Why International Stocks

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Lieutenant.Columbo
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Re: Why International Stocks

Post by Lieutenant.Columbo » Thu Nov 24, 2016 8:21 pm

investorguy1 wrote:..I could see a couple reasons for starting with global and then shifting to something else. 1. Because your personal circumstances such as your job and where you live for example makes you different than the average investor so you want to adjust the average (total market) portfolio to account for that difference or 2. You think you know which parts of the market will get higher returns and will make active bets on those areas...
investorguy1,
1. would you expand on how one's job and or location would justify tilting?
2. is tilting a temporary strategy in your opinion? or do you see one tilting as part of a permanent overall strategy?
Thank you.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

Rodc
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Re: Why International Stocks

Post by Rodc » Thu Nov 24, 2016 9:10 pm

larryswedroe wrote:Rod,
yes there are obvious reasons to expect international to have significantly different performance, at least today. The reason is simple. Valuations matter and valuations are dramatically lower in non US markets.
Larry
Hi Larry,

I was speaking long term and more generally. Personally, as you know well, I do not believe in tactical allocation/market timing based on valuations for a variety of reasons discussed on numerous occasions.

You do. Your choice. I do not recommend it. I will stick to rebalancing which is a half measure (after all you either sell what is high to buy what is low, or you direct new money in to what is low) and I think a better approach.

I will also caution that providing point estimates of returns with not even a hint at the errors bars is a very bad idea. A prediction of 4% +/- 2% is hugely different from 4%+/- 20% - one you might trust heavily and the other you would discount heavily. Historically the sort of predictions you are providing have not been very accurate and so to me they are of little value.

Rod
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

randomguy
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Re: Why International Stocks

Post by randomguy » Thu Nov 24, 2016 10:31 pm

Lieutenant.Columbo wrote:
randomguy wrote:...historically at some point international goes on a 3-5 year run and things go back to being even.

But lets compare international to us over the past 15 years.

US 4.46%
International 2.49%
50/50 3.58%

US was a big win right? Lets run the math on what happens with a 5% SWR
US: 10k->1526
International: 10k->1512
50/50: 10k->1747

Hmm that 50/50 portfolio which underperformed by almost 1% results in you have over 10% more money. Sequence of returns matter when spending money.
randomguy,
Is the logical consequence of your post that one's preferred International Stock allocation during Accumulation Phase will Not necessarily be one's preferred allocation during Retirement Phase?
You could make a set of assumptions that suggest a different asset allocation during withdrawal than accumulation. At a high level the switch from stocks to bonds is part of that. There are few products that have the return potential of US stocks that are not 100% correlated. People focus that the correlation tends to go to 1 during crashes (1973-4,1989,2000-2,2007-9) and ignore the benefits during periods like 2002-7, the mid 80s, or most of the 70s.

nominalBob
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Re: Why International Stocks

Post by nominalBob » Thu Nov 24, 2016 11:32 pm

ladders11 wrote:... Right now if you are invested 100% US, you are also missing 100% of the cheapest markets on earth.
Home planet bias!!

dustytown
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Re: Why International Stocks

Post by dustytown » Fri Nov 25, 2016 3:30 am

larryswedroe wrote: yes there are obvious reasons to expect international to have significantly different performance, at least today. The reason is simple. Valuations matter and valuations are dramatically lower in non US markets. Now that is likely reflective of higher risk perceptions. But that still means that non US has higher EXPECTED (not guaranteed returns). Real expected returns in US about 4%, non US developed about 7.5%, and EM about 9.5%. Those are huge differences and the more international one holds the lower the overall equity allocation needs to be, reducing the tail risk and exposure to global systemic shocks. So it matters a lot IMO.
Thank you Larry. Clear, concise and convincing :D

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Lieutenant.Columbo
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Re: Why International Stocks

Post by Lieutenant.Columbo » Fri Nov 25, 2016 5:07 am

Rodc wrote:...I do not believe in tactical allocation/market timing based on valuations
...
I will stick to rebalancing which is a half measure (after all you either sell what is high to buy what is low, or you direct new money in to what is low) and I think a better approach...
Rodc,
Let me see if I understand:
Your allocation percentages (12.5, 7.5, 20) remain constant targets (and you rebalance every so often in order to return to such percentages), while "tactical allocation" changes the target percentages based on (observed and expected) valuations. Is this correct?
Thank you.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

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Re: Why International Stocks

Post by Valuethinker » Fri Nov 25, 2016 6:22 am

nominalBob wrote:
ladders11 wrote:... Right now if you are invested 100% US, you are also missing 100% of the cheapest markets on earth.
Home planet bias!!
;-)

Good one.

:sharebeer

larryswedroe
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Re: Why International Stocks

Post by larryswedroe » Fri Nov 25, 2016 9:54 am

Rod
We do know that higher valuations must mean lower expected returns. That's simple common sense. The higher the price relative to the same future earnings means you have lower expected returns than if had lower price. And personally I find it foolish to not use current valuations especially when they are much higher than historical averages. And using historical averages can often make no sense whatsover, as was the case say in 1999 in US or 1990 in Japan. And we also know that higher valuations have led to not only lower means but lower best cases and lower worst cases. So seems to be it's incredibly foolish to ignore the data and the logic behind it, while accepting that there's lots of uncertainty (which must always be the case). You simply have to forecast returns somehow in order to determine an AA that gives you the best chance of achieving your goals.

And I think it's been said enough,certainly by me, that one should never treat an expected return as point estimate. That's in the definition of expected return itself. So don't blame the tool for people who misuse it. I've pointed out many times that one should +/- say 8% to the expected to fully cover HISTORICAL outcomes, which doesn't guarantee it will cover future ones.

Best wishes
larry

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Lieutenant.Columbo
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Re: Why International Stocks

Post by Lieutenant.Columbo » Fri Nov 25, 2016 10:41 am

larryswedroe wrote:Rod
We do know that higher valuations must mean lower expected returns. That's simple common sense. The higher the price relative to the same future earnings means you have lower expected returns than if had lower price. And personally I find it foolish to not use current valuations especially when they are much higher than historical averages. And using historical averages can often make no sense whatsover, as was the case say in 1999 in US or 1990 in Japan. And we also know that higher valuations have led to not only lower means but lower best cases and lower worst cases. So seems to be it's incredibly foolish to ignore the data and the logic behind it, while accepting that there's lots of uncertainty (which must always be the case). You simply have to forecast returns somehow in order to determine an AA that gives you the best chance of achieving your goals.

And I think it's been said enough,certainly by me, that one should never treat an expected return as point estimate. That's in the definition of expected return itself. So don't blame the tool for people who misuse it. I've pointed out many times that one should +/- say 8% to the expected to fully cover HISTORICAL outcomes, which doesn't guarantee it will cover future ones.

Best wishes
larry
Larry,
I'll ask again (until I understand :wink:)
Do all allocation percentages in your "Larry Portfolio" move over time as valuations change overtime?
Or can the Larry Portfolio Also work in a Buy-And-Hold approach where one sticks to a set of allocation percentages targets?
Thank you.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

orca91
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Re: Why International Stocks

Post by orca91 » Fri Nov 25, 2016 11:38 am

investorguy1 wrote:If I were to venture to guess why some people start with only US it would be because there is home country bias and people follow the crowed and/or that the S&P 500 became the kind of standard benchmark and again people follow the crowed.
As if those that are upping their international allocations now are not following the crowd?

I don't think it applies to those that just go with market weight, but those that are upping their international because of expert advice or Vanguard changing target funds are certainly following the crowd.

If anything, the US only investor is pretty anti-crowd nowadays.

Depends on what side of the mirror one is on, maybe? :happy

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Re: Why International Stocks

Post by investorguy1 » Fri Nov 25, 2016 1:34 pm

Lieutenant.Columbo wrote:
investorguy1 wrote:..I could see a couple reasons for starting with global and then shifting to something else. 1. Because your personal circumstances such as your job and where you live for example makes you different than the average investor so you want to adjust the average (total market) portfolio to account for that difference or 2. You think you know which parts of the market will get higher returns and will make active bets on those areas...
investorguy1,
1. would you expand on how one's job and or location would justify tilting?
2. is tilting a temporary strategy in your opinion? or do you see one tilting as part of a permanent overall strategy?
Thank you.
1. I am not necessarily recommending anyone do this but I'll explain an opinion that I could understand as to why someone would want to tilt based on their personal circumstances a lot of this comes from Andrew Ang. So lets say I am a stock broker. When the market does well that's great for business when it does poorly so do I. For that reason I may decide that I should really have more bonds in more portfolio since my main source of income is already so tied into the stock market. On the other hand lets say I am a bankruptcy attorney. When things are going great in the economy there are few bankruptcies and I don't get a lot of business but when there is a big recession I'm making all kinds of money. In that case I may want to have more stocks in my portfolio. You could use the same kind of logic with lets say someone who is a real estate developer and who works for a big pharmaceutical company. The idea is that the total market may be the right allocation for the average investor but if I am not average maybe I should adjust accordingly. (You may not want to do all that for reasons of simplicity, cost, tax efficiency or other reasons.) In terms of location. Lets say I live in Canada, I earn my wage in Canadian dollars, my house is in Canada and it makes up more than half my net worth. If the economy here does poorly I could lose my job, be underwater on my house etc. So I might want to diversify into other countries in case things are bad here. Of course the opposite could happen and things here could be great and everywhere else bad. But that is how diversification works you aren't going for the grand slam every time.

2. As far as tilting goes Larry Swedroe has an article on etf.com where he says that trying to time factor tilts isn't a good idea. I think in the article he sites an analogy of driving in the fast lane and then temporarily moving in the slow lane in order to take advantage of a temporary increase in the speed of that lane. You may get it right some times but over all the odds are against you and you are probably better off sticking with the faster lane and learn to put up with periods of under performance. Now if you life situation changes you may want to stop tilting. For example someone who is aggressive when they are young tilting to small cap value and emerging markets may want to dial that back once retired. But in general it seems like the expert bogleheads would recommend staying the course with any strategy.

There is still the question of well maybe are there some times when value becomes even cheaper than usual or stocks become even cheaper than usual should you load up? Larry talks about that also in the article. My default position would be what Jack says "stand there and do nothing". However maybe it is possible for someone to use some kind of momentum strategy for example to time factors.

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investorguy1
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Re: Why International Stocks

Post by investorguy1 » Fri Nov 25, 2016 1:42 pm

orca91 wrote:
investorguy1 wrote:If I were to venture to guess why some people start with only US it would be because there is home country bias and people follow the crowed and/or that the S&P 500 became the kind of standard benchmark and again people follow the crowed.
As if those that are upping their international allocations now are not following the crowd?

I don't think it applies to those that just go with market weight, but those that are upping their international because of expert advice or Vanguard changing target funds are certainly following the crowd.

If anything, the US only investor is pretty anti-crowd nowadays.

Depends on what side of the mirror one is on, maybe? :happy
Good point, a lot of people feel like why would I want to invest in Europe now? I'm just saying the starting point should be I don't know which country is best to invest in so I am not going to overweight any country. If someone than wants to say either 1. I do know which country has a better or worse chance and I will be an active investor and place my bets. 2. Or my personal circumstances places more of my risk in certain areas and I want to adjust my portfolio to take account of that, then I could understand them doing so. They may very well end up with more in the US. But I still think the starting point should be market cap weight.
Last edited by investorguy1 on Fri Nov 25, 2016 2:34 pm, edited 1 time in total.

larryswedroe
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Re: Why International Stocks

Post by larryswedroe » Fri Nov 25, 2016 1:54 pm

Lieutenant
The allocations can change over longer periods as valuations change because that changes your need to take risk. It should be used to mainly change your overall equity allocations, and not to say shift from US to international, keeping in mind you are rebalancing along the way. So you have been selling the outperformers to buy the underperformers.

I would add it should not be used to try and time the markets, but with that said, when you have extreme differences one can shift allocations some to allow for then lower overall equity allocations and reduce exposure to global systemic risks.

In other words IMO it is very foolish to totally ignore valuations.

Finally, the Larry Portfolio is just the result of an asset allocation decision to use higher expected returning asset classes to lower overall beta exposure. And it should no more be permanent than any other portfolio decision because the original asset allocation is based on original NEED to take risks which can change dramatically if valuations change dramatically. So one should review their ability, willingness and need to take risk say every few years to see if anything has changed significantly in terms of your assumptions. Why would you ever have the same plan if the underlying assumptions have changed? That's not logical. Even the passage of time can change assumptions, as can personal circumstances and market movements.

Orca
I would say exactly the opposite of what you think is happening. The ones adding international now are going against the crowd which tends to go with recency bias. And international has underperformed.

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Re: Why International Stocks

Post by orca91 » Fri Nov 25, 2016 2:22 pm

larryswedroe wrote:Orca
I would say exactly the opposite of what you think is happening. The ones adding international now are going against the crowd which tends to go with recency bias. And international has underperformed.
I guess I was talking more the Bogleheads crowd. Maybe in the big world of all investors, the recency bias you mention is happening. I think, and plenty of posts would support it, in Bogleheads many are following the crowd (experts and Vanguard and...).

Of course you would say it's not happening though. Your advice depends on it. :happy

Would you please answer this, which I asked earlier, Larry?
Can you expand on this, Larry? I believe your SCV AA is something like 30/70 - SCV/FI? Are you saying a similar type AA here... say, 20/20/60 - US/INT/FI? Or, what about concentrating on EM with a 15/15/15/55 - US/INT/EM/FI?

I am especially interested in the EM part of it. I don't believe there will be much of a difference in the long run between US and INT developed. But, I can see where the EM deal could pay off. How would one set an AA to get the hopeful benefit of EM without setting up for a wild ride tough to stomach?

trasmuss
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Re: Why International Stocks

Post by trasmuss » Fri Nov 25, 2016 2:57 pm

It is important to remember that currency trends can last a long time. The dollar is at a 13 year high. If it remains so (or goes higher) international stocks will be facing a strong headwind. How long this will last is unknown. I am guessing that Larry will acknowledge, however, that these trends can last years (and already have).

The fact that international companies are undervalued relative to American companies is offset to some degree (I don't know how much) by currency changes.

At some point the dollar will weaken and Total International will start beating Total Stock. Until then, however, you better be prepared to withstand tracking error (watching Total International underperform). If you are not willing to accept tracking error you better reconsider what percentage of your stock allocation you have in international.

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investorguy1
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Re: Why International Stocks

Post by investorguy1 » Fri Nov 25, 2016 3:59 pm

trasmuss wrote:It is important to remember that currency trends can last a long time. The dollar is at a 13 year high. If it remains so (or goes higher) international stocks will be facing a strong headwind. How long this will last is unknown. I am guessing that Larry will acknowledge, however, that these trends can last years (and already have).

The fact that international companies are undervalued relative to American companies is offset to some degree (I don't know how much) by currency changes.

At some point the dollar will weaken and Total International will start beating Total Stock. Until then, however, you better be prepared to withstand tracking error (watching Total International underperform). If you are not willing to accept tracking error you better reconsider what percentage of your stock allocation you have in international.
Is it off set or perhaps compounded? I don't know which way currencies will go. If you are worried about foreign currency risk you can get an international currency hedged ETF. It will only cost you an extra 22 basis points. I am not saying you should do that but if someones only reason for not investing internationally is currency there is a pretty easy solution. But I still haven't heard a reason to hedge.

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Taylor Larimore
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"To Hedge or Not to Hedge"

Post by Taylor Larimore » Fri Nov 25, 2016 4:20 pm

Bogleheads:

Bill Bernstein wrote this article about "hedging":

To Hedge or Not To Hedge

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

Rodc
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Re: Why International Stocks

Post by Rodc » Mon Nov 28, 2016 6:45 am

Lieutenant.Columbo wrote:
Rodc wrote:...I do not believe in tactical allocation/market timing based on valuations
...
I will stick to rebalancing which is a half measure (after all you either sell what is high to buy what is low, or you direct new money in to what is low) and I think a better approach...
Rodc,
Let me see if I understand:
Your allocation percentages (12.5, 7.5, 20) remain constant targets (and you rebalance every so often in order to return to such percentages), while "tactical allocation" changes the target percentages based on (observed and expected) valuations. Is this correct?
Thank you.
Basically yes. There may be people who use other measures for "tactical" allocations, but the idea is to use some estimates of future returns and adjust (and if you really want a reasonable approach you have to factor in how confident you are in those estimates, you have to factor in estimates ofrisk since risk is half of the risk/return relationship you care about, and how confident you are in the risks, and really, the correlations and how confident you are in them).

My weights get adjusted every few years when I do a deep dive on how things are progressing. I review goals (maybe I want to retire earlier), current situation (is my job or my wife's job pretty secure or very shaky?), has income gone up or down, are the retirement and college portfolios higher or lower than target, etc. Then I adjust savings rate, allocations. I might adjust goals. In other words taking into account the full current situation and personal outlook I make a new plan. Things have never been out of whack enough for this to result in major changes but I have made modest mid-course changes.

Personally point estimates of future expected returns come with such high uncertainly (errors), and future risk is also so hard to estimate, not to mention correlations between assets, that if I were to factor them in, accounting for all this extreme uncertainty, it would result in a rather minor adjustment. I do not know the "optimal" allocation between stocks and bonds to better than at best 10%. I am currently at 60/40, but I could not make a fully rational argument that says 65/35 is clearly too much in stocks or that 55/45 was clearly too low in stocks. Not sure I could really even do that for 7/30 or 50/50. By the time you get to 40/60 or 80/20 I could. Not to mention my rebalance bands are 5%. So if a "tactical" shift is going to be on the order of 5% it is lost in the noise, and even a shift of 10% is very hard to justify - even if I believed in tactical shifts. And the data simply do not, in my mind, justify shifts that are larger.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

larryswedroe
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Re: Why International Stocks

Post by larryswedroe » Mon Nov 28, 2016 8:55 am

Orca
First, there have been very long periods of very large differences in performance between US and international developed.

Second, right now because of the long recent US outperformance US valuations now much higher and expected returns much lower. So it makes a big difference in portfolio expected returns. Can hold less beta risk if hold more international, especially EM. Same principle as with tilting, the more you tilt the less beta risk you need to hold

Third, going international the biggest diversification benefit is not in large but in small where correlations much lower. And if going small might as well go SV where have much higher expected returns and avoid the black hole of stocks in sg.

Fourth, You can use the LP for any equity allocation.

As to currency risk. As I have pointed out many times, you want the currency risk for many reasons.
First, currency risk is a two way street, NOT ONE WAY as many investors seem to think. The dollar can go down as well as up. If goes down it could be for many reasons including very poor economy and now you have labor capital at risk at same time financial capital at risk, double jeopardy.

Second, hedging defeats the purpose of international investing as you increase the correlation of returns, though you do dampen volatility. You are reducing the benefits of economic and geopolitical risk diversification

Larry

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investorguy1
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Re: Why International Stocks

Post by investorguy1 » Mon Nov 28, 2016 6:59 pm

larryswedroe wrote:...US valuations now much higher and expected returns much lower....
Why is that necessarily the case? Can't it be that growth is expected to be higher in the US than international markets and then you would end up with the same returns after valuations revert to historical averages?

MindBogler
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Re: Why International Stocks

Post by MindBogler » Mon Nov 28, 2016 7:47 pm

investorguy1 wrote:
larryswedroe wrote:...US valuations now much higher and expected returns much lower....
Why is that necessarily the case? Can't it be that growth is expected to be higher in the US than international markets and then you would end up with the same returns after valuations revert to historical averages?
It isn't necessarily the case. Given current valuations, the expected return is lower. The actual outcome could be entirely different. It is worth noting that valuations have been significant, historically, over long time scales (10-15 years and beyond). Anything is possible, valuations point at probabilities.

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Re: Why International Stocks

Post by lack_ey » Mon Nov 28, 2016 8:43 pm

MindBogler wrote:
investorguy1 wrote:
larryswedroe wrote:...US valuations now much higher and expected returns much lower....
Why is that necessarily the case? Can't it be that growth is expected to be higher in the US than international markets and then you would end up with the same returns after valuations revert to historical averages?
It isn't necessarily the case. Given current valuations, the expected return is lower. The actual outcome could be entirely different. It is worth noting that valuations have been significant, historically, over long time scales (10-15 years and beyond). Anything is possible, valuations point at probabilities.
Of course the actual return can be lower or higher or just about anything. That's not answering a question anybody needs to ask or was asking.

The question was about the expected return, not the actual return. That is, the probabilistic average of the true underlying process. Can A have higher valuations and higher expected returns than B? Generally the answer should be yes. There are a number of considerations that could make that the case, despite those valuations. All else equal, lower valuations are better for future returns, but not all else is equal.

The problem is that nobody can prove any given estimate of the expected return is accurate and even unbiased in the statistical sense. A valuations-only model may or may not be the best available but it is almost certainly not actually right. On the other hand, it is hard to stake out a position that goes against the direction implied by valuations; just because that's not right doesn't mean an alternative is more likely to be more correct. In fact, probably the opposite.

It would be more accurate to say that we might estimate a higher expected return for international stocks given the current state of the markets, not that the expected return is actually higher.

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investorguy1
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Re: Why International Stocks

Post by investorguy1 » Mon Nov 28, 2016 9:42 pm

lack_ey wrote:
MindBogler wrote:
investorguy1 wrote:
larryswedroe wrote:...US valuations now much higher and expected returns much lower....
Why is that necessarily the case? Can't it be that growth is expected to be higher in the US than international markets and then you would end up with the same returns after valuations revert to historical averages?
It isn't necessarily the case. Given current valuations, the expected return is lower. The actual outcome could be entirely different. It is worth noting that valuations have been significant, historically, over long time scales (10-15 years and beyond). Anything is possible, valuations point at probabilities.
Of course the actual return can be lower or higher or just about anything. That's not answering a question anybody needs to ask or was asking.

The question was about the expected return, not the actual return. That is, the probabilistic average of the true underlying process. Can A have higher valuations and higher expected returns than B? Generally the answer should be yes. There are a number of considerations that could make that the case, despite those valuations. All else equal, lower valuations are better for future returns, but not all else is equal.

The problem is that nobody can prove any given estimate of the expected return is accurate and even unbiased in the statistical sense. A valuations-only model may or may not be the best available but it is almost certainly not actually right. On the other hand, it is hard to stake out a position that goes against the direction implied by valuations; just because that's not right doesn't mean an alternative is more likely to be more correct. In fact, probably the opposite.

It would be more accurate to say that we might estimate a higher expected return for international stocks given the current state of the markets, not that the expected return is actually higher.
Thank you lack_ey for better articulating my question. You could chose just about any investment and find some argument, ratio or rationale for why it has an above average chance of out performance. However I would think that to come up with a convincing argument you would have to look at as many of the contributing factors as possible and make sure that those factors really matter. For example the conference board has a list of economic indicators it looking at where it thinks the economy is headed (I don't know how well it works but I'm just giving an example).

I guess as far as investing goes we have 4-6 factors that are generally accepted as being the most important and perhaps looking at all of those will be better than just valuations alone. I would think there would be other macro factors as well perhaps some of those the the conference board looks like for example which could also play a role in determining expectations.

On the other side of all this analysis is an argument for market weight indexing. The markets are pretty efficient and the market knows better than me, and therefore just hold the market.

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Re: Why International Stocks

Post by Rodc » Tue Nov 29, 2016 6:41 am

investorguy1 wrote:
lack_ey wrote:
MindBogler wrote:
investorguy1 wrote:
larryswedroe wrote:...US valuations now much higher and expected returns much lower....
Why is that necessarily the case? Can't it be that growth is expected to be higher in the US than international markets and then you would end up with the same returns after valuations revert to historical averages?
It isn't necessarily the case. Given current valuations, the expected return is lower. The actual outcome could be entirely different. It is worth noting that valuations have been significant, historically, over long time scales (10-15 years and beyond). Anything is possible, valuations point at probabilities.
Of course the actual return can be lower or higher or just about anything. That's not answering a question anybody needs to ask or was asking.

The question was about the expected return, not the actual return. That is, the probabilistic average of the true underlying process. Can A have higher valuations and higher expected returns than B? Generally the answer should be yes. There are a number of considerations that could make that the case, despite those valuations. All else equal, lower valuations are better for future returns, but not all else is equal.

The problem is that nobody can prove any given estimate of the expected return is accurate and even unbiased in the statistical sense. A valuations-only model may or may not be the best available but it is almost certainly not actually right. On the other hand, it is hard to stake out a position that goes against the direction implied by valuations; just because that's not right doesn't mean an alternative is more likely to be more correct. In fact, probably the opposite.

It would be more accurate to say that we might estimate a higher expected return for international stocks given the current state of the markets, not that the expected return is actually higher.
Thank you lack_ey for better articulating my question. You could chose just about any investment and find some argument, ratio or rationale for why it has an above average chance of out performance. However I would think that to come up with a convincing argument you would have to look at as many of the contributing factors as possible and make sure that those factors really matter. For example the conference board has a list of economic indicators it looking at where it thinks the economy is headed (I don't know how well it works but I'm just giving an example).

I guess as far as investing goes we have 4-6 factors that are generally accepted as being the most important and perhaps looking at all of those will be better than just valuations alone. I would think there would be other macro factors as well perhaps some of those the the conference board looks like for example which could also play a role in determining expectations.

On the other side of all this analysis is an argument for market weight indexing. The markets are pretty efficient and the market knows better than me, and therefore just hold the market.
I would caution again that this discussion is focused on returns and almost all these sorts of discussions are. A discussion of return without a discussion of risk is meaningless.

Case 1: A is expected to return 4%, long term, with annual volatility of 2%, B is expected to return 8% with an annual volatiitiy of 3%, and lets toss in they are uncorrelated, and lets toss in the error in these various estimates we think is +/-1% (ie we have really good estimates somehow).

Case 2: A is expected to return 4%, long term, with annual volatility of 20%, B is expected to return 8% with an annual volatiitiy of 30%, and lets toss in they are uncorrelated, and lets toss in the error in these various estimates we think is +/-1%.

Are you going to build the same allocation in both cases?

I would not. A very risky 8% is not the same as a low risk 8%.

You can ask similar questions where what varies is the quality of the forecasts which also matters a lot, or the correlation which can matter (if highly correlated would lean heavily on the higher return as no rebalancing bonus).
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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