Are International Markets overdue for great gains?

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TomCat96
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Are International Markets overdue for great gains?

Post by TomCat96 » Fri Dec 30, 2016 1:38 pm

This is a rationale I see over and over again in support of international stocks.

Because International has been underperforming in the past few years, it's high time one invests in them.
This thread is about this specific rationale I see cited over and over again. I want to discuss this line of reasoning in investing theory in particular.

I personally do not agree with this single rationale. Calling international stocks overdue for great gains is about the same as calling US stocks overdue for great gains. I believe one cannot know. Whether one says international stocks are overdue, or whether international will outperform "going forward", it's all the same thing.

I believe that this rationale inherently assumes, as I have said many times, that international stocks are another version of U.S. Stocks.

Let me clarify what I mean by another version:

Assume for a moment U.S. stocks grow at 8% a year CAGR
Assume that International has been performing at 4% CAGR

then the idea is International will outperform at some point such that it's performance will be or approximate 8% CAGR because that's what U.S. stocks have been doing. The long term average of what International is supposed to be 8% CAGR because that is what US stocks are. International is therefore just like US stocks, its supposed to perform the way US stocks do in the long run, and therefore if you ever catch it at 4% CAGR, its a great time to buy in.


My objection is this rationale:
If International has been growing at 4% CAGR, then it does so because that growth is what the international market grows at more or less. International stocks are not another version of U.S. stocks. Slower growth now does mean faster growth later. Slower growth now occurs because that slower growth characterizes the composition of the International equities mix in VXUS.


Note:
This thread is NOT ABOUT International as providing additional diversification. I believe that is pretty effectively established, and I have never seen anyone argue that adding international somehow does not provide additional diversification.

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nedsaid
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Re: Are International Markets overdue for great gains?

Post by nedsaid » Fri Dec 30, 2016 1:46 pm

I tell you what, sell ALL of your International investments and hopefully this will cause those markets to zoom for the rest of us. I have the belief that the International Markets are overdue but I have no idea when the great gains will come. We could be in for a long wait. This is why investors need to be patient when they decide on a strategy.
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Re: Are International Markets overdue for great gains?

Post by nisiprius » Fri Dec 30, 2016 1:48 pm

If someone is in love with (or, for some reason, is promoting) some asset class, then usually one of two things will be true: it has been outperforming the S&P 500 or it has been underperforming the S&P 500.

If it has been outperforming, then they can point to the recent data... consciously or unconsciously picking a period that extends back to the time the outperformance began. They argue for "momentum."

If it has been underperforming, then they can say it is "cheap," that it is "overdue for great gains..." and they argue for "mean reversion."
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Re: Are International Markets overdue for great gains?

Post by nisiprius » Fri Dec 30, 2016 1:54 pm

TomCat96 wrote:This thread is NOT ABOUT International as providing additional diversification. I believe that is pretty effectively established, and I have never seen anyone argue that adding international somehow does not provide additional diversification.
I've argued that in the past, it has added very little additional diversification... which has been roughly balanced by the handicap it has also added.

This is half-joking, but only half-joking. It's significant because it is in a book that was using it to illustrate the general point that "the most important diversification on the equity side is to add an exposure to international equities." Yet, according to the book itself, using the author's own choice of data--basically "all available data" at the book's date of publication, a reasonable choice, and 35 years of data, a respectably long period--at the time the book was written, a portfolio that included international stocks made no difference whatsoever in either annualized return or standard deviation (= volatility = risk).

The "most important diversification" made no difference whatsoever.

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Re: Are International Markets overdue for great gains?

Post by WinnFlak » Fri Dec 30, 2016 1:55 pm

nisiprius wrote:If someone is in love with (or, for some reason, is promoting) some asset class, then usually one of two things will be true: it has been outperforming the S&P 500 or it has been underperforming the S&P 500.

If it has been outperforming, then they can point to the recent data... consciously or unconsciously picking a period that extends back to the time the outperformance began. They argue for "momentum."

If it has been underperforming, then they can say it is "cheap," that it is "overdue for great gains..." and they argue for "mean reversion."
Thank you. I'm fairly new to the investing world, and during my research phase over the last few months, I've seen this rationale used very often. I believe this is called "cherry picking". :happy

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Re: Are International Markets overdue for great gains?

Post by nedsaid » Fri Dec 30, 2016 2:06 pm

nisiprius wrote:If someone is in love with (or, for some reason, is promoting) some asset class, then usually one of two things will be true: it has been outperforming the S&P 500 or it has been underperforming the S&P 500.

If it has been outperforming, then they can point to the recent data... consciously or unconsciously picking a period that extends back to the time the outperformance began. They argue for "momentum."

If it has been underperforming, then they can say it is "cheap," that it is "overdue for great gains..." and they argue for "mean reversion."
This is why you have to behave rationally and not emotionally. I think of my investment disasters, we all have them, and they were mostly investments that I loved. I still think of how my beloved Lucent crashed and burned and never recovered. As Peter Lynch said, one should marry his wife and trade his stocks. Too often, people marry their stocks and trade their wives.

Part of behaving rationally is taking into account the relative valuations of asset classes. International Stocks are on sale right now. I am buying now as I am able. When I see toilet paper is 50% off, I stock up and don't write essays on the efficiencies of toilet paper markets. An academic would tell me that 50% off toilet paper is impossible as market expectations have already been priced in and toilet paper sells in a competitive market place. Silly me stocks up anyhow.
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Re: Are International Markets overdue for great gains?

Post by ofcmetz » Fri Dec 30, 2016 2:08 pm

OP, no one really knows if it's due. I international invest for diversification and wouldn't put my money there if it was because I thought it was due.
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Re: Are International Markets overdue for great gains?

Post by Tamalak » Fri Dec 30, 2016 2:10 pm

I certainly feel like international is "due" for great gains although it's more like I feel that the dollar is "due" to drop some.

However, I don't time the market. I buy the whole world at cap.

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Re: Are International Markets overdue for great gains?

Post by boglesmkcents » Fri Dec 30, 2016 2:52 pm

After thinking about this a lot, doing a lot of back testing, reading several excellent books on asset allocation (by William Bernstein and Rick Ferri, for example), I settled several years ago on 2/3 domestic and 1/3 international, and feel I am reasonably well-covered based on what is likely to transpire long-term, and regardless of how things evolve.

That said, I do think things will pivot in favor of international over the coming years, but timing and magnitude tbd, and none of this guaranteed. This thinking did not alter my opinion on my US/Intl mix however. I have learned that my opinions about what the markets are likely to do short-term are usually wrong, so I continue to take a long-term perspective while I continue to dollar-cost average, re-balance, annually, etc.

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Re: Are International Markets overdue for great gains?

Post by Erwin » Fri Dec 30, 2016 3:01 pm

If you believe that valuations are important, currently the US market PE10 is very high relative to history while international stocks are just the opposite, specially emerging markets. This would indicate that international markets are due for higher performance than US markets, which have been shining for years. How long will it take? That is the big question.
The best way is to not try to guess the market, but to invest globally, as mentioned in an earlier post, via an ETF like VT or ACWI. And if you feel strongly about international, add to it a small amount (tilt) via an ETF like VXUS. My preference is emerging markets. VT is my major equity investment, but I also own a bit of IEMG, an emerging markets ETF.
Erwin

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Re: Are International Markets overdue for great gains?

Post by TSR » Fri Dec 30, 2016 3:02 pm

I just invested in international in my Roth, but it was because my international allocation has dragged compared to my US allocation and therefore deviated from the allocation I have committed to. I'm hoping this strategy pays off reasonably well, regardless of whether that fund is "due" for big returns anytime soon.

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Re: Are International Markets overdue for great gains?

Post by TomCat96 » Fri Dec 30, 2016 3:37 pm

nedsaid wrote:I tell you what, sell ALL of your International investments and hopefully this will cause those markets to zoom for the rest of us. I have the belief that the International Markets are overdue but I have no idea when the great gains will come. We could be in for a long wait. This is why investors need to be patient when they decide on a strategy.

When I first came to this website, I hadn't yet settled on an allocation. As a newbie investor I wasn't interested in what I was supposed to do, I came here to figure out why and learn.

Telling me to sell all my international so the rest of you can get gains is not a cogent reason for international. Telling me you believe International is overdue tells me nothing more than you have a strong conviction without a supporting rationale.

The issue of this thread to is to explore just that single pin point rationale: Are International markets overdue? and is such rationale a good one?
If it is a good one, what are the assumptions upon which that rationale is based?


I presume that new people are coming to this website all the time. I only have 286 posts. Consider those new individuals and what you would say to them. I don't want this to be an Us vs Them kind of mentality where individuals ardently defend their position because they take things personally.

If you have no basis upon which to defend the International is Overdue theory other than your strong conviction so be it.

But let it be known that that is the basis in support of International is Overdue theory: strong convictions.

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Re: Are International Markets overdue for great gains?

Post by TomCat96 » Fri Dec 30, 2016 3:39 pm

If International is overdue theory is cogent, I will gladly apply it to other asset classes. For certainly International cannot be the only class that is "overdue"

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Re: Are International Markets overdue for great gains?

Post by 691175002 » Fri Dec 30, 2016 3:47 pm

TomCat96 wrote: My objection is this rationale:
If International has been growing at 4% CAGR, then it does so because that growth is what the international market grows at more or less. International stocks are not another version of U.S. stocks. Slower growth now does mean faster growth later. Slower growth now occurs because that slower growth characterizes the composition of the International equities mix in VXUS.
Your understanding of the issue is incomplete. There is a difference between GDP growth, corporate earnings growth, and stock market growth.

Stock Market Capitalization = P/E * Corporate Earnings
Corporate Earnings = Aggregate Profit Margin * GDP

Both profit margin and P/E are bounded, therefore over long enough time periods stock market returns will revert to GDP growth.

If international stock returns have been trailing their GDP growth the stocks will be getting cheaper and cheaper (as earnings growth is outpacing price growth). This situation could persist for 10 or 20 years but a stream of future earnings can only get so cheap. Similarly, US stock market P/E can only go so high.

Your focus purely on price returns is misplaced because they are necessarily mean-reverting. One way to back up your idea would be to observe that international GDP growth is persistently lower than US growth (and there isn't too much slack in the P/E ratios) but I don't know if that is true or not.

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Re: Are International Markets overdue for great gains?

Post by TomCat96 » Fri Dec 30, 2016 3:51 pm

Erwin wrote:If you believe that valuations are important, currently the US market PE10 is very high relative to history while international stocks are just the opposite, specially emerging markets. This would indicate that international markets are due for higher performance than US markets, which have been shining for years. How long will it take? That is the big question.
The best way is to not try to guess the market, but to invest globally, as mentioned in an earlier post, via an ETF like VT or ACWI. And if you feel strongly about international, add to it a small amount (tilt) via an ETF like VXUS. My preference is emerging markets. VT is my major equity investment, but I also own a bit of IEMG, an emerging markets ETF.

This is interesting.

So is your argument that International PE is low relative to it's historical PE?
Or is your argument International PE is low relative to the PE of US equities?

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Re: Are International Markets overdue for great gains?

Post by TomCat96 » Fri Dec 30, 2016 3:53 pm

691175002 wrote:
TomCat96 wrote: My objection is this rationale:
If International has been growing at 4% CAGR, then it does so because that growth is what the international market grows at more or less. International stocks are not another version of U.S. stocks. Slower growth now does mean faster growth later. Slower growth now occurs because that slower growth characterizes the composition of the International equities mix in VXUS.
Your understanding of the issue is incomplete. There is a difference between GDP growth, corporate earnings growth, and stock market growth.

Stock Market Capitalization = P/E * Corporate Earnings
Corporate Earnings = Aggregate Profit Margin * GDP

Both profit margin and P/E are bounded, therefore over long enough time periods stock market returns will revert to GDP growth.

If international stock returns have been trailing their GDP growth the stocks will be getting cheaper and cheaper (as earnings growth is outpacing price growth). This situation could persist for 10 or 20 years but a stream of future earnings can only get so cheap. Similarly, US stock market P/E can only go so high.

Your focus purely on price returns is misplaced because they are necessarily mean-reverting. One way to back up your idea would be to observe that international GDP growth is persistently lower than US growth (and there isn't too much slack in the P/E ratios) but I don't know if that is true or not.

I don't understand your argument. Are you arguing in favor of International markets being overdue or against.

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Re: Are International Markets overdue for great gains?

Post by trasmuss » Fri Dec 30, 2016 4:00 pm

International stocks will likely start outperforming domestic stocks when the value of the US dollar starts to weaken relative to foreign currencies.

When will this be? I don't know. It can take years for these trends to happen.

I'm sure there are other factors. Foreign companies have an edge in competing with imported US goods, for example, when their currencies are weak.

Just don't expect foreign stocks to bail you out when US stocks plunge.

So far people following Bogel's advice have done well. That will change when the value of the dollar changes.

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Re: Are International Markets overdue for great gains?

Post by saltycaper » Fri Dec 30, 2016 4:01 pm

TomCat96 wrote:
If you have no basis upon which to defend the International is Overdue theory other than your strong conviction so be it.

But let it be known that that is the basis in support of International is Overdue theory: strong convictions.
That is not the basis of the theory I hear most often. The basis of the theory is relative valuations. It is true the relative valuations can persist for some time, a very long time. My anecdotal impression is that most people who actually use valuations for forecasting admit that it is not a precise predictor, and that it's not even that great of a predictor, it's just a better predictor than others. If you wish to criticize the basis of the theory, then attack away, and if you wish to criticize those who are taking what they heard (int'l has higher expected returns), and throwing out the theory and all the caveats that go along with it, then criticize them. But try to avoid mischaracterizing what the theory actually is. It just perpetuates these other problems.
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Re: Are International Markets overdue for great gains?

Post by TomCat96 » Fri Dec 30, 2016 4:01 pm

Classification of Responses to the cogency of the rationale
Are International Markets overdue?

nedsaid: Strong Convictions in favor.
nisiprius: Abstention.
ofcmetz: Abstention
Tamalak: Convictions in Favor
boglesmkcents: Convictions in Favor
Erwin: Basis of "overdue" from historical PEs.
TSR: Conviction in favor
691175002: pending further clarification.
Saltycaper: Low relative to valuations.
trasmuss: International outperformance supported by eventual low performance of dollar.

Thus far the logical arguments in favor of the overdue of International markets to outperform the next few years is based on being low relative to historical PEs.

I will therefore begin to review the efficacy of investing based on low historical PEs and mean reversions.
If there are any more logical arguments in support of International is Overdue, please send them in and I will aggregate them.

Thus far, I have 4 convictions, and 3 logical argument in favor. Since I am here to explore the cogency of the rationale from a logical perspective only, feelings and convictions are immaterial and shall be discarded.


I want to remind people, this is not about whether International stocks are a good investment. This is about overdue theory--whether or not the asset class of International Stocks having underperformed in recent years is overdue for gains to reach a certain level of what it should or ought to be.

I will attempt to revisit this thread tomorrow and will collect all logical arguments in favor of. (I make no guarantees since holidays are a busy time) Afterwards I will explore those logical arguments in particular, shifting the focus of the discussion.


My current position at this time based on responses (This will change as more people post):

The idea that International markets are overdue for abnormal gains appear to be premised on the rationale of mean-reversion, or that the asset class is low relative to historical PE. At this time I am unclear as to whether the argument that International stocks are low relative to PE is compared to the PE of International Equities or the PE of US equities. I do believe that that latter comparison is far more dubious.

Therefore, without making any judgments as to the correctness of the argument, the logical force behind the argument that International stocks are overdue is equal to the logical force behind the idea that purchasing assets based on low PE relative to some historical PE is a good investment philosophy.
Last edited by TomCat96 on Fri Dec 30, 2016 4:34 pm, edited 11 times in total.

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Re: Are International Markets overdue for great gains?

Post by 691175002 » Fri Dec 30, 2016 4:03 pm

TomCat96 wrote:I don't understand your argument. Are you arguing in favor of International markets being overdue or against.
I don't have a particular opinion either way, as I belive that such a well researched asset class is likely to be efficiently priced on a relative basis at all times.

I'm just pointing out that the argument presented in the opening post is inconsistant with basic finance/economic theory. You cannot make your argument based on stock prices because they are both noisy and required to mean revert over a long enough period.

International asset returns cannot be "destined" to grow at a lower rate than US stocks because if they were nobody would buy them. Even if international corporate earnings grew more slowly, they would just receive a lower valuation to produce the same net present value.

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Re: Are International Markets overdue for great gains?

Post by TomCat96 » Fri Dec 30, 2016 4:15 pm

saltycaper wrote:
TomCat96 wrote:
If you have no basis upon which to defend the International is Overdue theory other than your strong conviction so be it.

But let it be known that that is the basis in support of International is Overdue theory: strong convictions.
That is not the basis of the theory I hear most often. The basis of the theory is relative valuations. It is true the relative valuations can persist for some time, a very long time. My anecdotal impression is that most people who actually use valuations for forecasting admit that it is not a precise predictor, and that it's not even that great of a predictor, it's just a better predictor than others. If you wish to criticize the basis of the theory, then attack away, and if you wish to criticize those who are taking what they heard (int'l has higher expected returns), and throwing out the theory and all the caveats that go along with it, then criticize them. But try to avoid mischaracterizing what the theory actually is. It just perpetuates these other problems.

That's fine. Tell me how I am mischaracterizing the argument if I am and offer a correction. To me, that is what I am reading. If I am not reading something properly, please flesh it out.

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Re: Are International Markets overdue for great gains?

Post by kosomoto » Fri Dec 30, 2016 4:26 pm

691175002 wrote:
TomCat96 wrote: My objection is this rationale:
If International has been growing at 4% CAGR, then it does so because that growth is what the international market grows at more or less. International stocks are not another version of U.S. stocks. Slower growth now does mean faster growth later. Slower growth now occurs because that slower growth characterizes the composition of the International equities mix in VXUS.
Your understanding of the issue is incomplete. There is a difference between GDP growth, corporate earnings growth, and stock market growth.

Stock Market Capitalization = P/E * Corporate Earnings
Corporate Earnings = Aggregate Profit Margin * GDP

Both profit margin and P/E are bounded, therefore over long enough time periods stock market returns will revert to GDP growth.

If international stock returns have been trailing their GDP growth the stocks will be getting cheaper and cheaper (as earnings growth is outpacing price growth). This situation could persist for 10 or 20 years but a stream of future earnings can only get so cheap. Similarly, US stock market P/E can only go so high.

Your focus purely on price returns is misplaced because they are necessarily mean-reverting. One way to back up your idea would be to observe that international GDP growth is persistently lower than US growth (and there isn't too much slack in the P/E ratios) but I don't know if that is true or not.
I'd like to point out a flaw in this rationale - corporate profits are not bound to their respective countries GDP. Us companies are moving into foreign countries and deriving profits from them, therefore US stocks can grow earnings faster than what is implied by US GDP.

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Re: Are International Markets overdue for great gains?

Post by MrKnight » Fri Dec 30, 2016 4:49 pm

kosomoto wrote:
691175002 wrote:
TomCat96 wrote: My objection is this rationale:
If International has been growing at 4% CAGR, then it does so because that growth is what the international market grows at more or less. International stocks are not another version of U.S. stocks. Slower growth now does mean faster growth later. Slower growth now occurs because that slower growth characterizes the composition of the International equities mix in VXUS.
Your understanding of the issue is incomplete. There is a difference between GDP growth, corporate earnings growth, and stock market growth.

Stock Market Capitalization = P/E * Corporate Earnings
Corporate Earnings = Aggregate Profit Margin * GDP

Both profit margin and P/E are bounded, therefore over long enough time periods stock market returns will revert to GDP growth.

If international stock returns have been trailing their GDP growth the stocks will be getting cheaper and cheaper (as earnings growth is outpacing price growth). This situation could persist for 10 or 20 years but a stream of future earnings can only get so cheap. Similarly, US stock market P/E can only go so high.

Your focus purely on price returns is misplaced because they are necessarily mean-reverting. One way to back up your idea would be to observe that international GDP growth is persistently lower than US growth (and there isn't too much slack in the P/E ratios) but I don't know if that is true or not.
I'd like to point out a flaw in this rationale - corporate profits are not bound to their respective countries GDP. Us companies are moving into foreign countries and deriving profits from them, therefore US stocks can grow earnings faster than what is implied by US GDP.
That's correct. Additional factor to consider is that the publicly stock market does not reflect all final goods and services that is included in the GDP calculation. For example, products and services offered by non publicly traded companies.

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Re: Are International Markets overdue for great gains?

Post by saltycaper » Fri Dec 30, 2016 4:51 pm

TomCat96 wrote:
That's fine. Tell me how I am mischaracterizing the argument if I am and offer a correction. To me, that is what I am reading. If I am not reading something properly, please flesh it out.
The argument, as I read it, was in your first post, "Because International has been underperforming in the past few years, it's high time one invests in them." And that was the end of the argument as I saw it. Now, perhaps I'm not being fair to you in that there very well are people who are probably pushing int'l on this logic alone, in which case I think you are fair to criticize them. But (I think) the basis for their argument, even if they themselves don't know it, or at least the logical argument I've heard (and believe), is that the US market is currently more highly valued than many other markets, and that over a period of the next, say, 10 years or so, that relationship is unlikely to hold to the current degree, though there is no guarantee that it won't. I should add that changes in valuation alone, of course, don't indicate what the relative performance will be. It is possible for the gap in valuations to close somewhat, yet the US still could outperform.
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Re: Are International Markets overdue for great gains?

Post by arcticpineapplecorp. » Fri Dec 30, 2016 5:13 pm

It depends on how well (or poorly) the individual countries do doesn't it, and the percentage those countries represent in your total international stock market index fund (and then what percentage that fund represents of your entire portfolio) and whether the currency when converted from local back to U.S. is beneficial or not.

You might want to check out the following website:
http://www.yardeni.com/pub/peacockglstkytd.pdf

This site shows how well different countries did individually (and as a group) in local currencies and in U.S. dollars. You can see that some countries could be up in local currency but down when converted to U.S. dollars. Take for instance, the U.K. which is UP 14.2% in their local currency (that's better than how the S&P500 did). However, in U.S. dollars that translates to a 4.2% LOSS. Similarly Europe as a whole in local currency (Euro) is UP 3.8% but when converted into U.S. dollars translates to 4.2% LOSS.

Remember currency flucutations cut both ways (sometimes hurt, other times help). Latin America was up in local currency 21.5% but when converted to U.S. dollars was up 28.3% (thanks strong U.S. dollar). Brazil was up 32.7% in local currency but when converted to U.S. dollars was up 61.8%. Russia was up 27.9% in local currency but converted to U.S. dollar is up 48.5%. South Africa was up 2.0% in local currency but 15.8% when converted to U.S. dollars. See how some countries you might have never guessed are actually helping your portfolio?

In other words, it could be said that some international countries have had great gains (Russia, Canada, Latin America, Taiwain, Pakistan). Unfortunately these countries might represent a small part of your international portfolio. And other countries Euro, U.K., etc. might have done ok but due to the drop in value of the Euro and Pound Sterling relative to the U.S. dollar, actually didn't help returns (and actually hurt returns). And those U.K., Europe and Japan are the biggest parts of the total international stock market index fund.

So investing internationally means taking currency risk. I think we (in the U.S.) seem to get spooked by this more than others because others are used to dealing in different currencies more than we are. Got to get over it if you're going to invest worldwide. Hope that helps.
Last edited by arcticpineapplecorp. on Fri Dec 30, 2016 5:27 pm, edited 5 times in total.
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Re: Are International Markets overdue for great gains?

Post by Alchemist » Fri Dec 30, 2016 5:16 pm

I do not believe in things like something being 'overdue' for great gains. International is underperforming because of currency fluctuations and real, serious problems in the EU and North East Asia (demographics, unemployment, debt burdens, and geopolitical uncertainty). Emerging markets are also facing serious headwinds as China slows to a crawl (they are in need of serious financial reform that is very unlikely to happen) and most of those related economies dependent on selling China raw materials are facing slowdowns themselves as a result.

The EU and Asia are also more prone to unexpected security crises. Russian provocation in eastern Europe, South China Sea territorial disputes, and the current migrant crisis give many investors pause. These problems are unlikely to change significantly in the short to medium term.

The U.S. by comparison has emerged from the financial crisis in far better shape. Unemployment is low, demographics are healthy (millennials outnumber Gen X'ers and Baby Boomers), geopolitical uncertainty is of little concern (quiet neighborhood in the Americas), economy wins with higher or lower oil prices, and retains the reserve currency in global markets.

If you back away from the charts, and look at the world as it is then there are clear reasons to expect International to have higher risks, and therefore be cheaper compared to U.S. stocks. Now, something crazy could happen that turns this all on its head. But unexpected and crazy (Black Swans) are inherently not priced into stocks.....or else they would be expected and non-crazy.

So....no. International Markets are not overdue for great gains.

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Re: Are International Markets overdue for great gains?

Post by FelixTheCat » Fri Dec 30, 2016 5:18 pm

I hope so. I am tired of tax loss harvesting Total International Stock Market.
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Re: Are International Markets overdue for great gains?

Post by nisiprius » Fri Dec 30, 2016 5:32 pm

TomCat96 wrote:Classification of Responses to the cogency of the rationale
Are International Markets overdue?

...nisiprius: Abstention....
Yes, and I think it's the correct response.
Therefore, without making any judgments as to the correctness of the argument, the logical force behind the argument that International stocks are overdue is equal to the logical force behind the idea that purchasing assets based on low PE relative to some historical PE is a good investment philosophy.
No, it's not equivalent.

The use of the word "overdue" makes it much stronger than that. The question you are asking implies not merely that "value averaging" is a sound strategy, not merely that international markets exhibit mean reversion and therefore long-term returns have less uncertainty than if they followed a random walk.

Your question uses the word "due," which implies a specific time... that mean reversion operates on a schedule.

"Overdue for great gains" is a much stronger statement than "has a higher long-term expected return than it did five years ago."
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Re: Are International Markets overdue for great gains?

Post by Kenkat » Fri Dec 30, 2016 5:38 pm

I feel and has only been unpleasant to hold international stocks recently, so therefore you may need to wait awhile until they outperform. When the thought of holding international stocks makes you want to be physically ill, when other chortle at you for blindly holding on to international stocks now that it has been determined that only fools hold them - THAT'S when you will know they will soon outperform.

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Re: Are International Markets overdue for great gains?

Post by Johnnie » Fri Dec 30, 2016 5:59 pm

I felt better about having 40 percent international two months ago than I do now. Long term it's probably smart, but I can't help feeling that those internationals are like a ball and chain holding me back for the next few years.

Makes me feel dis-bogled to even think that way, but I can't help it.
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Re: Are International Markets overdue for great gains?

Post by curiouskitty » Fri Dec 30, 2016 7:02 pm

arcticpineapplecorp. wrote:In other words, it could be said that some international countries have had great gains (Russia, Canada, Latin America, Taiwain, Pakistan). Unfortunately these countries might represent a small part of your international portfolio. And other countries Euro, U.K., etc. might have done ok but due to the drop in value of the Euro and Pound Sterling relative to the U.S. dollar, actually didn't help returns (and actually hurt returns). And those U.K., Europe and Japan are the biggest parts of the total international stock market index fund.

So investing internationally means taking currency risk. I think we (in the U.S.) seem to get spooked by this more than others because others are used to dealing in different currencies more than we are. Got to get over it if you're going to invest worldwide. Hope that helps.
I think arcticpineapplecorp put it perfectly.

I think there are two main reasons why I think international and especially emerging markets will have strong performance for US investors at some point:

1. The dollar is at an extremely high value compared to where it has been because we are further along in the economic recovery from the 2008 recession than most of the world, especially Europe. The US is raising interest rates so people want to have their money in dollars so they can have a stable currency and benefit from the rising rates. In some number of years, I'd guess within 5 but who knows, many other major international countries will have recovered and some will be experiencing faster rates of growth than the United States. Its possible we've reached a new normal for the US dollar but its much more likely that it will settle back down as the recovery takes hold worldwide.

2. Say you have 200 possible investments representing every country. It is very unlikely that one of them (the United States) will do the best in perpetuity. If you had done this a number of years ago, you might have chosen Rome or England or Japan. Japan is a particularly famous case of a very developed nation whose stock market collapsed and still hasn't recovered. Look at this chart and imagine it is 1990: https://en.wikipedia.org/wiki/Nikkei_22 ... ei_225.png If you were a Japanese investor, you'd be saying "Japan has had a 8% return and non-Japanese equities have had a 4% return so maybe non-Japanese equities are inherently worse." But now you've waited 26 years and your investment of 40,000 is only worth 10,000. By owning the world markets, you ensure a share of the world's performance whereas any given domestic market will have its ups and downs. Like with indexing, if you own more of the markets then you will smooth out some of the volatility (ie. less risk). Just as Japan looked really good in 1990, the US looks good now which is a likely indicator that P/E ratios will decrease at some point. Meanwhile lots of pessimism around Brexit, terrorism, debt, etc. has freaked our European investors but this will eventually blow over.

Note that global growth could slow in aggregate so nothing guarantees international markets will have "great gains" but for a US dollar investor they have more upside due to currency valuations and low P/E ratios

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Re: Are International Markets overdue for great gains?

Post by abuss368 » Fri Dec 30, 2016 11:46 pm

Are the international markets overdue? No one knows. I have been rebalancing into these funds for years! Hopefully when (if ever) the markets respond, we will all be smiling a lot more. Keep accumulating and stay the course.
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Re: Are International Markets overdue for great gains?

Post by abuss368 » Fri Dec 30, 2016 11:47 pm

Our Vanguard International Real Estate and REIT fund has also been under stress. I read the Brexit has not helped. So I have been buying and rebalancing back with a lot cheaper share prices. When the real estate and property markets turn, we will be rewarded.
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Re: Are International Markets overdue for great gains?

Post by nedsaid » Sat Dec 31, 2016 12:30 am

TomCat96 wrote:
nedsaid wrote:I tell you what, sell ALL of your International investments and hopefully this will cause those markets to zoom for the rest of us. I have the belief that the International Markets are overdue but I have no idea when the great gains will come. We could be in for a long wait. This is why investors need to be patient when they decide on a strategy.

When I first came to this website, I hadn't yet settled on an allocation. As a newbie investor I wasn't interested in what I was supposed to do, I came here to figure out why and learn.

Telling me to sell all my international so the rest of you can get gains is not a cogent reason for international. Telling me you believe International is overdue tells me nothing more than you have a strong conviction without a supporting rationale.

Nedsaid: I was joking. Of course one investor selling his International investments is not going to cause the markets to move. What I was referring to is that investors lose patience and tend to sell an investment before things turn around. Investors want to sell what has not recently been performing well in order to buy those investments that are red hot and off the charts with recent performance. Such performance chasing is not a prescription for long term investment success.

There is a certain reversion to the mean in the financial markets. Sometimes US Stocks do better than International Stocks as they have since the financial crisis in late 2008 and early 2009. People don't want to invest in International because of eight years of underperformance relative to US Stocks. I can tell you that in 2007, I read articles that said that the long term performance of International Stocks were superior to US Stocks. Hard to believe but there are actually periods of time where International Stocks have outperformed US Stocks. These things run in cycles.


The issue of this thread to is to explore just that single pin point rationale: Are International markets overdue? and is such rationale a good one?
If it is a good one, what are the assumptions upon which that rationale is based?

Nedsaid: Well, up until the 2008-2009 financial crisis, International Stocks had outperformed US Stocks during the 2000's. I saw this with my own investments. If you look at market history, US Stocks sometimes outperform International Stocks and sometimes International Stocks outperform US Stocks. One factor in this are currency fluctuations. A strong US Dollar are headwinds for International Stocks and tailwinds for US Stocks. Earnings in foreign currencies buy fewer dollars when translated back into dollars. A weak US Dollar creates tailwinds for International Stocks as earnings in foreign currencies will convert back into more US Dollars. This effect also affects US multinational companies that derive a lot of their earnings from overseas. Over long periods of time, US and International Stocks perform about the same.

It is also a way of saying that valuations matter. US Stocks are considered more expensive than International Stocks and thus their future expected returns should be lower as well. Over long periods of time, cheap beats expensive. Right now US Stocks are relatively expensive compared to International stocks. Larry Swedroe has discussed this a lot. You might do a search for "Larry Swedroe future expected returns" and see what comes up. Dr. Bill Bernstein has made similar comments.



I presume that new people are coming to this website all the time. I only have 286 posts. Consider those new individuals and what you would say to them. I don't want this to be an Us vs Them kind of mentality where individuals ardently defend their position because they take things personally.

Nedsaid: I have over 5,000 posts. Doesn't make me an expert but there is a lot out there you can search to get a clearer picture of my views. Sometimes my posts are short and sometimes they are lengthy. Of course, I have repeated certain points over and over again. Don't always give detailed explanations.

If you have no basis upon which to defend the International is Overdue theory other than your strong conviction so be it.

Nedsaid: My arguments are essentially that markets have trends or cycles, that valuations matter, and that there is a reversion to the mean in the markets. The US Markets have outperformed International for eight years now and it is not irrational to expect a reversion to the mean. What has outperformed in the past does not necessarily keep outperforming in the future. I would also say that the US Dollar will not continue to strengthen against foreign currencies forever. At some point, I expect the trend to reverse. I don't know when.

But let it be known that that is the basis in support of International is Overdue theory: strong convictions.
A fool and his money are good for business.

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Re: Are International Markets overdue for great gains?

Post by just frank » Sat Dec 31, 2016 7:30 am

As a currently 100% US investor, I think it is overdue as well. I think for the last several years, intl has been held down by

1) a strengthening dollar (IMO a rebound from the 'declining US' intl belief from the mid aughties)
2) perceived political risks in the EU
3) poorer countries getting hit by the drop in commodity prices (due largely to China shifting its economy)

so the question is how much longer can these factors continue?

I don't have the answers, but it seems these factors can continue for a while longer (1-2 years?) but not forever.

I will diversify to intl when one of you schmaht guys calls the intl bottom relative to the US. :)

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Re: Are International Markets overdue for great gains?

Post by Garco » Sat Dec 31, 2016 11:14 am

The stock market doesn't owe me anything. The international market isn't special in that respect. But I've seen the analyses that show that having some international holdings improves the long-term performance of a portfolio. And so year after year I keep 10-15% of my equities in non-US markets. Of course a lot of my "U.S." holdings depend on foreign markets for their success.

But I don't think international markets are "overdue." They are just a component of my long-term asset allocation. If the international markets remain "overdue," I could die without ever collecting on the debt. My beneficiaries wouldn't be able to make any legal claim.

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Re: Are International Markets overdue for great gains?

Post by leonard » Sat Dec 31, 2016 11:46 am

It's very unlikely you can time any market.

Set an Asset Allocation with whatever percent Int'l stocks you are comfortable with.

Rebalance according to your set schedule or rebalance bands.

Don't worry about what is "overdue" in any given market.
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Re: Are International Markets overdue for great gains?

Post by qwertyjazz » Sat Dec 31, 2016 11:59 am

Bogleheads are all about looking at a decade at a time vs individual years. I am going to go beyond that and argue over the next 5-10 decades. Economic powerhouses at least relatively change over the centuries. The US has had a great run and I think will continue to do so. But absent another world war for which we are relatively spared, I do not see US being as relatively dominant. Now as you have previously posted that does not mean stocks are the same as the economy.
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Re: Are International Markets overdue for great gains?

Post by inbox788 » Sat Dec 31, 2016 3:51 pm

Great gains, probably not. I don't expect great gains for international or US markets. I think we're in late stages of a bull market, and don't see where excess world growth is going to come from.
Greater gains, maybe. The US market has been leading, and there's the possibility the rest of the world will catch up. Mainly, it's Europe that will recover to catch up to the US, and faster growing companies in Asia. A reversion toward the mean if you will. (unless you believe what we went through was exactly that.)

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Re: Are International Markets overdue for great gains?

Post by feh » Sun Jan 01, 2017 2:16 pm

Are ex-US funds overdue for gains? I'd say absolutely not; the concept that if something hasn't happened in a while then it is sure to happen soon is a human fallacy.

Are es-US equities cheaper than US equities at this time? Absolutely.

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Re: Are International Markets overdue for great gains?

Post by nedsaid » Sun Jan 01, 2017 2:43 pm

TomCat96 wrote:Classification of Responses to the cogency of the rationale
Are International Markets overdue?

nedsaid: Strong Convictions in favor.

Nedsaid: I do have strong convictions that International Markets are overdue for great gains but this is based upon a valuations and a reversion to the mean argument and not upon a gambler's instinct. The trend of US outperformance over International since late 2008, could continue a while. I don't know when (and not even if) this trend will reverse but market history strongly suggests that it will. This is what I mean that there is a certain amount of faith required for success in investing.

nisiprius: Abstention.
ofcmetz: Abstention
Tamalak: Convictions in Favor
boglesmkcents: Convictions in Favor
Erwin: Basis of "overdue" from historical PEs.
TSR: Conviction in favor
691175002: pending further clarification.
Saltycaper: Low relative to valuations.
trasmuss: International outperformance supported by eventual low performance of dollar.

Thus far the logical arguments in favor of the overdue of International markets to outperform the next few years is based on being low relative to historical PEs.

Nedsaid: It is not irrational for US Stocks to carry higher P/E's compared to the rest of the world as the U.S. is regarded as a safe haven. US Stocks are perceived to have less risk and thus are given a premium by the markets. So you could say that larger future expected returns of International Stocks vs. US Stocks are not only a valuation story but also a risk story. Investors would be compensated for the additional risks they are taking.

I will therefore begin to review the efficacy of investing based on low historical PEs and mean reversions.
If there are any more logical arguments in support of International is Overdue, please send them in and I will aggregate them.

Thus far, I have 4 convictions, and 3 logical argument in favor. Since I am here to explore the cogency of the rationale from a logical perspective only, feelings and convictions are immaterial and shall be discarded.


I want to remind people, this is not about whether International stocks are a good investment. This is about overdue theory--whether or not the asset class of International Stocks having underperformed in recent years is overdue for gains to reach a certain level of what it should or ought to be.

I will attempt to revisit this thread tomorrow and will collect all logical arguments in favor of. (I make no guarantees since holidays are a busy time) Afterwards I will explore those logical arguments in particular, shifting the focus of the discussion.


My current position at this time based on responses (This will change as more people post):

The idea that International markets are overdue for abnormal gains appear to be premised on the rationale of mean-reversion, or that the asset class is low relative to historical PE. At this time I am unclear as to whether the argument that International stocks are low relative to PE is compared to the PE of International Equities or the PE of US equities. I do believe that that latter comparison is far more dubious.

Nedsaid: I view investing as putting the odds in your favor the best you can. It seems to me that over time that cheap beats expensive. If you are in the Charlie Munger camp of buying high quality, at least you don't want to overpay for it. It was Munger that said that it is better to buy a Great Company at a good price than a Good Company at a great price. No one questions that the US Stocks have been a great investment, the question is if investors are overpaying for future prospects. It seems to me that quality US Multi-National companies and quality International Multi-National companies are much the same, it would seem a good bet to buy some of the cheaper foreign based Multi-Nationals right now rather than continuing to load up on the US versions.

Pretty much, the US has outperformed International in dollar terms for eight years. How many more years will this continue? That is the $64,000 question. We don't know. Odds are that at some point the trends will reverse.


Therefore, without making any judgments as to the correctness of the argument, the logical force behind the argument that International stocks are overdue is equal to the logical force behind the idea that purchasing assets based on low PE relative to some historical PE is a good investment philosophy.

Nedsaid: I don't know, but it worked out pretty well for Warren Buffett.
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Re: Are International Markets overdue for great gains?

Post by TinkerPDX » Sun Jan 01, 2017 3:07 pm

Perhaps we should discuss the premise first: can an asset class be "overdue" for outperformance?

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Re: Are International Markets overdue for great gains?

Post by nedsaid » Mon Jan 02, 2017 1:10 pm

TinkerPDX wrote:Perhaps we should discuss the premise first: can an asset class be "overdue" for outperformance?
Where I would start is by looking at market history to see how long these US vs International trends lasted. I would also look at the history of the US Dollar vs. Foreign currencies. Certainly, large historical events like World War II would have had a huge impact. I would probably also study the career of John Templeton, who was a pioneer in International investing.

The problem with thinking that an asset class is "overdue" is that it sounds too much like a gamblers instinct about what is hot. This is why good investing is patient, trends in the market don't reverse on anyone's schedule.
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Re: Are International Markets overdue for great gains?

Post by JimmyJammy » Mon Jan 02, 2017 1:24 pm

Yes - my thoughts exactly when i read the subject headline.

Saying an asset class is "due" or "overdue" sounds a lot like the gambler's fallacy: https://en.wikipedia.org/wiki/Gambler's_fallacy

I also think it's somewhat absurd to lump so many different countries, with their diverse problems and situations, into one basket called "International" as if "International" was its own country.

I just consider Vanguard's Total International fund as simply the Total World of stocks minus the US. That's all it is.

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