Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendations?

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Sandtrap
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Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendations?

Post by Sandtrap » Sun Feb 26, 2017 10:23 am

In reading the "wiki's" and "Vanguard site", I noticed that International Bond and International Stock allocation has changed over time.

Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard Life Strategy Funds
Vanguard Star Fund
Vanguard Target Retirement Fund
Vanguard Target Retirement Funds (2005-2025
Vanguard Target Retirement Funds (2030-2050)
Vanguard Tax-Managed Balanced Fund
Etc.

viewtopic.php?f=10&t=159493

viewtopic.php?p=1523349#p1523349
(scroll down to "noobinvestor" . . . . thus fad or reactive or ?)

Question:
Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendations over time?
Do you agree with Vanguard's conclusions to act this way?
Do the International Stock and International Bond allocations add volatility?
How is it beneficial? . . . or not?
Other?

Edited to add "dbr's" excellent question.
Last edited by Sandtrap on Sun Feb 26, 2017 1:15 pm, edited 4 times in total.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Alexa9 » Sun Feb 26, 2017 10:31 am

Currently it's at about 40% which is close to global market cap weighting. The US has been the best country to invest in historically, but the future is unknown. Vanguard recommends at least 20%. Bogle and Buffett have said all you need is domestic but they are old school. Personally I would like to hedge against a catastrophe in the US. It is likely that would cause global markets to sink too though.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by TheGipper » Sun Feb 26, 2017 10:44 am

Three Reasons:

1). No reason to think that international may not outperform domestic for the next decade or your entire investing lifetime. A chart of US vs international performance looks like a yo-yo alternating every several years.
2). Diversifies against a catastrophic US event or an event that simply leads to long term underperformance.
3). If you are believer in CAPE or alternate valuation methods, US stocks are relatively overvalued now.

IMO Bogle and Buffet recs of US only are probably fine if we're talking 30+ years investing timeline. The shorter the timeline, the more sense it makes to diversify with international. Curiously, most target date glidepaths decrease % international over time which makes little sense to me.

Granted there are still slightly higher costs and currency risks with international investing and US still has top-notch transparency and a political environment in which corporate taxes may trend way down.

I've settled on 30% international, but see no fault with anything between 20%-60% as long as one sticks with it. For very long term investors, I think it makes less difference.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Sandtrap » Sun Feb 26, 2017 10:59 am

TheGipper wrote:Three Reasons:

1). No reason to think that international may not outperform domestic for the next decade or your entire investing lifetime. A chart of US vs international performance looks like a yo-yo alternating every several years.
2). Diversifies against a catastrophic US event or an event that simply leads to long term underperformance.
3). If you are believer in CAPE or alternate valuation methods, US stocks are relatively overvalued now.

IMO Bogle and Buffet recs of US only are probably fine if we're talking 30+ years investing timeline. The shorter the timeline, the more sense it makes to diversify with international. Curiously, most target date glidepaths decrease % international over time which makes little sense to me.
This pattern is what caught my attention. At a "newbie" level of understanding, one increases less volatile assets with age and in retirement. If that is so, then decreasing % international implies reducing volatility. So this doesn't make sense to me either. But I am not an expert.
Granted there are still slightly higher costs and currency risks with international investing and US still has top-notch transparency and a political environment in which corporate taxes may trend way down.

I've settled on 30% international, but see no fault with anything between 20%-60% as long as one sticks with it. For very long term investors, I think it makes less difference.
Also, isn't a working 40 year old a lot longer term investor than a 80 year old retiree?
thanks,
j
Last edited by Sandtrap on Sun Feb 26, 2017 11:05 am, edited 1 time in total.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Sandtrap » Sun Feb 26, 2017 11:04 am

Alexa9 wrote:Currently it's at about 40% which is close to global market cap weighting. The US has been the best country to invest in historically, but the future is unknown. Vanguard recommends at least 20%. Bogle and Buffett have said all you need is domestic but they are old school. Personally I would like to hedge against a catastrophe in the US. It is likely that would cause global markets to sink too though.
By "Bogle and Buffett. . . old school", do you mean that the economy was not as globalized from their early perspective vs Vanguard's increase in International Stock and Bond Stock allocations in their portfolio's is evolving from "old school" into "modern"?
(Sorry for this awkward newbie phrasing)
thanks,
j

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by lack_ey » Sun Feb 26, 2017 11:08 am

Alexa9 wrote:Currently it's at about 40% which is close to global market cap weighting. The US has been the best country to invest in historically, but the future is unknown. Vanguard recommends at least 20%. Bogle and Buffett have said all you need is domestic but they are old school. Personally I would like to hedge against a catastrophe in the US. It is likely that would cause global markets to sink too though.
By returns, by DMS data 1900-present, Australia and South Africa have been better than the US for stocks. For those with significant bond allocations, depending on the ratio, Denmark and Sweden as well over the full period. The US was well above the aggregate ex-US, though.

Sandtrap wrote:Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendations over time?
Could be any number of things. Publicly they say things that line up with their white papers and published research on the subject like this:
https://personal.vanguard.com/pdf/icriecr.pdf
http://www.vanguard.com/pdf/icrifi.pdf

International investing is cheaper than before (frictions/costs down). It's also possible they're looking to differentiate from competitors (most use lower percentage), expand their global presence, make some kind of one-time market timing move while US valuations were higher than ex-US valuations, or something else.
Sandtrap wrote:Do the International Stock and International Bond allocations add volatility?
International stock, particularly in as high an allocation as they use, should add a bit of short-term volatility. The correlations are too high. Historically at times, it may have reduced short-term vol, but correlations are higher now and it's not true now. It could change in the future.

USD-hedged international bonds, as they use, have little effect but might reduce vol very slightly.

Keep in mind that volatility measures variation along the time axis. Also important, or maybe more important, is to consider the (unknowable, unobservable) spread of possible outcomes across probability.

As I've illustrated before, your risk in general is not just big spikes but that long-term performance is disappointing for whatever you're investing in, which has happened plenty of times historically even outside of major black swans / disaster, just not in the US.
Image

In the long term, having returns like Scenario B is worse than Scenario A, but everybody seems to fixate on the kinds of drops you see in Scenario A.
Sandtrap wrote:How is it beneficial? . . . or not?
Okay, at this point I refer you to the dozens upon dozens of previous threads on the subject, which you can read for yourself.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by stemikger » Sun Feb 26, 2017 11:15 am

Not sure I understand your post but Balanced Index does not hold international stocks or bonds. Please correct me if I'm wrong.
This index fund offers investors an easy, low-cost way to gain exposure to stocks and bonds. The fund invests roughly 60% in stocks and 40% in bonds by tracking two indexes that represent broad barometers for the U.S. equity and U.S. taxable bond markets. The fund’s broad diversification is important, because one or two holdings should not have a sizeable impact on the fund. Investors with a long-term time horizon who want growth and some income—and who are willing to accept stock and bond market volatility—may wish to consider this as a core holding in their portfolio.
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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by beardsworth » Sun Feb 26, 2017 11:22 am

In the following link to a February 2015 Vanguard announcement, scroll past the initial section about fund expense reductions and you'll see Vanguard's reasons for increasing both the international stock and the international bond components of the Target Retirement and LifeStrategy funds.

https://pressroom.vanguard.com/content/ ... .2015.html

Vanguard Asset Allocation fund, mentioned in the original post here, was once part of the LifeStrategy funds but no longer exists.

As stemikger notes above, Vanguard Balanced Index Fund is domestic stocks and bonds.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by nisiprius » Sun Feb 26, 2017 11:34 am

I'm going to state a blunt opinion: it is just a change in fashion. Burton Malkiel recommended in 1990 that 1/6th of stocks be international, now he recommends half. Regardless of which is "better," there is nothing rational anybody can point to explain the change. Contrary to what many people assume, the US share of the world market in 1990 was lower than it is today, and there were plenty of reasonable international stock investment vehicles in 1990.

If 50% is rational today, then 50% would have been rational in 1990. If 16% was rational in 1990, then 16% is rational today.

(And my own belief is that it doesn't make much difference, either would have been fine in 1990, either is fine today--and therefore the actual recommendation is easily swayed by fashions, fads, and personal tastes.)

As to the explanation for the change in fashion, I can think of several. First--and again, right or wrong--there has been a very obvious trend toward higher and higher levels of risk in mainstream recommendations, and one notable detail is the total elimination of an explicit "short-term reserves" (aka cash) holding in the LifeStrategy funds. In the 1990s it was normal to recommend some amount of "cash" within a retirement portfolio--not just as a separate emergency fund. Another partial explanation is that international stock outperformed US stocks during the "lost decade" of 2000 through 2009.

A strictly personal guess, based on no information at all, is that Vanguard does this in their own interests. Perhaps they see it as a win for them and also a win for their investors; perhaps as a win for them and no harm to their investors; but, at any rate, a win for them, in two ways. They may feel that their own future involves becoming more international themselves, seeking "new worlds to conquer." They also may be concerned that the increasing size of their big mainstream funds is now starting to be a transactional concern in trying to buy and sell so much stock, and even perhaps starting to come up against the limits of the diversification rules for mutual funds. They may prefer to have Vanguard investors putting about half their investments into international stocks so that they can spread their huge transactions globally instead of just in the US. I have a strikeout markup symbol read to put over this paragraph if someone can convince me that I'm nuts.
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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by retiredjg » Sun Feb 26, 2017 11:49 am

Vanguard has always balanced maximum diversification and trying to achieve market weights against cost. If costs go up as you approach a goal, there is a point of diminishing returns. Vanguard always stayed on the other side of that point.

When I joined this forum about 10 years ago, there were few choices of international stock index funds, most were not broadly diversified, and the costs were higher. Low cost international bond index funds didn't even exist to my knowledge. They were certainly not discussed here much, if at all. And ETFs of any type were an oddity. Nobody used them. Most had probably never even heard of them.

A LOT of things have changed in that 10 years. International stock index funds got broader - including small cap stocks and/or emerging markets. They also got cheaper. ETFs appeared. New indexes appeared. All of a sudden, there were lots of good choices of lower cost and very broad international stock vehicles. At that point, Vanguard increased their allocations to international stocks from about 30% of stocks to about 40% of stocks, presumably because costs had become less of an issue.

Also, Vanguard created an international bond index fund (3 or 4 years ago?) that had a relatively low cost and was also currency hedged. They included this in many of their balanced funds. Some people didn't like it. Others said Vanguard had been headed in that direction all along (maximum diversification) and when such a fund because available at a low cost, they just moved along another step in the original plan.

From my point of view, all of this makes sense. As the outliers because better and cheaper, they could be included in balanced funds and portfolio recommendations without increasing costs beyond a point of no expected extra return.

Watching what people have done over the years, I'd say many have increased their international allocations to stocks over time although most still do not use a market weight approach. Adding international bonds....not so much. People have been much slower to see inclusion of international bonds as "the norm". I think many of us just don't see them as necessary.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by sambb » Sun Feb 26, 2017 11:55 am

If some major event happens, international can save you.
Japan hasnt recovered yet - for decades. I bet those investors wished they had put money outside their country.
Same could go for natural disasters, war, pestilence that is focused in one area

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Sandtrap » Sun Feb 26, 2017 12:04 pm

lack_ey wrote:. . . . . . .
As I've illustrated before, your risk in general is not just big spikes but that long-term performance is disappointing for whatever you're investing in, which has happened plenty of times historically even outside of major black swans / disaster, just not in the US.
Image

In the long term, having returns like Scenario B is worse than Scenario A, but everybody seems to fixate on the kinds of drops you see in Scenario A.
. . . . . . . . . . . . .
Sandtrap wrote:How is it beneficial? . . . or not?
Okay, at this point I refer you to the dozens upon dozens of previous threads on the subject, which you can read for yourself.
Thanks, "lack_ey" for the visuals. Really helps to understand things better.
Will continue reading threads as you advise.
j

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by ruralavalon » Sun Feb 26, 2017 12:18 pm

Sandtrap wrote: Question:
Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendations over time?
Do the International Stock and International Bond allocations add volatility?
How is it beneficial? . . . or not?
Other?
In my opinion there is no readily apparent reason for the increase in international stock allocation.

I don't see any new data since Vanguard's March 2012 white paper, which suggested a range of 20-40% of stocks in international stocks. That report stated that there had historically been a diversification benefit of 0.75%, that an allocation of 20% had achieved about 87% of that benefit, and that an allocation of 30% had access about 99% of that benefit (p. 6). A graph (p. 5) had a fairly flat curve in the range of 00-50% of stocks in international stocks, seeming to indicate that historically it had made little difference where you had been in that range.

Vanguard issued a February 2014 white paper on the same subject, which suggested a range of 00%-50% of stocks in international stocks. That report estimated the maximum historical diversification benefit at 0.71%, said that all of that benefit had been achieved at an allocation of about 30% international, and that about 85% of the historical benefit had been achieved at an allocation of 20% international (p.6).

Edits to add: These are the two papers linked in lack_key's post. The February 2015 news release linked by beardsworth doesn't add any new data. Also edited for grammar.
Last edited by ruralavalon on Sun Feb 26, 2017 1:01 pm, edited 4 times in total.
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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Aptenodytes » Sun Feb 26, 2017 12:52 pm

lack_ey wrote:In the long term, having returns like Scenario B is worse than Scenario A, but everybody seems to fixate on the kinds of drops you see in Scenario A.
That seems an exaggeration. The Sharpe Ratio is designed to incorporate both and is a pretty standard way to characterize both risk and return in a single, comparable, dimension.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by dbr » Sun Feb 26, 2017 1:00 pm

I don't doubt that Vanguard follows what they say in their white papers as far as about any of the recommendations they make. Whether one agrees with their conclusions is another question but not the one you are asking.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Alexa9 » Sun Feb 26, 2017 1:14 pm

Sandtrap wrote:
Alexa9 wrote:Currently it's at about 40% which is close to global market cap weighting. The US has been the best country to invest in historically, but the future is unknown. Vanguard recommends at least 20%. Bogle and Buffett have said all you need is domestic but they are old school. Personally I would like to hedge against a catastrophe in the US. It is likely that would cause global markets to sink too though.
By "Bogle and Buffett. . . old school", do you mean that the economy was not as globalized from their early perspective vs Vanguard's increase in International Stock and Bond Stock allocations in their portfolio's is evolving from "old school" into "modern"?
(Sorry for this awkward newbie phrasing)
thanks,
j
The US has historically been one of the most investor and business friendly nations with relatively little corruption. Buffett and Bogle both lived in huge bull markets in the US and uncertainty in other parts of the world. You could say that Europe and Australia are similar to the US but the rest of the world doesn't seem as investor friendly. You have communism, corruption and other barriers to investing. Certainly it is getting better and there is a lot of opportunity for growth so would you want to limit yourself to just US based companies? Some say yes, some say no. I think younger people are more open to investing globally. I am glad there is at least the option to invest internationally.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Sandtrap » Sun Feb 26, 2017 1:16 pm

dbr wrote:I don't doubt that Vanguard follows what they say in their white papers as far as about any of the recommendations they make. Whether one agrees with their conclusions is another question but not the one you are asking.
Your expert input is invaluable. OP original question edited to include whether you agree with Vanguard's trend.
Thanks"dbr".

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by ram » Sun Feb 26, 2017 1:24 pm

I live in a small town in the midwest. There is one McDonald and one Burger King. When I go out I eat what I can get. I am happy with the friday fish fry.
Then I go to Chicago and I eat Thai and Indian and Lebanese because it is all available within a mile of where I stay.
In the 90's the investment menu was like in my small town. Now you can get the international flavor at a modest cost. I think Nisiprius (as always) has a point.
Ram

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by lack_ey » Sun Feb 26, 2017 2:02 pm

Aptenodytes wrote:
lack_ey wrote:In the long term, having returns like Scenario B is worse than Scenario A, but everybody seems to fixate on the kinds of drops you see in Scenario A.
That seems an exaggeration. The Sharpe Ratio is designed to incorporate both and is a pretty standard way to characterize both risk and return in a single, comparable, dimension.
I think you missed the point I was attempting to make. Sharpe ratio computed over past data can only see return over the risk-free rate and volatility over time in observed history. You're not directly getting information over other possible progressions.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Dirghatamas » Sun Feb 26, 2017 5:16 pm

nisiprius wrote:I'm going to state a blunt opinion: it is just a change in fashion. Burton Malkiel recommended in 1990 that 1/6th of stocks be international, now he recommends half. Regardless of which is "better," there is nothing rational anybody can point to explain the change. Contrary to what many people assume, the US share of the world market in 1990 was lower than it is today, and there were plenty of reasonable international stock investment vehicles in 1990.

If 50% is rational today, then 50% would have been rational in 1990. If 16% was rational in 1990, then 16% is rational today.

(And my own belief is that it doesn't make much difference, either would have been fine in 1990, either is fine today--and therefore the actual recommendation is easily swayed by fashions, fads, and personal tastes.)
I agree with you that rationally it doesn't make sense to change. I have always invested globally, disregarding any fixed number (0%,20%,50%) as being arbitrary. I just think companies are companies, stocks are stocks and if you can diversify across the world's public companies at relatively low cost, there is no sense in keeping any constant % or keeping a concentrated portfolio over weighting any country. Nothing has changed in that argument in 20 or 30 years so why change the allocation: either you thought global asset allocation makes sense (like me) and should stick with it, or you thought home country concentration makes sense (and you should stick with it). There is no reason to change it due to fashion.

I also don't understand this argument about low costs being a new thing. While I was not invested in 1990 (still in college), I started in 1992 as a global cap weighted investor and it wasn't bad. Sure there were imperfections which got solved over time. When I started, my 401K didn't offer "total stock market" so the choice was s&P 500. A few years later, "US total stock market" became available in our 401K so then one changes to it. There wasn't a low cost "Total International Stocks" when I started but a close approximation (and very cheap) was available that invested ONLY in developed markets and ONLY in large/medium cap (to keep costs down). Fine. A few years later emerging markets started getting added so I changed. Many years later the index funds also added small cap into international so I changed. In taxable, 2008-2009 was great (glass half full) because I could TLH there to the modern "total stock" and "total international) without any baggage from my (close enough) international index funds.

So, while my position would have been to be ALWAYS be diversified at full weight in international, if you disagree with that philosophically, nothing has changed in the last 20 years for your investment philosophy to change.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Good Listener » Sun Feb 26, 2017 7:16 pm

nisiprius wrote:I'm going to state a blunt opinion: it is just a change in fashion. Burton Malkiel recommended in 1990 that 1/6th of stocks be international, now he recommends half. Regardless of which is "better," there is nothing rational anybody can point to explain the change. Contrary to what many people assume, the US share of the world market in 1990 was lower than it is today, and there were plenty of reasonable international stock investment vehicles in 1990.

If 50% is rational today, then 50% would have been rational in 1990. If 16% was rational in 1990, then 16% is rational today.

(And my own belief is that it doesn't make much difference, either would have been fine in 1990, either is fine today--and therefore the actual recommendation is easily swayed by fashions, fads, and personal tastes.)

As to the explanation for the change in fashion, I can think of several. First--and again, right or wrong--there has been a very obvious trend toward higher and higher levels of risk in mainstream recommendations, and one notable detail is the total elimination of an explicit "short-term reserves" (aka cash) holding in the LifeStrategy funds. In the 1990s it was normal to recommend some amount of "cash" within a retirement portfolio--not just as a separate emergency fund. Another partial explanation is that international stock outperformed US stocks during the "lost decade" of 2000 through 2009.

A strictly personal guess, based on no information at all, is that Vanguard does this in their own interests. Perhaps they see it as a win for them and also a win for their investors; perhaps as a win for them and no harm to their investors; but, at any rate, a win for them, in two ways. They may feel that their own future involves becoming more international themselves, seeking "new worlds to conquer." They also may be concerned that the increasing size of their big mainstream funds is now starting to be a transactional concern in trying to buy and sell so much stock, and even perhaps starting to come up against the limits of the diversification rules for mutual funds. They may prefer to have Vanguard investors putting about half their investments into international stocks so that they can spread their huge transactions globally instead of just in the US. I have a strikeout markup symbol read to put over this paragraph if someone can convince me that I'm nuts.
Nuts? You are highly interested in posts of this nature and frankly, each one gets better and more sensible than the one before. I've asked it once too and now have come to the conclusion that I am going to PROBABLY allocate about 30% but that any international exposure between 0 and 50% cannot really be argued with and I don't know how to make a final decision.
Last edited by Good Listener on Mon Feb 27, 2017 2:16 pm, edited 1 time in total.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by nisiprius » Sun Feb 26, 2017 9:29 pm

lack_ey wrote:...
As I've illustrated before, your risk in general is not just big spikes but that long-term performance is disappointing for whatever you're investing in, which has happened plenty of times historically even outside of major black swans / disaster, just not in the US.
Image
In the long term, having returns like Scenario B is worse than Scenario A, but everybody seems to fixate on the kinds of drops you see in Scenario A.
Is that a chart of some actual financial data or is it just illustrating a concept?

I don't have a true world allocation dataset, but I can make a chart of 100% US (represented by SBBI "Large-Company Stocks" and 50% US / 50% international (represented by EAFE) and it doesn't look that way. Annual rebalancing, total return including dividends, inflation-adjusted.

Image
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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by lack_ey » Sun Feb 26, 2017 9:58 pm

nisiprius wrote:
lack_ey wrote:...
As I've illustrated before, your risk in general is not just big spikes but that long-term performance is disappointing for whatever you're investing in, which has happened plenty of times historically even outside of major black swans / disaster, just not in the US.
http://i.imgur.com/7QYackz.png
In the long term, having returns like Scenario B is worse than Scenario A, but everybody seems to fixate on the kinds of drops you see in Scenario A.
Is that a chart of some actual financial data or is it just illustrating a concept?

I don't have a true world allocation dataset, but I can make a chart of 100% US (represented by SBBI "Large-Company Stocks" and 50% US / 50% international (represented by EAFE) and it doesn't look that way. Annual rebalancing, total return including dividends, inflation-adjusted.
https://s28.postimg.org/ffn8ods7h/Captu ... _19_PM.png
Just a concept, not even illustrating two different assets but two different possibilities for what could happen for any given risky asset.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by gwrvmd » Sun Feb 26, 2017 10:25 pm

I believe Vanguard has taken diversification too far
I believe in diversification in size, value vs growth, among industries, service vs industrial etc, etc
However, I do not agree with extending diversification to countries
When you diversify internationally you introduce
1) Currency risk
2) Political risk
3) Accounting standards risk

I am retired, I don't want any of the above risk. I am invested in dollars and am spending dollars. The US system of democracy combined with free enterprise is the greatest system in the world. At 80 years old I have seen many other economic systems fail. The purpose of diversification is to reduce risk.....I don't think country diversification decreases risk

What if we had happen what happened to Japan? Japan is doing just fine, still one of the richest countries in the world, still exporting Hondas and Toyotas to the US...................Gordon
Disciple of John Neff

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Brian2d » Sun Feb 26, 2017 11:27 pm

gwrvmd wrote:I
When you diversify internationally you introduce
1) Currency risk
2) Political risk
3) Accounting standards risk
I certainly agree with currency risk as a risk introduced by international investing. However, I don't believe that the US is magically exempt from political or accounting standards risk, and likely is similar in this regard to most other developed markets. I do modestly overweight US equities, but my decision to do so is almost entirely due to currency risk.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Tamales » Sun Feb 26, 2017 11:31 pm

I didn't read the whole thread but Vanguard Tax-Managed Balanced Fund (VTMFX) has only a fraction of a percent in international stock and no international bonds. It had a 100% QDI for 2016.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Sandtrap » Mon Feb 27, 2017 12:46 am

OP: Thanks everyone for sharing your expert perspectives on this topic.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Noobvestor » Mon Feb 27, 2017 2:31 am

Lots of answers already given cover much of what I would say. I would just like to add, though, that people who go back and forth on this, or call it a trend or whatnot ... the thing is: the global market is cheaply and easily accessible now in a way it wasn't not that long ago.

There's no need to doubt or hedge or guess or wonder or whatever if you start with the total world market, or round it off to around 50/50. If you want to eliminate doubt and guesswork, just do that.

The only thing that surprises me is that Vanguard hasn't gone all the way and made Vanguard Total World their main stock fund for Target Date and similar funds-of-funds. It's not a random swing - note that it has never swung back toward US - that's the direction they are headed IMHO.
gwrvmd wrote: 1) Currency risk
2) Political risk
3) Accounting standards risk
Every time I see political and accounting standards risks raised, I have to ask: do you think the markets are blind to these risks? Assuming these risks are higher abroad (big assumption, but let's grant it), surely the market would price them in and demand higher expected returns.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by nisiprius » Mon Feb 27, 2017 6:37 am

Noobvestor wrote:...Every time I see political and accounting standards risks raised, I have to ask: do you think the markets are blind to these risks? Assuming these risks are higher abroad (big assumption, but let's grant it), surely the market would price them in and demand higher expected returns...
It can't do this with currency risk, because there isn't a unified one-currency world market and not all participants need to take that risk. I don't need to take currency risk in order to invest in Vanguard Total [US] Stock, a German investor does. Why should US investors "price in" somebody else's risk?

Now again I need to defend myself just a bit because I'm not saying this is necessarily a very large risk. A piece of information I don't have, that perhaps you or somebody else has, is this: nowadays there are "currency hedged" stock funds. If we knew how effective this hedging really is, and if we knew how much it cost, then we'd probably have some measure of how big or how important it is.

Also, if there isn't enough for US investors buying the stock of a US company, then I suppose yes, foreign investors "pricing in" their currency risk will drive down the price to both US and foreign buyers.

Finally, just to acknowledge a disagreement, I personally am completely convinced that a zero return asset can't improve a portfolio through diversification unless it actually has something better than "low" correlation, and I believe authorities that say currency has a long-term zero return. Therefore, I do not believe that currency risk has a valuable diversifying effect that outweighs its risk-increasing effect. However, Larry Swedroe who is in contact with more people that know more than I do says I it does.

But the point is that no, an efficient "market of markets" in different currencies is not going to work exactly the same as a single market in one currency.

As for pricing in other risks, I assume it does.
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.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by in_reality » Mon Feb 27, 2017 7:41 am

nisiprius wrote: Finally, just to acknowledge a disagreement, I personally am completely convinced that a zero return asset can't improve a portfolio through diversification unless it actually has something better than "low" correlation, and I believe authorities that say currency has a long-term zero return. Therefore, I do not believe that currency risk has a valuable diversifying effect that outweighs its risk-increasing effect. However, Larry Swedroe who is in contact with more people that know more than I do says I it does.
To quote Larry:
For example, for the period 1970-2013, a portfolio that was 60 percent S&P 500/40 percent five-year Treasury notes that was rebalanced annually returned 9.75 percent with an annual standard deviation of 10.98 percent.

A portfolio that was 36 percent S&P 500/24 percent MSCI EAFE/40 percent five-year Treasurys returned 9.87 percent and did so with an annual standard deviation of 10.87 percent.

Despite the currency risk, and despite the MSCI EAFE having lower returns (10.0 percent versus 10.4 percent) as well as higher volatility (22.4 percent versus 17.6 percent), the portfolio that included the allocation to the MSCI EAFE had slightly higher returns and slightly lower volatility.

The reason is that the annual correlation of the MSCI EAFE to the S&P 500 was just 0.66, and while the correlation of the S&P 500 to five-year Treasurys was just 0.03, the correlation of the MSCI EAFE to five-year Treasurys was actually a negative -0.16, providing greater diversification benefits. This example demonstrates why you should never make the mistake of considering assets in isolation.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Bogel0048 » Mon Feb 27, 2017 8:43 am

nisiprius wrote: Image
When it comes to the technical side of investing analysis I am an advice consumer, not and advice producer. I always find nisiprius' posts to be well researched and clearly presented. The chart above makes me feel better about my own mostly two fund portfolio based on VTSAX and VBILX. Generally, I feel defensive about my lack of international, but the chart indicates we have done OK since my wife and I started putting our savings into equities after 1987.

We began working in the mid-1970's and focused initially on building a "safe" bond-oriented portfolio. The high interest rates during the late 70s through mid-80s made us think we were doing OK, but we missed a big stock run-up that started in mid-1982. We woke up after October, 1987 and shifted to a 75% stock target, which has done pretty good for us through the present.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by Noobvestor » Mon Feb 27, 2017 8:30 pm

nisiprius wrote:It can't do this with currency risk, because there isn't a unified one-currency world market and not all participants need to take that risk. I don't need to take currency risk in order to invest in Vanguard Total [US] Stock, a German investor does. Why should US investors "price in" somebody else's risk?
Sure - currency risk (which cuts both ways) is different. I was referring to political and accounting risks. But let's look at currency anyway.
nisiprius wrote:Now again I need to defend myself just a bit because I'm not saying this is necessarily a very large risk. A piece of information I don't have, that perhaps you or somebody else has, is this: nowadays there are "currency hedged" stock funds. If we knew how effective this hedging really is, and if we knew how much it cost, then we'd probably have some measure of how big or how important it is.
I Googled around and at least one Vanguard source suggests the cost of currency hedging for bond funds is around .2%/year. That's not nothing, but it's also not much - and certainly not enough to drive me to reduce diversification, as in: if I were a German investor I would not flinch at paying .2% a year on some part of my portfolio if that's what it took tweak currency to desired exposure.
nisiprius wrote:Finally, just to acknowledge a disagreement, I personally am completely convinced that a zero return asset can't improve a portfolio through diversification unless it actually has something better than "low" correlation, and I believe authorities that say currency has a long-term zero return. Therefore, I do not believe that currency risk has a valuable diversifying effect that outweighs its risk-increasing effect. However, Larry Swedroe who is in contact with more people that know more than I do says I it does.
Currency risk (to me) is not about adding return, it's about hedging global purchasing power. If there is conventional risk/reward in international investing it would be those other risks - political and accounting - but again: I would expect those risks to be compensated. I guess it all depends on what you mean by 'improving a portfolio' - hedging a potential dollar decline is, to me, an improvement.
nisiprius wrote:But the point is that no, an efficient "market of markets" in different currencies is not going to work exactly the same as a single market in one currency. As for pricing in other risks, I assume it does.
Not exactly the same way, no, but if we assume currency hedging is a relatively low-cost endeavor (I'm not 100% sure of this - I only went and found one highly specific source) then I can't imagine it adding a lot of friction relative to a single-currency market. Either way, these days I see more and more US-tilted portfolios - including from non-US investors - which I chalk up to performance chasing, not currency motivations.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by NibbanaBanana » Tue Feb 28, 2017 8:40 am

Last time I looked, the total international bond fund was yielding 77 basis points. Sorry. Not enough.

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Re: Why has Vanguard increased International Stock and International Bond in Balanced Funds and Portfolio Recommendation

Post by lack_ey » Tue Feb 28, 2017 11:20 am

NibbanaBanana wrote:Last time I looked, the total international bond fund was yielding 77 basis points. Sorry. Not enough.
That's SEC yield, which doesn't include hedge return from the forward currency contracts. The US short-term rates are on average higher than elsewhere, so it's positive for us now and will get even more positive if the Fed moves with FFR this year as expected.

Currently, checking HSBC's calculator—don't know how close this is to actual rates Vanguard can get—for buying 1 USD in a month, you can sell
0.9403 EUR (spot rate is 0.9417)
0.8042 GBP (spot rate is 0.8045)
111.83 JPY (spot rate is 111.96)
1.3248 CAD (spot rate is 1.3253)
1.3024 AUD (spot rate is 1.3013)

Of the above, the hedge return is only negative for AUD now, and that's 2.9% of the fund, whereas JPY is 18.1%, six of the top ten countries use EUR, UK is 8.3%, and Canada is 5.9% of the fund.

I still don't particularly think it's worth it, but it's not as simple as saying the local currency yield is lower.

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