Should you own foreign stocks?

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Rick Ferri
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Should you own foreign stocks?

Post by Rick Ferri »

For as long as I have followed Vanguard Group founder and former CEO John Bogle, he has never embraced investing in foreign stocks. “I wouldn’t invest outside the U.S.” he said during an interview with Carla Fried for Bloomberg Business. “If someone wants to invest 20 percent or less of their portfolio outside the U.S., that’s fine. I wouldn’t do it, but if you want to, that’s fine.”

This isn’t a new position for Bogle. He has been lukewarm on foreign stocks for decades. I don’t agree with him, and neither do most advisers. The data shows that allocating 20–40% in foreign stocks has provided a diversification benefit in long-term portfolios. That being said, Bogle’s viewpoint is worth exploring because it leads to an interesting discussion about revenue generated by S&P 500 Index companies – specifically the revenue earned from their overseas operations.

Here is an article on S&P 500 foreign sales that supports both sides of the debate: Should you own foreign stocks?

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Re: Should you own foreign stocks?

Post by cfs »

Thanks.

Thanks to our shipmate Rick Ferri for another good article. Keep them coming. I like the closing paragraph.

Thanks again.
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Re: Should you own foreign stocks?

Post by Riprap »

Nice article.

I am having trouble understanding the effect of the so called tax inversions on what is considered a foreign company. As U.S. companies relocate their tax domicile to another country...are they still domestic or are they foreign? Does the exchange a company is listed on determine whether it is foreign or is it where they pay taxes? There are some companies whose tax domicile is outside the U.S., yet they are included in the SP500. ACE Ltd. is an example.

Thoughts?
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Re: Should you own foreign stocks?

Post by Taylor Larimore »

Bogleheads:

This is a post I made last month.
JACK BOGLE WAS RIGHT

Bogleheads:

I first read Mr. Bogle's thoughts on international investing in Bogle on Mutual Funds published in 1994. In that book he wrote:
Given the incremental currency risk, not to mention the addition of sovereign risk (the risk that a nation will default on its financial obligations and the risk of political instability or even war), your exposure to mutual funds investing in foreign stocks should not exceed 20% of your equity portfolio.
Today, I went back 21 years to see if his advice was valid. These are the results of investing $10,000 in Vanguard Total U.S. Stock Market Index Fund (VTSMX) on 7/14/1994 compared with the same investment at the same time in Vanguard Total International Index Fund (VGTSX):

VTSMX is now worth $70,756
VGTSX is now worth $24,630

I am reminded of Bill Bernstein's quote:
When I disagree with Jack Bogle – I am usually wrong.
My own stock allocation has been 20% - 30% international.

Best wishes.
Taylor
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"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Should you own foreign stocks?

Post by Rick Ferri »

Riprap wrote:Nice article.

I am having trouble understanding the effect of the so called tax inversions on what is considered a foreign company. As U.S. companies relocate their tax domicile to another country...are they still domestic or are they foreign? Does the exchange a company is listed on determine whether it is foreign or is it where they pay taxes? There are some companies whose tax domicile is outside the U.S., yet they are included in the SP500. ACE Ltd. is an example.

Thoughts?
In 2002, the S&P selection committee deleted foreign issues from the S&P 500, rendering the index a pure US play. However, in 2010, the same committee reversed this decision and decided that any company that trades on a U.S. market, reports financials to SEC in U.S. dollars and conducts a majority of its business in the United States is a “US based company.” If I’m not mistaken, around 23 companies in the S&P 500 are no longer US flagged corporations.

I am not exactly sure how the taxes work for these companies. Perhaps a corporate tax expert will chime in.

Hope this helps.

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Re: Should you own foreign stocks?

Post by timboktoo »

Thanks for posting this, Rick.

- Tim
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Re: Should you own foreign stocks?

Post by Clive »

The UK's top 100 (largest) FTSE100 more recently has around 80% of its earnings derived from foreign. Even the next 250 (FT250) has 50%. Both up over the years.

As a UK investor buying foreign stock such as US stocks will incur withholding taxes (US standard rate is 30% but that's reduced to 15% under the US/UK tax treaty).

Holding foreign via a firm with global business is perhaps more tax efficient than holding foreign stocks more directly oneself. 15% withholding tax is pretty average on foreign held stocks. Even a relatively low 2% dividend typically incurs a 0.3% 'cost'. When interest rates/dividend yields rise so that cost rises. 5% dividend, 0.75% withholding tax and perhaps 0.25% fund management fees and that's a 1% index lag.

For global firms the choice of domicile is for whatever reason the firm decided to choose New York over London .... or wherever. Some such as CISCO for instance lists in both US and Mexico (multiple markets). If CISCO decided to delist from US and have just a presence in the Mexican market only then part of the haystack is missing if you opted for US listed firms only.
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Re: Should you own foreign stocks?

Post by kolea »

The benefit of diversification by adding international equities to the 3000+ stocks one gets in TSM really comes down to correlation. The long term trend is that international is becoming increasingly well correlated to US equities. Any benefit that existed in the past is diminishing. The following chart shows the trend in correlation over the last century.

Image

Source

And I don't need to look at cross-correlation numbers to tell me what my eye is already saying: In 2008/9 VTIAX crashed just as hard as VTSAX did, so where is the diversification benefit?

Image
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Re: Should you own foreign stocks?

Post by Rick Ferri »

Global stocks become more highly correlated after the introduction of the Euro as TwoByFour noted. The Euro Zone comprises the largest portion of the international equity market, so consolidating currencies into the Euro had the affect of increasing correlations. However, this is not a reason to no longer have direct international exposure for the reasons noted in the article. Plus, over the past 12 months, the correlation between US stocks and international stocks has come down to it's lowest post-Euro level.

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Re: Should you own foreign stocks?

Post by timboktoo »

Rick,

Would it be okay if I ask what percentage of your own equities are allocated to international stocks?

- Tim
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Re: Should you own foreign stocks?

Post by Rick Ferri »

Currently, it is 30%, but I plan to increase this to 40% at some time given the greater globalization in the equity markets (The US market is currently 52% of global equity). See this post. I do not know when I'll actually make this move. Perhaps by the end of 2015, or maybe in early 2016. Taxes are a main consideration in any asset allocation shift.

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Re: Should you own foreign stocks?

Post by John3754 »

TwoByFour wrote:The benefit of diversification by adding international equities to the 3000+ stocks one gets in TSM really comes down to correlation. The long term trend is that international is becoming increasingly well correlated to US equities. Any benefit that existed in the past is diminishing. The following chart shows the trend in correlation over the last century.

Image

Source

And I don't need to look at cross-correlation numbers to tell me what my eye is already saying: In 2008/9 VTIAX crashed just as hard as VTSAX did, so where is the diversification benefit?

Image
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Re: Should you own foreign stocks?

Post by timboktoo »

Taylor Larimore wrote:Bogleheads:

This is a post I made last month.
JACK BOGLE WAS RIGHT

Bogleheads:

I first read Mr. Bogle's thoughts on international investing in Bogle on Mutual Funds published in 1994. In that book he wrote:
Given the incremental currency risk, not to mention the addition of sovereign risk (the risk that a nation will default on its financial obligations and the risk of political instability or even war), your exposure to mutual funds investing in foreign stocks should not exceed 20% of your equity portfolio.
Today, I went back 21 years to see if his advice was valid. These are the results of investing $10,000 in Vanguard Total U.S. Stock Market Index Fund (VTSMX) on 7/14/1994 compared with the same investment at the same time in Vanguard Total International Index Fund (VGTSX):

VTSMX is now worth $70,756
VGTSX is now worth $24,630

I am reminded of Bill Bernstein's quote:
When I disagree with Jack Bogle – I am usually wrong.
My own stock allocation has been 20% - 30% international.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Taylor, you often say that past performance is not indicative of future results, so I find your post above to be a little confusing. Is Mr. Bogle proven correct because one fund outperformed another? If we can't expect the future to be like the past, then how can one person be "right" by suggesting that we only hold domestic stocks and other people be "wrong" by suggesting that we also hold international, should domestic once again outperform international during the next 21 year period.

Performance alone is not indicative of the best choice. For example, one could invest all their money in an individual stock that outperforms the broad market, but that doesn't mean that the person was right to do so. That's just an example. I realize that one is already quite diversified just holding Total Stock Market, but I wanted to make my point clear.

Furthermore, if we are investors who rebalance, then shouldn't we look how these funds performed together in a portfolio rather than comparing their performance as separate funds?

- Tim
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Re: Should you own foreign stocks?

Post by Wagnerjb »

Taylor Larimore wrote: Today, I went back 21 years to see if his advice was valid. These are the results of investing $10,000 in Vanguard Total U.S. Stock Market Index Fund (VTSMX) on 7/14/1994 compared with the same investment at the same time in Vanguard Total International Index Fund (VGTSX):

VTSMX is now worth $70,756
VGTSX is now worth $24,630
Taylor: if you had looked at International equity returns for the decade up to 1994, you would have seen that International equity returns were almost 50% greater than those of US equities. Personally, I am not convinced that whether actual returns have been higher or lower is an important determinant in this issue, which is about diversification.

Best wishes.
Andy
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Re: Should you own foreign stocks?

Post by Clive »

Single start/end date points aren't as informative as sampling multiple start/end dates

Image

Whilst correlations are visually evident, magnitudes differ. Averaging the middle road is less volatile than either individual alone. Given similar arithmetic averages (the average for all 5 year rolling periods in the above chart were very similar) higher volatility (one or the other alone) induces a lower geometric (annualised).
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Mr. Bogle WAS correct.

Post by Taylor Larimore »

Taylor, you often say that past performance is not indicative of future results, so I find your post above to be a little confusing. Is Mr. Bogle proven correct because one fund outperformed another.
timboktoo:

Mr. Bogle is frequently criticized for his luke-warm endorsement of international investing. I feel it only fair to point out that Mr. Bogle WAS correct during the past 21 years.

I agree with you -- going forward, no one knows.

Best wishes.
Taylor
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Re: Should you own foreign stocks?

Post by Clive »

VGTSX largest weighted stock is Nestle SA that is recently paying a 2.92% dividend yield http://www.bloomberg.com/quote/NESN:VX and it looks like Switzerland have a 35% dividend withholding tax pdf page 8 http://www2.deloitte.com/content/dam/De ... e-2014.pdf which would result in just over 1% less dividend being received (1.9%) from that single stock.

Repeated across all stocks that can sum up to a sizeable drag factor.
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Re: Should you own foreign stocks?

Post by Grt2bOutdoors »

Clive wrote:VGTSX largest weighted stock is Nestle SA that is recently paying a 2.92% dividend yield http://www.bloomberg.com/quote/NESN:VX and it looks like Switzerland have a 35% dividend withholding tax pdf page 8 http://www2.deloitte.com/content/dam/De ... e-2014.pdf which would result in just over 1% less dividend being received (1.9%) from that single stock.

Repeated across all stocks that can sum up to a sizeable drag factor.
The French and Italians are docking dividends at 25% - ouch! The double whammy is they pay out in Euros usually. Euros have declined vis a vie the USD, leading to lower overall yield. Look for Euros to come down more if interest rates here rise, the USD will get stronger yet.
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Re: Should you own foreign stocks?

Post by kolea »

John3754 wrote: The past doesn't predict the future.
Thanks for that bit of insight. But I would then ask what is your justification for investing in anything, international included? Rick's article, Vanguard white papers, analyst recommendations - they are all based on what we know about securities, and knowledge all comes from the past. Epistemology aside, do you have a rational belief that the trend towards higher correlation between US and ex-US equities will reverse course in the future? Or do you believe it is random and therefore reversing course is just as likely as a continued trend towards higher correlation?
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Re: Should you own foreign stocks?

Post by FillorKill »

TwoByFour wrote:...do you have a rational belief that the trend towards higher correlation between US and ex-US equities will reverse course in the future? Or do you believe it is random and therefore reversing course is just as likely as a continued trend towards higher correlation?
What if over the next 15 years correlation is 1.0 and US market returns are 0.5% real and ex-US market returns are 5.0% real? Perfectly positively correlated and a highly valuable addition to the US only portfolio. Correlation isn't everything.
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Re: Should you own foreign stocks?

Post by dbr »

Rick, I notice you use the term "sales of US goods and services to foreign countries" and also chart foreign sales by US companies. I worked for an international megacorp and I know that a very large fraction or even most of the foreign sales of my company are of goods and services manufactured OUS by foreign nationals. In addition a corresponding fraction of the management, sales, R&D, and logistics support is established OUS employing local employees etc. This would seem to strengthen the case that US corporations are in fact significant OUS businesses, but the issue is not one of selling US origin goods and services abroad.
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Re: Should you own foreign stocks?

Post by John3754 »

TwoByFour wrote:
John3754 wrote: The past doesn't predict the future.
Thanks for that bit of insight. But I would then ask what is your justification for investing in anything, international included? Rick's article, Vanguard white papers, analyst recommendations - they are all based on what we know about securities, and knowledge all comes from the past. Epistemology aside, do you have a rational belief that the trend towards higher correlation between US and ex-US equities will reverse course in the future? Or do you believe it is random and therefore reversing course is just as likely as a continued trend towards higher correlation?
My "justification for investing in anything" is that I invest in stocks because I want to own part of the future earnings of the corporations that those stocks represent, and I invest in bonds because I want to own debt. My belief on future trends is that they are unknowable.
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Re: Should you own foreign stocks?

Post by kolea »

FillorKill wrote:
TwoByFour wrote:...do you have a rational belief that the trend towards higher correlation between US and ex-US equities will reverse course in the future? Or do you believe it is random and therefore reversing course is just as likely as a continued trend towards higher correlation?
What if over the next 15 years correlation is 1.0 and US market returns are 0.5% real and ex-US market returns are 5.0% real? Perfectly positively correlated and a highly valuable addition to the US only portfolio. Correlation isn't everything.
If the correlation is perfect, the returns will be identical.
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Re: Should you own foreign stocks?

Post by Clive »

Grt2bOutdoors wrote:
Clive wrote:VGTSX largest weighted stock is Nestle SA that is recently paying a 2.92% dividend yield http://www.bloomberg.com/quote/NESN:VX and it looks like Switzerland have a 35% dividend withholding tax pdf page 8 http://www2.deloitte.com/content/dam/De ... e-2014.pdf which would result in just over 1% less dividend being received (1.9%) from that single stock.

Repeated across all stocks that can sum up to a sizeable drag factor.
The French and Italians are docking dividends at 25% - ouch! The double whammy is they pay out in Euros usually. Euros have declined vis a vie the USD, leading to lower overall yield. Look for Euros to come down more if interest rates here rise, the USD will get stronger yet.
France is very socialist and high taxes in general even just to do business. In some cases France can levy a 75% dividend withholding tax - that targets tax-haven's/unfriendly nations. Historically the French stock market rewards have been below average, perhaps due to their more socialist tendencies. Workers rights for example are very good, so much so that employers almost prefer to avoid employing/expanding whenever possible. A large proportion of 'profits' are fed to the state.

As I see it on the one hand diversification to include international induces lower volatility and assuming similar broad rewards and correlation but varying magnitudes is mathematically better, but in practice after higher costs such as dividend withholding taxes etc. overall and broadly its better to stick with domestic big businesses that have global presence/earnings as the 'foreign' exposure. But that will have tracking error compared to the smoother overall domestic + foreign and as such have periods of relatively under/out performance. Equally however if/when you can invest more tax/cost efficiently in foreign then its reasonable to do so. As a UK investor for instance holding BRK-A as a example that pays no dividends so no US withholding taxes is a useful diversification inclusion. As can synthetic stock positions that derive no US dividends. A leveraged US stock ETF for instance that pays no dividends but that when scaled to 1x stock exposure combined with UK (domestic) bonds in effect switches 'dividends' from being US sourced to being UK sourced (more tax efficient). As a example I mentioned this in another thread https://www.portfoliovisualizer.com/bac ... entage=0.0 that uses XIV (inverse volatility exchange traded product) as a 5x US stock like holding i.e. 20% XIV, 80% bonds as a synthetic 1x US stock position. XIV pays no dividends and if bonds are UK (domestic) there's no withholding taxes incurred by a UK investor for in effect holding US stock (like) risk/reward.
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Re: Should you own foreign stocks?

Post by Clive »

TwoByFour wrote:
FillorKill wrote:
TwoByFour wrote:...do you have a rational belief that the trend towards higher correlation between US and ex-US equities will reverse course in the future? Or do you believe it is random and therefore reversing course is just as likely as a continued trend towards higher correlation?
What if over the next 15 years correlation is 1.0 and US market returns are 0.5% real and ex-US market returns are 5.0% real? Perfectly positively correlated and a highly valuable addition to the US only portfolio. Correlation isn't everything.
If the correlation is perfect, the returns will be identical.
=pearson a sequence of +10,-10 repeated with that of +5,-5 repeated and the correlation is shown as 1.0 (perfect), but the magnitudes differ. Combining a high beta with a low beta and rebalancing generally yields a better overall outcome (which in this context is like blending both domestic and foreign), but sometimes the US is the +10, other-times the +5 case. Conceptually better - however after costs/taxes have eaten the magnitude of the benefits can be totally lost (and more). One of the largest costs of foreign is dividend withholding taxes, which broadly average around 15% (but with wide variations from 0% UK to potentially 75% by France).
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Re: Should you own foreign stocks?

Post by Thebigc »

TwoByFour wrote:The benefit of diversification by adding international equities to the 3000+ stocks one gets in TSM really comes down to correlation. The long term trend is that international is becoming increasingly well correlated to US equities. Any benefit that existed in the past is diminishing. The following chart shows the trend in correlation over the last century.

Image

Source

And I don't need to look at cross-correlation numbers to tell me what my eye is already saying: In 2008/9 VTIAX crashed just as hard as VTSAX did, so where is the diversification benefit?

Image
Very true about increased correlation, and it probably will increase long term. But it depends what you are correlating, see the way I see it the Vanguards and the Blackrocks of the world suddenly didn't wake up 3 years ago and go you know 30 - 40% instead of 10 - 20% international would increase diversification, and have a negative correlation effect. Something had to get their attention. Where would the neggative correlation come from? The dollar which started it's run about three years ago, and QE. As the US began to taper off QE, Europe and China began to take steps to impliment the US style QE. With the US coming off QE the dollar was expected to rise and intrest rates were expected effect growth, and make equities more expensive. The impact of the strong dollar both slows growth, and increases buying power in international. QE in the two primary holdings of total international would likely kick start growth, and make equities cheaper buy cheapening those countries currencies.

QE at it's heart is a form of currency manipulation, and is designed to push growth. Now look at how the storn dollar has effected growth, the most recent studies suggest the dollar has slowed growth by as much as 2 percent in the US, though second quarter revisions seem to have been or are being revised up for this year, while Europe and Japan may be getting revised down and growth is slowing in the global market.

But what seems to be the idea is that US growth would and will slow because an end of QE and increasing intrest rates and the strong dollar. While they were expecting more growth in international because of QE and weaker currecies. So you have a negative currency correlation and a negative QE correlation of sorts. So the plan is US slows but has a strong dollar, you buy cheaper international which has QE stimulating the economies, those economies should see increased growth, when the taper off their currencies should rise and the dollar should weaken thus sparking US growth you reblance back down to 10 - 20% and you make money because Total international is unhedged.

Well that looks like it was part of the plan. Some problems though, monetary policy can't fix a lot of the infrastructure problems in those countries along with the macros, most notably Japan which needs economic reform more than anything. They were expecting China to slow and may have been expecting the crash at least Bloomberg was and reported it back in February. The crash that is everyone knew they were slowing and everyone new they were horrible at capturing Growth in their markets. Then China crash and devaluing of the Yuan spark deflatinary pressure, Europe and Japan growth is revised down, US revised up. This may be short term, but China's problems seem to be deeper than anyone realized, lots of bad news coming out there, and it looks like it really is an export problem, along with wage problems and growth problems, and lots of companies that are export based there are not making any money because wages are up and exports are down, and the Yuan is to strong from them to be competative. Don't be surprised if the Yuan is lowered a lot more in the future. I think they will taper it down over time, but it needs to go lower. That is why people are worried about a currency war. Because if they undercut everyone, then to be competative everyone else has to devalue. Global deflation. Basically China just did QE on steroids with all their moves, and I doubt they are finished.

Personally I don't like Total international, I don't like heavy EM's weight in it, it's to speculative for me. I like international Growth better because it is lighter EM's. But would really like to see an international fund from them that is comparable to MGC, which would be more focused on the mega cap blue chips with high credit ratings in international. Then I can weight in small caps to my own comfort level, and skip most EM's. I would be intrested to see if it would track the way MGC tracks the 500, which seems to track the 1000, which seems to track Total US, while maybe providing more stablity and loss volatility.

Anyway the negative correlation seems to be based on QE, and currencies. The timing of the move to 40% seems about right. I am sure there are other factors, but this seems a recency bias on the part of investment companies related to QE and currency. So that is something to consider but so are the effects of oil being devalued, slowing growth globally, and deflationary preasures outside the US. You should always be comfortable with what you invest in, I believee EM's have been slowing and contracting more as well, on a whole, I am sure people can find countries in EM that are doing really well, or companies in EM's that are doing well. Maybe they suddenly rally and jump up. Still don't want them, don't like the risk vs return.
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Re: Should you own foreign stocks?

Post by Riprap »

Rick Ferri wrote:If I’m not mistaken, around 23 companies in the S&P 500 are no longer US flagged corporations.
I have always assumed that the SP500 is considered 100% domestic stocks. This factoid further blurs the lines between foreign and domestic. I wonder what the cap weight is of those 23 companies?

Regarding the tax drag from tax withholding on foreign dividends, I have always considered the foreign tax credit as a way to help mitigate that drag. This assumes foreign stocks are held in taxable accounts.

Perhaps SP500 is good enough.
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Re: Should you own foreign stocks?

Post by Taylor Larimore »

Do you have a rational belief that the trend towards higher correlation between US and ex-US equities will reverse course in the future? Or do you believe it is random and therefore reversing course is just as likely as a continued trend towards higher correlation?
TwoByFour:

There are many things I don't know, especially when forecasting the future. This is one of them.

I like total market index funds so that whatever happens I will not be concentrated in losing funds.

Best wishes.
Taylor
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Re: Should you own foreign stocks?

Post by Browser »

Taylor: if you had looked at International equity returns for the decade up to 1994, you would have seen that International equity returns were almost 50% greater than those of US equities.
We could play this game all year long and wind up with no conclusions. Try looking at Bogle's "telltale chart" and you'll see that starting and ending points make all the difference. For example, during the 26-year period 1989-2015, EAFE has spectacularly underperformed US Total Market by 75%. Even if you had split your equity investment between EAFE and TSM and rebalanced annually, you still would have underperformed TSM by 48% over this time period -- so much for diversification. Over the longest time period that I have available data in Portfolio Visualizer from 1972-2015, EAFE has underformed TSM by 39%.

By examining the telltale chart, one can see that there are brief periods no longer than about six years in which EAFE outperformed TSM, but it is clear as the time periods lengthen there has been a tendency for TSM to outperform EAFE. Historical data seem to suggest that for long-term investors (longer than one decade), investing in foreign developed equities hasn't been worth the incremental cost and risks. Of course, this could all change over the next couple of decades but of course maybe it won't. You don't know, and I don't either. I'd much rather invest based on data than on supposition, but when it comes to investing in foreign equities, it all really comes down to supposition and opinion.
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Re: Should you own foreign stocks?

Post by Wagnerjb »

Grt2bOutdoors wrote:
Clive wrote:VGTSX largest weighted stock is Nestle SA that is recently paying a 2.92% dividend yield http://www.bloomberg.com/quote/NESN:VX and it looks like Switzerland have a 35% dividend withholding tax pdf page 8 http://www2.deloitte.com/content/dam/De ... e-2014.pdf which would result in just over 1% less dividend being received (1.9%) from that single stock.

Repeated across all stocks that can sum up to a sizeable drag factor.
The French and Italians are docking dividends at 25% - ouch! The double whammy is they pay out in Euros usually. Euros have declined vis a vie the USD, leading to lower overall yield. Look for Euros to come down more if interest rates here rise, the USD will get stronger yet.
In a taxable account, the withholding is irrelevant to the US investor. He/she gets a foreign tax credit for any withholdings, which reduces the US tax liability on those dividends. You pay the same amount of total tax, but in this case some is withheld by foreign governments and the remainder is paid to Uncle Sam.

My experience is that the broadly diversified international mutual funds have average withholding rates less than the 15% you might owe in US income taxes. I suppose if you were invested in a single country fund (such as Switzerland), then maybe you could end up with excess (unused) foreign tax credits. Same if you had very low income and had no US tax liability. But for the vast majority, I don't see anything to fret about when foreign countries withhold.

Best wishes.
Andy
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Re: Should you own foreign stocks?

Post by Grt2bOutdoors »

I hold quite a bit of international, it's done absolutely bup-kus over the past few years. Then, I think back to a statement we hear of often: "past performance is not indicative of future performance". :)
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Re: Should you own foreign stocks?

Post by sschullo »

Pardon, if this has already been mentioned.
Here is another way to look at the domestic and international markets: Market Cap. The dominating U.S. market cap makes Bogle's point more convincing. While the US market cap is roughly twice the size of the rest of the world combined, I still have a small international allocation.

Image
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Re: Should you own foreign stocks?

Post by hafius500 »

TwoByFour wrote:The benefit of diversification by adding international equities to the 3000+ stocks one gets in TSM really comes down to correlation. The long term trend is that international is becoming increasingly well correlated to US equities. Any benefit that existed in the past is diminishing. The following chart shows the trend in correlation over the last century.

Image

Source

And I don't need to look at cross-correlation numbers to tell me what my eye is already saying: In 2008/9 VTIAX crashed just as hard as VTSAX did, so where is the diversification benefit?

Image
And Euro or UK investors would have profited from global diversification because US and EM stocks outperformed.
What does it tell us about the future?

According to http://www.mscibarra.com (Correct me if the data is wrong):

10-year Total Net Returns (Euro), as of Aug 17, 2015:

4,47 % MSCI EMU Index

4,46% MSCI France
5,33% MSCI UK
4,63% MSCI Japan
8,46% MSCI USA

5,65 % MSCI Europe
5,59% MSCI Pacific

7,15% MSCI World
6,93% MSCI EM

10-year Total Net Returns (GBP):

5,78% MSCI UK
6,11% MSCI Europe

7,62% MSCI World
7,40% MSCI EM

-------

Clive,

foreign withholding taxes (Nestle) can be fully or partially recovered if Switzerland and your home country have a treaty or if you invest in a fund that is domiciled in a country that has a treaty with Switzerland.
I can't imagine these taxes should prevent an (fund) investor from investing in foreign assets. But I'm no tax advisor.
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Re: Should you own foreign stocks?

Post by FillorKill »

TwoByFour wrote: If the correlation is perfect, the returns will be identical.
I like MPT too but let's use a real world example. In 2014 the correlation of EDV to TLT was .98 - nearly perfectly positive. What were the returns?

EDV: 44.7
TLT: 27.3

The correlation in 2011 was also .98. It was even worse:

EDV: 56.1
TLT: 34.0
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Re: Should you own foreign stocks?

Post by Beliavsky »

Should Canadians own only Canadian stocks? Japanese only Japanese stocks? Americans only American stocks? If your answer is "no" for them but "yes" for Americans, you need to explain why.
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Re: Should you own foreign stocks?

Post by Browser »

Beliavsky wrote:Should Canadians own only Canadian stocks? Japanese only Japanese stocks? Americans only American stocks? If your answer is "no" for them but "yes" for Americans, you need to explain why.
Well, for starters because the US stock market is much larger than any of those, the US economy is more diverse than any of those, and you can't possibly be as economically diversified if your only equity holding is in any other single country in the world. How much incremental value is added by investing outside your home country? In the case of any country in the world except the U.S. a whole lot. In the case of the U.S. maybe not so much.
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Hedged foreign stocks

Post by hirlaw »

I will throw another wrinkle in the discussion.

What do you think of a hedged vs. non-hedged foreign equity fund/etf? I own some (extraordinarily expensive) Tweedy Browne Global Value -TBGVX, which has always hedged foreign shares.
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Re: Should you own foreign stocks?

Post by Rick Ferri »

I prefer un-hedged equity funds because I want the currency diversification.

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Re: Should you own foreign stocks?

Post by Browser »

Rick Ferri wrote:I prefer un-hedged equity funds because I want the currency diversification.

Rick Ferri
How come? I've mostly read that currency diversification is a wash over the long term -- it merely adds uncompensated risk to the equation.
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Re: Should you own foreign stocks?

Post by randomguy »

Who would you rather be:

https://www.portfoliovisualizer.com/bac ... entage=0.0

Over the long run (when you look at 30 year rolling periods), I expect US and international stocks to be in spitting distance return wise. So why would I take the unreward risk of owning US only stocks? Guessing right (either way) and getting an extra .5% more return just isn't worth the rest of guessing wrong and going broke. And note how that lower deviation US only portfolio didn't prevent you from going broke. Of course I am old enough to remember 2 (maybe 3) of these cycles where US outperformance leads people to say why invest overseas and then 10 years later have the same people saying you need to invest overseas due to the great returns:)

Now I would might have had a totally different opinion even in something like 1985. The fund options then were limited and you tended to pay a lot more for them (we are talking 1% difference versus the .09 of today).

The way I look at it is, would I be willing to ignore 50% of the US stocks (chosen at random)? Odds are things would work out. Owning google and skipping facebook, owning exxon but not chevron on average will work out. But why take the risk? To save .09%? Not worth it to me. As far as currency risk, odds are it will even out. Sure the US dollar could soar when I need the money. It could also plumet. I for one am not smart enough to guess how it will work out over the next 50+ years (if I am lucky) that I am investing for.
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Re: Should you own foreign stocks?

Post by Rick Ferri »

There is a portfolio benefit to re-balancing currencies to a fixed US/International allocation over time.

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Re: Should you own foreign stocks?

Post by Browser »

Rick Ferri wrote:There is a portfolio benefit to re-balancing currencies to a fixed US/International allocation over time.

Rick Ferri
Any data? I've been looking for a way to separate the effects of currencies from the effects of equity returns, per se; i.e, what is the variance in returns attributable to currencies alone?
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Re: Should you own foreign stocks?

Post by Browser »

As far as currency risk, odds are it will even out. Sure the US dollar could soar when I need the money. It could also plumet. I for one am not smart enough to guess how it will work out over the next 50+ years (if I am lucky) that I am investing for.
In my view, I agree with Bogle that retired income-oriented investors living in the U.S. and spending U.S. dollars for their goods and services should probably not add currency risk to the equation. Sure, it could work for you or against you but the rule of thumb is to avoid potentially significant downside risks in retirement. If currencies move against you it can take a long time for things to move the other way, while in the meantime you're taking income withdrawals and dissipating your nestegg.
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Re: Should you own foreign stocks?

Post by hirlaw »

Tweedy Browne Global Value is only a small portion of my foreign holdings, and the only active foreign fund I own. I bought it because I am nearing retirement and wanted a conservative value foreign fund. Hedging happened to be a part of their strategy (They also run an identical non-hedged fund).

For those interested, here is Tweedy Browne's explanation for it's hedging:
http://www.tweedy.com/resources/library ... 14Fund.pdf
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Re: Should you own foreign stocks?

Post by investorguy1 »

Please correct me if I am wrong but the way I see it there are risks of having all of your investments in any one country no matter how big that country is. Any of the follow situations could cause big swings in US stock prices:

1. If there is rapid inflation or deflation in the US.
2. A government default.
3. Prolonged government shut down.
4. Big changes is government policy regarding taxation, wages, trade deals etc.
5. Natural disasters.
6. War.

Bogle I don't think is worried about those potential scenarios hurting long term returns of US stocks. For those who are more worried about the short term or potential long term problems, adding foreign companies diversifying these risks.
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Re: Should you own foreign stocks?

Post by Browser »

hirlaw wrote:Tweedy Browne Global Value is only a small portion of my foreign holdings, and the only active foreign fund I own. I bought it because I am nearing retirement and wanted a conservative value foreign fund. Hedging happened to be a part of their strategy (They also run an identical non-hedged fund).

For those interested, here is Tweedy Browne's explanation for it's hedging:
http://www.tweedy.com/resources/library ... 14Fund.pdf
Thanks for the link. I've looked at several other papers on currency hedging and there seems to be some agreement that hedged and unhedged foreign equities will produce about the same return over the long run, or that not hedging might increase returns while also increasing volatility with a net wash in terms of risk-adjusted returns. There is also some agreement with my previous post that investors with home-country spending liabilities incur a substantial tracking error risk relative to defined home-currency liabilities by not hedging foreign investments (both stocks and bonds). In other words, unhedged foreign investments might not be as great an idea for retirees who are spending down their portfolios as it might be for younger investors who are accumulating assets. The volatility of currency movements can actually be greater than the volatility of equities and can easily erase gains or magnify losses from foreign investments. I guess if I were an FA I'd be little cautious about advising my retired clients to invest abroad unless they can utilized currency-hedged vehicles, or perhaps follow Bogle's advice not to invest abroad except sparingly.
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Re: Should you own foreign stocks?

Post by EyeDee »

.
Browser,

I do not believe the following link provides any data concerning Rick's comment about re-balancing currencies, however, I believe Figure 8 on page 12 of the downloadable whitepaper referenced at the link, gives a summary answer to your question of what is the variance in returns attributable to currencies alone.

It shows the numbers for both stocks and bonds, although it is a paper on international bonds.

https://advisors.vanguard.com/VGApp/iip ... ixedIncome
Browser wrote:
Rick Ferri wrote:There is a portfolio benefit to re-balancing currencies to a fixed US/International allocation over time.

Rick Ferri
Any data? I've been looking for a way to separate the effects of currencies from the effects of equity returns, per se; i.e, what is the variance in returns attributable to currencies alone?
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Re: Should you own foreign stocks?

Post by UHCOP »

I've asked this question in another thread but didn't get much response but this thread seems more fitting. In Bogle's Common Sense of mutual funds he said that emerging is a better bet when it comes to risk vs return than developed markets, which is pretty much what total intl index is consisted of. I'm curious to what fellow bogleheads opinion on 80TSM/20EM vs 80TSM/20TISM for long term holding (20+ yr)? Thanks for an insight.
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Re: Should you own foreign stocks?

Post by Browser »

EyeDee wrote:.
Browser,

I do not believe the following link provides any data concerning Rick's comment about re-balancing currencies, however, I believe Figure 8 on page 12 of the downloadable whitepaper referenced at the link, gives a summary answer to your question of what is the variance in returns attributable to currencies alone.

It shows the numbers for both stocks and bonds, although it is a paper on international bonds.

https://advisors.vanguard.com/VGApp/iip ... ixedIncome
Browser wrote:
Rick Ferri wrote:There is a portfolio benefit to re-balancing currencies to a fixed US/International allocation over time.

Rick Ferri
Any data? I've been looking for a way to separate the effects of currencies from the effects of equity returns, per se; i.e, what is the variance in returns attributable to currencies alone?
Thanks for that link. If I'm interpreting the figure correctly it looks consistent with the observation that higher returns attributable to currency movements over the period studied were accompanied by greater volatility attributable to currency as well, with perhaps not much difference in risk-adjusted returns overall had currencies been hedged.
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Re: Should you own foreign stocks?

Post by rca1824 »

The problem with looking at correlation in annual returns is may not be indicative of long term returns. Annual volatility is the sum of two kinds of volatility: speculative volatility and intrinsic volatility. In the short run, speculative volatility dominates. In the long run, intrinsic volatility dominates. In a given month or year, as investors panic from a recession and sell all their holdings, because both domestic and foreign equity mutual funds are liquid tradable assets held by the same people, their prices will get bid down in tandem, increasing their correlation.

But this doesn't imply that in the long run they will be as closely correlated. In the long run speculative changes in price wash out, leaving only the correlation in intrinsic volatility. That is probably lower since it is tied to the earnings of a completely different set of companies.
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