What are the REAL reasons to avoid international?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Tamalak
Posts: 410
Joined: Fri May 06, 2016 2:29 pm

What are the REAL reasons to avoid international?

Post by Tamalak » Wed Dec 21, 2016 10:31 am

People hate international because it hasn't been performing well. Because it's hard to see where value will come from going forward. Because there are poor investor protections.

But it seems like all of these things would be priced into the market. It's no more reason to skip international than to skip any struggling U.S. company - a boglehead buys it all, under the weak efficient market hypothesis.

Can we use this topic to list what drawbacks, if any, are NOT priced into international stocks?

The only one I can think of that I'm sure of is currency risk. If you're investing in a French company in France, you don't get currency risk.. if you do it from the U.S., you do get that risk. Higher volatility for no more expected return, so lower risk-adjusted returns.

I also saw, in another topic, something about high tax rates internationally? Do native investors pay high overhead/tax as well? Since if they do, that would also be priced in.

livesoft
Posts: 57192
Joined: Thu Mar 01, 2007 8:00 pm

Re: What are the REAL reasons to avoid international?

Post by livesoft » Wed Dec 21, 2016 10:33 am

C'mon, the real reason is [remarks removed by non-moderator].

But we can't say the truth on this forum.
This signature message sponsored by sscritic: Learn to fish.

Dieharder
Posts: 976
Joined: Mon Apr 02, 2007 6:22 pm

Re: What are the REAL reasons to avoid international?

Post by Dieharder » Wed Dec 21, 2016 10:48 am

Currency risk is the main reason to limit international. I don't think there are enough reasons to avoid it completely. In theory, currency risk is something that is neutral over long periods, however, in reality this is not the case when you look at specific time periods. It is possible that the dollar can stay stronger than other currencies over long periods and that may result in lower international returns for a U.S investor. Especially, when you are primarily concerned about future expenses in U.S Dollar. This is where hedged international equity funds come into play, although there is additional cost involved.

User avatar
reriodan
Posts: 393
Joined: Fri Feb 12, 2016 10:08 am

Re: What are the REAL reasons to avoid international?

Post by reriodan » Wed Dec 21, 2016 10:53 am

Speculation.

sid hartha
Posts: 81
Joined: Fri Dec 09, 2016 2:17 pm

Re: What are the REAL reasons to avoid international?

Post by sid hartha » Wed Dec 21, 2016 11:05 am

I don't know about the REAL reason. But seems like if you stick to the 20% recommended by experts it's just not going to move the needle to such a degree that you would be very much worse off by avoiding them altogether. Personally I do have 20% but if someone avoided all together I don't think it's a big deal. In the long run probably very little impact. Things like fees, behaviors and personal finance matter much more IMO.

bamn
Posts: 17
Joined: Tue Nov 01, 2016 1:11 pm

Re: What are the REAL reasons to avoid international?

Post by bamn » Wed Dec 21, 2016 11:35 am

It's interesting as a non-American to browse the Bogleheads forums and see attitudes regarding 'international' funds. Where I live, USA is international. Investors here wouldn't be caught dead without a heavy USA weighting in our portfolios. The common passive strategy here is some home-bias to reduce currency risk, but beyond that, basically following the market caps. If you believe in a mostly efficient market, and that fundamentally diversification is good, why wouldn't you want to own the whole pie?

Levett
Posts: 4177
Joined: Fri Feb 23, 2007 2:10 pm
Location: upper Midwest

Re: What are the REAL reasons to avoid international?

Post by Levett » Wed Dec 21, 2016 11:52 am

The year 2015 began with a seeming embrace of international.

Remember this thread that began on January 1.

viewtopic.php?t=154400

Just an observation.

Lev

Tamalak
Posts: 410
Joined: Fri May 06, 2016 2:29 pm

Re: What are the REAL reasons to avoid international?

Post by Tamalak » Wed Dec 21, 2016 12:22 pm

sid hartha wrote:I don't know about the REAL reason. But seems like if you stick to the 20% recommended by experts


If you only invest 20% in international instead of the ~45% that is market cap you are strongly tilting towards U.S. stocks, on the advice of 'experts'.

If someone came to this forum bragging about how 'experts' have convinced him to tilt into this or that U.S. sector he'd be run out of Bogletown.

Why is international treated differently? Currency Risk - check. What else?

User avatar
akblizzard
Posts: 124
Joined: Mon May 05, 2014 4:25 pm

Re: What are the REAL reasons to avoid international?

Post by akblizzard » Wed Dec 21, 2016 12:31 pm

I dunno, really. But I rely heavily on what my gut tells me and what Mr. Bogle tells me.
Here's what he said, for your entertainment.

https://www.youtube.com/watch?v=vMj4sHj ... FcuZ7hFJ5p

Bfwolf
Posts: 1645
Joined: Thu Oct 14, 2010 11:19 am

Re: What are the REAL reasons to avoid international?

Post by Bfwolf » Wed Dec 21, 2016 1:13 pm

Currency risk first and foremost.

There's some tax drag for holding international stocks in the US. Might be 10 or 20 basis points.

International stocks include emerging markets which are riskier. This isn't a reason not to hold them, but you may want to hold more bonds if you're choosing to hold international stocks.

Saphomd
Posts: 165
Joined: Tue Apr 03, 2012 6:11 pm
Location: SF, CA

Re: What are the REAL reasons to avoid international?

Post by Saphomd » Wed Dec 21, 2016 1:19 pm

I believe Mr. Bogle said there is enough international exposure in the Vanguard 500 Index fund. :happy

kolea
Posts: 1234
Joined: Fri Jul 11, 2014 5:30 pm
Location: Maui and Columbia River Gorge

Re: What are the REAL reasons to avoid international?

Post by kolea » Wed Dec 21, 2016 1:20 pm

1) I don't hate International. I have 10% in it.

2) To me the argument is why own it rather than why not own it, and I just don't see it as compelling enough to go deeper than 10%.

3) As to diversification - I am exposed to 3000+ stocks with US TSM. How much more does one need? Not much "free lunch" with diversifying to International since it is so highly correlated with US equities. Which brings us back to #2 - what is the compelling reason to own it?

4) I would have to sell a bunch of TSM (US) to buy more ex-US and I don't want to take the cap gains hit.

5) Currency risk.

6) If I were 30 rather than 65 I would view ex-US as far more interesting. The economic center will shift out of the US over the next 50+ years according to economists. My 10% stake pretty much reflects the degree of shifting that I think will occur in my life time.
Kolea (pron. ko-lay-uh). Golden plover.

User avatar
saltycaper
Posts: 2195
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: What are the REAL reasons to avoid international?

Post by saltycaper » Wed Dec 21, 2016 1:22 pm

I for one do not want to hold all of my investments in US Dollars. There is currency risk there too. Now, perhaps the risk is not symmetric between US and non-US, especially for a US-based investor, but I think the comparable risk of ex-US currency is somewhat overstated for the same reasons investors avoid international, which I see primarily as:

1) Home-country bias

2) Recency bias

3) Because-someone-I-respect-said-so bias

Investing in un-hedged int'l equities always struck me as the easiest investment decision to make, even more so than how much to hold in stocks vs. bonds.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

User avatar
steve roy
Posts: 1450
Joined: Thu May 13, 2010 5:16 pm

Re: What are the REAL reasons to avoid international?

Post by steve roy » Wed Dec 21, 2016 1:25 pm

livesoft wrote:C'mon, the real reason is [remarks removed by non-moderator].

But we can't say the truth on this forum.


Because this forum can't HANDLE the truth!

Tamalak
Posts: 410
Joined: Fri May 06, 2016 2:29 pm

Re: What are the REAL reasons to avoid international?

Post by Tamalak » Wed Dec 21, 2016 1:26 pm

I believe Mr. Bogle said there is enough international exposure in the Vanguard 500 Index fund.


Then there is also "enough" U.S. exposure in international stocks and there is "no need" to invest in the U.S. at all 8-) - but this does not address the question of why tilt?

Bfwolf wrote:There's some tax drag for holding international stocks in the US. Might be 10 or 20 basis points


Am I to understand that this tax drag doesn't exist for natives? That is a U.S. investing in France gets the tax drag but a Frenchman investing in France does not get the tax drag?

In that case the above is exactly what I'm talking about since an efficient market won't save me from that 0.1-0.2% drag on return.

Where can I read more about this expense and when is it incurred? Is it reflected in the ERs of the funds or do I get a higher capital gains tax for holding vxus as opposed to vti?
Last edited by Tamalak on Wed Dec 21, 2016 1:28 pm, edited 1 time in total.

Jack FFR1846
Posts: 5847
Joined: Tue Dec 31, 2013 7:05 am

Re: What are the REAL reasons to avoid international?

Post by Jack FFR1846 » Wed Dec 21, 2016 1:27 pm

I just read an interview that Chuck Jaffe did with Jack Bogle. When asked why only US, he said that companies in the S&P 500 did 50% of their business outside of the US. So investing in the S&P gets you all the international you need.

I have been coming around to agree with him on that and as a result am leaving my Developed International fund at Vanguard just sit rather than rebalancing into it.
Bogle: Smart Beta is stupid

orca91
Posts: 1223
Joined: Thu Mar 03, 2016 7:17 pm

Re: What are the REAL reasons to avoid international?

Post by orca91 » Wed Dec 21, 2016 1:30 pm

Tamalak wrote:
sid hartha wrote:I don't know about the REAL reason. But seems like if you stick to the 20% recommended by experts


If you only invest 20% in international instead of the ~45% that is market cap you are strongly tilting towards U.S. stocks, on the advice of 'experts'.

If someone came to this forum bragging about how 'experts' have convinced him to tilt into this or that U.S. sector he'd be run out of Bogletown.

Why is international treated differently? Currency Risk - check. What else?


Run out of town?? Nah, just depends on how thick your skin is. :happy

Some of us are very heavily tilted to US, as in that's all we hold is US stocks. Mainly on the advice and reasoning of Bogle and Buffett.

Bogleheads don't run us out of town. They just tell us we're wrong. :happy

There are MANY threads on international and the reason for and against. Search the site for threads with international in the title and enjoy the reading. Spoiler alert.... it's the same reasons for and against given over and over.

Valuethinker
Posts: 33379
Joined: Fri May 11, 2007 11:07 am

Re: What are the REAL reasons to avoid international?

Post by Valuethinker » Wed Dec 21, 2016 1:31 pm

Tamalak wrote:People hate international because it hasn't been performing well. Because it's hard to see where value will come from going forward. Because there are poor investor protections.

But it seems like all of these things would be priced into the market. It's no more reason to skip international than to skip any struggling U.S. company - a boglehead buys it all, under the weak efficient market hypothesis.

Can we use this topic to list what drawbacks, if any, are NOT priced into international stocks?

The only one I can think of that I'm sure of is currency risk. If you're investing in a French company in France, you don't get currency risk.. if you do it from the U.S., you do get that risk. Higher volatility for no more expected return, so lower risk-adjusted returns.

I also saw, in another topic, something about high tax rates internationally? Do native investors pay high overhead/tax as well? Since if they do, that would also be priced in.


Good reasons

- additional volatility from currency risk - evidence suggests currency volatility risk is not compensated for in higher return

- tax drag arising from dividend withholding taxes (unrecovered) in foreign jurisdictions

- expense ratios are higher on foreign funds and ETFs

- limited gain to diversification especially in other Developed Markets. Correlations have been around 0.8 historically and move towards 1.0 in a crisis

Bad reasons (ie that contain a logical contradiction v. belief in efficient markets)

- US has superior corporate governance, investor protection law etc. and that is not already priced into market valuations (ditto re US government vs. other countries)

- US companies have faster earnings growth than other countries, and that is not already priced into market valuations

- the US market has historically done better over (arbitrary historic period) and always will do so (and any related "US is best" argument that assumes investor knows more than the market does, in aggregate)

- more comfortable owning stocks of companies I name like recognize (e.g. Nestle, Samsung, Shell, Toyota, Honda, Glaxo Smithkline ... ;-))

- US companies have plenty of overseas exposure via their sales and earnings - I'd count that as a half good answer: the problem is of course many foreign companies have strong US operations as well, and there are sectoral composition issues

- US stock market is so diversified I don't need any more diversification - if you actually *look* at the US market, you see big sectors like tech (and healthcare) that are much smaller in other countries. Whereas if you want mining stocks, the US isn't really there (London has 3 of the world's 5 largest mining companies as their home listing)

This links into the FANGS problem (Facebook Apple Netflix Google) that to a large extent, US market performance this cycle has been driven by a handful of super stocks. So tech is on a roll, and that's largely good, but it doesn't mean that it will go on forever. Nobody puts Cisco Intel IBM Microsoft into that list, but they are major tech companies (but they haven't shown supergrowth this cycle).

It's possible to construct a 2 fund portfolio (Vanguard TSM & a bond fund) that gets you most of the way there, if you are a US based investor. But you do risk some kind of Japan situation where the US market just derates.

In practice, historically, 20-30% of portfolio seems to have maximized return without a huge additional cost in volatility.

bigred77
Posts: 1933
Joined: Sat Jun 11, 2011 4:53 pm

Re: What are the REAL reasons to avoid international?

Post by bigred77 » Wed Dec 21, 2016 1:32 pm

I haven't found any reason to avoid international equities. 47% of my equity allocation is in international equities.

I have made the decision to forego international bonds. I think US treasuries (and a smattering of US corporate debt) sufficiently meets my needs from the fixed income portion of my portfolio (which is mainly safety, to dampen portfolio volatility, and hopefully return a smidge over US inflation over the coming decades).

I see a lot of home country bias from US investors. I understand it too, the US has been a great place to invest for a long time now. However, there is no reason to think the US will be the absolute optimal country to invest in going forward. I also think it's reasonable to protect yourself in case the US hits a very bad stretch over your investing lifetime.

Tamalak
Posts: 410
Joined: Fri May 06, 2016 2:29 pm

Re: What are the REAL reasons to avoid international?

Post by Tamalak » Wed Dec 21, 2016 1:41 pm

Valuethinker wrote:Good reasons

- additional volatility from currency risk - evidence suggests currency volatility risk is not compensated for in higher return

- tax drag arising from dividend withholding taxes (unrecovered) in foreign jurisdictions

- expense ratios are higher on foreign funds and ETFs

- limited gain to diversification especially in other Developed Markets. Correlations have been around 0.8 historically and move towards 1.0 in a crisis


Great post!! Just what I was looking for.. again where can I read up on how these taxes work, how large they are, when they're applied and most importantly if natives get to dodge them?

User avatar
abuss368
Posts: 11874
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: What are the REAL reasons to avoid international?

Post by abuss368 » Wed Dec 21, 2016 3:13 pm

When I considered this question, I was not sure there are any "real" reasons. I am inclined to believe it is performance chasing based on recent history

If international stocks and bonds were outperforming U.S., there would be minimal threads or comments on the "need" for this asset class.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
triceratop
Moderator
Posts: 3744
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: What are the REAL reasons to avoid international?

Post by triceratop » Wed Dec 21, 2016 3:22 pm

Tamalak wrote:
Valuethinker wrote:Good reasons

- additional volatility from currency risk - evidence suggests currency volatility risk is not compensated for in higher return

- tax drag arising from dividend withholding taxes (unrecovered) in foreign jurisdictions

- expense ratios are higher on foreign funds and ETFs

- limited gain to diversification especially in other Developed Markets. Correlations have been around 0.8 historically and move towards 1.0 in a crisis


Great post!! Just what I was looking for.. again where can I read up on how these taxes work, how large they are, when they're applied and most importantly if natives get to dodge them?


You can look at the size of the foreign tax credit for a fund, i.e. Foreign Tax Paid. This is what was withheld internationally, dampening returns. You can of course recover it (perhaps only partially, depending on your tax situation and extent of foreign holdings) by holding international funds in a taxable account. However, there are often fewer qualified dividends (and a higher yield, recently) so it often turns out to be a wash, or worse. That gets into the topic of tax efficiency, to which there are many threads devoted.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

User avatar
msi
Posts: 308
Joined: Sun Feb 17, 2008 11:15 pm

Re: What are the REAL reasons to avoid international?

Post by msi » Wed Dec 21, 2016 3:23 pm

You can use a currency hedged ETF if currency risk is a real concern to you. Have a look at DBEF and HEFA.

rbaldini
Posts: 756
Joined: Mon Mar 23, 2015 3:20 pm

Re: What are the REAL reasons to avoid international?

Post by rbaldini » Wed Dec 21, 2016 3:29 pm

It sounds like you're suggesting that a lot of the usual reasons aren't good reasons, because "they've already been priced in". But what if you don't subscribe strongly to an efficient market hypothesis? Wouldn't that argument then not be convincing?

letsgobobby
Posts: 10690
Joined: Fri Sep 18, 2009 1:10 am

Re: What are the REAL reasons to avoid international?

Post by letsgobobby » Wed Dec 21, 2016 3:35 pm

In my opinion the default should be the market weight, more or less 50/50 (it fluctuates). An argument can be made for home country bias since typically one's obligations are denominated in a local currency; and the closer one is to the decumulation phase the stronger such an argument is. Thus if one is starting retirement a strong home country bias makes sense. For an early accumulator I think such bias should be minimal.

re: correlations, small and microcaps stocks have less correlation. S&P500 plus a diverse world microcap index without a currency hedge would be highly complementary. Within my international stocks, I have a tilt toward small and EM for this reason.

Tamalak
Posts: 410
Joined: Fri May 06, 2016 2:29 pm

Re: What are the REAL reasons to avoid international?

Post by Tamalak » Wed Dec 21, 2016 3:47 pm

rbaldini wrote:It sounds like you're suggesting that a lot of the usual reasons aren't good reasons, because "they've already been priced in". But what if you don't subscribe strongly to an efficient market hypothesis? Wouldn't that argument then not be convincing?


To be a Boglehead you kinda HAVE to subscribe to an efficient market hypothesis (strong or weak). If you don't even subscribe to the weak one, then bogleheading makes no sense - just buy underpriced assets and short overpriced assets.

User avatar
JoMoney
Posts: 4465
Joined: Tue Jul 23, 2013 5:31 am

Re: What are the REAL reasons to avoid international?

Post by JoMoney » Wed Dec 21, 2016 3:48 pm

rbaldini wrote:It sounds like you're suggesting that a lot of the usual reasons aren't good reasons, because "they've already been priced in". But what if you don't subscribe strongly to an efficient market hypothesis? Wouldn't that argument then not be convincing?

Right, and despite all the "risk factors" that seem to get discovered within domestic stocks, some of which are claimed to be pervasive across international markets, nobody seems to claim that "international" itself is a factor of risk/return.
The usual story for international is that it reduces risk through broader diversification, but there is contention on those grounds as well.
I've seen some EMH people (like Ken French) suggest that the global market-cap weighting is best, and holding something less (as most people do) with a home country bias is irrational... which I think is a bizzare thing for him to say that the market is being irrational with how they individually weight there portfolios. There may be very rational reasons involving risks, expenses, and taxes that cause people to weight international stocks at less than market weights... and if having a home country bias is how the market actually holds there stocks maybe that's the real "market weighted portfolio" and not the aggregated weight that doesn't actually represent any individual.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
jainn
Posts: 178
Joined: Tue Jun 28, 2011 6:41 pm

Re: What are the REAL reasons to avoid international?

Post by jainn » Wed Dec 21, 2016 3:51 pm

triceratop wrote:
Tamalak wrote:
Valuethinker wrote:Good reasons

- additional volatility from currency risk - evidence suggests currency volatility risk is not compensated for in higher return

- tax drag arising from dividend withholding taxes (unrecovered) in foreign jurisdictions

- expense ratios are higher on foreign funds and ETFs

- limited gain to diversification especially in other Developed Markets. Correlations have been around 0.8 historically and move towards 1.0 in a crisis


Great post!! Just what I was looking for.. again where can I read up on how these taxes work, how large they are, when they're applied and most importantly if natives get to dodge them?


You can look at the size of the foreign tax credit for a fund, i.e. Foreign Tax Paid. This is what was withheld internationally, dampening returns. You can of course recover it (perhaps only partially, depending on your tax situation and extent of foreign holdings) by holding international funds in a taxable account. However, there are often fewer qualified dividends (and a higher yield, recently) so it often turns out to be a wash, or worse. That gets into the topic of tax efficiency, to which there are many threads devoted.


https://www.lordabbett.com/content/lordabbett/en/perspectives/equityperspectives/international-funds-foreign-credits-may-boost-aftertax-returns.html

Q. Assuming the same dividend yield, does an international equity fund or a domestic equity fund have a higher aftertax yield?
A. To the extent a shareholder holds the fund in an account that is subject to current income taxes and not a tax-advantaged account (such as an IRA or 401(k)), the international equity fund typically will have a higher aftertax yield due to the foreign tax credit (FTC) pass-through. [See the example below for a comparison of a fund with a foreign tax credit pass-through to a similar fund with no FTC.]



https://www.lordabbett.com/content/lord ... turns.html

User avatar
saltycaper
Posts: 2195
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: What are the REAL reasons to avoid international?

Post by saltycaper » Wed Dec 21, 2016 3:54 pm

Tamalak wrote:
To be a Boglehead you kinda HAVE to subscribe to an efficient market hypothesis (strong or weak). If you don't even subscribe to the weak one, then bogleheading makes no sense - just buy underpriced assets and short overpriced assets.


It's possible not to believe in EMH in any form but also believe that the market is better than you are at pricing assets.
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

User avatar
JoMoney
Posts: 4465
Joined: Tue Jul 23, 2013 5:31 am

Re: What are the REAL reasons to avoid international?

Post by JoMoney » Wed Dec 21, 2016 3:55 pm

Tamalak wrote:
rbaldini wrote:It sounds like you're suggesting that a lot of the usual reasons aren't good reasons, because "they've already been priced in". But what if you don't subscribe strongly to an efficient market hypothesis? Wouldn't that argument then not be convincing?


To be a Boglehead you kinda HAVE to subscribe to an efficient market hypothesis (strong or weak). If you don't even subscribe to the weak one, then bogleheading makes no sense - just buy underpriced assets and short overpriced assets.

I still contend that if you don't believe in EMH it's an even stronger reason to be a Boglehead. If EMH were accurate, any investment would get you reward appropriate to the risks your taking. EMH protects dumb investors because the outcome just comes down to luck. Without the EMH you have to be careful in a market where there are forces that will try to force you into mistakes. This old paper presents it nicely:
The Inefficient Market Argument for Passive Investing

While not specific to the stock market, the new Robert Shiller book "Phishing For Phools" touches on the idea as well.

Or even the crux of "How To Win The Losers Game"
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
triceratop
Moderator
Posts: 3744
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: What are the REAL reasons to avoid international?

Post by triceratop » Wed Dec 21, 2016 4:01 pm

jainn wrote:
triceratop wrote:
Tamalak wrote:
Valuethinker wrote:Good reasons

- additional volatility from currency risk - evidence suggests currency volatility risk is not compensated for in higher return

- tax drag arising from dividend withholding taxes (unrecovered) in foreign jurisdictions

- expense ratios are higher on foreign funds and ETFs

- limited gain to diversification especially in other Developed Markets. Correlations have been around 0.8 historically and move towards 1.0 in a crisis


Great post!! Just what I was looking for.. again where can I read up on how these taxes work, how large they are, when they're applied and most importantly if natives get to dodge them?


You can look at the size of the foreign tax credit for a fund, i.e. Foreign Tax Paid. This is what was withheld internationally, dampening returns. You can of course recover it (perhaps only partially, depending on your tax situation and extent of foreign holdings) by holding international funds in a taxable account. However, there are often fewer qualified dividends (and a higher yield, recently) so it often turns out to be a wash, or worse. That gets into the topic of tax efficiency, to which there are many threads devoted.


https://www.lordabbett.com/content/lordabbett/en/perspectives/equityperspectives/international-funds-foreign-credits-may-boost-aftertax-returns.html

Q. Assuming the same dividend yield, does an international equity fund or a domestic equity fund have a higher aftertax yield?
A. To the extent a shareholder holds the fund in an account that is subject to current income taxes and not a tax-advantaged account (such as an IRA or 401(k)), the international equity fund typically will have a higher aftertax yield due to the foreign tax credit (FTC) pass-through. [See the example below for a comparison of a fund with a foreign tax credit pass-through to a similar fund with no FTC.]



https://www.lordabbett.com/content/lord ... turns.html


This has been discussed before; after tax yield is a metric which IMO makes no sense as a basis of comparison, just as yield is not how we select our equity investments. You're interested in the extent to which taxes reduces total return. And for that comparison, all else is not equal between international and US for the reasons I mentioned above.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

rbaldini
Posts: 756
Joined: Mon Mar 23, 2015 3:20 pm

Re: What are the REAL reasons to avoid international?

Post by rbaldini » Wed Dec 21, 2016 4:02 pm

JoMoney wrote:
Tamalak wrote:
rbaldini wrote:It sounds like you're suggesting that a lot of the usual reasons aren't good reasons, because "they've already been priced in". But what if you don't subscribe strongly to an efficient market hypothesis? Wouldn't that argument then not be convincing?


To be a Boglehead you kinda HAVE to subscribe to an efficient market hypothesis (strong or weak). If you don't even subscribe to the weak one, then bogleheading makes no sense - just buy underpriced assets and short overpriced assets.

I still contend that if you don't believe in EMH it's an even stronger reason to be a Boglehead. If EMH were accurate, any investment would get you reward appropriate to the risks your taking. EMH protects dumb investors because the outcome just comes down to luck. Without the EMH you have to be careful in a market where there are forces that will try to force you into mistakes. This old paper presents it nicely:
The Inefficient Market Argument for Passive Investing

While not specific to the stock market, the new Robert Shiller book "Phishing For Phools" touches on the idea as well.

I don't know much about EMH beyond the simplest definition. Seems to me that I don't need to; the value of indexing becomes readily apparent when you realize that (1) trading is a zero-sum game, and (2) most traders are probably smart professionals. It follows that the only way to consistently beat the market is to be consistently better than the smart professionals - which not everyone can do, necessarily (zero sum). So unless you're quite confident in your abilities, don't spend time or money trying to win - just buy the market. This doesn't even require that you believe that people are rational - just that you're probably not more rational than most professional competition. Is that cogent?

But that's a distraction from the topic...

Seems to me that one could believe that capitalization within countries is rational and hard-to-beat (hence, buy that country's index), but that this does not hold between countries (hence, don't trust international indices). Not sure what rationale would support this belief.

User avatar
JoMoney
Posts: 4465
Joined: Tue Jul 23, 2013 5:31 am

Re: What are the REAL reasons to avoid international?

Post by JoMoney » Wed Dec 21, 2016 4:15 pm

rbaldini wrote:
JoMoney wrote:
Tamalak wrote:
rbaldini wrote:It sounds like you're suggesting that a lot of the usual reasons aren't good reasons, because "they've already been priced in". But what if you don't subscribe strongly to an efficient market hypothesis? Wouldn't that argument then not be convincing?


To be a Boglehead you kinda HAVE to subscribe to an efficient market hypothesis (strong or weak). If you don't even subscribe to the weak one, then bogleheading makes no sense - just buy underpriced assets and short overpriced assets.

I still contend that if you don't believe in EMH it's an even stronger reason to be a Boglehead. If EMH were accurate, any investment would get you reward appropriate to the risks your taking. EMH protects dumb investors because the outcome just comes down to luck. Without the EMH you have to be careful in a market where there are forces that will try to force you into mistakes. This old paper presents it nicely:
The Inefficient Market Argument for Passive Investing

While not specific to the stock market, the new Robert Shiller book "Phishing For Phools" touches on the idea as well.

I don't know much about EMH beyond the simplest definition. Seems to me that I don't need to; the value of indexing becomes readily apparent when you realize that (1) trading is a zero-sum game, and (2) most traders are probably smart professionals. It follows that the only way to consistently beat the market is to be consistently better than the smart professionals - which not everyone can do, necessarily (zero sum). So unless you're quite confident in your abilities, don't spend time or money trying to win - just buy the market. This doesn't even require that you believe that people are rational - just that you're probably not more rational than most professional competition. Is that cogent?

But that's a distraction from the topic...

Seems to me that one could believe that capitalization within countries is rational and hard-to-beat (hence, buy that country's index), but that this does not hold between countries (hence, don't trust international indices). Not sure what rationale would support this belief.

The key is simply to avoid making big mistakes. I'm not saying international is a mistake, people that "diversify" internationaly do just fine... but it seems to me there are risks and expenses involved with going international that just aren't necessary for a U.S. investor to get a well diversified portfolio.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
Dutch
Posts: 1277
Joined: Thu Jun 27, 2013 2:12 pm

Re: What are the REAL reasons to avoid international?

Post by Dutch » Wed Dec 21, 2016 4:33 pm

Dunno.

I feel a lot better purchasing international stocks, than I do purchasing US stocks.

jhawktx
Posts: 83
Joined: Thu May 19, 2011 8:15 am

Re: What are the REAL reasons to avoid international?

Post by jhawktx » Wed Dec 21, 2016 4:42 pm

1. Higher expenses
2. Loss of FTC if held in retirement accounts

boglephreak
Posts: 441
Joined: Fri Apr 22, 2016 5:16 pm

Re: What are the REAL reasons to avoid international?

Post by boglephreak » Wed Dec 21, 2016 4:45 pm

my brother does not buy int'l because he thinks other countries' economic policies are lax (especially china), and that europeans are lazy socialists.

i find that humorous, but hold 20% of my portfolio in int'l. not too much, but enough (allegedly) to get the diversification benefit from int'l.

DetroitRick
Posts: 430
Joined: Wed Mar 23, 2016 9:28 am

Re: What are the REAL reasons to avoid international?

Post by DetroitRick » Wed Dec 21, 2016 5:01 pm

Personally, I don't see any real reason to avoid it. Big picture, much of the world's income and growth will be coming from outside the U.S. Some markets face bigger challenges than others right now. But long-term direction seems clear to me. Even more so with an aging U.S. population (which I'm part of). And any major invest-able segment that doesn't move in lock-step with U.S. equities, and that has positive returns long-term, is a diversification tool that I want to use. It's a big unpredictable world out there, and it is in the U.S. too. But, international investing doesn't scare me in the least (spent most of my career in international trade). However, I do try to maintain a healthy respect for its added complexities.

Globally, there are lots of headwinds right now, depending on the exact market you are talking about. If I had to guess, I'd say the dollar will be strengthening more for a while too. But either way, I'm in. And while a decent part of my international portfolio is indexed, I prefer active management funds internationally, with very selective currency hedging. Hedging is certainly not free, and I like the experts to choose for me (now THAT choice is really difficult). Plus in my smaller taxable account, all my international holdings are ADR's and no currency hedging is used there.

No guarantee that history will repeat, but in my over 20 years of investing, my international returns have slightly exceeded my domestic equity returns while giving great diversification benefits. Even counting these last few especially challenging years. Of course, that means nothing to other investors, but it would be difficult for me to say that now and henceforth that things will be different and that I should retreat. Especially when so many local economies show promise. I could be happy anywhere in the 25% to 45% range (intern'l to total equity), and am currently sitting at 31%-32% overall, starting to edge up slightly.

I'm also a contrarian. As I watch recent outflows from the international funds I follow lately, I am feeling more and more like heading in the opposite direction. I know, not very Boglehead of me, but nobody is perfect :oops: .

User avatar
abuss368
Posts: 11874
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: What are the REAL reasons to avoid international?

Post by abuss368 » Wed Dec 21, 2016 5:48 pm

If I remember correctly, I believe under the Efficient Market Hypothesis all information is priced into the market correct?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
abuss368
Posts: 11874
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: What are the REAL reasons to avoid international?

Post by abuss368 » Wed Dec 21, 2016 5:51 pm

bamn wrote:It's interesting as a non-American to browse the Bogleheads forums and see attitudes regarding 'international' funds. Where I live, USA is international. Investors here wouldn't be caught dead without a heavy USA weighting in our portfolios. The common passive strategy here is some home-bias to reduce currency risk, but beyond that, basically following the market caps. If you believe in a mostly efficient market, and that fundamentally diversification is good, why wouldn't you want to own the whole pie?


Hi bamn,

Welcome to the Bogleheads!

I found you post interesting. I have more and more about a 50% U.S. and 50% International equity allocation. Vanguard appears to me moving in this direction as well as the most recent recommendation is 40% of equity (increased from 20% previously). In my opinion, it would certainly be easier to manage and more aligned with market capitalization.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

jalbert
Posts: 2277
Joined: Fri Apr 10, 2015 12:29 am

Re: What are the REAL reasons to avoid international?

Post by jalbert » Wed Dec 21, 2016 6:14 pm

I think it is age-dependent. The closer you are to retirement, the closer you are to depending on retirement savings to cover liabilities denominated in one's home currency.

I think the risk of a US-only portfolio is sector concentration. Over the last 15-20 years, US market cap has become less diversified across sectors, with tech, healthcare, and financial services making up about half of the market cap of the S&P500. Non-US developed markets are sufficient to diversify this risk if emerging market equities are not your cup of tea.

User avatar
abuss368
Posts: 11874
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: What are the REAL reasons to avoid international?

Post by abuss368 » Wed Dec 21, 2016 6:51 pm

jalbert wrote:I think it is age-dependent. The closer you are to retirement, the closer you are to depending on retirement savings to cover liabilities denominated in one's home currency.

I think the risk of a US-only portfolio is sector concentration. Over the last 15-20 years, US market cap has become less diversified across sectors, with tech, healthcare, and financial services making up about half of the market cap of the S&P500. Non-US developed markets are sufficient to diversify this risk if emerging market equities are not your cup of tea.


Interesting. Vanguard's Target Retirement fund allocates 40% of equity to international for retirees.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
FIREchief
Posts: 1415
Joined: Fri Aug 19, 2016 6:40 pm

Re: What are the REAL reasons to avoid international?

Post by FIREchief » Wed Dec 21, 2016 6:58 pm

boglephreak wrote:my brother does not buy int'l because he thinks other countries' economic policies are lax (especially china), and that europeans are lazy socialists.

i find that humorous, but hold 20% of my portfolio in int'l. not too much, but enough (allegedly) to get the diversification benefit from int'l.


Sounds like your approach to international is "lax" and "lazy." :D :sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
triceratop
Moderator
Posts: 3744
Joined: Tue Aug 04, 2015 8:20 pm
Location: la la land

Re: What are the REAL reasons to avoid international?

Post by triceratop » Wed Dec 21, 2016 7:15 pm

abuss368 wrote:
jalbert wrote:I think it is age-dependent. The closer you are to retirement, the closer you are to depending on retirement savings to cover liabilities denominated in one's home currency.

I think the risk of a US-only portfolio is sector concentration. Over the last 15-20 years, US market cap has become less diversified across sectors, with tech, healthcare, and financial services making up about half of the market cap of the S&P500. Non-US developed markets are sufficient to diversify this risk if emerging market equities are not your cup of tea.


Interesting. Vanguard's Target Retirement fund allocates 40% of equity to international for retirees.


Of course, what Vanguard does has nothing to do with the very real risks that jalbert points out you take on. I might be 50% international, but those are risks without a doubt.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

Quark
Posts: 1045
Joined: Sun Nov 01, 2015 5:32 pm

Re: What are the REAL reasons to avoid international?

Post by Quark » Wed Dec 21, 2016 7:35 pm

triceratop wrote:
jainn wrote:
triceratop wrote:You can look at the size of the foreign tax credit for a fund, i.e. Foreign Tax Paid. This is what was withheld internationally, dampening returns. You can of course recover it (perhaps only partially, depending on your tax situation and extent of foreign holdings) by holding international funds in a taxable account. However, there are often fewer qualified dividends (and a higher yield, recently) so it often turns out to be a wash, or worse. That gets into the topic of tax efficiency, to which there are many threads devoted.


https://www.lordabbett.com/content/lordabbett/en/perspectives/equityperspectives/international-funds-foreign-credits-may-boost-aftertax-returns.html

Q. Assuming the same dividend yield, does an international equity fund or a domestic equity fund have a higher aftertax yield?
A. To the extent a shareholder holds the fund in an account that is subject to current income taxes and not a tax-advantaged account (such as an IRA or 401(k)), the international equity fund typically will have a higher aftertax yield due to the foreign tax credit (FTC) pass-through. [See the example below for a comparison of a fund with a foreign tax credit pass-through to a similar fund with no FTC.]

https://www.lordabbett.com/content/lord ... turns.html

This has been discussed before; after tax yield is a metric which IMO makes no sense as a basis of comparison, just as yield is not how we select our equity investments. You're interested in the extent to which taxes reduces total return. And for that comparison, all else is not equal between international and US for the reasons I mentioned above.

Exactly. Foreign governments take $1 in taxes from your dividends, the US government gives you back something between nothing and the original $1. You don't end up ahead on a net basis. Any analysis which purports to show the process helps your net returns is misguided (although the FTC is clearly helpful compared to not getting anything back).

MnD
Posts: 3088
Joined: Mon Jan 14, 2008 12:41 pm

Re: What are the REAL reasons to avoid international?

Post by MnD » Wed Dec 21, 2016 7:40 pm

The flip side - reasons to avoid US equities.
Our one pension claim, two claims on Social Security along with the value of our home and collectibles and fixed income holdings are almost 100% dependent on the health of the US economy, government and currency. So while we are global market cap weighted on just the equity portion of our investment portfolio, we are vastly over-weighted on US in terms of the country importance to our overall future income streams and net worth.
A 45% international equity holding is probably 15% of the game overall.

Given that, I would be perfectly comfortable being 100% international equity, especially given that internationals derive a significant portion of their earnings from the US. The majors do for the most part sell a bit of product in the US. You don't need any US stocks to have significant US exposure.
1 Royal Dutch Shell plc
2 Nestle SA
3 Samsung Electronics Co. Ltd.
4 Novartis AG
5 Roche Holding AG
6 Toyota Motor Corp.
7 HSBC Holdings plc
8 Taiwan Semiconductor Manufacturing Co. Ltd.
9 Tencent Holdings Ltd.
10 Unilever

User avatar
tractorguy
Posts: 579
Joined: Wed May 19, 2010 6:32 pm
Location: Chicago Suburb

Re: What are the REAL reasons to avoid international?

Post by tractorguy » Wed Dec 21, 2016 8:20 pm

I am retired. I have about 20% of stocks international and no bonds. I can only speak for my reasons for not increasing my exposure. They are:
1. Currency Risk
2. Currency Risk
3. Currency Risk. I have lived outside the U.S. for 10 of my working years. During this time, I was shipping money back and forth between the U.S. and my local bank as I built up my retirement accounts and savings accounts or needed to pay for big ticket items like cars in local currency. It was not unusual to see a +/- 30% swing in the exchange rate in a very short period of time with little or no believable justification. The financial press always had justification but not uncommonly trotted the same one out a year later for a swing in the opposite direction! Because of currency risk alone, I'm not willing to add any more than 20% of this risk to the stock side of my portfolio and I'm not willing to add any of this risk to the safe (bond and cash) side of my portfolio.
4. Increased correlation between U.S. and other countries is decreasing any advantage to investing internationally. I saw this in spades when I was working for an international company. In the 70's in my company, R&D was done in one country, and a large part of manufacturing was done in the U.S. and Western Europe for sales everywhere in the globe. When I left in 2010 every discipline within the company was global. R&D, manufacturing, finance, and sales were done in every economic region in the world, and there was much, much more effort to design products and support systems that could be sold and used everywhere with minimal changes. The engineering, marketing, and financial teams were international. I'm sure every company in the S&P500 is seeing the same thing. To a somewhat lesser degree, smaller companies are also seeing it because they are competing with companies everywhere in the globe to sell goods and services.
5. Finally, I believe in the efficient market hypothesis but take it with a large dose of salt. First it is only an hypothesis. Secondly, not all investors come to the table with the same rules, constraints and particularly tax strategies so I don't know why we would expect that universe of efficient investors in the U.S. would have the same optimum portfolio allocation as the universe of non U.S. investors. Between home country bias, currency risk, and tax strategies, I believe that investors living outside the U.S. have strong incentives to buy more non-US stock than I as a U.S. based investor have. For that reason, I think the efficient market ideal balance point for a U.S. domiciled investor is going to be somewhat less international stock than is in the global index. I don't know if this is a significant factor but I'm certain it is a factor and I've not seen it discussed here. I have to admit that I don't have any data to support this belief. I'd love to see a discussion. Maybe somebody ought to do a doctoral thesis on the subject.
Lorne

jalbert
Posts: 2277
Joined: Fri Apr 10, 2015 12:29 am

Re: What are the REAL reasons to avoid international?

Post by jalbert » Thu Dec 22, 2016 4:08 am

abuss368 wrote:
jalbert wrote:I think it is age-dependent. The closer you are to retirement, the closer you are to depending on retirement savings to cover liabilities denominated in one's home currency.

I think the risk of a US-only portfolio is sector concentration. Over the last 15-20 years, US market cap has become less diversified across sectors, with tech, healthcare, and financial services making up about half of the market cap of the S&P500. Non-US developed markets are sufficient to diversify this risk if emerging market equities are not your cup of tea.


Interesting. Vanguard's Target Retirement fund allocates 40% of equity to international for retirees.


They also reduce total equity exposure down to 30% in Target Retirenent Income which puts unhedged currency exposure for the fund at 12% of the fund.

Call_Me_Op
Posts: 6576
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: What are the REAL reasons to avoid international?

Post by Call_Me_Op » Thu Dec 22, 2016 6:34 am

Dieharder wrote:Currency risk is the main reason to limit international.


Unless. of course, you view it as "currency diversification."
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
abuss368
Posts: 11874
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: What are the REAL reasons to avoid international?

Post by abuss368 » Thu Dec 22, 2016 6:39 am

jalbert wrote:
abuss368 wrote:
jalbert wrote:I think it is age-dependent. The closer you are to retirement, the closer you are to depending on retirement savings to cover liabilities denominated in one's home currency.

I think the risk of a US-only portfolio is sector concentration. Over the last 15-20 years, US market cap has become less diversified across sectors, with tech, healthcare, and financial services making up about half of the market cap of the S&P500. Non-US developed markets are sufficient to diversify this risk if emerging market equities are not your cup of tea.


Interesting. Vanguard's Target Retirement fund allocates 40% of equity to international for retirees.


They also reduce total equity exposure down to 30% in Target Retirenent Income which puts unhedged currency exposure for the fund at 12% of the fund.


Correct.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
nisiprius
Advisory Board
Posts: 34319
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: What are the REAL reasons to avoid international?

Post by nisiprius » Thu Dec 22, 2016 7:16 am

abuss368 wrote:If I remember correctly, I believe under the Efficient Market Hypothesis all information is priced into the market correct?
1) Does EMH lead to a belief that the price must be right at the same time for investors in all currencies?

The arguments based on efficient market theory (which I pretty much agree with) do not carry over to a multi-currency portfolio, because based on the information available to me, I should not be willing to pay as much for, e.g. Euro-denominated stock as a Euro investor should be willing to pay, because I incur extra, un-rewarded risk.

The fundamentals of, let's say, Siemens Group (German) are the same for me and a Euro investor. So theoretically the value of the stock in Euros would be the same. However, I, investing in dollars, experience more volatility than the German investor does, because I have a double layer of volatility, dollar fluctuation on top of stock fluctuation. Therefore, my information is different and the price I am willing to pay for it (converted to Euros) will be different.

If the currency I use myself is dollars, then I am forced to take a risk which Euro investors do not need to take.

The facts for Euro investors and U.S. dollar investors are actually different, and the "right price" for the stock (after conversion to the same currency) can't be exactly the same for both.

2) If stocks are worth different amounts to home-currency and foreign-currency investors, are they better or worse?

It is usually said that currency fluctuations are have long-term zero return (aka the "law of one price,") so currency fluctuations are unrewarded risk. If we believed that the intrinsic characteristics of every national stock market, measured in its own currency, were exactly the same as the U.S. market--same return, same standard deviation, same Sharpe ratio, all equally good measured in their own currency--then to any investor, the stocks of every other country would be not as good as those of the home country, lower Sharpe ratio.

3) Even if currency fluctuations are zero return, they are probably uncorrelated with U.S. stock prices, so can't they improve a portfolio anyway?

A zero return asset (the currency investment layered into international stocks) cannot improve a portfolio unless it actually has negative correlation--not just a chance, temporary negative correlation, but long-term, persistent negative correlation. FOREX cannot improve a portfolio unless you believe either that it actually has a positive long-term return, or that it has a reasonable strong, persistent--risk-cancelling, fluctuation-erasing--negative correlation with U.S. stocks.

If we believed this about FOREX, then it would be a standard, mainstream recommendation that everyone hold pure FOREX in their portfolios. On the contrary, FOREX is usually assumed to be one of the riskiest, most speculative, most-gambling-like of all investments.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Post Reply