Why invest in international?

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tdo1966
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Why invest in international?

Post by tdo1966 » Wed Feb 24, 2016 12:35 pm

I am not an expert investor, more of an interested investor seeking knowledge. I am new to the Bogleheads, and I recently been reading various articles and interviews with/about Jack Bogle and his investing philosophy. After becoming aware of his views on international investing, I looked at the two international funds available in my 401k (Fidelity Spartan Int'l Index and American Funds Europacific Growth). These funds have annualized returns over a 10 year period of just 1.55% and 3.07% respectively. All of the bond funds available in my 401k have better returns with out the volatility. Most 'experts' tell you that you need invest a portion of your portfolio in international for a diversified portfolio. But, with the low returns and high volatility, I don't get it. What am I missing?

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mhc
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Re: Why invest in international?

Post by mhc » Wed Feb 24, 2016 12:43 pm

Part of what you are missing is that you are only looking at one 10 year period. That is not a large enough sample size to determine much.

lack_ey
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Re: Why invest in international?

Post by lack_ey » Wed Feb 24, 2016 12:51 pm

Do you realize how inconsistent and unpredictable stock returns are for a given decade?
Image

Extrapolating based on the past ten years is a really bad idea. If nothing else you should look at longer-term data:
http://publications.credit-suisse.com/t ... 0FAF7A4A65

Consider starting and ending conditions with respect to market size and what happened in between. How much are differences in returns attributable to one-time events, luck, and conditions that no longer exist, and how much to underlying and potentially persistent attributes that are applicable in the future?

Broadly your question is one of the most commonly discussed, so here's a sampling of recent threads:
viewtopic.php?t=185252
viewtopic.php?t=183740
viewtopic.php?t=167255

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Christine_NM
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Re: Why invest in international?

Post by Christine_NM » Wed Feb 24, 2016 1:00 pm

As I remember it, the "need" for international began in the 1980s, when Japan was riding high and could carry the performance of a whole world-ex US fund.

The Japan experience was an outlier IMO. Today's Europe experience may be an outlier too, idk. I can't make a case to myself for always owning large amounts of whatever the world is selling.

At the end of the day this is something you have to decide for yourself. Past performance is not a predictor, etc.
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randomguy
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Re: Why invest in international?

Post by randomguy » Wed Feb 24, 2016 1:12 pm

tdo1966 wrote:I am not an expert investor, more of an interested investor seeking knowledge. I am new to the Bogleheads, and I recently been reading various articles and interviews with/about Jack Bogle and his investing philosophy. After becoming aware of his views on international investing, I looked at the two international funds available in my 401k (Fidelity Spartan Int'l Index and American Funds Europacific Growth). These funds have annualized returns over a 10 year period of just 1.55% and 3.07% respectively. All of the bond funds available in my 401k have better returns with out the volatility. Most 'experts' tell you that you need invest a portion of your portfolio in international for a diversified portfolio. But, with the low returns and high volatility, I don't get it. What am I missing?
Why do you want to own US stocks. Look at the low returns and high volatility

2000-2009
US stocks -.27% / 21.79%
International +2.29 / 28%
Emerging markets 9.8/40%
total bonds 6% / 2.69%

Why on earth would anyone want to buy US stock? Lower returns and higher volatility than bonds.
Why would anyone own total market either. 10 year return is 6.5. Why buy that crap when you could buy health care returning 11%?

Chasing performance is not a good way to invest. The next 10 years are rarely the same as the last 10 years. If you think over 50 year periods that international and domestic will have the same returns (i.e. like the have since the 60s), picking one over the other is just gambling.

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fortyofforty
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Re: Why invest in international?

Post by fortyofforty » Wed Feb 24, 2016 10:04 pm

tdo1966 wrote:I am not an expert investor, more of an interested investor seeking knowledge. I am new to the Bogleheads, and I recently been reading various articles and interviews with/about Jack Bogle and his investing philosophy. After becoming aware of his views on international investing, I looked at the two international funds available in my 401k (Fidelity Spartan Int'l Index and American Funds Europacific Growth). These funds have annualized returns over a 10 year period of just 1.55% and 3.07% respectively. All of the bond funds available in my 401k have better returns with out the volatility. Most 'experts' tell you that you need invest a portion of your portfolio in international for a diversified portfolio. But, with the low returns and high volatility, I don't get it. What am I missing?
Welcome to the Bogleheads, tdo1966. You will read various opinions as to international investing. Jack Bogle himself sees no need for international stocks. I like some international. However, if you are not happy with either of your two fund choices at work, perhaps you can forgo international investing there. I would suggest the lower cost index choice, and if you are curious (like I am) check out what stocks it owns. You might view yourself as being a part owner of all those companies.
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longinvest
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Re: Why invest in international?

Post by longinvest » Thu Feb 25, 2016 8:49 am

tdo1966 wrote:I am not an expert investor, more of an interested investor seeking knowledge. I am new to the Bogleheads, and I recently been reading various articles and interviews with/about Jack Bogle and his investing philosophy. After becoming aware of his views on international investing, I looked at the two international funds available in my 401k (Fidelity Spartan Int'l Index and American Funds Europacific Growth). These funds have annualized returns over a 10 year period of just 1.55% and 3.07% respectively. All of the bond funds available in my 401k have better returns with out the volatility. Most 'experts' tell you that you need invest a portion of your portfolio in international for a diversified portfolio. But, with the low returns and high volatility, I don't get it. What am I missing?
Tdo,

When looking at past returns, you are falling to the illusion of end-points. It is natural for our human brain to assume that the asset that had the highest performance is a winner; that it is an asset that will perform in the future. This is what we are used to, in many areas of our lives.

Unfortunately, this is not true in investing. But, maybe you don't believe me, some random person on the internet. So, I'll present you with a historical growth chart of the US and International markets. Which one, do you think is represented by the higher performing Portfolio 2, for the 20 years spanning 1971 to 1991?

We're not talking about a small difference, here. Portfolio 2 has grown to almost double the size of portfolio 1, at the end of 20 years. That's the result of compounding at an average rate of 15.25% instead of 11.51%.

Image

You probably guessed it (from the context of this post); Portfolio 1 is the US total stock market, and Portfolio 2 is International stock markets.

The next 20 years played in reverse:

Image

Puzzling, isn't it. Sometimes, the US market wins by a lot, other times, International markets win by a lot. How do you choose between the two?

You don't! If you look at the purest of Bogleheads portfolios, the Three-Fund Portfolio, you'll see that it contains both the US stock market and International stock markets (in addition to bonds, of course).

Here's the growth chart of three portfolios: US stock market (Portfolio 1), International stock markets (Portfolio 2), and a 50/50 allocation to both (Portfolio 3), for the entire 40-year period spanning from 1971 to 2001:

Image

Isn't it amazing how a diversified portfolio always performs better than the worst performing asset over any period?

It is up to you. You can decide to concentrate your portfolio in the asset you think will beat others, or you can adopt our philosophy and diversify your portfolio.
Last edited by longinvest on Thu Feb 25, 2016 9:09 am, edited 2 times in total.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international) stocks / (nominal/inflation-indexed) long-term bonds | VCN/VXC/VLB/ZRR

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Cruiser
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Re: Why invest in international?

Post by Cruiser » Thu Feb 25, 2016 9:03 am

Adding on to longinvest's great post, I would encourage you to find an asset allocation that works for you. That doesn't keep you up at night. But whatever that AA is, you have to abide by it. For example, if you include no international in your portfolio, you cannot go buy international if/when it starts outperforming US.

If one changes their AA based on market performance, they are going to have a long and subpar investing career.

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Re: Why invest in international?

Post by nisiprius » Thu Feb 25, 2016 9:50 am

The benefit for international stocks is a small thing that has been magnified into a big thing. There's probably something to it, but it's nowhere near as important or powerful or reliable as people make it out to be. I'm not sure what's behind the intense drumbeat for international stocks that's been going on since about 2005 or thereabouts. Of course in 2005-2008 there was recency (that always seems to explain why things start).

International stocks have had about an 0.66 correlation with U.S. stocks. That's not perfect so there's some diversification effect, but mostly they move more or less together, just by differing amounts. It's not like the near-zero correlation between stocks and bonds. During 2008-2009, for example, international stocks crashed a little bit worse than U.S. stocks, while Vanguard Total Bond Market Index funds basically sailed straight through.

From 1970 through 2014--the only international index that goes back that far is the EAFE index--the correlation between EAFE and the S&P 500 has been about 0.66. The Sharpe ratio (risk-adjusted reward) for U.S. stocks was 0.400. For international stocks it was less, 0.312. That means international stocks over that time period weren't as good an investment. Nevertheless, because of the imperfect correlation, they would have tended to improve the risk-adjusted reward of the portfolio. So the lower Sharpe ratio means they drag the portfolio down while the imperfect correlation tends to improve it.

A rule of thumb I discovered is that in order to have an overall benefit, the correlation must be lower than the ratio of the Sharpe ratios. In this case, it is 0.312 / 0.400 = 0.78. Since the correlation is lower than 0.78, in theory the low correlation helps more than the inferior risk-adjusted returns of international hurt.

Therefore... as a mathematical calculation... over the specific time period 1970-2014... using EAFE as the measure of "international stocks" and the S&P 500 as the measure of "U.S. stocks..." there was, overall, a small benefit to having a mix of international and US than US alone.

If you believe that all this will persist, then there is a small benefit to using a mix of U.S. and international provided you are prepared to stay the course, recognizing that there can be long periods during which international hurts as well as long periods during which it helps.

As always, when an asset class is down half the world says "dump it, don't buy it, it sucks: look, it's down" and the other half says "great buying opportunity, it's on sale, valuations are favorable, it's sure to bounce back, mean reversion."

It's probably a good idea to hold some international, just like almost everyone says, but don't hold so much that you will start paying attention to it and will have trouble sticking to it when it isn't doing well.
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Dandy
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Re: Why invest in international?

Post by Dandy » Thu Feb 25, 2016 10:30 am

As I get further into retirement I have been less interested in maintaining a high international exposure. I think it is a higher risk higher reward investment that seems a bit more suitable to younger investors. I look around the world and see that the US seems pretty well positioned vs Europe or Asia. That has historically been the case for at least a century. I'm more interested in asset preservation vs reaching for growth.

So, I treat international equities as a sub investment category e.g. like someone would tilt toward small caps or REITS.

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Re: Why invest in international?

Post by tdo1966 » Thu Feb 25, 2016 10:35 am

Thank you all for taking the time to reply. You have provided great information to study and digest.

randomguy
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Re: Why invest in international?

Post by randomguy » Thu Feb 25, 2016 10:50 am

Dandy wrote:As I get further into retirement I have been less interested in maintaining a high international exposure. I think it is a higher risk higher reward investment that seems a bit more suitable to younger investors. I look around the world and see that the US seems pretty well positioned vs Europe or Asia. That has historically been the case for at least a century. I'm more interested in asset preservation vs reaching for growth.

So, I treat international equities as a sub investment category e.g. like someone would tilt toward small caps or REITS.
Thats backwards to me. Over long time periods (say 40 years), international and US are going to return the same (hand waving about picking start and end points changing results). Over short periods of time (i.e. 20 years) you want the diversification of one doing well while the other doesn't.

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

for an example of how the last 16 years have played out. You can gamble by trying to pick who is going to win or you can just accept that you can' t do that an accept average returns.

When a market is outperforming (i.e. US of the last 5 years) it is easy to pretend that is the norm.

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Re: Why invest in international?

Post by Dandy » Thu Feb 25, 2016 1:14 pm

Thats backwards to me. Over long time periods (say 40 years), international and US are going to return the same (hand waving about picking start and end points changing results). Over short periods of time (i.e. 20 years) you want the diversification of one doing well while the other doesn't.


I'm not sure what is backwards? I guess you feel the risk/reward is a better option over the shorter term. I can see that since International equities look riskier now and a bit greater risk can pay off with a better return. At my age and with my financial situation I don't need to take extra risk to get a better reward. But, as a younger person in the accumulation might find that attractive.

When a market is outperforming (i.e. US of the last 5 years) it is easy to pretend that is the norm.

I agree but that is not why I underweight international equities. I have generally underweighted them for quite a while and as I have trimmed my equity allocation I have trimmed international a bit more. Sure when I look at the international situation now it doesn't look favorable. Japan? China? India? Europe? but over time those challenges are usually overcome. Got the idea - just don't feel I need to buy into it whole hog - I'll settle for a tilt.

longinvest
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Re: Why invest in international?

Post by longinvest » Thu Feb 25, 2016 1:27 pm

I just want to add this to my earlier post: I am not advocating a 50/50 allocation to US and international; I just used this allocation for illustration, in the chart.

I think that most investor should consider dividing their stock allocation between domestic and international stocks; at least 25% but no more than 75% of the stock allocation in international, based on the specific circumstances of the investor (his domestic country) and his perception of risk and rewards (whatever lets him sleep well at night and stay the course).

Actually, I think that it is even more important to consider including domestic bonds, in a portfolio; at least 25% but no more than 75% of the portfolio. Bonds are a really distinct asset class. International stocks are only a distinct subclass of stocks which is subject to additional risks not present in domestic stocks such as currency fluctuations.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international) stocks / (nominal/inflation-indexed) long-term bonds | VCN/VXC/VLB/ZRR

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Re: Why invest in international?

Post by AverageReturns » Thu Feb 25, 2016 3:22 pm

longinvest wrote:I just want to add this to my earlier post: I am not advocating a 50/50 allocation to US and international; I just used this allocation for illustration, in the chart.

I think that most investor should consider dividing their stock allocation between domestic and international stocks; at least 25% but no more than 75% of the stock allocation in international, based on the specific circumstances of the investor (his domestic country) and his perception of risk and rewards (whatever lets him sleep well at night and stay the course).

Actually, I think that it is even more important to consider including domestic bonds, in a portfolio; at least 25% but no more than 75% of the portfolio. Bonds are a really distinct asset class. International stocks are only a distinct subclass of stocks which is subject to additional risks not present in domestic stocks such as currency fluctuations.
I chose market-weight international (about 50/50), specifically for the reasons in your post. Hopefully Vanguard Total World Stock lowers their expense ratio (0.17 for the ETF currently), I'd love to see it become the default stock recommendation for Bogleheads.

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Re: Why invest in international?

Post by Rodc » Thu Feb 25, 2016 3:38 pm

Image

Look at this image from the site wiki.

Note closely the scale, which in my humble opinion was terribly chosen. Why? Because it was chosen to make something extremely tiny look big and important.

From about 100% US to 20% US, almost everything but nearly pure International the return was about 9.2% +/- 0.1%. That is simply not a difference to argue about.

From about 100% US to 30% the volatility was about 19% +/- 1% - who notices a 1% difference in year to year values? Again, not worth arguing about.

Now, on smaller time scales things look different and even flipped with international looking better than US or vice versa.

So historically at least it has hardly mattered in the long run, and from time to time was a good or a bad idea in the short run.

I think added diversification at low cost is worth a shot, even if the diversification is modest. Why buy Chevy and skip Toyota if you can buy them both at low cost?

Now the cost might not be exactly the same, you might be concerned about currency changes and such, so no need to go market cap weight if you don't want to.

Just pick something more or less reasonable and be done with it. Go on and spend time doing something more worthwhile.
Last edited by Rodc on Thu Feb 25, 2016 3:43 pm, edited 1 time in total.
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munemaker
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Re: Why invest in international?

Post by munemaker » Thu Feb 25, 2016 3:42 pm

The primary reason for investing internationally is diversification. For diversification, you want to hold assets that are not strongly correlated. That way if one asset class is down, the other may be up. You don't want to hold only assets that move together as that increases your risk, and it is risk that can be removed through diversification.

Also, regarding in investing in emerging markets, that is where the most growth potential is.

randomguy
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Re: Why invest in international?

Post by randomguy » Thu Feb 25, 2016 6:28 pm

Dandy wrote:Thats backwards to me. Over long time periods (say 40 years), international and US are going to return the same (hand waving about picking start and end points changing results). Over short periods of time (i.e. 20 years) you want the diversification of one doing well while the other doesn't.


I'm not sure what is backwards? I guess you feel the risk/reward is a better option over the shorter term. I can see that since International equities look riskier now and a bit greater risk can pay off with a better return. At my age and with my financial situation I don't need to take extra risk to get a better reward. But, as a younger person in the accumulation might find that attractive.
No. I am saying I have no clue which market is going to outperform over the next 10 years. Imagine these 2 cases are equally possible
a) for 10 years US 10%, international 0 then international 10%, us 0
b) international 10%, US 0% followed by international 0%/ US 10%

Over 20 years those give the same return. However for the retiree who is taking money out, you get drastically different results (sequence of returns). Given you odds of picking the right AA is 50/50 at best, you can reduce your risk by going 50/50.

here are some portfolio visualizer links to demonstrate it

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

International doesn't matter. You get pretty much the same results no matter what. But now lets assume you are retired and spending money

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

Note how the US only investor goes broke while the other guys have 2.5 or 4x as much money as they started with. The lesson isn't that going 100% international is the right move. It is that since you can't know which is going to outperform, stop being greedy and diversify.

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Re: Why invest in international?

Post by john94549 » Thu Feb 25, 2016 9:37 pm

It is impossible to predict whether international (including emerging) will satisfy. Select a percentage of your total equity position for international/emerging with which you feel comfortable, then do a "Rip van Winkle", i.e., come back in 30 years.

Remember, it was just a year ago that emerging was on a tear. In April, 2015, it turned on a dime and went south.

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Re: Why invest in international?

Post by Dandy » Thu Feb 25, 2016 10:38 pm

It is that since you can't know which is going to outperform, stop being greedy and diversify.

Greed has nothing to do with my decisions regarding international equities. If I were trying to be greedy I would load up on higher risk and therefore potentially higher rewards. I'm not, I am underweighting what I consider a somewhat higher risk equity investment.

I don't think this is the final word on risk but Vanguard rates Total Stock Market Index fund risk as a 4 and Total International Stock Market Index risk as a 5. So there is some justification for a retiree with an investment goal of asset preservation to underweight international equities vs maybe someone in the accumulation stage or someone with a growth goal.

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Re: Why invest in international?

Post by heyyou » Thu Feb 25, 2016 11:03 pm

The best performance enhancer is to save more. No one knows which stock categories will do better in the future. The Callan Periodic Table shows how random the relative performances are of the various categories.

The Japan example is why we diversify across many different countries, away from our own high performing one.
As noted by some, diversification averages your returns even when you wish that it didn't.

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Re: Why invest in international?

Post by columbia » Thu Feb 25, 2016 11:22 pm

It's possible that I could work for 25 more years. While the US only and I'm already retired outlook is perfectly rational for those in that status, that's not true for must US investors. This isn't a gripe, but the forum definitely has an age skew, which could very well negatively affect younger investors (were they to blindly follow a similar path).

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Re: Why invest in international?

Post by randomguy » Fri Feb 26, 2016 12:56 am

Dandy wrote:It is that since you can't know which is going to outperform, stop being greedy and diversify.

Greed has nothing to do with my decisions regarding international equities. If I were trying to be greedy I would load up on higher risk and therefore potentially higher rewards. I'm not, I am underweighting what I consider a somewhat higher risk equity investment.

I don't think this is the final word on risk but Vanguard rates Total Stock Market Index fund risk as a 4 and Total International Stock Market Index risk as a 5. So there is some justification for a retiree with an investment goal of asset preservation to underweight international equities vs maybe someone in the accumulation stage or someone with a growth goal.
You are adding risk by not diversifying internationally. You are making the bet that the US performance will be better when you want. Thats greed:). 100% might be riskier than 100% us. 100% US though is riskier than 70/30 (exact ratio to minimize risk is impossible to know a head of time). Odds are it will not kill you. But why take a risk you don't have to.

The downside of diversifing of course is you will always be wondering why you didn't shove more money in international or US depending on what is doing better.

In reality we are talking about a pretty small effect that may or may not matter to you. It isn't like adding international ups a SWR to 6% from 4. It is more like 4 to 4.5%.

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Re: Why invest in international?

Post by Theoretical » Fri Feb 26, 2016 1:43 am

Dandy wrote:It is that since you can't know which is going to outperform, stop being greedy and diversify.

Greed has nothing to do with my decisions regarding international equities. If I were trying to be greedy I would load up on higher risk and therefore potentially higher rewards. I'm not, I am underweighting what I consider a somewhat higher risk equity investment.

I don't think this is the final word on risk but Vanguard rates Total Stock Market Index fund risk as a 4 and Total International Stock Market Index risk as a 5. So there is some justification for a retiree with an investment goal of asset preservation to underweight international equities vs maybe someone in the accumulation stage or someone with a growth goal.
However, even risky assets have their place in a retiree's portfolio, because they can offset the others when they are down. A retiree only invested in the US would have hated 2000-2010, because their equity portion would have been basically flat, while there would have been modest but decent growth in the International portion. The most important question though is not whether you have equities but whether you have bonds in this situation.

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Re: Why invest in international?

Post by ofcmetz » Fri Feb 26, 2016 4:58 am

International returns have been rough the last decade, but that really means nothing going forward. Many times its actually better to buy equities after a period of bad returns as you are getting more for your money. I like owning international for the diversification it provides. I don't really expect it to provide higher returns, but it feels like hedging my bets in a way. My IPS calls for 25% of my total portfolio to be in International and that's about where I am now.
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Re: Why invest in international?

Post by Toons » Fri Feb 26, 2016 6:25 am

Diversification :happy
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Re: Why invest in international?

Post by Dandy » Fri Feb 26, 2016 8:09 am

A couple of final comments before I try to leave this discussion.
1. It is not greedy or unwise to choose less than a global weighting of international equities. By that definition of greed having no equities would be greedy. If I had 100% in CDs I would be greedy? Risk averse or unwise you could make a strong case but greedy not a chance. One definition of greed is
having or showing an intense and selfish desire for something, especially wealth or power
.
2. I am not trying to maximize growth - don't need a dollar of growth and I'll be fine. When I collect SS at age 70 I might not need to take anything from my portfolio to fund retirement expenses. So I could be "greedy" and try to turn a great situation into a fantastic situation but I choose to play it more conservative. I'm not "betting" the US equities will outperform - just that they will provide moderate growth over the one or two decades I have left. The US is probably a bit over valued compared to international equities now - doesn't bother me (I'm not greedy :happy )
3. I have international equities - but not a global weighting.
4. Having riskier investments in your portfolio can be a good thing. Some people add gold or tilt toward REITS or small cap value. I feel the longer your time horizon the better these work. I have a nice size tilt toward small caps.
5. The higher your overall equity allocation the need to diversify it becomes more important. e.g. If you have 100% equities you may really need to make sure it isn't all in US equities. If you have 40% equities your international equity allocation probably matters a lot less. I have 40% equities and 7-8% of that is international it used to be 25%.
6. I think there is a different approach to investing for growth vs asset preservation that many can't fully grasp. Dr. Bernstein's idea of having 20-25 years of residual expenses in "safe" products is hard for growth oriented investors to buy into.
7. Finally, global weighting of international equities might be great. I do sense a bit of over marketing of the idea and a bit of knee jerk acceptance of it as done deal. Same for international bonds. It may be good but not as much of a winner as being projected.
8. I'm rooting for international equities and bonds - global prosperity might mean a better chance at a more peaceful world for me and my grandchildren.

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climber2020
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Re: Why invest in international?

Post by climber2020 » Fri Feb 26, 2016 8:50 am

Where are all the people who, just a few months ago, were complaining about not wanting to invest because domestic stocks were so historically expensive? Those people should be currently buying up tons of international stocks since they've done poorly recently and subsequently telling us all the great reasons to invest in international right now.

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Re: Why invest in international?

Post by Theoretical » Fri Feb 26, 2016 9:12 am

climber2020 wrote:Where are all the people who, just a few months ago, were complaining about not wanting to invest because domestic stocks were so historically expensive? Those people should be currently buying up tons of international stocks since they've done poorly recently and subsequently telling us all the great reasons to invest in international right now.
Yep, and doubly so because the current strong dollar (especially against the Euro) means you're backing up the truck to buy these stocks, assuming you're buying an unhedged instrument.

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Re: Why invest in international?

Post by Valuethinker » Fri Feb 26, 2016 9:35 am

tdo1966 wrote:I am not an expert investor, more of an interested investor seeking knowledge. I am new to the Bogleheads, and I recently been reading various articles and interviews with/about Jack Bogle and his investing philosophy. After becoming aware of his views on international investing, I looked at the two international funds available in my 401k (Fidelity Spartan Int'l Index and American Funds Europacific Growth). These funds have annualized returns over a 10 year period of just 1.55% and 3.07% respectively. All of the bond funds available in my 401k have better returns with out the volatility. Most 'experts' tell you that you need invest a portion of your portfolio in international for a diversified portfolio. But, with the low returns and high volatility, I don't get it. What am I missing?
Past returns do not predict future returns.

Historic evidence says there is a bonus to international diversification into developed markets. It's not huge, but a portfolio of equities 20-30% international has a better risk return tradeoff than one which is 100% US domestic equities.

The US has also had a *very* long period of outperformance of international markets. This is a lot to do with the FANGs - Facebook Apple Netflix Google. ie the success of the tech sector.

That may reverse at some point. US stocks are very underweight natural resources (other than energy) compared to other indices, for example. And overweight healthcare and tech.

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Re: Why invest in international?

Post by Valuethinker » Fri Feb 26, 2016 9:38 am

ofcmetz wrote:International returns have been rough the last decade, but that really means nothing going forward. Many times its actually better to buy equities after a period of bad returns as you are getting more for your money. I like owning international for the diversification it provides. I don't really expect it to provide higher returns, but it feels like hedging my bets in a way. My IPS calls for 25% of my total portfolio to be in International and that's about where I am now.
GBP now buys $1.40. Ouch. It used to buy $2.00. It means, from your perspective, that UK stocks are 30% cheaper than they were a few years ago. Canadian dollar was at par, and now it's worth barely over 70 cents. That's happened in something like 2 years.

Watch pound go to 1.20 or even par if the Brexit side (Britain to exit the EU) wins the referendum (the markets are not yet discounting that possibility). The referendum will be in June, and it's going to be a long 4 months ;-) .

Call_Me_Op
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Re: Why invest in international?

Post by Call_Me_Op » Fri Feb 26, 2016 11:10 am

tdo1966 wrote:I am not an expert investor, more of an interested investor seeking knowledge. I am new to the Bogleheads, and I recently been reading various articles and interviews with/about Jack Bogle and his investing philosophy. After becoming aware of his views on international investing, I looked at the two international funds available in my 401k (Fidelity Spartan Int'l Index and American Funds Europacific Growth). These funds have annualized returns over a 10 year period of just 1.55% and 3.07% respectively. All of the bond funds available in my 401k have better returns with out the volatility. Most 'experts' tell you that you need invest a portion of your portfolio in international for a diversified portfolio. But, with the low returns and high volatility, I don't get it. What am I missing?
You are, quite frankly, missing a lot on this. Jack's statement that you don't need international is not a statement about expected return. The fact that international stocks have had lower return over the past decade has nothing to do with the question (and much to do with the strong dollar).

Do not confuse a good company with a good stock. The same can be said of foreign versus domestic companies. The fact of the matter is the recent under-performance of foreign stocks bodes well for their performance going forward. But this has little to do with the strategic question of where to invest, which is all about diversification.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

sambb
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Re: Why invest in international?

Post by sambb » Tue Aug 14, 2018 5:15 am

might be a good time to balance into international if ones allocation indicates

selters
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Re: Why invest in international?

Post by selters » Tue Aug 14, 2018 5:28 am

If foreign and US markets are reasonably efficient, then not only do American companies need to continue to do better than international companies for American stocks to continue to outperform, but they need to do even better than markets are currently expecting. Said in other words,the higher earnings growth of US companies ought to be priced into their stocks already, so higher earnings growth (in line with the market's expectations) should not be enough for US stocks to continue outperforming.

acegolfer
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Re: Why invest in international?

Post by acegolfer » Tue Aug 14, 2018 7:43 am

because your human capital is correlated with the domestic market

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Ice-9
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Re: Why invest in international?

Post by Ice-9 » Tue Aug 14, 2018 9:34 am

Lots of great replies already. Just wanted to add one more visual explanation - the famous Periodic Table of Investment Returns:
https://www.callan.com/wp-content/uploa ... d_2018.pdf

Look at the relative positions of the gray International return and the olive S&P 500 return for each of the last 20 years. It changes, and it's not very predictable. Therefore, people like me like to hold both. But as some people have pointed out, it's not the most important part of an investment strategy.

Angst
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Re: Why invest in international?

Post by Angst » Tue Aug 14, 2018 9:43 am

Here's a song that explains my perspective:

https://www.youtube.com/watch?v=rZru_TywyME

CraigTester
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Re: Why invest in international?

Post by CraigTester » Tue Aug 14, 2018 12:36 pm

As many posters have pointed out in various way throughout this thread, US and Non-US stocks perform about the same over the long-term with .6 type correlation levels....

Unless this is not going to continue to be true, going forward, wouldn't it make sense for an "arbitrager" to go long Int'l and short US, betting on an eventual convergence...?

E.g US has pulled out front of International over the last half decade....Doesn't reversion to the mean suggest that is not sustainable...?

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Re: Why invest in international?

Post by daveydoo » Tue Aug 14, 2018 1:21 pm

CraigTester wrote:
Tue Aug 14, 2018 12:36 pm

Unless this is not going to continue to be true, going forward, wouldn't it make sense for an "arbitrager" to go long Int'l and short US, betting on an eventual convergence...?
This is why I always play two slot machines at the same time -- that way I can never lose. :D
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asif408
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Re: Why invest in international?

Post by asif408 » Tue Aug 14, 2018 3:11 pm

CraigTester wrote:
Tue Aug 14, 2018 12:36 pm
Unless this is not going to continue to be true, going forward, wouldn't it make sense for an "arbitrager" to go long Int'l and short US, betting on an eventual convergence...?

E.g US has pulled out front of International over the last half decade....Doesn't reversion to the mean suggest that is not sustainable...?
I agree with the going long part Int'l, but the going short part could bite you if it takes a while for things to turn around. You could be right in the long term but your short position could kill you (speaking from an investment perspective). Better just to not own US stocks than short them.

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Re: Why invest in international?

Post by financeperchance » Wed Aug 15, 2018 11:30 am

I have my equities in VTI (total stock market) rather than VT (total world), and here is why. And please poke holes in this, because I'd like my mind to be changed if I am mistaken:

1) In the years when VTI is down, VT has had a high correlation. So the diversification benefit is overstated during bear markets.

2) Currency risk is uncompensated with international investing, so over time there is a lower expected return going forward, adjusted for risk (note that historical returns are a different story).

3) US firms that dominate VTI, like Apple, Microsoft, and Alphabet, are multinational anyway, so it doesn't make any difference about the economies of different countries relative to the US. Google is happy to get ad clicks from Europe just as much as from the US.

4) The expense ratio is only .04% for VTI vs. 0.10% for VT, so long term that creates a drag from owning VT. This is an uncompensated expense, since local investors in things like Shell and Tencent don't pay the high commissions.

5) It's almost exactly the same holdings anyway. If you look at the top 10 holdings, they are basically the same (Apple, Microsoft, etc.).

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