How much international stock? A suggestion.

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Taylor Larimore
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How much international stock? A suggestion.

Post by Taylor Larimore » Sat Aug 06, 2016 9:35 pm

Bogleheads:

Our Boglehead "Search" engine reports 22,400 results for the question: "How much international stock?" It is a question without a definitive answer because no investor knows the future. We are all guessing.

There are many reasons for holding, or not holding, international stocks in our portfolio. The purpose of this post is to suggest a reasonable percentage.

Two very knowledgeable expert sources wrote:

In February 2014, Vanguard Research published a 15-page study titled, "Global equities: Balancing home bias and diversification."
This paper concludes that although no one answer fits all investors, the empirical and practical considerations suggest a reasonable starting allocation to non-U.S. stocks of 20%, with an upper limit based on global market capitalization, subject to the investor's perspective on the short- and long-term trade-offs.
Our mentor, Jack Bogle, in Common Sense on Mutual Funds (published in 2010), wrote 26 pages about international investing with this conclusion:
So, I'd approach this relatively new wave of international investing with caution, and stick to my recommendation that international funds--including BRIC funds--do not exceed one-fifth (20%) of an investor's equity position.
So there we have it:

Vanguard researchers believe no less than a 20% international stock allocation is reasonable.

Jack Bogle believes no more than a 20% international stock allocation is reasonable.

When 20% is the only percentage of stocks that these two expert sources agree on, I feel comfortable using that 20% figure.

Best wishes.
Taylor

Edit (July 1, 2017): Today, I ran a comparison of two Vanguard total stock market index funds introduced by Jack Bogle.

Mr. Bogle introduced Vanguard Total Stock U.S. Stock Market Index Fund on April 22, 1992 and Vanguard Total International Stock Index Fund on April 29, 1996. I ran this total return comparison:

According to Morningstar, if you had invested $10,000 in each fund on April 29, 1996, you would now have $26,655 in your Total International Fund and $55,249 in your Total U.S. Stock Market fund -- over twice as much. So far, Mr. Bogle has been right. You can hear his reasons here:

[url=https://www.youtube.com/watch?v=vMj4sHjF_kA
Last edited by Taylor Larimore on Fri Aug 25, 2017 8:57 pm, edited 5 times in total.
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Re: How much international stock? A suggestion.

Post by joe8d » Sat Aug 06, 2016 9:38 pm

20% :thumbsup
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Re: How much international stock? A suggestion.

Post by jwillis77373 » Sat Aug 06, 2016 10:50 pm

Very fine research Taylor.. although (and I am biased based on what I am invested in now).. there might be some adjustments to that Percentage given the more recent investment returns environment.

Given the generally predicted "lower" returns we can expect in the coming years, as compared to previous years

One might want to adjust the Percentage "lower" to compensate for a lower ability to tolerate speculative investments.

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Re: How much international stock? A suggestion.

Post by pascalwager » Sat Aug 06, 2016 11:00 pm

I like Larry Swedroe's reasoning: Start at global market weighting and then add/subtract after considering personal liabilities.

Presently, international is 46% of global, so I hold 50% international after considering certain personal cash flows subject mainly to domestic risks. Because international is more risky, I would not choose to hold more than 50%.

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Re: How much international stock? A suggestion.

Post by jwillis77373 » Sat Aug 06, 2016 11:07 pm

sometimes I wonder if Elon Musk opens a branch of the New York Stock Exchange on Mars, everyone will feel the need to add Interplanetary diversification to their portfolio.. <sigh>

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Re: How much international stock? A suggestion.

Post by QuietProsperity » Sat Aug 06, 2016 11:22 pm

jwillis77373 wrote:Given the generally predicted "lower" returns we can expect in the coming years, as compared to previous years

One might want to adjust the Percentage "lower" to compensate for a lower ability to tolerate speculative investments.


I am confused, is that in regards to international stocks or US stocks?

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Re: How much international stock? A suggestion.

Post by pascalwager » Sun Aug 07, 2016 12:59 am

jwillis77373 wrote:sometimes I wonder if Elon Musk opens a branch of the New York Stock Exchange on Mars, everyone will feel the need to add Interplanetary diversification to their portfolio.. <sigh>


Feelings would be irrelevant. The solar market would determine its identity as, perhaps, an emerging market. Then it might well be included in the Vanguard Total Solar Stock Fund.

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Re: How much international stock? A suggestion.

Post by Crushtheturtle » Sun Aug 07, 2016 1:25 am

As of this date in 2016, the market has decided that 46 cents of every dollar is invested in companies not domiciled in the United States.

If your international equity allocation is anything other than that global market weight, you are tilting. You are betting that you know something that the global market does not.

If you have justifications, so be it. I believe that ex-US market share will inevitably increase long term, and so tilts should be in that direction, if at all.

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Re: How much international stock? A suggestion.

Post by bertilak » Sun Aug 07, 2016 5:19 am

Crushtheturtle wrote:You are betting that you know something that the global market does not.

But I DO know something the global market does not know. I know what denomination my expenses will be in: U.S. Dollars.

Yes diversification is important. I used the same logic Taylor used to come up with a 20% international (aka non-US) allocation. Will that turn out to have been the optimal choice? No one knows, but probably not. ANY choice one makes is most likely not optimal. 20% can't be too far wrong, though. I'll accept that.
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Re: How much international stock? A suggestion.

Post by oldcomputerguy » Sun Aug 07, 2016 6:03 am

There are some efficient frontier graphs on the wiki showing allocations of domestic to international that seem to indicate the optimum mix for risk-adjusted return is 70/30 domestic/international. Return as shown on these graphs seems to peak at 60/40, with 50/50 having the same return but more risk.

https://www.bogleheads.org/wiki/File:US ... tional.png
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Re: How much international stock? A suggestion.

Post by randomguy » Sun Aug 07, 2016 8:22 am

bertilak wrote:
Crushtheturtle wrote:You are betting that you know something that the global market does not.

But I DO know something the global market does not know. I know what denomination my expenses will be in: U.S. Dollars.



Sure and does that matter? The number in front of the denomination matters just as much as the denomination and that is driven to some extent by global markets. Look at high inflation countries for examples of where holding your investments in local currency doesn't work out too well. Compare the investor with say 50% swiss bonds/50% argentina pesos to the 100% peso guy starting in say 1975 and see who did better even when they had to buy everything in pesos. Obviously an extreme example and reverse can happen. The question is always do you want to take that risk for the potential gain or would you be happy with just average results.

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Re: How much international stock? A suggestion.

Post by cfs » Sun Aug 07, 2016 8:35 am

I predict a TIE!

Thanks to our shipmate Taylor for starting this new conversation on the YES Internationals and NO Internationals. For some of our shipmates the Internationals are great, for other shipmates the Internationals is where the good money goes to die. Based on methaphysics, extrapolation, and my proprietary cfs guessing indicators I can now make a high confidence prediction that the final score will be a TIE between YES and NO. Good luck with your investments, with or without Internationals.

Thanks for reading.
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Re: How much international stock? A suggestion.

Post by synpacket » Sun Aug 07, 2016 8:38 am

Taylor has a way of cutting through the confusion and making things seem simple. Great advice as always, thank you.

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Re: How much international stock? A suggestion.

Post by Taylor Larimore » Sun Aug 07, 2016 8:41 am

cfs wrote:I predict a TIE!

Thanks to our shipmate Taylor for starting this new conversation on the YES Internationals and NO Internationals. For some of our shipmates the Internationals are great, for other shipmates the Internationals is where the good money goes to die. Based on methaphysics, extrapolation, and my proprietary cfs guessing indicators I can now make a high confidence prediction that the final score will be a TIE between YES and NO. Good luck with your investments, with or without Internationals.

Thanks for reading.

cfs:

When experts disagree it is often because it makes no foreseeable difference.

Best wishes.
Taylor
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Re: How much international stock? A suggestion.

Post by cfs » Sun Aug 07, 2016 8:45 am

Taylor Larimore wrote: . . . When experts disagree it is often because it makes no foreseeable difference.

And I totally concur with our shipmate Taylor !!!

Thanks for reading.
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Re: How much international stock? A suggestion.

Post by spammagnet » Sun Aug 07, 2016 8:48 am

smartinwate wrote:There are some efficient frontier graphs on the wiki showing allocations of domestic to international that seem to indicate the optimum mix for risk-adjusted return is 70/30 domestic/international. Return as shown on these graphs seems to peak at 60/40, with 50/50 having the same return but more risk.
https://www.bogleheads.org/wiki/File:US ... tional.png

An earlier version of that graph (listed on the same page) was labeled EAFE, rather than "international". Does this conversation refer only to EAFE? Did the graph content change? Or only the label?

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Re: How much international stock? A suggestion.

Post by spammagnet » Sun Aug 07, 2016 8:53 am

spammagnet wrote:An earlier version of that graph (listed on the same page) was labeled EAFE, rather than "international". Does this conversation refer only to EAFE? Did the graph content change? Or only the label?

Never mind. I found the answer on the wiki page it came from. Because the analysis there demonstrated a variation of risk/return depending on the period chosen (as does any investment), 20% is probably as good a guess as 30%.

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Re: How much international stock? A suggestion.

Post by MnD » Sun Aug 07, 2016 9:23 am

I just look up whatever Vanguard World has for international with no rebalancing and new money goes in at around whatever the current global cap split is. This eliminates a lot of rebalancing transactions and hand-wringing over knowing the "right" US/-ex-US allocation. Likewise for the suballocation to emerging markets.

Tilting heavily to US now seems just brilliant after US market outperformance (and now-lofty US valuations) in 6 of the past 8 years, but don't confuse a single-country equity winning streak with investing acumen or a basis for a long-term plan. Maybe US % of equities will go to 70% of global cap or 20% of market cap over over the next few decades. Regardless, I'll be along for the ride rather than rebalancing to some arbitrary "correct" allocation which is easy to justify when the market is going your way and difficult to explain when the market is not.

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Re: How much international stock? A suggestion.

Post by nisiprius » Sun Aug 07, 2016 9:41 am

smartinwate wrote:There are some efficient frontier graphs on the wiki showing allocations of domestic to international that seem to indicate the optimum mix for risk-adjusted return is 70/30 domestic/international. Return as shown on these graphs seems to peak at 60/40, with 50/50 having the same return but more risk.
There are two big problems with using MPT as a guide to U.S./international allocation.

The first is: even if it is real, what is the size of the effect? How big is it in the first place... and, instead of arguing exactly where the optimum spot is, how much difference is there between the supposed optimum and anything else?

You will notice that virtually everyone who shows an efficient frontier chart of U.S. and international, including the wiki, uses a "suppressed zero" chart that magnifies differences rather than showing how big they are in absolute terms. The reason why nobody ever plots them with axes going to zero is that if you do, the efficient frontier is a little squiggle, up and to the right, on a big blank space, and you can't see the differences clearly--and they don't look impressive. The Bogleheads' Wiki chart, for example, really should look something about like this:

Image

Now, obviously, if you believed that these small differences in past averages were real, robust, and that you were guaranteed to get something close to them in your own portfolio going forward, then you could do the compounding math and "prove" that the difference in return between 9.28% at the optimum and 9.08% for 100%-U.S. was hugely important and thirty years from now would be enough to buy you a nice Rolex. But--unlike the effect of expense ratios--there's no such certainty.

Second, John C. Bogle makes this point himself, but let me make it myself a little differently. My 2007 copy of Burton Malkiel's A Random Walk Down Wall Street illustrates diversification and modern portfolio theory, and the example he chose to illustrate happens to be U.S. and developed foreign country stocks, i.e. the EAFE index, January 1970-June 2006. The picture is on p. 193.

For whatever reason, he chose to highlight, not the tangent portfolio, but the minimum-risk portfolio, which at that time was 76% U.S., 24% international. In the latest edition, p. 203, he has an updated chart based on data through December 2013 and the minimum risk is obtained with only 16% international. That big a change already suggests endpoint dependence, but let me put my own spin on it.

We have 46 years of international stock data in the EAFE index--nothing broader goes back anywhere near that far--and Malkiel's 2007 book showed the results of looking at the first 35 years of it.

Hey, 35 years, that's a lot, and even today you can say that's a good big part of all available data.

Instead of looking at the first 35 years, 1970-2005 inclusive, let's look at the last 35 years of data that I happen to have in my homebrew software: 1980-2014 inclusive. Got that? I'm still looking at most of the data, and the two date ranges include two-and-a-half decades of overlap. Each period is a good long 35 years, and they mostly overlap.

But even so, just look at the difference!

Image
Image

At the end of 2006, you've have said, based on that chart, that "the last 35 years of data show that the best allocation is 33% international." But at the end of 2014, looking at the same amount of data the same way, you'd have said "the last 35 years of data show that the best allocation is 100% U.S., zero international."

What I mean to say is: for determining the best mix of U.S. and international, using MPT on past data is a bad joke. In the context of U.S. versus international stock, MPT isn't much more than an obfuscated, pseudo-scientific way of telling you which asset class did better during the endpoints chosen--and, as with return itself, the results are highly endpoint-dependent.

What happened? It's pretty clear. The much-vaunted MPT low-correlation thing only works if the two asset classes have comparable return in the same place--meaning they are both fairly close to the yellow line. This is actually the case in the first chart. And, it only works if the two assets have low correlation, which shows up in the chart as the amount of bend. Under the right conditions, as in the first chart, the low correlation will make the curve bend up, which will push the tangent line (yellow) up above the just-use-the-best-asset line (red). How much it pushes it up depends on the correlation--the more correlation, the less bend and the less push.

The big effect here is 2008-2009, when both U.S. and foreign stocks tanked and foreign stocks tanked a little more, and 2009-present, when foreign stocks in general had lower return than U.S. stocks. The low return brings the green dot down. The not-so-low correlation prevents the line from bending much. In theory, a sufficiently low correlation (a negative correlation would be needed) could make the curve bulge enough to the right that the yellow line would be lifted above the red line.
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Re: How much international stock? A suggestion.

Post by cfs » Sun Aug 07, 2016 9:43 am

Good information.

Thanks to our shipmate MnD for mentioning the Vanguard Total World Stock Index Fund (VTWSX). This could be a good option for the YES on Internationals group. This fund was launched in the middle of the Financial Markets Debacle and immediately went south, so, those "low gains" [since inception] numbers could be deceiving. Now waiting for Vanguard to launch their Vanguard Total World Bond Index Fund [there may be one in the works] to make the perfect two-fund-international-portfolio. Good luck with your investments with or without Internationals.

Thanks for reading.
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Re: How much international stock? A suggestion.

Post by FillorKill » Sun Aug 07, 2016 10:48 am

P1: 100% US Market
P2: 50/50 US Market/Int Market (annual rebalance)

According to visualizer, from 1972-2015 one of these portfolios had a Sharpe of .37 and a Sortino of .63 while the other had a Sharpe of .37 and a Sortino of .63.

Can you guess which is which?

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Re: How much international stock? A suggestion.

Post by lostdog » Sun Aug 07, 2016 11:00 am

Does Vanguard recommend 20% of the total portfolio go to International stocks? Or 20% of the equities portion?
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Re: How much international stock? A suggestion.

Post by randomguy » Sun Aug 07, 2016 11:02 am

cfs wrote:
Taylor Larimore wrote: . . . When experts disagree it is often because it makes no foreseeable difference.

And I totally concur with our shipmate Taylor !!!

Thanks for reading.


My experience is that when experts disagree, most of the time it is because one is wrong. There might not be enough evidence now to know which one is right but that doesn't change that one is right and the other is wrong. You need to decide if you expert is wrong what that worse case will be. Lets make it real simple: there are 3 possible returns for the next 30 years 4%,7%, or 10%. Are you willing to risk getting 4% for the chance for 10%, or are you happy just getting 7%?

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Re: How much international stock? A suggestion.

Post by nedsaid » Sun Aug 07, 2016 11:06 am

I believe a stock allocation anywhere between 20% and 50% International is just fine.
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Re: How much international stock? A suggestion.

Post by goingup » Sun Aug 07, 2016 11:14 am

lostdog wrote:Does Vanguard recommend 20% of the total portfolio go to International stocks? Or 20% of the equities portion?

Vanguard has upped the % of international in the Target Funds and Lifestrategy Funds to 40% of equity.

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Re: How much international stock? A suggestion.

Post by tc101 » Sun Aug 07, 2016 11:18 am

I talked to a Vanguard adviser about 2 months ago. He said Vanguard now recommends a stock allocation between 30% and 50% International.
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Re: How much international stock? A suggestion.

Post by Dirghatamas » Sun Aug 07, 2016 1:30 pm

Well, the obvious logical starting point is global market cap weighted. That's what I concluded when I started investing as a young guy 24 years back (gosh how fast time flies). Not too much to think about. I do agree that currency of expenses is a valid argument for some tilt but it seems so complicated to predict any macro trends, that I never bother and ignore its effects.

Investing has been simple. Every month, just look up the global US/ex US ratio and invest that% in each category. Don't re balance (because it is always in balance). Simply at the end of each year, use annual bonus to remove any small, inevitable portfolio drift (due to different ER between US/ex US, differences in dividends/qualified, differences in taxation etc.). Never sell any shares except for taxes and to do TLH.

Seems to have worked for almost a quarter century for me. Every year, I know my portfolio will under perform whatever is the hot stock/sector/industry/country/continent. Relax with those average expectations and don't be too greedy :beer

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Re: How much international stock? A suggestion.

Post by triceratop » Sun Aug 07, 2016 1:44 pm

Taylor Larimore wrote:<snip>

So there we have it:

Vanguard researchers believe no less than a 20% international stock allocation is reasonable.

Jack Bogle believes no more than a 20% international stock allocation is reasonable.

When 20% is the only percentage of stocks that these two expert sources agree on, I feel comfortable using that 20% figure.


But the fact that there is some commonality in that they both have recommendations containing the two numbers shouldn't make you think they are in agreement. In fact these recommendations are in direct opposition and it would be dangerous to falsely conclude with any confidence that this is the right allocation. Simply: "No less than X" is quite different than "no more than X".

I am much more convinced by the arguments for global equity weights. Also: valuations themselves make an excellent argument for purchasing now.
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Re: How much international stock? A suggestion.

Post by nisiprius » Sun Aug 07, 2016 1:57 pm

FillorKill wrote:P1: 100% US Market
P2: 50/50 US Market/Int Market (annual rebalance)

According to visualizer, from 1972-2015 one of these portfolios had a Sharpe of .37 and a Sortino of .63 while the other had a Sharpe of .37 and a Sortino of .63.

Can you guess which is which?
:D

Another illustration of the effect of adding an international allocation--in this case, going from 60% U.S. stock, 40% bonds to 30% U.S. stock, 30% international stock, 40% bonds.

Image
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Re: How much international stock? A suggestion.

Post by triceratop » Sun Aug 07, 2016 2:07 pm

nisiprius wrote:
FillorKill wrote:P1: 100% US Market
P2: 50/50 US Market/Int Market (annual rebalance)

According to visualizer, from 1972-2015 one of these portfolios had a Sharpe of .37 and a Sortino of .63 while the other had a Sharpe of .37 and a Sortino of .63.

Can you guess which is which?
:D

Another illustration of the effect of adding an international allocation--in this case, going from 60% U.S. stock, 40% bonds to 30% U.S. stock, 30% international stock, 40% bonds.

Image


This is a strong argument for international diversification, in my opinion, precisely because of the similar results. Diversifying globally cuts tail risk but (historically) hasn't reduced returns or increased "risk" (depending on your definition). I don't want to quite call it a free lunch, but you do lessen the risk of a Japan-style downturn in your local country.
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Re: How much international stock? A suggestion.

Post by longinvest » Sun Aug 07, 2016 2:17 pm

triceratop wrote: valuations themselves make an excellent argument for purchasing now.

Triceratop,

Prices are set by transactions on the market. These transactions happen when a buyer and a seller both agree on a price. They both perceive the price as fair.

All the latest prices of stocks (domestic and international) and bonds were perceived as fair by their respective buyers and sellers.

Please explain to me how you happen to know something that these investors didn't know when making their transactions. Because, if sellers knew that their international stocks were undervalued, they would have kept their stocks for themselves or asked for a higher price, wouldn't they?

Have you been listening to so-called experts who conviced you using simplistic metrics and sophisticated prose that "valuations matter", by any chance?
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Re: How much international stock? A suggestion.

Post by triceratop » Sun Aug 07, 2016 2:37 pm

longinvest wrote:
triceratop wrote: valuations themselves make an excellent argument for purchasing now.

Triceratop,

Prices are set by transactions on the market. These transactions happen when a buyer and a seller both agree on a price. They both perceive the price as fair.

All the latest prices of stocks (domestic and international) and bonds were perceived as fair by their respective buyers and sellers.

Please explain to me how you happen to know something that these investors didn't know when making their transactions. Because, if sellers knew that their international stocks were undervalued, they would have kept their stocks for themselves or asked for a higher price, wouldn't they?

Have you been listening to so-called experts who conviced you using simplistic metrics and sophisticated prose that "valuations matter", by any chance?


I don't know about "so-called experts", but Jack Bogle and Larry Swedroe present convincing arguments.

Jack Bogle wrote:There is an option for bold and self-confident investors. It does not abandon the "stay the course" principle, but it allows for a mid course correction if stormy weather threatens on the horizon. If rational forecasts indicate that one asset class offers a considerably better investment opportunity than another, you might shift a modest percentage of your assets from the class judged less attractive to the class judged more attractive. This policy is referred to as tactical asset allocation. It is an opportunistic, transitory, aggressive policy that--if skill, insight, and luck are with you -- may result in marginally better long-term returns than either a fixed-ratio approach or benign neglect.

It is grand to possess skill and insight, although all of us tend to overate our abilities in both areas. But luck, too, plays a role. Many investors are right but at the wrong time. It does not good to be too early or too late. Tactical asset allocation, if the strategy is used at all, should therefore be used only at the margin. That is, if your optimal strategic allocation is 65 percent stocks, limit any change to no more that 15 percentage points (50 to 80 percent stocks, and implement the change gradually.

The prospect of having the skill, insight, and luck to eliminate your stock position overnight and restore it "when the time is right" is, in my view, patently absurd. Cautious tactical allocation may have a lure for the bold. Full-blown tactical allocation lures only the fool."


Now of course, I am not recommending buying international stocks simply because of valuations; just that current valuations mean implementing an international portfolio one holds for the long term may prove to be quite cheap (much better than investing and then having the currencies swing against you!). If you believe the arguments by Swedroe for example. And I do. You may object to that, but perhaps it might be more convincing to attack the substance of the analysis and not simply describe them as "simplistic metrics and sophisticated prose". There's a current topic started by Larry devoted to this topic.
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Re: How much international stock? A suggestion.

Post by longinvest » Sun Aug 07, 2016 2:57 pm

triceratop wrote:I don't know about "so-called experts", but Jack Bogle and Larry Swedroe present convincing arguments.


Triceratop,

I was really asking you a serious question. Please don't deflect it. Here it is, again:

    How do you, personally, happen to know something that those who recently sold their international stocks did not know?

I am not asking you about what experts, or Jack Bogle think. They can think whatever they want, it does not mean that they actually know. And even if they knew, it doesn't follow that anyone who listens to them knows.

I am not asking you about your belief in the opinion of Jack Bogle or any other expert, out there. I am asking you about what you, yourself, know about these stocks that their sellers did not know, leading them to sell their holdings for less than they are worth.

This is a very important question that I always ask myself. I realized that I was easily "convinced" of something just because somebody in a position of authority said it, in the past, without actually taking the time to check that what I thought true actually was.

Some expert could tell me, for example, that the P/E ratio is such that international stocks are "cheap". But, when I tried to actually verify that having any specific P/E ratio is a guarantee of future performance, I couldn't find any proof. Worse: I have yet to find people who avoided the Enron debacle using any such metric.

And, let's not forget that international stock sellers knew all about the different ratios, before selling. I keep asking myself: why would they have sold their stocks for less than they're worth?

How do you know something that sellers didn't?
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Re: How much international stock? A suggestion.

Post by triceratop » Sun Aug 07, 2016 3:33 pm

longinvest wrote:
triceratop wrote:I don't know about "so-called experts", but Jack Bogle and Larry Swedroe present convincing arguments.


Triceratop,

I was really asking you a serious question. Please don't deflect it. Here it is, again:

    How do you, personally, happen to know something that those who recently sold their international stocks did not know?

I am not asking you about what experts, or Jack Bogle think. They can think whatever they want, it does not mean that they actually know. And even if they knew, it doesn't follow that anyone who listens to them knows.

I am not asking you about your belief in the opinion of Jack Bogle or any other expert, out there. I am asking you about what you, yourself, know about these stocks that their sellers did not know, leading them to sell their holdings for less than they are worth.

This is a very important question that I always ask myself. I realized that I was easily "convinced" of something just because somebody in a position of authority said it, in the past, without actually taking the time to check that what I thought true actually was.

Some expert could tell me, for example, that the P/E ratio is such that international stocks are "cheap". But, when I tried to actually verify that having any specific P/E ratio is a guarantee of future performance, I couldn't find any proof. Worse: I have yet to find people who avoided the Enron debacle using any such metric.

You're using the example of a single stock's collapse to argue against diversification to market weights? :confused

Besides that, nobody in this conversation (specifically: A costly mistake made by both investors and advisors) is making guarantees. They would be foolish to do so. They're trying to describe the expected value of future returns, with full knowledge of the wide dispersion of possible results. That is all that "cheaper" means, since of course the future is unknowable. The key quote to me from Larry's article is:

"Common sense, which is all-too-uncommon, should lead you to conclude that this isn’t logical. Higher prices paid for the same dollar of earnings should lead one to forecast lower, not higher, returns. And the academic literature demonstrates current valuations do in fact provide us with the best estimate of future returns. In other words, high valuations don’t forecast high future growth in earnings (which would be required to generate a high return). Instead, the research shows high valuations predict low future returns. And from 2000 through 2015, the S&P 500 went on to return just 4.1% in nominal terms and 1.9% in real terms. It’s easy to see the damage that could be done if one built a retirement plan that relied on a nominal return forecast of 11.3% and a real return forecast of 8.1%."

I'm not accepting Larry's argument because he's an expert, I am saying that his argument is convincing. What is your critique of Larry's points? Simply saying "he's a a so-called expert" is not itself an argument.

I'm an academic, not albeit in finance, but to me the academic consensus is convincing to me. You are of course free to disagree.


And, let's not forget that international stock sellers knew all about the different ratios, before selling. I keep asking myself: why would they have sold their stocks for less than they're worth?

Did they? No, seriously, how do we know they did? Bogleheads believe that in the short run the market is a voting machine and in the long run is a weighing machine. Unspecified are the actual timescales involved.

How do you know something that sellers didn't?

I don't. In fact I never suggested I did; I did suggest the arguments for global equity diversification make the most sense to me (my international allocation is currently 40%, about 5% off from market weights), and that if you believe valuations matter then there could be much worse times to begin investing internationally.
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Re: How much international stock? A suggestion.

Post by dandypandys » Sun Aug 07, 2016 3:36 pm

Thanks again Taylor! 20% it is.

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Re: How much international stock? A suggestion.

Post by NMJack » Sun Aug 07, 2016 4:08 pm

triceratop wrote:The key quote to me from Larry's article is:

"Common sense, which is all-too-uncommon, should lead you to conclude that this isn’t logical. Higher prices paid for the same dollar of earnings should lead one to forecast lower, not higher, returns.


He mentions common sense and logic and then immediately violates both. His quote should likely read "Higher prices paid for the same dollar of PAST earnings should lead one to forecast lower, not higher, returns. The P/E is entirely in the past. Adding the word "past" destroys the argument. Why do we just rule out the possibility that the person on the buying side of the equation has good, factual basis for deciding that buying at today's prices will provide excellent returns going forward. We don't know for sure, but neither does Larry. Common sense indeed!

triceratop wrote: And the academic literature demonstrates current valuations do in fact provide us with the best estimate of future returns. In other words, high valuations don’t forecast high future growth in earnings (which would be required to generate a high return).


Again, to be accurate, the statement should probably read that "valuations provided us with the best estimate of future returns in the past. In other words, high valuations didn't forecast high future growth in earnings in the past."

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Re: How much international stock? A suggestion.

Post by triceratop » Sun Aug 07, 2016 4:20 pm

^ All true.
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Re: How much international stock? A suggestion.

Post by miles monroe » Sun Aug 07, 2016 4:30 pm

based on global valuations, the answer is approximately 50-50.

most don't have that much int'l. fear of the unknown is my guess as to why.

interesting that vanguard has nudged the ratio up to 60-40.

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Re: How much international stock? A suggestion.

Post by MIpreRetirey » Sun Aug 07, 2016 5:46 pm

NMJack wrote:
triceratop wrote:The key quote to me from Larry's article is:

"Common sense, which is all-too-uncommon, should lead you to conclude that this isn’t logical. Higher prices paid for the same dollar of earnings should lead one to forecast lower, not higher, returns.


He mentions common sense and logic and then immediately violates both. His quote should likely read "Higher prices paid for the same dollar of PAST earnings should lead one to forecast lower, not higher, returns. The P/E is entirely in the past. Adding the word "past" destroys the argument. Why do we just rule out the possibility that the person on the buying side of the equation has good, factual basis for deciding that buying at today's prices will provide excellent returns going forward. We don't know for sure, but neither does Larry. Common sense indeed!

triceratop wrote: And the academic literature demonstrates current valuations do in fact provide us with the best estimate of future returns. In other words, high valuations don’t forecast high future growth in earnings (which would be required to generate a high return).


Again, to be accurate, the statement should probably read that "valuations provided us with the best estimate of future returns in the past. In other words, high valuations didn't forecast high future growth in earnings in the past."

Hey! I don't know. But does anyone recall if he's talking ttm earnings/dividends, or expected earnings. I believe the former. Because there is no earnings/dividends for less than a year, and they are either past year or expected year. So, yeah.
But, there will always be earnings, and there will always be bonds. What the market will pay for either, in the form of P/E, is a measure today, and not the past. And the forecast is no change; it's not a weather forecast.

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Re: How much international stock? A suggestion.

Post by ruralavalon » Sun Aug 07, 2016 5:53 pm

bertilak wrote:
Crushtheturtle wrote:You are betting that you know something that the global market does not.

But I DO know something the global market does not know. I know what denomination my expenses will be in: U.S. Dollars.

Yes diversification is important. I used the same logic Taylor used to come up with a 20% international (aka non-US) allocation. Will that turn out to have been the optimal choice? No one knows, but probably not. ANY choice one makes is most likely not optimal. 20% can't be too far wrong, though. I'll accept that.

I also know that historically holding over 20 - 30% of equities in international equities has yielded little or no diversification benefit.

Our allocation is 25% of equities in international equities, using Vanguard Total International Stock Index Fund.
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Re: How much international stock? A suggestion.

Post by jtopicz1 » Sun Aug 07, 2016 6:55 pm

My equity is 50% Domestic / 50% International. May be right, may be wrong, but I sleep well knowing that I'm really not tilting one way or another.

To further this, I'm 33/33/33 Domestic/International/Bonds. Again, this may be wrong or right for my age (35), but I'm comfortable with it.

I firmly believe, any allocation that is "reasonable" and that you will stick with is just fine. I'd much rather focus on maximizing what I can contribute and let the markets do the rest...

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Re: How much international stock? A suggestion.

Post by baw703916 » Sun Aug 07, 2016 10:09 pm

While Vanguard's report gave a minimum value of 20%, I think it's more relevant where they're actually putting their money (or more precisely, the money of the investors in their TR funds).

It's 40% international.

I think the more important thing is to pick an allocation and stick to it, whatever happens. Not buying high/selling low is much more critical than the exact allocation.
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Re: How much international stock? A suggestion.

Post by Miriam2 » Sun Aug 07, 2016 10:39 pm

Taylor Larimore wrote:Our mentor, Jack Bogle, in Common Sense on Mutual Funds (published in 2010), wrote 26 pages about international investing with this conclusion:
So, I'd approach this relatively new wave of international investing with caution, and stick to my recommendation that international funds--including BRIC funds--do not exceed one-fifth (20%) of an investor's equity position.

Will having 20% of one's equity position in international funds make much of a difference in a portfolio?

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Re: How much international stock? A suggestion.

Post by triceratop » Sun Aug 07, 2016 10:41 pm

Miriam2 wrote:
Taylor Larimore wrote:Our mentor, Jack Bogle, in Common Sense on Mutual Funds (published in 2010), wrote 26 pages about international investing with this conclusion:
So, I'd approach this relatively new wave of international investing with caution, and stick to my recommendation that international funds--including BRIC funds--do not exceed one-fifth (20%) of an investor's equity position.

Will having 20% of one's equity position in international funds make much of a difference in a portfolio?


I don't see too many people saying 80/20 stock/bond allocation meaningfully different from 100/0. Yes, of course it could make a difference. How much is a question of the future and is unknowable.
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Re: How much international stock? A suggestion.

Post by randomguy » Mon Aug 08, 2016 8:35 am

triceratop wrote:
Miriam2 wrote:
Taylor Larimore wrote:Our mentor, Jack Bogle, in Common Sense on Mutual Funds (published in 2010), wrote 26 pages about international investing with this conclusion:
So, I'd approach this relatively new wave of international investing with caution, and stick to my recommendation that international funds--including BRIC funds--do not exceed one-fifth (20%) of an investor's equity position.

Will having 20% of one's equity position in international funds make much of a difference in a portfolio?


I don't see too many people saying 80/20 stock/bond allocation meaningfully different from 100/0. Yes, of course it could make a difference. How much is a question of the future and is unknowable.



https://www.portfoliovisualizer.com/bac ... alBond3=40


See how much better international investing is than US?:) US and International stock performance over that period is with in a fraction of a percent but still the international investor ended up with more cash than the US only one. It is all about picking the right starting date and conditions;) Obviously as the amount of stock you own drops (i.e. at 60%, 20% is still 12% of the portfolio. Drop your stock to 20%, and 4% of your portfolio probably isn't enough to change much)

Are we talking huge differences? Probably not. Most studies suggest you will get ~10% higher SWR with international. Of course past may or may not be representative of the future.

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Re: How much international stock? A suggestion.

Post by triceratop » Mon Aug 08, 2016 8:48 am

randomguy wrote:
triceratop wrote:
Miriam2 wrote:
Taylor Larimore wrote:Our mentor, Jack Bogle, in Common Sense on Mutual Funds (published in 2010), wrote 26 pages about international investing with this conclusion:
So, I'd approach this relatively new wave of international investing with caution, and stick to my recommendation that international funds--including BRIC funds--do not exceed one-fifth (20%) of an investor's equity position.

Will having 20% of one's equity position in international funds make much of a difference in a portfolio?


I don't see too many people saying 80/20 stock/bond allocation meaningfully different from 100/0. Yes, of course it could make a difference. How much is a question of the future and is unknowable.



https://www.portfoliovisualizer.com/bac ... alBond3=40


See how much better international investing is than US?:) US and International stock performance over that period is with in a fraction of a percent but still the international investor ended up with more cash than the US only one. It is all about picking the right starting date and conditions;) Obviously as the amount of stock you own drops (i.e. at 60%, 20% is still 12% of the portfolio. Drop your stock to 20%, and 4% of your portfolio probably isn't enough to change much)

Are we talking huge differences? Probably not. Most studies suggest you will get ~10% higher SWR with international. Of course past may or may not be representative of the future.


Sorry, I meant to include a "is not" in my sentence. I mean that 20% is indeed meaningful.
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Re: How much international stock? A suggestion.

Post by Dulocracy » Mon Aug 08, 2016 8:51 am

Was there not a more recent Vanguard study saying 30-40%? I wound up picking 40% based on something I read from Vanguard saying 30-40 and another study stating 40-50 was the right amount. I set mine at 40%, which also acts as enough to hedge any Japan situation (however unlikely) in the US.

Of course, having set the amount, I am going to stay the course.
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Re: How much international stock? A suggestion.

Post by Engineer250 » Mon Aug 08, 2016 10:37 am

triceratop wrote:This is a strong argument for international diversification, in my opinion, precisely because of the similar results. Diversifying globally cuts tail risk but (historically) hasn't reduced returns or increased "risk" (depending on your definition). I don't want to quite call it a free lunch, but you do lessen the risk of a Japan-style downturn in your local country.


I am surprised by both the "Japan this" and "Japan that" I hear and read all over media/news outlets in the US lately and the simultaneous appearance of "do I really need international" threads on this forum. Still plenty of people who see the US outpacing international over the last X years and therefore don't want to invest. I was going to say no one really makes the same leap about bonds, but I suppose there are a fair number who do.
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Re: How much international stock? A suggestion.

Post by triceratop » Mon Aug 08, 2016 12:07 pm

Engineer250 wrote:
triceratop wrote:This is a strong argument for international diversification, in my opinion, precisely because of the similar results. Diversifying globally cuts tail risk but (historically) hasn't reduced returns or increased "risk" (depending on your definition). I don't want to quite call it a free lunch, but you do lessen the risk of a Japan-style downturn in your local country.


I am surprised by both the "Japan this" and "Japan that" I hear and read all over media/news outlets in the US lately and the simultaneous appearance of "do I really need international" threads on this forum. Still plenty of people who see the US outpacing international over the last X years and therefore don't want to invest. I was going to say no one really makes the same leap about bonds, but I suppose there are a fair number who do.


There's a risk/reward argument to be made about bonds. The only somewhat convincing case against international stocks is to me the argument against currency risk. That too the argument only makes sense to me for those much older who don't want exposure to that risk when they need to spend USD soon.

If I'm 25 and looking at (hopefully, at least) 50 years of investing it seems a no-brainer to invest in International.
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Re: How much international stock? A suggestion.

Post by kosomoto » Mon Aug 08, 2016 12:14 pm

Why does nobody ever mention taxes??

International stocks would need to outperform in order to get the same return as US stocks. You can't put international stocks in a retirement account otherwise other countries will tax your dividends and you can't do anything about it. If you put them in a taxable account you by default get lower returns. You won't even fully recover all withholding taxes using the tax credit assuming you hold countries like Germany. So since everyone here seems to think performance will be about the same in the long run, international will underperform in the long run due to taxes.

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