the currency risk drag and higher ER. And I think Bogle is right that you have to accept additional geopolitical and sovereign risks as part of the deal. But maybe US will be a half step slower than historically. It's a global economy and some of the most serious risks are now globally present -- the bad guys could set off a nuke anywhere at some future point; hard for any single nation to stand apart and stand out as was possible in the past.
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Re: John Bogle on International Investing

Post by Noobvestor » Sun Feb 15, 2015 2:27 pm

Browser wrote:Being US only has worked over the last 4 decades, I believe. If I had to guess -- and it's anybody's guess -- it would be that being US only vs. globally diversified with be a wash going forward. No clear advantage for being US-centric, but not a clear loser either. I think global investing starts a half-step behind because you have to overcome the currency risk drag and higher ER. And I think Bogle is right that you have to accept additional geopolitical and sovereign risks as part of the deal. But maybe US will be a half step slower than historically. It's a global economy and some of the most serious risks are now globally present -- the bad guys could set off a nuke anywhere at some future point; hard for any single nation to stand apart and stand out as was possible in the past.
I still love that you used the subprime mortgage crisis - which was an epic failure of US regulations - to try and create an analogy about how the US is better and safer. As for it being 'hard for a single nation to stand out' - I really enjoy reading the back of the Economist where they show a page of how different national markets are performing relative to each other - the range is amazing - over any given year some or up or down 40-50% while others are relatively flat, and those winners and losers and stay-the-samers rotate a lot.

But back to the question of outcomes. There are three possibilities, give or take, as I've suggested before:

1) The US greatly outperforms going forward, in which case, congratulations, you picked one of the countries that happened to win the race over the period you invested - you can rest safe in the knowledge that your market-picking skills are excellent and that you know better than the market (though you might regret not applying those skills to get filthy rich!).

2) The US and international markets are a wash going forward - no harm, no foul, having international diversification as insurance didn't really hurt because currencies are probably a wash and the ER difference was completely negligible (seriously, the difference between US equities and bonds is the difference between US bonds and international in terms of ER, but you still hold bonds, right?).

3) The US greatly underperforms going forward, in which case, the insurance paid off and you can look back and say 'well, I wasn't sure how different markets would do, so I diversified accordingly.' As you said, it's hard to know what will happen going forward and it's quote "only a guess" that they will be a wash. As you also said, the bad guys could set off a nuke anywhere going forward, so I would prefer to have my investments spread geographically - you are illustrating exactly why geographical risk is an asset rather than a liability.

Really, as I've asked before: if you're going to pick markets, why not sectors or stocks? I would expect the kind of reasoning you're using for US-centric investing to apply to other things just as well - why not pick healthcare stocks because of the aging population and the fact they have done well as a sector now for decades, beating the total market? For that matter, over the same periods you're looking stocks beat bonds pretty handily and consistently, so why not just hold 100% stocks? So many ways for your logic/data to be applied to other decisions, why stop with US stocks?

No worries, I know no minds are going to be changing here anytime soon, so I just hope everyone enjoys their weekend :beer
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Re: John Bogle on International Investing

Post by investorguy1 » Sun Feb 15, 2015 3:40 pm

Browser wrote:currency risk drag
in my view investing in one currency is high currency risk maybe better to diversify that risk across different currencies. Now maybe you trust the US currency more but then you are just been an active investor. In terms of fees they are still very low for international yes a bit higher but still very low.

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Re: John Bogle on International Investing

Post by Browser » Sun Feb 15, 2015 4:30 pm

I still love that you used the subprime mortgage crisis - which was an epic failure of US regulations - to try and create an analogy about how the US is better and safer.
Not a great example to illustrate your point. The US doesn't get a pass, but the excesses of the real estate market and egregious fiscal behavior was a global phenomenon and an epic failure of international investing to diversify anything. That's the problem, all the developed nations are in lockstep and monkey-see, monkey-do. Blame them all.
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Re: John Bogle on International Investing

Post by JoMoney » Mon Feb 16, 2015 6:07 am

Noobvestor wrote:...if you're going to pick markets, why not sectors or stocks? I would expect the kind of reasoning you're using for US-centric investing to apply to other things just as well - why not pick healthcare stocks because of the aging population and the fact they have done well as a sector now for decades, beating the total market? For that matter, over the same periods you're looking stocks beat bonds pretty handily and consistently, so why not just hold 100% stocks? So many ways for your logic/data to be applied to other decisions, why stop with US stocks? ...
There is a difference between picking stocks (or even stocks over bonds) because you think one will outperform in the future, as opposed to deciding to take a defensive position because you think one has risks you're not willing to accept, and still again different than picking what you know can be purchased at lower costs and tax burden.
I really have no idea if the U.S. market will stagnate relative to International, vice-versa, or if they'll track each other in perfect harmony. Whether or not the "Total World Index" tracks the "Total U.S. Index" is not a risk I think I can do anything about. What I expect is that they'll probably have quite similar long-term returns, I could be wrong... but there are still other risks (and costs) with International that I don't think I need to take to build a reasonable stock portfolio as a U.S. investor.
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Re: John Bogle on International Investing

Post by swaption » Mon Feb 16, 2015 8:31 am

Browser wrote: Being US only has worked over the last 4 decades, I believe. If I had to guess -- and it's anybody's guess -- it would be that being US only vs. globally diversified will be a wash going forward. No clear advantage for being US-centric, but not a clear loser either.
When making a statement such as this, it might be worthwhile to consider how different the world was 40 years ago in 1975. Runaway inflation here, NYC on the verge of collapse, no real sign of any of the technology we have today, no real presence for Japanese cars, a list of phone and computer companies for most might be as long as AT&T and IBM, Vietnam War just about to end, the list goes on. China, Korea, India, forget about it. What was a best guess back then for anything?

Like I have said elsewhere in this thread, when we say the future is uncertain, it is because it really is uncertain. It is understandable that the above might be your preferred view. But please put forward any fundamental basis for this position. I don't see any simply because there is none.

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Re: John Bogle on International Investing

Post by Noobvestor » Tue Feb 17, 2015 12:35 am

Browser wrote:
I still love that you used the subprime mortgage crisis - which was an epic failure of US regulations - to try and create an analogy about how the US is better and safer.
Not a great example to illustrate your point. The US doesn't get a pass, but the excesses of the real estate market and egregious fiscal behavior was a global phenomenon and an epic failure of international investing to diversify anything. That's the problem, all the developed nations are in lockstep and monkey-see, monkey-do. Blame them all.
They did that time, but will they next time? A regional crisis in the US, I agree, is likely to impact the rest of the world, but who knows how it will play out in the next crisis. The point stands: you say the US is safer, that it is less subject to political/economic risks, yet it was the source of the last global equities crisis - that alone should give any reasonable person pause and cause to diversify. You said it yourself: developed markets may move in lockstep, so perhaps the solution is to be extra-sure you have emerging in your portfolio - regardless, that point doesn't help your case.
JoMoney wrote:
Noobvestor wrote:...if you're going to pick markets, why not sectors or stocks? I would expect the kind of reasoning you're using for US-centric investing to apply to other things just as well - why not pick healthcare stocks because of the aging population and the fact they have done well as a sector now for decades, beating the total market? For that matter, over the same periods you're looking stocks beat bonds pretty handily and consistently, so why not just hold 100% stocks? So many ways for your logic/data to be applied to other decisions, why stop with US stocks? ...
There is a difference between picking stocks (or even stocks over bonds) because you think one will outperform in the future, as opposed to deciding to take a defensive position because you think one has risks you're not willing to accept, and still again different than picking what you know can be purchased at lower costs and tax burden.
I really have no idea if the U.S. market will stagnate relative to International, vice-versa, or if they'll track each other in perfect harmony. Whether or not the "Total World Index" tracks the "Total U.S. Index" is not a risk I think I can do anything about. What I expect is that they'll probably have quite similar long-term returns, I could be wrong... but there are still other risks (and costs) with International that I don't think I need to take to build a reasonable stock portfolio as a U.S. investor.

If you're right, then it's a wash ... if you're wrong, there are only a few possibilities - either the US outperforms, in which case not all things were equal and you happened to pick the winner (congrats!) or it underperforms, in which case you picked the loser. The only way this bet works out as you suggest is if they essentially tie, which is unlikely. What are you basing that conjecture on anyway? The last 30-year period in which the US happened to roughly pace other national markets on average? What about all the national markets that ended up way ahead or behind? Spurious correlations.

Lower costs and tax burden? Really, might as well pick low-dividend sectors then - again we're back in the realm of nitpicking over tiny differences that are totally ignored when choosing stock/bond ratios or US broad-market approaches. The cost and tax differentials are minute - you are far more impacted by picking stocks versus bonds than US stocks versus international stocks, so if that cart is going to lead the horse then we should back it up and start with that decision set, no? Stocks are generally much more cost and tax efficient than bonds, so ditch bonds?

http://www.tylervigen.com/

Here's my fundamental issue: all of the logic being applied toward US-only investing is selectively applied - it isn't used when picking stocks versus bonds, or this sector versus another, it is only employed to selectively and retroactively justify emotional decision-making. At least that's how it looks until someone can provide a real, grounded and logical explanation to the contrary. If you've been at it for decades and being US-only will help you stay the course, OK, so be it, better that than switching things up at the wrong time, but for new investors trying to make decisions, please keep in mind that low-cost international investing is a full-blown reality now. Additional costs and taxes are on par with (or less than) those of adding bonds to stocks. Period. End of story.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: John Bogle on International Investing

Post by JoMoney » Tue Feb 17, 2015 6:19 am

Noobvestor wrote:...Here's my fundamental issue: all of the logic being applied toward US-only investing is selectively applied - it isn't used when picking stocks versus bonds, or this sector versus another, it is only employed to selectively and retroactively justify emotional decision-making. At least that's how it looks until someone can provide a real, grounded and logical explanation to the contrary. ....
:confused It gets applied all the time. People choose bonds over stocks when they're not willing to accept the risks inherent in the unpredictable returns of stocks. Nobody here is claiming that they know for certain that stocks will earn more or less than bonds, but most people are willing to acknowledge there are risks with stocks that you don't need to take by owning bonds. I'm not claiming anyone knows what the relative returns are going to be between U.S./International only that there are additional risks in International that I don't think a U.S. investor has to take. Which if they do so and "tilt" towards some other "risk preference" diverging from the "global market portfolio" almost certainly means their returns will not match the broad global market, but I don't believe anyone can tell you which one is going to return more or less, and while I'm quite willing to take risks in stocks over bonds, there's a list of other risks (many of which are outlined in any international mutual funds documentation) that I don't think I need to take to build a reasonable stock portfolio. Further, I do believe someone could put in considerably more effort and make decisions on the risks of individual stock holdings as well, but personally I came to the conclusion that the effort in doing so, along with some other risks and expenses, wasn't worth it considering how simple and inexpensively someone can buy a broadly diversified index fund... but there are limits to how far I'm willing to take the idea that ever broader diversification is somehow always better.
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Re: John Bogle on International Investing

Post by hudson4351 » Tue Feb 17, 2015 1:59 pm

As much as we Bogleheads like to think we are more rational than the average investor, I think threads like this are proof that even we fall victim to recency bias. The only reason the topic of international vs. domestic has come up so often lately is because US markets have done so well relative to international markets over the past few years. If the opposite were true, Jack's viewpoint would be conveniently ignored and we would see more posts like "100% total international?", "time to ditch US stocks?", and so on.

For what it's worth, I'm 60% TSM and 40% TISM. I think I picked up the recommendation from either A Random Walk Down Wall Street or The Intelligent Asset Allocator.

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Re: John Bogle on International Investing

Post by Noobvestor » Tue Feb 17, 2015 2:08 pm

hudson4351 wrote:As much as we Bogleheads like to think we are more rational than the average investor, I think threads like this are proof that even we fall victim to recency bias. The only reason the topic of international vs. domestic has come up so often lately is because US markets have done so well relative to international markets over the past few years. If the opposite were true, Jack's viewpoint would be conveniently ignored and we would see more posts like "100% total international?", "time to ditch US stocks?", and so on.
Precisely. If the situations were reversed, US-only investors would be stuck trying to explain the shortfall. As it stands, it is easy to say 'see, having international hasn't helped'.
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Re: John Bogle on International Investing

Post by Noobvestor » Tue Feb 17, 2015 2:21 pm

JoMoney wrote:It gets applied all the time. People choose bonds over stocks when they're not willing to accept the risks inherent in the unpredictable returns of stocks. Nobody here is claiming that they know for certain that stocks will earn more or less than bonds, but most people are willing to acknowledge there are risks with stocks that you don't need to take by owning bonds. I'm not claiming anyone knows what the relative returns are going to be between U.S./International only that there are additional risks in International that I don't think a U.S. investor has to take.
The thing is, even if we're going based on past data alone (which I maintain isn't sufficient), the leap from US to international is far less of a risk change than from stocks to bonds - adding international simply doesn't up risk in any way comparable to having more in stocks in general versus bonds. So what I'm still puzzled by is why anyone would say 'I'm totally fine with the risk of having stocks, but having international stocks is just 'a step too far' rather than simply using bonds to balance any perceived or actual risks as one would do otherwise. It seems to me like proponents of this approach are picking their approach first, then trying to justify it, not developing the approach from a sound foundation. But I'm repeating myself, so I'll move on.

----------------

As an aside, some of these 'risks' listed by Vanguard for their Total International fund are worse than a joke. Check this one out:
Country/regional risk: The chance that world events—such as political upheaval, financial troubles, or natural disasters—will adversely affect the value of securities issued by companies in foreign countries or regions. Because the fund may invest a large portion of its assets in securities of companies located in any one country or region, its performance may be hurt disproportionately by the poor performance of its investments in that area. Country/regional risk is especially high in emerging markets.
Who are they kidding? There is far less country/region concentration in Total International than in Total (US) Stock. Indeed, the fund does not invest a 'large portion' of its assets in any one company or region - it spreads them across thousands of stocks around the world with no more than 16.3% in any one country (all but the UK and Japan are under 10%). Meanwhile, if something happens in North America, the US is squarely in the middle of it. You'd think they were saying the US is immune to all of these risks. They should take this risk off Total International and put it on Total US!

Here's another one they list off for Total International but not Total (US) Stock:
Investment style risk: The chance that returns from small- and mid-capitalization stocks, to the extent that the fund invests in them, will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall market, and they often perform quite differently.
Total International follows a cap-weighted index - why bother to warn about small and mid cap stocks? Seems like someone at Vanguard is just slapping various risk labels onto funds without really thinking them through.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: John Bogle on International Investing

Post by JoMoney » Tue Feb 17, 2015 3:38 pm

Noobvestor wrote:...Total International follows a cap-weighted index - why bother to warn about small and mid cap stocks? Seems like someone at Vanguard is just slapping various risk labels onto funds without really thinking them through.
The "Median Market Cap" for the Total International fund is $24.1 billion , a little more than half the median market cap of the Total U.S.( $47.6 billion ), I doubt that Vanguard is applying labels willy-nilly, I'm sure they have some criterion.
Either way, you needn't go to Vanguard to read about the various risks involved with buying international stocks, the SEC and other entities provide information to consider as well. http://www.sec.gov/investor/alerts/inte ... lletin.pdf
I think most people can imagine the various risks of buying stocks internationally, in areas where they may not hold any legal rights to actually affect "ownership", without needing a whole lot of further justification. There is a lot of international exposure when buying the broad multi-national companies in the U.S. market as it is.
Why is the issue of "international investing" such a hot-button item for some people? Especially for some that would acknowledge "tilting" or "slice-n-dice" or other methods where people choose to act on a "risk preference" ?
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Re: John Bogle on International Investing

Post by Browser » Tue Feb 17, 2015 3:58 pm

hudson4351 wrote:As much as we Bogleheads like to think we are more rational than the average investor, I think threads like this are proof that even we fall victim to recency bias. The only reason the topic of international vs. domestic has come up so often lately is because US markets have done so well relative to international markets over the past few years. If the opposite were true, Jack's viewpoint would be conveniently ignored and we would see more posts like "100% total international?", "time to ditch US stocks?", and so on.

For what it's worth, I'm 60% TSM and 40% TISM. I think I picked up the recommendation from either A Random Walk Down Wall Street or The Intelligent Asset Allocator.
If you call recency bias and the "last few years" the last four decades or so, I agree with you. That's how long international equity diversification hasn't done diddly for your returns, except briefly when the Nikkei ran up in the 80s, but then it gave it all back. You are correct, that if it had made a difference nobody would be listening to Jack. But it didn't make a difference to we are listening to Jack because maybe he makes sense. I'm not against the idea of international diversification but I'm not a fanatic about it. I'm not overly concerned about going into the flaming hell of not being globally diversified or becoming the next Japan.
Last edited by Browser on Tue Feb 17, 2015 4:31 pm, edited 1 time in total.
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Re: John Bogle on International Investing

Post by tm6391 » Tue Feb 17, 2015 4:05 pm

Just adding some more data to the discussion: https://www.fidelity.com/bin-public/060 ... chart2.jpg

I'm personally pro-international stocks and strive for about a 70/30 US/non-US mix.

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Re: John Bogle on International Investing

Post by pingo » Tue Feb 17, 2015 6:04 pm

Well...the other reason these threads come up is the divergence of probably the majority of Bogleheads with our mentor, a man who continues to emphasize the adequacy of an all-U.S. portfolio. In the case of this thread, Stemikger gets to live with the satisfaction of saying, "Not only do I invest as Jack recommends, I use the very fund he recommends!" I do not because I want international equities in my portfolio. (sigh)

It's as if psychologically we have to make sure we're really sure of what we're doing because a departure from John Bogle's counsel should not be taken lightly.

I'm still pro-international, but Morningstar now has an article that should drive this discussion forward for another 5 or 6 pages:
Morningstar.com wrote:There's no shortage of reasons as to why foreign equities have lagged. U.S. companies have enjoyed far better earnings growth and higher returns on capital since the last recession. The U.S. economy has also been stronger than most developed markets, with Europe's economy stuck in neutral; emerging-markets growth is slowing, too.
It goes on to discuss currency issues.

Source: Morningstar.com: Foreign Equities Aren't As Cheap As You Think

Carry on.

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Re: John Bogle on International Investing

Post by Browser » Tue Feb 17, 2015 6:40 pm

From the Morningstar article:
Since equity markets hit bottom during the credit crisis in March 2009, the S&P 500 has gained an annualized 22.5% through January versus 14.9% for the ACWI. The gap has been especially pronounced during the past three years, with the S&P 500 gaining 17.5% annualized versus just 6.6% for the ACWI.
Which raises the interesting matter of "tracking error." Is your reference base the global equity index or U.S. stocks? As US investors, the performance of US stocks tend to be in your face and if you are global you're probably feeling a little regretful that you are getting killed vs. US stocks. Be sure you can handle the tracking error regret and not chicken out.
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Re: John Bogle on International Investing

Post by ginmqi » Tue Feb 17, 2015 6:46 pm

As an average investor/boglehead, I've read about the need to diversify to international stocks. The common Japan example is often given...but the problem is...if one is really wanting to hedge the US becoming the next Japan, then shouldn't a portfolio be allocated much heavier into international...something to the effect of 50/50 US/foreign.

Also, with the globalization and modernization (westernization) of all countries...how does the Hong Kong / Tokyo / London / etc. markets behavior compared to the US equity markets? Will the continued globalization and linkages of financials/economies between all nations make the world market more "US-like?"

The bottom line is...for the average boglehead/investor, is foreign an added overall risk reduction to a portfolio...and if so how much foreign to add?

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Re: John Bogle on International Investing

Post by ginmqi » Tue Feb 17, 2015 9:54 pm

A Vanguard white paper on this very topic has some nice insights: https://personal.vanguard.com/pdf/icriecr.pdf

Historically, adding a certain amount of non-US stocks has reduced portfolio volatility. (The main reason to add foreign stocks...not to chase higher returns but to diversify...aka getting the only "free lunch" in finance which would be diversifying power of risk lowering)
Image

But know this...for those who are skeptical for Bogle and are saying that the future is unknown and that the US may not be the world leader in steady, long term equity returns...the exact same thing can apply to non-US equities. What if non-US equities become more volatile, while becoming highly correlated with the US...in which case the diversification power is reduced and it adds extra volatility?

Increasing volatility in recent years:
Image


And here is the more ominous sign...foreign stocks closing in on 1.0 correlation with US stocks:
Image

Bogle's own company has deviated from his personal belief...which is fine. And they do have the quantitative analysis to back up their claim...which is lowered volatility when added to a portfolio in the right amounts.
For many investors, an allocation between 20% and 40% should be considered reasonable, given the historical benefits of diversification.

Allocations closer to 40% may be suitable for those investors seeking to be closer to a market proportional weighting or for those who are hoping
to obtain potentially greater diversification benefits and are less concerned with the potential risks and higher costs. \

On the other hand, allocations closer to 20% may be viewed as offering a greater balance among the benefits of diversification, the risks of currency volatility and higher U.S. to non-U.S. stock correlations, investor preferences, and costs.

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Re: John Bogle on International Investing

Post by Noobvestor » Wed Feb 18, 2015 1:28 am

Well, one solution is to tilt toward less-correlated international markets, specifically developing markets. But if things only become more correlated regardless, we're back to the one-of-three-outcomes scenario, specifically the one in which it is largely a wash - in that case, there isn't really much to lose.
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Re: John Bogle on International Investing

Post by Noobvestor » Wed Feb 18, 2015 1:30 am

Browser wrote:
hudson4351 wrote:As much as we Bogleheads like to think we are more rational than the average investor, I think threads like this are proof that even we fall victim to recency bias. The only reason the topic of international vs. domestic has come up so often lately is because US markets have done so well relative to international markets over the past few years. If the opposite were true, Jack's viewpoint would be conveniently ignored and we would see more posts like "100% total international?", "time to ditch US stocks?", and so on.

For what it's worth, I'm 60% TSM and 40% TISM. I think I picked up the recommendation from either A Random Walk Down Wall Street or The Intelligent Asset Allocator.
If you call recency bias and the "last few years" the last four decades or so, I agree with you. That's how long international equity diversification hasn't done diddly for your returns, except briefly when the Nikkei ran up in the 80s, but then it gave it all back. You are correct, that if it had made a difference nobody would be listening to Jack. But it didn't make a difference to we are listening to Jack because maybe he makes sense. I'm not against the idea of international diversification but I'm not a fanatic about it. I'm not overly concerned about going into the flaming hell of not being globally diversified or becoming the next Japan.
Groan ... so over a 40-year period it didn't help. Great. Over that same period bonds did't help either. Let's just jettison everything that didn't win over the last 40-year period, ignoring all of the other periods of outperformance and underperformance that happened in between:

Image
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Re: John Bogle on International Investing

Post by JoMoney » Wed Feb 18, 2015 2:24 am

ginmqi wrote:...Historically, adding a certain amount of non-US stocks has reduced portfolio volatility. ...
One could also say that "historically" going all US stocks, or possibly even all non-U.S. stocks, and several weightings in between, has "reduced portfolio volatility" - but these are period dependent scenarios that wax and wane based on the time period chosen. It's unlikely to be predictable in advance as to what the optimal allocation would be. To the extent that "volatility" is a risk that someone wants to mitigate, using some mix of cash/bonds is a far more reliable way to do it - not that someone would be able to predict the perfect balance on some efficient frontier with stocks/bonds but they can reliably be certain about the amount of dollars they have at risk over a period of time.
ginmqi wrote:...(The main reason to add foreign stocks...not to chase higher returns but to diversify...aka getting the only "free lunch" in finance which would be diversifying power of risk lowering)...
Diversification is a great way to mitigate risks, but it's not the only way, and I'm of the opinion that you can take the idea too far - there's a point where it becomes di-worse-ification and you're essentially adding more of less desired qualities and reducing the factors you may prefer. The idea that it provides a "free lunch" in the market the way MPT suggests in models, is based on premises that are far from proven as facts.
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Re: John Bogle on International Investing

Post by Caduceus » Wed Feb 18, 2015 4:08 am

I don't understand the idea that we can somehow extrapolate what the future is going to look like based on looking at past returns in international markets, and especially in emerging markets.

If you actually did business in emerging markets, you might change your mind. In many of these markets, companies compete for business through kickbacks, by bringing top brass to brothels, through profligate gift-giving, or not uncommonly, through outright bribery. Businesses decide on contracts based on relationships, rather than strategic economic reasons. In fact, their entire economic culture is predicated on the fact that contract law isn't particularly strong, and corporate governance nearly non-existent, which is why cultivating personal relationships and trust is so important (and also so fragile). What this means is that there are no developed corporate mechanisms that ensure that management acts in the interest of shareholders, especially if a government is a substantial stakeholder that is capable of extracting returns that minority shareholders cannot. If you like the idea of a company that you own deciding to award another firm a contract because that firm treated the vice-president to a whole night's worth of prostitutes, or deciding to invest in one place over another because of a few phonecalls ...

With greater internationalization of cash flows, what makes companies domiciled in one place fundamentally similar to one another is their exposure to a similar regulatory and business environment. Take a look at what makes up the emerging market index - the actual companies.

What the data might be showing is that companies deriving a good portion of their profits from emerging markets have succeeded spectacularly in spite of these corporate weaknesses because of the massive margins usually available with first movers in unsaturated markets. What it might not be showing is that it will do well going forward.

One has to have a position on what the data means before discussing it. Generating a whole string of combinations for different years in which one index or one combination may or may not have outperformed the other is largely meaningless. Another example of social science failing to act like a social science - lurching at the instinct to quantify and calculate without doing any real thinking.

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Re: John Bogle on International Investing

Post by Twins Fan » Wed Feb 18, 2015 8:28 am

Noobvestor wrote:Groan ... so over a 40-year period it didn't help. Great. Over that same period bonds did't help either. Let's just jettison everything that didn't win over the last 40-year period, ignoring all of the other periods of outperformance and underperformance that happened in between
Now you're just being silly. Folks don't hold bonds in the portfolio for the same purpose as they would hold international. That's really reaching.

If you're so into diversifying, why not take it to the other extreme.... folks should be investing in the three fund to start and then real estate, timber, farmaland, gold, tulips, donkeys,..... Can't be too diversified, right?

Your sig line shows why you feel so strongly about international. Larry has been present in many of the past threads about international and we know where he stands. Obviously there's the expert you choose to believe in. Others believe in Bogle or Buffett. To each their own.

What's the saying about when experts don't agree... it likely matters little.

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Re: John Bogle on International Investing

Post by backpacker » Wed Feb 18, 2015 10:26 am

Noobvestor wrote:
JoMoney wrote: There is a difference between picking stocks (or even stocks over bonds) because you think one will outperform in the future...[and] picking what you know can be purchased at lower costs and tax burden.
Lower costs and tax burden? Really, might as well pick low-dividend sectors then - again we're back in the realm of nitpicking over tiny differences that are totally ignored when choosing stock/bond ratios or US broad-market approaches. The cost and tax differentials are minute.
I split my portfolio evenly between domestic and international so am obviously a friend of international investing. But...

In an IRA, an international fund like VXUS will lose ~20 basis points to foreign withholding taxes and ~9 basis points to higher fees. Call it 30 basis points a year in tax/fee drag.

Say domestic and international both return 5% before taxes and fees for 40 years. That means international will trail domestic by 10% after taxes and fees. Not huge, but also not minute. Holding a 50/50 portfolio like my own will result in returns that are roughly 5% lower than an all US portfolio, all else being equal.

I hold international because (a) I don't have any bonds and (b) I get nervous about things like local stock bubbles. Are US stocks overpriced? I have no idea, but don't have to know because I own both domestic and international.
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Re: John Bogle on International Investing

Post by swaption » Wed Feb 18, 2015 10:56 am

Twins Fan wrote:What's the saying about when experts don't agree... it likely matters little.
Let's just be clear here, expert(s) don't disagree. Bogle disagrees. Find me others. Bernstein, Swedroe, Ferri, or even the long lost Troutner? And in terms of Bogle, I'm not sure what would necessarily qualify him as an expert on international allocation. He even acknowledges that one should formulate their own opinion on this specific topic.

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Re: John Bogle on International Investing

Post by Browser » Wed Feb 18, 2015 11:13 am

Yes. Adding foreign stocks might have reduced volatility. It also reduced returns. The risk-adjusted returns of an internationally diversified portfolio were lower than for a non-diversified portfolio. In any event, as Bogle remarked the differences are mainly of academic interest, not practical interest. And as Jomoney points out, it waxes and wanes over short period with no discernable trend. It's OK to invest internationally if it floats your boat. But if you don't I doubt it will make a difference worth writing to Mom about. Much ado about nada.
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Re: John Bogle on International Investing

Post by Twins Fan » Wed Feb 18, 2015 12:23 pm

swaption wrote:
Twins Fan wrote:What's the saying about when experts don't agree... it likely matters little.
Let's just be clear here, expert(s) don't disagree. Bogle disagrees. Find me others. Bernstein, Swedroe, Ferri, or even the long lost Troutner? And in terms of Bogle, I'm not sure what would necessarily qualify him as an expert on international allocation. He even acknowledges that one should formulate their own opinion on this specific topic.
Sure, let's be clear.... or better yet, why don't you clear up for us what qualifies any expert as an expert. Apparently the qualifier is if one agrees with their opinion and findings??

I did say another earlier. Mr. Buffett is a wise man, I believe, and I don't think he feels international is necessary for the average investor either. I highly doubt Mr. Bogle nor Mr. Buffett are talking our their rear with no thought or study behind those beliefs.

Yes, one should form thier own opinion and most or many of us have on this topic. The opinions then get debated endlessly. What else are internet forums for, I guess. :happy

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Re: John Bogle on International Investing

Post by JoMoney » Wed Feb 18, 2015 3:46 pm

Here's an old Dr.Bernstein article from 1998, http://www.efficientfrontier.com/ef/499/death.htm
He criticizes an article written by Roger Lowenstein who was also dismissive of the need for international investing.
I'm basicly in the same boat with Dr.Bernstein where he says: "There is in fact no a priori reason to expect that the returns for foreign equity should be any different than for domestic equity..." (..although I might argue some taxes and expenses as reasons a U.S. investor might experience lower returns)
My difference of opinion is that I do believe there are plenty of reasons to see a higher degree of risk in foreign equity. Risks that aren't necessary to take. Obviously from the arguments here, others take a different view.
Since then, there's been plenty of waxing and waning, sometimes international was ahead, sometimes it's behind... I still don't think the present market conditions or the past tells us which will have higher returns in the future... but I still think I can make a decision on the risks I choose to be exposed to, and I think others agree to some extent - just not to the possibly extreme allocation of 0% international vs. some other less than full market weighting.
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Re: John Bogle on International Investing

Post by backpacker » Wed Feb 18, 2015 4:06 pm

JoMoney wrote: My difference of opinion is that I do believe there are plenty of reasons to see a higher degree of risk in foreign equity.
I probably agree with this. One of the oddities of diversification, though, is that you can often decrease risk by adding riskier investments. Even if A is safer than B, it doesn't follow that a portfolio of only A is safer than a portfolio of A and B.

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Noobvestor
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Re: John Bogle on International Investing

Post by Noobvestor » Wed Feb 18, 2015 9:42 pm

JoMoney wrote:Here's an old Dr.Bernstein article from 1998, http://www.efficientfrontier.com/ef/499/death.htm
He criticizes an article written by Roger Lowenstein who was also dismissive of the need for international investing.
I'm basicly in the same boat with Dr.Bernstein where he says: "There is in fact no a priori reason to expect that the returns for foreign equity should be any different than for domestic equity..." (..although I might argue some taxes and expenses as reasons a U.S. investor might experience lower returns)
My difference of opinion is that I do believe there are plenty of reasons to see a higher degree of risk in foreign equity. Risks that aren't necessary to take. Obviously from the arguments here, others take a different view.
Since then, there's been plenty of waxing and waning, sometimes international was ahead, sometimes it's behind... I still don't think the present market conditions or the past tells us which will have higher returns in the future... but I still think I can make a decision on the risks I choose to be exposed to, and I think others agree to some extent - just not to the possibly extreme allocation of 0% international vs. some other less than full market weighting.
Well, back in 1998 things were a bit different - Total International was nearly brand new, for starters. Also he's saying over really long periods he'd expect similar performance, but that doesn't help the investor waiting for years for their single-country allocation to catch back up. But more interestingly, from the same article comes something a lot of US-oriented investors could learn from:

"The notion that simple familiarity with GM cars or Microsoft software translates into higher returns and lower risks for the domestic investor strains credulity. First and foremost, almost all of the major capital markets of Europe have histories stretching much farther back than the Manhattan buttonwood tree."

Bill Bernstein also said last year:

"The real risk that you face is that you're going to have crummy returns in one part of your portfolio over 30 years. And you're certainly reducing that risk if you are internationally diversified," says William Bernstein, co-principal of portfolio manager Efficient Frontier Advisors in Eastford, Conn. Owning shares in large multinational companies isn't the same thing as owning shares of companies in foreign markets, according to Mr. Bernstein and other experts. International diversification means being exposed both to what is happening in foreign stock markets and to the swings in the value of foreign currencies, they say.

http://www.wsj.com/articles/the-right-w ... 1406308068

But wait, there's more! Currency 'risk', you say? Turns out he sees that as a hedge against one of the greatest dangers a portfolio can face.

"Inflation: Here is one of Bernstein’s most interesting contributions. First of all, a serious inflation shock is the most probable big risk we face. Second, everything you know about how to cope with it is wrong. Gold, it turns out, is no great inflation hedge. In serious inflations, it behaves like any real asset — keeping pace with CPI but little more (which also means you need a lot of it to do you any good). Commodity producers, it turns out, have worked better. The cheapest solution is to hold an internationally diversified stock portfolio, so that rampant inflation in the U.S. can be offset by more stable returns from foreign stocks. A long-term, fixed rate mortgage tied to a house not purchased in a bubble will also offer an offset. Finally, there are inflation-protected bonds for those who want them."

http://www.forbes.com/sites/phildemuth/ ... th-author/
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: John Bogle on International Investing

Post by tm6391 » Wed Feb 18, 2015 10:14 pm

Browser wrote:Much ado about nada.
That's a bold statement 140+ responses into what is really just the most recent thread on the subject :)

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Re: John Bogle on International Investing

Post by JoMoney » Thu Feb 19, 2015 5:22 am

backpacker wrote:...One of the oddities of diversification, though, is that you can often decrease risk by adding riskier investments. Even if A is safer than B, it doesn't follow that a portfolio of only A is safer than a portfolio of A and B.
I only think this is true under the assumptions of Modern Portfolio Theory with the ideas of risk equating to the price variations, volatility, correlations, etc.. relative to other assets etc.... Which is all very interesting, but I don't buy it.
Despite what the models and rating agencies might have liked people to believe, the "sub-prime" mortgages of a few years back didn't get less risky by pooling the NINJA loans with government backed ones. I have a lot more to learn before anyone is going to convince me that 1+2 equals something less than 3.

I don't claim to have it all figured out, or to be some super-investor, or selling some path to easy money nobody knows about. It may very well be that prices in international stocks are "irrationally" cheap or that they might be after a possible sovereign default. But I do know that their are risks like that out there, and that I'm not willing accept the market is persistently pricing a "risk premium" for such occurrences, or that I know how cheap is cheap enough that I should expect extra returns for it.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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