Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

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neomutiny06
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Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by neomutiny06 » Sat Mar 12, 2016 10:44 pm

Hi all. I am a big John Bogle fan. I am also a big Swedroe, Malkiel, Ferri, and Ellis fan. And they all disagree with John Bogle on the international stocks debate.

I just read "Enough" by John Bogle. In it, he says that he doesn't believe international stocks are necessary. And the US has proven time and time again that our stocks can outpace international.

I know this has been discussed many times before. But has Bogle's statistic been discussed? US stocks grew 10% annually since 1990. Intl only grew 6%. This is a very long time period.

Are we convinced that international stocks can get closer to US stock returns in the future? Or is there something that Bogle is realizing that others are not?

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by arcticpineapplecorp. » Sat Mar 12, 2016 10:53 pm

neomutiny06 wrote:Hi all. I am a big John Bogle fan. I am also a big Swedroe, Malkiel, Ferri, and Ellis fan. And they all disagree with John Bogle on the international stocks debate.

I just read "Enough" by John Bogle. In it, he says that he doesn't believe international stocks are necessary. And the US has proven time and time again that our stocks can outpace international.

I know this has been discussed many times before. But has Bogle's statistic been discussed? US stocks grew 10% annually since 1990. Intl only grew 6%.This is a very long time period.

Are we convinced that international stocks can get closer to US stock returns in the future? Or is there something that Bogle is realizing that others are not?
If you think 26 years is a very long time period, then I think your expectation of investing is too limited. Consider someone who starts investing with their first job (401k), let's say at age 25. They retire at age 65. That's 40 years so far (longer than the 26 years you think is a very long time period). Retire at 65 and live to (varies here, but let's say...) 95 (possible depending on genetics, lifestyle, location, etc). That's another 30 years you'd be investing some portion of your money in stocks (maybe 30% at a minimum). You'd need to hold 30% in stocks THROUGH retirement unless you have so much more than you need that you'd never run out of money over a 30 year retirement with assets in a savings account losing purchasing power to inflation.

So now if you start investing at 25 and live to be 95...that's 70 years of investing in the stock market. Do you still think 26 years is a "very long time period"? I don't.

1. Have you looked at the historical returns of the stock market (U.S. and International) over a 70 year time period rather than a 26 year time period?
2. Have you looked at every rolling 26 year period back over the past 100 years and determine if U.S. ALWAYS beat International?
3. If the U.S. beat International over the past 26 years, does that mean it is guaranteed to beat it again over the next 26 years? No, everyone's crystal ball is cloudy.

from https://personal.vanguard.com/pdf/ISGGEB.pdf

Image
Last edited by arcticpineapplecorp. on Sat Mar 12, 2016 11:03 pm, edited 2 times in total.
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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Wayson » Sat Mar 12, 2016 10:54 pm

Let me turn that around on you. Are you convinced that US stocks will stay higher than international stocks in the future? Or is there something that Bogle is missing that others are not?

Trick question. The answer is 'no one knows what the future will look like'. So, we avoid home country bias by diversifying internationally.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Taylor Larimore » Sat Mar 12, 2016 10:57 pm

neomutiny06 wrote:Hi all. I am a big John Bogle fan. I am also a big Swedroe, Malkiel, Ferri, and Ellis fan. And they all disagree with John Bogle on the international stocks debate.

I just read "Enough" by John Bogle. In it, he says that he doesn't believe international stocks are necessary. And the US has proven time and time again that our stocks can outpace international.

I know this has been discussed many times before. But has Bogle's statistic been discussed? US stocks grew 10% annually since 1990. Intl only grew 6%. This is a very long time period.

Are we convinced that international stocks can get closer to US stock returns in the future? Or is there something that Bogle is realizing that others are not?
neomutiny:

Mr. Bogle gives his reasons in this interview yesterday:

http://ritholtz.com/2016/03/mib-jack-bo ... p-founder/

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by lack_ey » Sat Mar 12, 2016 11:03 pm

For stocks even 26 years is not that long. As always, when looking at investment returns over a given period of time, you need to understand the implications of what happened through the period and what differences there are in the starting and ending conditions.

Keep in mind that US stock valuations are somewhere in the range of 55% higher than the rest of the world now. It obviously depends on which measure you use, and I'm not saying that the valuation is unwarranted (the US economy looks overall stronger, with perhaps better long-term prospects, and there are many other things you could point to), just that it matters in terms of interpreting the current state of affairs. If it were say 25% lower now, which may or may not be reasonable, the return over the last 26 years would have been correspondingly lower.

In 1990, Japan was the dominant component of the ex-US stock market, and the valuations there were much higher than we've ever seen here even at the peak of the 2000 dot-com bubble. They had a CAPE (Shiller PE) of over 90, and it's in the low-mid 20s now. That has deflated international returns considerably.

Bogle's argument is not really about expected returns for the future.

P.S. where are you getting 10% and 6% from? Or rather, which dates specifically is the reference to? It looks approximately right but maybe outdated? Point stands that the US did several percentage points better.
Last edited by lack_ey on Sat Mar 12, 2016 11:05 pm, edited 1 time in total.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by neomutiny06 » Sat Mar 12, 2016 11:05 pm

lack_ey wrote:For stocks even 26 years is not that long. As always, when looking at investment returns over a given period of time, you need to understand the implications of what happened through the period and what differences there are in the starting and ending conditions.

Keep in mind that US stock valuations are somewhere in the range of 55% higher than the rest of the world now. It obviously depends on which measure you use, and I'm not saying that the valuation is unwarranted (the US economy looks overall stronger, with perhaps better long-term prospects, and there are many other things you could point to), just that it matters in terms of interpreting the current state of affairs. If it were say 25% lower now, which may or may not be reasonable, the return over the last 26 years would have been correspondingly lower.

In 1990, Japan was the dominant component of the ex-US stock market, and the valuations there were much higher than we've ever seen here even at the peak of the 2000 dot-com bubble. They had a CAPE (Shiller PE) of over 90, and it's in the low-mid 20s now. That has deflated international returns considerably.

Bogle's argument is not really about expected returns for the future.

P.S. where are you getting 10% and 6% from?
Bogle doesn't share his source in the book. He just says those are the annual return numbers since 1990.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by lack_ey » Sat Mar 12, 2016 11:10 pm

Is the book updated? It was published in 2010 as far as I can tell.

Is he using EAFE or what? 10% looks a bit high if annualized for the US over that period, and 6% also looks high.

I guess it doesn't really matter as we can just use updated data ourselves. No need to wonder about what exactly he was talking about.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by siamond » Sun Mar 13, 2016 12:39 am

Those things have to be assessed over multiple decades. Looking at the past 25 years is just not enough. Here is a slide I assembled for a discussion of a local Bogleheads chapter. Click to see a bigger version. This should dispel a couple of myths...

Simple conclusion: hedge your bets, diversify.

Image

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by nedsaid » Sun Mar 13, 2016 12:49 am

Hate to disappoint all you sports fans out there. The "outperformance" of US Stocks has been due
to the very strong US Dollar over the last few years. This has depressed the returns of Foreign Stocks.

It wasn't very long ago, lets say 2007-2008, I was reading articles saying that International Stocks were doing better than US Stocks. Hmmm. Back then the US Dollar was relatively weak.

Sports fans, much of this is just currency fluctuations.
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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by staythecourse » Sun Mar 13, 2016 2:22 am

nedsaid wrote:Hate to disappoint all you sports fans out there. The "outperformance" of US Stocks has been due
to the very strong US Dollar over the last few years. This has depressed the returns of Foreign Stocks.

It wasn't very long ago, lets say 2007-2008, I was reading articles saying that International Stocks were doing better than US Stocks. Hmmm. Back then the US Dollar was relatively weak.

Sports fans, much of this is just currency fluctuations.
Should that be a surprise? I believe Jeremy Seigel in his excellent book, "Stocks for the Long Run" written many years ago already highlighted the reasons to invest in foreign equities were for: 1. Diversification and/ or 2. Play on currency. It has been known for a long time the difference between U.S. and International developed is merely the currency play. I believe Seigel wrote about that in his book and Mr. Bogle discussed the same in "Common Sense".

So the question back in this never ending debate/ discussion is, "Can one predict which currency will be the best going foreward?" If the answer is "I don't know" then your response is to diversify international in one's equity play. Any other answer is frought with some bias, either: home country, recency, etc...

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by lack_ey » Sun Mar 13, 2016 2:36 am

nedsaid wrote:Hate to disappoint all you sports fans out there. The "outperformance" of US Stocks has been due
to the very strong US Dollar over the last few years. This has depressed the returns of Foreign Stocks.

It wasn't very long ago, lets say 2007-2008, I was reading articles saying that International Stocks were doing better than US Stocks. Hmmm. Back then the US Dollar was relatively weak.

Sports fans, much of this is just currency fluctuations.
It's not all FX movement, not by a long shot.

This is just the dollar index and it's not exact for our purposes, but at least it shows the trends:

Image

Since about 2008, the USD has gained a bit over 30%. In this period, US stocks are up about 67% compared to international stocks down 10% cumulative.

Go back further in time to 1990 and the performance difference has even less to do with currencies.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by normaldude » Sun Mar 13, 2016 4:19 am

"Past performance does not guarantee future results"

In 1990, you could have taken 26 years of past Japan stock market data, and made a similar conclusion: that Japan had outperformed the rest of the world, and it was unncessary to invest in non-Japanese stocks.

But as the Japan case showed, a single-country portfolio can easily be crushed by a long downturn.

I prefer to be globally diversified, rather than having all my eggs in one basket.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Quark » Sun Mar 13, 2016 6:23 am

Do you believe markets are more or less efficient? If so, and rational investors thought US stocks would have a higher return, they'd buy relatively more US stocks and invest less in non-US. This would increase the price of US stocks relative to non-US stocks, which would decrease returns of US stocks going forward.

You may believe you're better at making judgments of future returns than is the market generally. If so, is your superior ability limited to US v. non-US or does it extend further?

Mr Bogle might be right that the US economy is stronger, but returns depend on earnings growth and the price you pay, so just being right about economic growth isn't enough.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by nisiprius » Sun Mar 13, 2016 7:33 am

lack_ey wrote:
nedsaid wrote:...Sports fans, much of this is just currency fluctuations...
...It's not all FX movement, not by a long shot...
BOTH statements are true.

Currency fluctuations are important. They are noticeable. They are not (as some on this board have claimed) some tiny theoretical academic thing, and many recency-based statements on international stocks often turn out to be statements about currency movements. The self-congratulation of international stock enthusiasts around the end of 2009 ("it hasn't been a 'lost decade' for us") was mostly the result of the dollar weakening 2002-2008. Some posters heaped scorn on my head I pointed out mildly that the dollar could also strengthen--but that's what happened and that's what has been mostly responsible for recent underperformance.

At one point I did a back-of-the-envelope calculation that suggested that during 2000-2009, about 2/3 of international stock's outperformance relative to U.S. stock, when measured in dollars, was due to the dollar weakening.

Currency fluctuations are one of (several) sources of added risk in international stock investing. It's not a huge amount of added risk, but it's there and it's silly to speak as if it isn't. The prospectus for every international stock fund says so. Vanguard puts Total Stock Market Index Fund in risk category 4 and Total International Stock Index Fund in risk category 5.

One of the big debates in this forum, and one of the relatively few places where some well-informed people flatly say one thing and I flatly think they're wrong, involves the question of whether currency fluctuation produces a diversification benefit. As far as I know most people agree that currency fluctuation is, long term, a wash. There's too much world trade, currency values have to equilibrate in the long run. So, German stocks (say) have their intrinsic business-based fluctuations, and on top of that have extra fluctuation because the Euros they pay out in dividends are sometimes worth more dollar and sometimes less. Therefore international stocks will in fact be imperfectly correlated with U.S. stocks, and the actual historic number has been about 0.67.

These question is whether or not any imperfect correlation improves a portfolio and provides a diversification benefit. I'll state what I think and allow others to contradict me. Imperfect correlation does not necessarily improve a portfolio. It may or it may not. It depends on the relative risk-adjusted return of the diversifying asset to the diversified asset. And the relationship is simple for it to be an improvement, the correlation must be less than diversifier's Sharpe ratio divided by the diversified's Sharpe ratio.

For example, consider the actual performance of the Merk Hard Currency ETF. Portfolio Visualizer shows us that from 2006 through 2016:
  • The Sharpe ratio of Vanguard Total Stock Index Fund was 0.42.
  • The Sharpe ratio of the Merk Hard Currency ETF was 0.14. So it was a much worse investment in risk-adjusted terms. But perhaps it provided a diversification benefit?
  • In order to have provided a diversification benefit, it would need to have a correlation with U.S. stock of less than 0.14/0.42 = 0.34. If it had had that low a correlation, then adding it to U.S. stock would have provided an improvement in the portfolio as a whole.
  • However, the correlation was not lower than 0.34, it was 0.54.
  • Therefore, as expected, a portfolio of 80% Total Stock, 20% MERKX did not have better risk-adjusted reward than pure Total Stock--there was no improvement, the Sharpe ratio of the mix is still 0.42. (However, to my surprise, it is not detectably worse, either. I think the explanation is simply that all these low-correlation-diversification things are pretty weak and tenuous, and that the difference between the effect of a correlation of 0.34 and 0.54 is lost in roundoff error.)
To me, the real puzzle about international stock investing is why the drumbeat for it has been so loud and so insistent, when there is nothing in the data to suggest that it has ever made much difference one way or another.

Not all, but a lot of the apparent "diversification" benefit is just currency fluctuation, and not all, but a lot of the deceptive "recency" effects (good during 2000-2009, bad since) are just currency fluctuation.

Finally, currency fluctuation breaks the assumptions that make total cap-weighting optimum, so the frequent assertion that "we cap-weight in our domestic allocation, why not in our global allocation?" isn't valid. Because of currency fluctuation, I am (90% sure but haven't checked) that the same assumptions under which cap-weighting is optimum when investing only in one's home currency would say that the optimum weighting is to overweight local currency investments, whatever the local currency is, and underweight foreign currency investments, whatever the foreign currencies are. It's not just irrational home bias. It's a rational response to the added risk, without added reward, from investments made in foreign currencies.

It's not just flag-waving. To a Euro investor, U.S. stocks have a small but meaningful amount of extra risk over Euro-denominated stocks. To a dollar investor, European stocks have a small but meaningful amount of extra risk over dollar-denominated stocks.
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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Valuethinker » Sun Mar 13, 2016 8:07 am

For me as much as anything this is about sector diversification.

If you omit the US you are not investing in most of the world's really big tech companies (Samsung, TSMC perhaps a couple of others being exceptions).

If you do the US and omit the rest of the world you are:

- heavily exposed to the US healthcare market, which has all sorts of issues with government mandated change etc.
- probably OK weighted in energy, but underweight almost any other natural resource you could name
- missing a lot of the world's biggest consumer names (Nestle, Unilever, Inditex (Zara) etc.)
- missing some of the world's top class industrial companies (Siemens, Hitachi, Alsthom, various S. Korean Chaibol etc.)
- for better (of late) or worse you are not exposed to many of the world's leading financial companies: Munich Re, Zurich, HSBC, etc Again significantly cutting your EM exposure

Many of these companies have high exposures to Emerging Markets, so you are missing out on that story as well.

It's possible (I have not checked) that non-US markets are weighted towards "value" more than the US market (over the past 10 years at least). And we know value has tanked against growth.

I view the differences in performance as to some extent differences in sector weightings-- particularly in and around tech.

I saw some numbers posted here how the last 6-7 years went for US investors if they did not hold Apple. A big underperformance v. the S&P500 as I recall.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Call_Me_Op » Sun Mar 13, 2016 8:30 am

Funny that the same people who use recent historical data to support the superiority of US stocks will reject the use of recent data to support the superiority of (for example) small-cap value.
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Small-Cap Value Performance

Post by Taylor Larimore » Sun Mar 13, 2016 9:12 am

Call_Me_Op wrote:Funny that the same people who use recent historical data to support the superiority of US stocks will reject the use of recent data to support the superiority of (for example) small-cap value.
Call_Me_Op:

According to Morningstar, Vanguard Small Cap Value Index Fund (VISUX) has underperformed the S&P 500 Index during the past 1-year, 3-years, 5-years and 10-years.

http://performance.morningstar.com/fund ... ture=en_US

Best wishes.
Taylor
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Re: Small-Cap Value Performance

Post by Call_Me_Op » Sun Mar 13, 2016 9:18 am

Taylor Larimore wrote:
Call_Me_Op wrote:Funny that the same people who use recent historical data to support the superiority of US stocks will reject the use of recent data to support the superiority of (for example) small-cap value.
Call_Me_Op:

According to Morningstar, Vanguard Small Cap Value Index Fund (VISUX) has underperformed the S&P 500 Index during the past 1-year, 3-years, 5-years and 10-years.

http://performance.morningstar.com/fund ... ture=en_US

Best wishes.
Taylor
Hi Taylor,

10 years is a relatively short period of time. Over the past 44 years, small-cap value has beat total stock market by 2.8% per year in terms of CAGR. [Source: Portfolio Visualizer]
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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by stemikger » Sun Mar 13, 2016 9:25 am

neomutiny06 wrote:Hi all. I am a big John Bogle fan. I am also a big Swedroe, Malkiel, Ferri, and Ellis fan. And they all disagree with John Bogle on the international stocks debate.

I just read "Enough" by John Bogle. In it, he says that he doesn't believe international stocks are necessary. And the US has proven time and time again that our stocks can outpace international.

I know this has been discussed many times before. But has Bogle's statistic been discussed? US stocks grew 10% annually since 1990. Intl only grew 6%. This is a very long time period.

Are we convinced that international stocks can get closer to US stock returns in the future? Or is there something that Bogle is realizing that others are not?
I didn't read the other replies, but I took Jack's advice way back. I think I briefly owned an international fund for about a month and realized, I didn't feel comfortable holding it. I believe everything Jack says about international especially the fact that if you hold a S&P Index Fund (which I do), you already have quite a bit of international exposure. Why do I need more than that?

Listen to this podcast that one of our fellow Bogleheads posted. It is an excellent interview where Jack touches upon why he does not like international. I also read Common Sense on Mutual Funds years ago and he makes an excellent case on why it is not needed.

http://www.bloomberg.com/podcasts/masters_in_business
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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by in_reality » Sun Mar 13, 2016 9:33 am

stemikger wrote: I believe everything Jack says about international especially the fact that if you hold a S&P Index Fund (which I do), you already have quite a bit of international exposure. Why do I need more than that?
Because a S&P fund doesn't account for the number of Toyota's sold in America or the rest of the world. I guess you have exposure to whatever GM and Ford are doing in Japan but don't kid yourself that you hold the market. Or Toyota doesn't count?

I am not suggesting you change allocations. Stay the course.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by columbia » Sun Mar 13, 2016 9:42 am

I'm close to 50 and could live to 100.
Assuming that the US will outperform the rest of the world for the next 50 years seems like bet to make.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by stemikger » Sun Mar 13, 2016 9:57 am

in_reality wrote:
stemikger wrote: I believe everything Jack says about international especially the fact that if you hold a S&P Index Fund (which I do), you already have quite a bit of international exposure. Why do I need more than that?
Because a S&P fund doesn't account for the number of Toyota's sold in America or the rest of the world. I guess you have exposure to whatever GM and Ford are doing in Japan but don't kid yourself that you hold the market. Or Toyota doesn't count?

I am not suggesting you change allocations. Stay the course.
You are correct, but by adding international so I can hold Toyotya, Nestle, etc. I add sovereign risk, currency risk and higher risk in general. Vanguard puts the S&P Index fund at 4 and the the international index fund at 5.
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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by nisiprius » Sun Mar 13, 2016 10:01 am

Look, there's a really fundamental issue here, and it's implicit in Siamond's chart above, really good and really worth looking at. I'm not going to put my spin on his presentation by circling a part of it, but look at 1900-2014. Over that period of time, the U.S. outperformed the rest of the world by a really big amount, and 114 years is not recency. That's as long-term as it gets. Seriously. 114 years.

And before anyone starts berating me for mentioning that, let me point out the other thing, which is that nobody in their right mind believes that we should expect that to continue, and as Siamond mentions, the last fifty years the U.S. and the rest of the world have been on a par with each other.

It's a fundamental problem with the "long-term view." You never know how much should "count." Look at a century and the U.S. has shown substantial, consistent, meaningful outperformance relative to the rest of the world (though Australia did even better). Look at the period of time covered e.g. by the EAFE index, and it's about the same... and any diversification benefit due to low correlation is negligible.

And the big problem is that when we look at international returns, it's just plainly obvious that we are not looking at one big consistent thing. It doesn't really make sense to consider "the global stock market for the last 114 years," because over that period of time world-historical events have transformed everything about the world to the point that you can't possibly believe that the past tells you quantitatively, to two decimal places, actual numbers about the future. In the past 114 years we've seen entire nations appear and disappear, and we've seen e.g. Toynbee's theory of predictability of history come and go (I bet many people reading this don't know who Toynbee was... or know of him only through the "Toynbee tiles.")

My personal take on it is that the U.S. is about half the world's stock market to begin with, and the world is so globalized now that you can split the stock market into any two halves and one half can't be hugely different from the other half. And that if something happens that actually manages to put the U.S. down the tubes without putting the rest of the world down the tubes along with it, having 50% of my stock allocation be international instead of 25% isn't going to be any magic shield of invulnerability.
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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by in_reality » Sun Mar 13, 2016 10:06 am

stemikger wrote:
in_reality wrote:
stemikger wrote: I believe everything Jack says about international especially the fact that if you hold a S&P Index Fund (which I do), you already have quite a bit of international exposure. Why do I need more than that?
Because a S&P fund doesn't account for the number of Toyota's sold in America or the rest of the world. I guess you have exposure to whatever GM and Ford are doing in Japan but don't kid yourself that you hold the market. Or Toyota doesn't count?

I am not suggesting you change allocations. Stay the course.
You are correct, but by adding international so I can hold Toyotya, Nestle, etc. I add sovereign risk, currency risk and higher risk in general. Vanguard puts the S&P Index fund at 4 and the the international index fund at 5.
The risk I don't want to take is being only in US equities when the economy hits a soft spot and money flows overseas. The weakening dollar magnifies the problem and then people chase flows even more. Sequence of return risk is a risk too ...

Sure the US is the best but if everyone thinks that way, sooner or later US valuations will get beyond what the companies are really worth and then mean reversion will occur.

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Re: Small-Cap Value Performance

Post by abuss368 » Sun Mar 13, 2016 10:10 am

Taylor Larimore wrote:
Call_Me_Op wrote:Funny that the same people who use recent historical data to support the superiority of US stocks will reject the use of recent data to support the superiority of (for example) small-cap value.
Call_Me_Op:

According to Morningstar, Vanguard Small Cap Value Index Fund (VISUX) has underperformed the S&P 500 Index during the past 1-year, 3-years, 5-years and 10-years.

http://performance.morningstar.com/fund ... ture=en_US

Best wishes.
Taylor
Hi Taylor,

I did read that small cap value was underperforming but I did not know it was over the previous 10 years. I am curious if that impacts the strategy DFA recommends.

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by normaldude » Sun Mar 13, 2016 10:23 am

stemikger wrote:
in_reality wrote:
stemikger wrote: I believe everything Jack says about international especially the fact that if you hold a S&P Index Fund (which I do), you already have quite a bit of international exposure. Why do I need more than that?
Because a S&P fund doesn't account for the number of Toyota's sold in America or the rest of the world. I guess you have exposure to whatever GM and Ford are doing in Japan but don't kid yourself that you hold the market. Or Toyota doesn't count?

I am not suggesting you change allocations. Stay the course.
You are correct, but by adding international so I can hold Toyotya, Nestle, etc. I add sovereign risk, currency risk and higher risk in general. Vanguard puts the S&P Index fund at 4 and the the international index fund at 5.
That's only if you look at them in isolation. Holding a little bit of both will actually result in lower overall risk through diversification, because they are not perfectly correlated. Same diversification concept behind holding a diversified set of stocks, versus holding a bunch of stocks in one industry, or holding one stock. Don't put all your eggs in one basket.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by siamond » Sun Mar 13, 2016 10:38 am

nisiprius wrote:In the past 114 years we've seen entire nations appear and disappear, and we've seen e.g. Toynbee's theory of predictability of history come and go (I bet many people reading this don't know who Toynbee was... or know of him only through the "Toynbee tiles.")
Ok, I took the bait... Here is a good (and reasonably quick) read... A short summary of Toynbee's masterpiece:
https://en.wikipedia.org/wiki/A_Study_of_History

(and great posts on this thread, Nisiprius, your insights are always very interesting to read; I too struggle with what amount of history should be considered... and there is no good answer)

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Re: Small-Cap Value Performance

Post by siamond » Sun Mar 13, 2016 10:47 am

abuss368 wrote:I did read that small cap value was underperforming but I did not know it was over the previous 10 years. I am curious if that impacts the strategy DFA recommends.
Just recency bias at work... Check this thread, and form your opinion... For me, the conclusion is pretty clear.

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Re: Small-Cap Value Performance

Post by in_reality » Sun Mar 13, 2016 10:56 am

siamond wrote: Just recency bias at work... Check this thread, and form your opinion... For me, the conclusion is pretty clear.
Interesting...
Taylor Larimore wrote:Bogleheads:
Very few people know more about mutual fund investing than our mentor, Jack Bogle. This is what he wrote:
"The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."
Forget the needle, buy the haystack (total market).
Best wishes.
Taylor
So if we listen to Bogle, we should ignore that "Since 1990, US stocks grew 10%, Intl grew 6%" and buy the haystack (total market).

I think the total market includes international, but what do I know.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by lack_ey » Sun Mar 13, 2016 11:13 am

nisiprius wrote:...
For example, consider the actual performance of the Merk Hard Currency ETF. Portfolio Visualizer shows us that from 2006 through 2016:
  • The Sharpe ratio of Vanguard Total Stock Index Fund was 0.42.
  • The Sharpe ratio of the Merk Hard Currency ETF was 0.14. So it was a much worse investment in risk-adjusted terms. But perhaps it provided a diversification benefit?
  • In order to have provided a diversification benefit, it would need to have a correlation with U.S. stock of less than 0.14/0.42 = 0.34. If it had had that low a correlation, then adding it to U.S. stock would have provided an improvement in the portfolio as a whole.
  • However, the correlation was not lower than 0.34, it was 0.54.
  • Therefore, as expected, a portfolio of 80% Total Stock, 20% MERKX did not have better risk-adjusted reward than pure Total Stock--there was no improvement, the Sharpe ratio of the mix is still 0.42. (However, to my surprise, it is not detectably worse, either. I think the explanation is simply that all these low-correlation-diversification things are pretty weak and tenuous, and that the difference between the effect of a correlation of 0.34 and 0.54 is lost in roundoff error.)
To me, the real puzzle about international stock investing is why the drumbeat for it has been so loud and so insistent, when there is nothing in the data to suggest that it has ever made much difference one way or another.
...
FWIW Merk Hard Currency has a nontrivial ER of around 1.3% and is actively managed. It has had both long and short positions. I don't think you can take it as a proxy for the point you're trying to make.

Also, I think you mean the fund, MERKX. There was talk of opening an ETF it looks like but I don't see it anywhere.

Furthermore, you looked at a period where the USD appreciated slightly against most other currencies—except gold, if you count that, and note that the fund does use gold. So if anything, you might expect the fund to have lost money (ignoring for now interest rates and other second-order effects). And as everyone here knows, 10 years is kind of short to be evaluating these kinds of things anyway.


Back to the OP's original question, again, I don't think FX played much of a part in the 1990-2016 return discrepancy. (2000-2009 was a lot about currency movements, sure.) Part of that was valuations changing, part other factors. The USD didn't change very much between the start and end points.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Quark » Sun Mar 13, 2016 11:29 am

On the relationship between economic growth and stock returns:
Several studies (Dimson et al. [2002], Ritter [2005]) have examined whether countries with higher long-run real GDP growth also had higher long-run real stock market return. The surprising result was contrary to expectations -- the correlation between stock returns and economic growth across countries can be negative!
https://www.msci.com/documents/10199/a1 ... adb948f578 They do note that the results depend on what countries and time periods you examine.
nisiprius wrote:It's a fundamental problem with the "long-term view." You never know how much should "count." Look at a century and the U.S. has shown substantial, consistent, meaningful outperformance relative to the rest of the world (though Australia did even better). Look at the period of time covered e.g. by the EAFE index, and it's about the same... and any diversification benefit due to low correlation is negligible.
A serious issue for, say, investing for a retirement investing that might last 30 years.
nisiprius wrote:And the big problem is that when we look at international returns, it's just plainly obvious that we are not looking at one big consistent thing. It doesn't really make sense to consider "the global stock market for the last 114 years," because over that period of time world-historical events have transformed everything about the world to the point that you can't possibly believe that the past tells you quantitatively, to two decimal places, actual numbers about the future. In the past 114 years we've seen entire nations appear and disappear, and we've seen e.g. Toynbee's theory of predictability of history come and go (I bet many people reading this don't know who Toynbee was... or know of him only through the "Toynbee tiles.")
Two decimal places? Probably more like five or more percentage points of uncertainty.
nisiprius wrote:My personal take on it is that the U.S. is about half the world's stock market to begin with, and the world is so globalized now that you can split the stock market into any two halves and one half can't be hugely different from the other half. And that if something happens that actually manages to put the U.S. down the tubes without putting the rest of the world down the tubes along with it, having 50% of my stock allocation be international instead of 25% isn't going to be any magic shield of invulnerability.
As they say, in times of crisis, correlations go to one. However, we're not always in times of crisis.

I doubt 50% v 25% would make a big difference ex ante.

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Re: Small-Cap Value Performance

Post by Taylor Larimore » Sun Mar 13, 2016 11:31 am

abuss368 wrote:
Taylor Larimore wrote:
Call_Me_Op wrote:Funny that the same people who use recent historical data to support the superiority of US stocks will reject the use of recent data to support the superiority of (for example) small-cap value.
Call_Me_Op:

According to Morningstar, Vanguard Small Cap Value Index Fund (VISUX) has underperformed the S&P 500 Index during the past 1-year, 3-years, 5-years and 10-years.

http://performance.morningstar.com/fund ... ture=en_US

Best wishes.
Taylor
Hi Taylor,

I did read that small cap value was underperforming but I did not know it was over the previous 10 years. I am curious if that impacts the strategy DFA recommends.

Best.
Abuss:

Sorry, I don't know "the strategy DFA recommends." If it is based on "past performance" I suggest investor's use caution.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by stemikger » Sun Mar 13, 2016 11:33 am

in_reality wrote:
stemikger wrote:
in_reality wrote:
stemikger wrote: I believe everything Jack says about international especially the fact that if you hold a S&P Index Fund (which I do), you already have quite a bit of international exposure. Why do I need more than that?
Because a S&P fund doesn't account for the number of Toyota's sold in America or the rest of the world. I guess you have exposure to whatever GM and Ford are doing in Japan but don't kid yourself that you hold the market. Or Toyota doesn't count?

I am not suggesting you change allocations. Stay the course.
You are correct, but by adding international so I can hold Toyotya, Nestle, etc. I add sovereign risk, currency risk and higher risk in general. Vanguard puts the S&P Index fund at 4 and the the international index fund at 5.
The risk I don't want to take is being only in US equities when the economy hits a soft spot and money flows overseas. The weakening dollar magnifies the problem and then people chase flows even more. Sequence of return risk is a risk too ...

Sure the US is the best but if everyone thinks that way, sooner or later US valuations will get beyond what the companies are really worth and then mean reversion will occur.
For me, it really is what I have been comfortable with and at 51 soon to be 52, I am perfectly happy with my all U.S. portfolio. I also believe the old adage, when the U.S. gets sick, the rest of the world catches a cold. I think our economy has become more global than it has ever been and the sequence of risk may not be all that great going forward. Hey, not many people agree with Jack, but there are a few and Warren Buffett is one of them. I think the average investor will do perfectly fine without adding international.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: Small-Cap Value Performance

Post by abuss368 » Sun Mar 13, 2016 1:15 pm

siamond wrote:
abuss368 wrote:I did read that small cap value was underperforming but I did not know it was over the previous 10 years. I am curious if that impacts the strategy DFA recommends.
Just recency bias at work... Check this thread, and form your opinion... For me, the conclusion is pretty clear.
Hi siamond,

Do you invest in DFA mutual funds? Do you favor tilting your investment portfolio to a small and value approach?

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Small-Cap Value Performance

Post by abuss368 » Sun Mar 13, 2016 1:17 pm

Taylor Larimore wrote: Abuss:

Sorry, I don't know "the strategy DFA recommends." If it is based on "past performance" I suggest investor's use caution.

Best wishes.
Taylor
Hi Taylor,

In terms of strategy, I was referring to mutual funds from DFA that tilt to small and value factors.

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Alchemist » Sun Mar 13, 2016 1:26 pm

I do not invest in international for three reasons:

1. The U.S. economy has unique advantages that are not present in any other developed economy. Most notably, demographics are heading the right way, while everywhere else is heading the wrong way except some places in the developing world. Then there are the other unique advantages like being the reserve currency, only super power, most stable/peaceful continent in the world (except maybe Australia), ect

2. Emerging Markets I find to be too risky all around for my taste. So while they may out perform, the risks (particularly sovereign) of EM are above my tolerance level.

3. Owning international exposes me to more, not less, risk. Currency is one obvious example, but just as importantly you are exposed to more black swans with a global portfolio. The U.S. can weather many international crises (EU break up, China collapse, Oil shock, ect) much better than the EU, China, Japan or any other developed economies because it is more insulated. The converse is not true, any black swan that takes out the U.S. economy will take down everyone else with us because of the hugely outsized role the U.S. plays in the political, economic, and security system holding up global trade.


So in short, I see international as adding risk to me as a U.S. investor without any payback for it.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Munir » Sun Mar 13, 2016 1:40 pm

Bogle has said in the past that he doesn't think there is a need for any international holdings but up to 20% of equities being international is "OK". Vanguard currently has 40% international in their Target Date and Life Strategy funds' equities.

Vanguard also has 30% international bonds in the above-mentioned funds. Has Bogle commented on international bonds?

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by arcticpineapplecorp. » Sun Mar 13, 2016 2:09 pm

normaldude wrote:
stemikger wrote:
in_reality wrote:
stemikger wrote: I believe everything Jack says about international especially the fact that if you hold a S&P Index Fund (which I do), you already have quite a bit of international exposure. Why do I need more than that?
Because a S&P fund doesn't account for the number of Toyota's sold in America or the rest of the world. I guess you have exposure to whatever GM and Ford are doing in Japan but don't kid yourself that you hold the market. Or Toyota doesn't count?

I am not suggesting you change allocations. Stay the course.
You are correct, but by adding international so I can hold Toyotya, Nestle, etc. I add sovereign risk, currency risk and higher risk in general. Vanguard puts the S&P Index fund at 4 and the the international index fund at 5.
That's only if you look at them in isolation. Holding a little bit of both will actually result in lower overall risk through diversification, because they are not perfectly correlated. Same diversification concept behind holding a diversified set of stocks, versus holding a bunch of stocks in one industry, or holding one stock. Don't put all your eggs in one basket.
Agreed. And data (from Vanguard) through 2010 supports that. Holding international has in the past decreased stock volatility for US investors. I know some will say since the mid 2000s (and gloablization increasing) the volatility between them has had higher correlation, but it's unknown whether that's a long term or short term phenomenon:
from https://personal.vanguard.com/pdf/ISGGEB.pdf

Image

Also, the effects of currency fluctuations can hurt (as they have over the recent past) or help:
from https://fundsus.deutscheawm.com/EN/docs ... edging.pdf

Image


The way I look at it (for those with international investments), when international currencies get cheaper (relative to the US dollar) your portfolio gets hurt, but international travel gets cheaper (and imports too). When international currencies get stronger (relative to the US dollar), travel and foreign goods get more expensive, but your portfolio benefits. Win-win? (plus those with international in taxable, get the foreign tax credit).

In addition, I just like the idea of having close to 10,000 stocks rather than just 3000 some. I know some will say 500 is enough diversification, but I still think the greater the better. And now that the total international stock market index (Admiral) shares with Vanguard are only 0.12%, what's not to like?
"May you live as long as you want and never want as long as you live" -- Irish Blessing | "Invest we must" -- Jack Bogle

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Hallman » Sun Mar 13, 2016 2:16 pm

The currency risk argument is fair enough, even though I don't agree.

The US advantage argument is already priced in. There is a reason US is half of the stock market and valuations are higher than most of the developed world. Besides, the argument would hold true for everyone, not just americans. Using Bogle's logic, everyone should overweight the US. Using this as an argument to hold more US stock is like double counting. First using it to justify the US being half of the global stock market and then again when justifying going above 50% US.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by lack_ey » Sun Mar 13, 2016 2:20 pm

Hallman wrote:The currency risk argument is fair enough, even though I don't agree.

The US advantage argument is already priced in. There is a reason US is half of the stock market and valuations are higher than most of the developed world. Besides, the argument would hold true for everyone, not just americans. Using Bogle's logic, everyone should overweight the US. Using this as an argument to hold more US stock is like double counting. First using it to justify the US being half of the global stock market and then again when justifying going above 50% US.
Bogle does say that US investors don't need ex-US stocks, but ex-US investors need US stocks.

Yes, this is somewhat counter to the idea of not trying to pick winners and assuming the market prices things in (at least approximately right, if not completely).

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Re: Small-Cap Value Performance

Post by siamond » Sun Mar 13, 2016 3:15 pm

abuss368 wrote:
siamond wrote:
abuss368 wrote:I did read that small cap value was underperforming but I did not know it was over the previous 10 years. I am curious if that impacts the strategy DFA recommends.
Just recency bias at work... Check this thread, and form your opinion... For me, the conclusion is pretty clear.
Hi siamond,

Do you invest in DFA mutual funds? Do you favor tilting your investment portfolio to a small and value approach?

Best.
I don't have access to DFA funds, regrettably. Anyhoo, I am NOT willing to pay an advisor 1% to do so! So I stick to Vanguard, and I do use various tilts in my AA, including small & value. And I pray that the new CRSP indexes that Vanguard now follows will do a better job at capturing those factors than in the past.

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Re: Small-Cap Value Performance

Post by abuss368 » Sun Mar 13, 2016 3:22 pm

siamond wrote:
abuss368 wrote:
siamond wrote:
abuss368 wrote:I did read that small cap value was underperforming but I did not know it was over the previous 10 years. I am curious if that impacts the strategy DFA recommends.
Just recency bias at work... Check this thread, and form your opinion... For me, the conclusion is pretty clear.
Hi siamond,

Do you invest in DFA mutual funds? Do you favor tilting your investment portfolio to a small and value approach?

Best.
I don't have access to DFA funds, regrettably. Anyhoo, I am NOT willing to pay an advisor 1% to do so! So I stick to Vanguard, and I do use various tilts in my AA, including small & value. And I pray that the new CRSP indexes that Vanguard now follows will do a better job at capturing those factors than in the past.
Hi siamond,

Thank you for your response!

Best.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by timboktoo » Sun Mar 13, 2016 3:54 pm

That there are experts whom I respect who have opposing views on the role of international stocks in a portfolio only confirms what I already knew to be true: this is an unsolvable problem. Although it can be fun to argue the merits of your own choice regarding international stocks, this argument is not a winnable one. The future is unknowable and we all use different lenses to look into the past.

Focus on the basics of the Boglehead philosophy. There's more than one road to Dublin :)

- Tim

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Munir » Sun Mar 13, 2016 4:07 pm

timboktoo wrote:That there are experts whom I respect who have opposing views on the role of international stocks in a portfolio only confirms what I already knew to be true: this is an unsolvable problem. Although it can be fun to argue the merits of your own choice regarding international stocks, this argument is not a winnable one. The future is unknowable and we all use different lenses to look into the past.

Focus on the basics of the Boglehead philosophy. There's more than one road to Dublin :)

- Tim
It doesn't have to be an either/or. How about a 20% international/80% domestic as a compromise?

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by herpfinance » Sun Mar 13, 2016 4:55 pm

Alchemist wrote:I do not invest in international for three reasons:

1. The U.S. economy has unique advantages that are not present in any other developed economy. Most notably, demographics are heading the right way, while everywhere else is heading the wrong way except some places in the developing world. Then there are the other unique advantages like being the reserve currency, only super power, most stable/peaceful continent in the world (except maybe Australia), ect

2. Emerging Markets I find to be too risky all around for my taste. So while they may out perform, the risks (particularly sovereign) of EM are above my tolerance level.
What makes you think that the market has not already priced these risks into valutations?
Alchemist wrote: 3. Owning international exposes me to more, not less, risk. Currency is one obvious example, but just as importantly you are exposed to more black swans with a global portfolio. The U.S. can weather many international crises (EU break up, China collapse, Oil shock, ect) much better than the EU, China, Japan or any other developed economies because it is more insulated. The converse is not true, any black swan that takes out the U.S. economy will take down everyone else with us because of the hugely outsized role the U.S. plays in the political, economic, and security system holding up global trade.

So in short, I see international as adding risk to me as a U.S. investor without any payback for it.
Except that arcticpineapplecorp.'s data suggests the opposite. Adding non-perfectly correlated asset classes reduces overall portfolio risk.

Now whether that risk reduction is substantial and meaningful can certainly be argued.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by lack_ey » Sun Mar 13, 2016 5:02 pm

herpfinance wrote:...
Except that arcticpineapplecorp.'s data suggests the opposite. Adding non-perfectly correlated asset classes reduces overall portfolio risk.

Now whether that risk reduction is substantial and meaningful can certainly be argued.
This is not necessarily true as stated. If the correlation and risk of the asset class are too high, it will make the overall allocation more risky, not less.

Depending on which numbers you plug in, you can make a case that adding some stocks increase risk.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by herpfinance » Mon Mar 14, 2016 10:20 am

lack_ey wrote:
herpfinance wrote:...
Except that arcticpineapplecorp.'s data suggests the opposite. Adding non-perfectly correlated asset classes reduces overall portfolio risk.

Now whether that risk reduction is substantial and meaningful can certainly be argued.
This is not necessarily true as stated. If the correlation and risk of the asset class are too high, it will make the overall allocation more risky, not less.

Depending on which numbers you plug in, you can make a case that adding some stocks increase risk.
You are of course absolutely correct. I was a bit too quick to hit reply.

Though I would assume that combining equally risky asset classes (as measured by standard deviation) would always reduce expected risk?
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by 38,000 ft » Mon Mar 14, 2016 12:01 pm

stemikger wrote:You are correct, but by adding international so I can hold Toyotya, Nestle, etc. I add sovereign risk, currency risk and higher risk in general. Vanguard puts the S&P Index fund at 4 and the the international index fund at 5.
You mention that by adding an international allocation, you are adding sovereign risk. I agree, but isn't it also diversifying sovereign risk? I feel like in our discussions on this topic, I don't often see US sovereign risk acknowledged sufficiently. If anything I would expect to see some recency bias in the direction of US being riskier than before based on recent events such as government shutdowns, Trump being considered a serious presidential candidate and so on.

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Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by Solo Prosperity » Mon Mar 14, 2016 5:13 pm

Some fun from our friends at Portfolio Visualizer...

Time Frame: 1972 - 2015

Portfolio 1: 100% U.S. Stock Market
Initial Balance: $10,000
CAGR: 10.15%
Std. Dev: 17.93%
Max DD: -40.61%
Sharpe: 0.37
Final Balance: $704,957

Portfolio 2: 100% International Developed Stock Market
Initial Balance: $10,000
CAGR: 8.91%
Std. Dev: 21.87%
Max DD: -41.27%
Sharpe: 0.28
Final Balance: $428,242

Portfolio 3: 100% Emerging Stock Market
Initial Balance: $10,000
CAGR: 14.48%
Std. Dev: 31.73%
Max DD: -52.81%
Sharpe: 0.44
Final Balance: $3,842,578

Portfolio 4: 60% U.S. / 20% Intl. Devel. / 20% EM (Re-balanced annually)
Initial Balance: $10,000
CAGR: 11.29%
Std. Dev: 18.86%
Max DD: -41.04%
Sharpe: 0.42
Final Balance: $1,108,163

Portfolio 5: 70% U.S. / 0% Intl. Devel. / 30% EM (Re-balanced annually)
Initial Balance: $10,000
CAGR: 12.04%
Std. Dev: 19.44%
Max DD: -41.77%
Sharpe: 0.45
Final Balance: $1,485,458


Some conclusions:

1. When you extend back to 43 years instead of 25, the difference is much smaller for U.S. versus International Developed, but, U.S. still wins very comfortably. Emerging Markets was the big winner of the three 100% allocations tested...but...that volatility is pretty scary, and it had the highest Max DD. I'm not sure most people could handle that type of portfolio (Insert Swedroe's 15% EM / 15% SCV / 70% T-Bill portfolio comment). Surprisingly, of the three 100% allocations, EM had the highest Sharpe at 0.44 despite the volatility. So Bogle was right in his data from 1990 - 2015 and he also would have been right in the U.S. vs. International Developed debate over an even longer time-frame. He would however be wrong about U.S. versus EM though...Even on a risk-adjusted basis...although, good luck with a 100% EM stock allocation and that volatility.

2. The diversified portfolios did very well. They both beat a 100% U.S. allocation over the last 43 years on a risk-adjusted basis and an absolute return basis. What was interesting was that the U.S./EM portfolio that excludes International Developed was the best portfolio on a risk-adjusted basis out of all 5. In fact, if we look at Bogle's time-frame of 1990-2015, that 70% U.S. / 30% EM allocation (re-balanced annually) actually beat a 100% U.S. stock allocation (9.55% CAGR versus 9.29% CAGR). So maybe it is an EM versus Developed conversation when it comes to International exposure, not a "Should we include International at all?".

3. It's all about time-frame. We have no idea what will be the best risk-adjusted market over the next 43 years, but I would be more comfortable with at least a small allocation to some EM stocks, re-balanced annually. Some might prefer to stick with all U.S., or some other combination. I think the point is that as long as you keep the costs to gain these exposures low, have an allocation that you can handle risk wise & re-balance periodically, we will all be fine in the long run.

kosomoto
Posts: 483
Joined: Tue Nov 24, 2015 8:51 pm

Re: Bogle - "Since 1990, US stocks grew 10%, Intl grew 6%"

Post by kosomoto » Mon Mar 14, 2016 10:46 pm

QuietWealth wrote:Some fun from our friends at Portfolio Visualizer...

Time Frame: 1972 - 2015

Portfolio 1: 100% U.S. Stock Market
Initial Balance: $10,000
CAGR: 10.15%
Std. Dev: 17.93%
Max DD: -40.61%
Sharpe: 0.37
Final Balance: $704,957

Portfolio 2: 100% International Developed Stock Market
Initial Balance: $10,000
CAGR: 8.91%
Std. Dev: 21.87%
Max DD: -41.27%
Sharpe: 0.28
Final Balance: $428,242

Portfolio 3: 100% Emerging Stock Market
Initial Balance: $10,000
CAGR: 14.48%
Std. Dev: 31.73%
Max DD: -52.81%
Sharpe: 0.44
Final Balance: $3,842,578

Portfolio 4: 60% U.S. / 20% Intl. Devel. / 20% EM (Re-balanced annually)
Initial Balance: $10,000
CAGR: 11.29%
Std. Dev: 18.86%
Max DD: -41.04%
Sharpe: 0.42
Final Balance: $1,108,163

Portfolio 5: 70% U.S. / 0% Intl. Devel. / 30% EM (Re-balanced annually)
Initial Balance: $10,000
CAGR: 12.04%
Std. Dev: 19.44%
Max DD: -41.77%
Sharpe: 0.45
Final Balance: $1,485,458


Some conclusions:

1. When you extend back to 43 years instead of 25, the difference is much smaller for U.S. versus International Developed, but, U.S. still wins very comfortably. Emerging Markets was the big winner of the three 100% allocations tested...but...that volatility is pretty scary, and it had the highest Max DD. I'm not sure most people could handle that type of portfolio (Insert Swedroe's 15% EM / 15% SCV / 70% T-Bill portfolio comment). Surprisingly, of the three 100% allocations, EM had the highest Sharpe at 0.44 despite the volatility. So Bogle was right in his data from 1990 - 2015 and he also would have been right in the U.S. vs. International Developed debate over an even longer time-frame. He would however be wrong about U.S. versus EM though...Even on a risk-adjusted basis...although, good luck with a 100% EM stock allocation and that volatility.

2. The diversified portfolios did very well. They both beat a 100% U.S. allocation over the last 43 years on a risk-adjusted basis and an absolute return basis. What was interesting was that the U.S./EM portfolio that excludes International Developed was the best portfolio on a risk-adjusted basis out of all 5. In fact, if we look at Bogle's time-frame of 1990-2015, that 70% U.S. / 30% EM allocation (re-balanced annually) actually beat a 100% U.S. stock allocation (9.55% CAGR versus 9.29% CAGR). So maybe it is an EM versus Developed conversation when it comes to International exposure, not a "Should we include International at all?".

3. It's all about time-frame. We have no idea what will be the best risk-adjusted market over the next 43 years, but I would be more comfortable with at least a small allocation to some EM stocks, re-balanced annually. Some might prefer to stick with all U.S., or some other combination. I think the point is that as long as you keep the costs to gain these exposures low, have an allocation that you can handle risk wise & re-balance periodically, we will all be fine in the long run.
Sorry to be blunt, but EVERYBODY'S calculations in this thread have been meaningless. Unless you all plan on investing all your retirement funds on the same day, these results are simply meaningless. The results would look WAY different if you calculate for adding funds every 2 weeks or monthly, as a normal investor cost averages over time. Picking one date to another date without cost averaging creates very weird results. I realize the calculation of cost averaging is far more time consuming, but it is also far more accurate.

How to Calculate Personal Rate of Return When Dollar-Cost Averaging

Let's say you are in the accumulation phase and are dollar-cost-averaging into a mutual fund. You get your mutual fund statement at the end of the year and it tells you that the fund returned X amount that year. Was that YOUR actual return? Most likely not. Why? Because you invested at different times during the year. The mutual fund's reported rate of return is based on the assumption that you invested on January 1st and held it until December 31.

So, what is a Personal Rate of Return? It is the ACTUAL rate of return that you receive.

How do you calculate it? There are a number of ways. I'll show you a way that I learned about. I must warn you, this is a pretty involved method for calculating personal ROR (also known as a time-weighted ROR). Also, some of you will notice that there are shortcuts that can be taken in some of the steps. I'm going to go the long way around so that hopefully everyone can understand this.

EXAMPLE

For this example, we will say that you started on January 1, 2004 with zero dollars in your account. We will assume that you set up your account for automatic investments of $100 to be made on the last day of each month. For this example, we will use Vanguard's S&P 500 Index Fund (VFNIX).

Step 1. Calculate the number of shares purchased for each time period.

Here are the monthly closing prices and number of shares purchased for VFNIX:


Purchase Shares
Price Purchased
01/31/2004 104.54 0.95657165
02/29/2004 105.98 0.94357426
03/31/2004 104.01 0.96144601
04/30/2004 102.37 0.97684869
05/31/2004 103.76 0.96376253
06/30/2004 105.41 0.9486766
07/31/2004 101.92 0.9811617
08/31/2004 102.31 0.97742156
09/30/2004 102.99 0.97096806
10/31/2004 104.55 0.95648015
11/30/2004 108.78 0.91928663
12/31/2004 111.64 0.8957363


Step 2. Figure out a running total for each purchase. This step is pretty involved.

Shares Price Total
1/31/2004 Initial Purchase 0.9566 104.54 $100
2/29/2004 Purchase 0.9436 105.98 $100
Previous Balance 0.9566 105.98 $101
Total 1.9001 $201
3/31/2004 Purchase 0.9614 104.01 $100
Previous Balance 1.9001 104.01 $198
Total 2.8616 $298
4/30/2004 Purchase 0.9768 102.37 $100
Previous Balance 2.8616 102.37 $293
Total 3.8384 $393
5/31/2004 Purchase 0.9638 103.76 $100
Previous Balance 3.8384 103.76 $398
Total 4.8022 $498
6/30/2004 Purchase 0.9487 105.41 $100
Previous Balance 4.8022 105.41 $506
Total 5.7509 $606
7/31/2004 Purchase 0.9812 101.92 $100
Previous Balance 5.7509 101.92 $586
Total 6.7320 $686
8/31/2004 Purchase 0.9774 102.31 $100
Previous Balance 6.7320 102.31 $689
Total 7.7095 $789
9/30/2004 Purchase 0.9710 102.99 $100
Previous Balance 7.7095 102.99 $794
Total 8.6804 $894
10/31/2004 Purchase 0.9565 104.55 $100
Previous Balance 8.6804 104.55 $908
Total 9.6369 $1,008
11/30/2004 Purchase 0.9193 108.78 $100
Previous Balance 9.6369 108.78 $1,048
Total 10.5562 $1,148
12/31/2004 Purchase 0.8957 111.64 $100
Previous Balance 10.5562 111.64 $1,178
Total 11.4519 $1,278



Step 3. Calculate the individual returns for each time period.

To do this, you simply use this formula:

[(This month's closing balance - Current month's purchase)/Previous month's balance]-1

For the month of February, the numbers would like this (I rounded the numbers for simplicity's sake):

[(201 - 100)/100]-1
[101/100]-1
[1.01]-1
.01

You would repeat this process for March - December. Here's what your numbers should look like not rounded:

Feb 0.013775
March -0.01859
April -0.01577
May 0.013578
June 0.015902
July -0.03311
Aug 0.003827
Sept 0.006646
Oct 0.015147
Nov 0.040459
Dec 0.026292


Step 4. Calculate the Personal Rate of Return

Here's the formula for this step:

{[(1 + Feb Rate) X (1 + March Rate) X ...]-1} X 100

It should look like this:

{[(1 + 0.013775) X (1 + (-0.01859)) X (1 + (-0.01577)) X ...]-1} X 100

Your final answer should look like this:

{[1.067917] - 1} X 100
.067917 X 100
6.7917%

WHEW! That's a lot of work to find out that your personal rate of return for this example is 6.8%! Now you know why a stockbroker doesn't furnish this information!

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