Investing in the World - Part 1 [Financial Page blog article]

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siamond
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Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sat Mar 18, 2017 3:14 pm

A new article was published on Financial Page, the Bogleheads blog site. Here is the introduction:

True Bogleheads know the power of diversification. And yet, many such investors (and John Bogle himself!) are reluctant to diversify beyond domestic investments. Japanese investors could have perceived the same thing, with a remarkable run in the 80s in terms of market capitalization (nearly half of the world, higher than the US at some point) and in terms of stock returns. Unfortunately for Japan, as discussed in a previous blog article, this impressive success was followed by the worst equity crisis in modern history. This study about Japan also showed how some level of international diversification would have helped a local investor to mitigate this extremely painful crisis.

This raised an interesting question. Could one simply invest with the world, using global stocks and global bonds?

Read more ›

Feedback welcome.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by Stormbringer » Sat Mar 18, 2017 4:25 pm

The only concern I have about international investing is that it introduces currency risk, and I don't see how the market rewards you for that extra risk. Also, one could argue that many US firms do business globally, so you are getting exposure indirectly.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sat Mar 18, 2017 5:51 pm

Stormbringer wrote:The only concern I have about international investing is that it introduces currency risk, and I don't see how the market rewards you for that extra risk. Also, one could argue that many US firms do business globally, so you are getting exposure indirectly.

Yes, currency risk is a more severe threat than I originally expected. Did you read my study about the Japanese crisis though? Maybe this will make you look at things in a slightly different light.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by larryswedroe » Sat Mar 18, 2017 6:01 pm

US only investing induces the currency risk--currency risk isn't a one way risk, it's two way, reflecting both economic and geopolitical risks. Failing to understand this is one of the most common and IMO one of the worst mistakes investors can make.
Larry

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sat Mar 18, 2017 6:07 pm

larryswedroe wrote:US only investing induces the currency risk--currency risk isn't a one way risk, it's two way, reflecting both economic and geopolitical risks.

That is a very nice quote, Larry. I took the liberty of paraphrasing it while tuning a bit my conclusion, I hope this is ok. This is really what I am trying to look at through those International studies. What happened to some other countries may happen to the US in the future, we just don't know.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by White Coat Investor » Sat Mar 18, 2017 9:15 pm

siamond wrote:A new article was published on Financial Page

Feedback welcome.


Can you tell us more about Financial Page, who owns it, who writes for it, how the writers are chosen, how it is related to Bogleheads.org and how it is related to the John C. Bogle Financial Literacy Center?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by AlohaJoe » Sat Mar 18, 2017 9:36 pm

White Coat Investor wrote:
siamond wrote:A new article was published on Financial Page

Feedback welcome.


Can you tell us more about Financial Page, who owns it, who writes for it, how the writers are chosen, how it is related to Bogleheads.org and how it is related to the John C. Bogle Financial Literacy Center?


The blog was originally announced here: viewtopic.php?f=10&t=134520
A few months later it was moved to the current location: viewtopic.php?t=146538

From what I can tell (but I'm not positive), the answers to your questions are:

- It is owned by Barry Barnitz
- It will probably accept anyone who wants to publish something
- It used to be the official Bogleheads blog but is not anymore, it remains as an unofficial Bogleheads blog
- I don't know but since it is maintained​ by Barry Barnitz personally I'm guessing it no longer has any relationship?
Last edited by AlohaJoe on Sat Mar 18, 2017 10:38 pm, edited 1 time in total.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by packer16 » Sat Mar 18, 2017 9:47 pm

I think many folks miss Bogle's correct insight about international investing for the long-term. It is no coincidence when you look at the countries with the largest historical gains per year has a strong sense of free markets as a part of their culture and had little state/government interference in firm's operations. If you look at the countries that have these high returns they are the Netherlands, UK & the countries where UK emigrants went to in large numbers (US, Canada, Australian & South Africa) and Scandinavia (see Elroy Dimson's Triumph of the Optimists) this was not a random coincidence of countries with high returns. This is why I think the Japan analogy is off base & investing in countries with a history of state intervention (like Japan) is a different animal than investing those who have little or less intervention.

Now home country bias becomes important when you are investing in countries with high state intervention less so when you have less intervention. Buffett has the same view as Bogle on this so IMO you have to have a strong argument with evidence to refute an argument by two of the most wise & successful investors of the 20th century.

Some deltas in Japan beyond state intervention in private businesses is the primitive banking system that prevented losses on debt from being recognized (in a process such as the US Chapter 11 bankruptcy process) & thus having the capital redeployed to more efficient uses. This Chapter 11 bankruptcy process in the US is what has & will prevent the financial constipation that Japan has experienced from happening in the US.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sat Mar 18, 2017 10:36 pm

AlohaJoe wrote:
White Coat Investor wrote:
siamond wrote:A new article was published on Financial Page

Feedback welcome.


Can you tell us more about Financial Page, who owns it, who writes for it, how the writers are chosen, how it is related to Bogleheads.org and how it is related to the John C. Bogle Financial Literacy Center?


The blog was originally announced here: viewtopic.php?f=10&t=134520
A few months later it was moved to the current location: viewtopic.php?t=146538

From what I can tell (but I'm not positive), the answers to your questions are:

- It is owned by Barry Barnitz
- It will probably accept anyone who wants to publish something
- It used to be the official Bogleheads blog but is not anymore, it remains as an unofficial Bogleheads blog
- I don't know but since it is maintain by Barry Barnitz personally I'm guessing it no longer has any relationship

I actually don't know much about the historical context. This seemed like a cool initiative to have Bogleheads contribute to a blog, I volunteered to write a few things here and there, and Barry was kind enough to let me contribute. And this satisfies my urge to do occasional research and share my findings! Better than a personal blog, I think (way too many of those!) :wink:

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sat Mar 18, 2017 10:45 pm

packer16 wrote:I think many folks miss Bogle's correct insight about international investing for the long-term. It is no coincidence when you look at the countries with the largest historical gains per year has a strong sense of free markets as a part of their culture and had little state/government interference in firm's operations. [...]

Actually, I listened to Jack twice during BH conferences explaining 'live' his position about International stocks. I didn't get the perception that 'free markets are better' was his primary argument, he actually never put it like that (as far as I can recall). And I am not going to put (other) words in his mouth on this matter.

Personally, I think the forces driving stock returns are terribly complicated. Oversimplifying to one thesis (e.g. free markets, risk/reward, whatever) just doesn't cut it. If it were demonstrably true, then why would institutional investors make other choices all the time?

So I'd rather stick to studying past history, trying to get a sense of what could happen through what actually happened, draw some lessons from history, and not overly theorize on the whys.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by willthrill81 » Sat Mar 18, 2017 11:01 pm

packer16 wrote:I think many folks miss Bogle's correct insight about international investing for the long-term. It is no coincidence when you look at the countries with the largest historical gains per year has a strong sense of free markets as a part of their culture and had little state/government interference in firm's operations. If you look at the countries that have these high returns they are the Netherlands, UK & the countries where UK emigrants went to in large numbers (US, Canada, Australian & South Africa) and Scandinavia (see Elroy Dimson's Triumph of the Optimists) this was not a random coincidence of countries with high returns. This is why I think the Japan analogy is off base & investing in countries with a history of state intervention (like Japan) is a different animal than investing those who have little or less intervention.

Now home country bias becomes important when you are investing in countries with high state intervention less so when you have less intervention. Buffett has the same view as Bogle on this so IMO you have to have a strong argument with evidence to refute an argument by two of the most wise & successful investors of the 20th century.

Some deltas in Japan beyond state intervention in private businesses is the primitive banking system that prevented losses on debt from being recognized (in a process such as the US Chapter 11 bankruptcy process) & thus having the capital redeployed to more efficient uses. This Chapter 11 bankruptcy process in the US is what has & will prevent the financial constipation that Japan has experienced from happening in the US.

Packer


+1

Add to that that over the very long term, as in over 100+ years by one dataset, the U.S. has had returns over 2% higher than the rest of the world. The future may look very different from the past, and there have certainly been periods where international kept pace or even outpaced the U.S., but over the long-term, it simply hasn't happened. Some consider this a fluke (even over 100+ years :idea:), but I think that it makes perfect sense given the reasons you spell out. Not all countries are created equal, and, as such, not all companies across the world are either. The data simply do not support that view and actually contradict it. People can argue about this kind of risk and that kind of risk, but the data on returns don't lie and are far more convincing to me that hypothetical arguments that aren't supported with long-term data.

I've heard it said that the U.S. was the 'darling' of the 20th century, but I don't see another firm displacing this far into the 21st. And as you point out, neither do Bogle and neither do Buffett.

I would never try to dissuade someone else from investing in international, but it certainly isn't getting a hefty portion of my portfolio. I'll probably keep it at around 5% for the rest of my investing career unless there are significant socio-political changes (not market returns) that can change my mind.
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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by Dirghatamas » Sun Mar 19, 2017 12:05 am

Siamond

As usual great work! Thanks for both the time and the insights.

Have you cross checked this against the similar work by others? In particular the Credit Suisse Yearbook work by Dimson et al.?

Last year (2016) yearbook, they had the real returns from 1966 to 2015 (pretty close to your time period). This year (2017), they have split it up differently, as 1900-2016 as well as ~20 year periods, 1980-1999 and 2000-2016.

Several things stand out to me when I compare their long term period vs. a shorter period you focused on. Over the long period, the returns from stocks and bonds were

US: Stocks 6.4%, Bonds 2.0%
World: Stocks 5.1%, Bonds 1.8%

While, if we look at the shorter period of 2000-2016 we see
US: Stocks 2.7%, Bonds 5.1%
World: Stocks 1.9%, Bonds 4.8%

These are all real values, measured in USD. The data over the long haul is very supportive of stocks, while in the shorter time period, we both had 2 big bears as well as the tail end of the once in history Bonds bull market. I would be extremely skeptical of the close (stock vs. bond) returns going forward.

I also have a comment about exchange rates and inflation. We should leave Switzerland out due to its very unique situation (small country looked upon as safe haven for storing cash). Japan is interesting because again, the exchange rate in the time domain you started, used to be fixed (result of post world war II Bretton Woods agreement). I suspect a large part of the diversity you see in your results is that finally, currencies became freely exchangeable with floating exchanges.

I again suspect that with floating currency exchnages today, we won't see a repeat of that past. Yes I know people can say "this time is NOT different" but we do need to account for seriously big stuff like world wars (and its impact on returns from various countries) as well as movement away from Gold Standard and Bretton Woods.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sun Mar 19, 2017 12:13 am

willthrill81 wrote:Add to that that over the very long term, as in over 100+ years by one dataset, the U.S. has had returns over 2% higher than the rest of the world. The future may look very different from the past, and there have certainly been periods where international kept pace or even outpaced the U.S., but over the long-term, it simply hasn't happened.

Actually... If you look at one of the recent Credit Suisse Investment Yearbook reports (e.g. 2016 report), you will notice that in the past 50 years, the US were roughly on par with the rest of the world for equity (real) returns, and lagging for the bond returns by more than a point. The time in history where the US strongly outpaced the rest of the world was the 1st part of the 20th century, and here, I'll venture a fairly obvious 'why': World War I and World War II, which totally devastated so many countries, but not North America.

You might argue that this result of the past 50 years is incidental (meaning that I might have cherry picked a favorable starting date), which is quite possible. I don't have access to the DMS dataset underlying those Credit Suisse reports to compute rolling returns for the International side of the story, but I wouldn't rush to say that in modern times, the US has consistently outpaced the rest of the world.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sun Mar 19, 2017 12:30 am

Dirghatamas wrote:As usual great work! Thanks for both the time and the insights.

Have you cross checked this against the similar work by others? In particular the Credit Suisse Yearbook work by Dimson et al.?

Yes, I am well aware of the Credit Suisse work, but I could never put my hands on their underlying numbers (I asked, and this costs an arm and a leg). I could compare at a high level (e.g. CAGR per decade; I also believe they did drawdowns in one edition), but you need to wait for Part 2 of my little study! Where I'll start using per-country domestic returns in the analysis.

So far, I only looked at the combined effect of inflation and currency rates, no more. Thanks for the nice words though.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by packer16 » Sun Mar 19, 2017 8:58 am

I think may be missing the historical context of the evolution of public markets (i.e. the development that non-family members could trust each other with money/investment and not steal the money). Markets began in the Netherlands with Dutch East India company & spread to England after that when the English made the Dutch ruler their king. Most of the nations that were settled by English subjects have this notion in their DNA, thus the high returns.
A speech given by Li Lu (a money manager who manages Charlie Munger's money) also provides context and speaks to the network effects of what he calls Civilization 3.0 (free market economy). His insight is that other countries are heading in that direction (including China that he says is a Civilization 2.5) but there will be bumps in the road. His observation is also that the larger the country the larger the amount of the network effect. Here is a link to a transcript of his speech:

http://www.cornerofberkshireandfairfax. ... -peking-u/

You can make it as complicated or simple as you want to but the facts are three groups of countries have the highest returns, two actually involved in WWII directly, UK and Scandanavia, yet the hypothesis holds. It was more than the US & UK in the Anglo group, it also includes Canada, Australia & South Africa. The hypothesis is based upon underlying economics not some mean reverting theory that is based upon the assumption of free markets everywhere, which we know is not true.

BTW if you look at the Dutch/Anglo/Scandi countries individually they all exceed the world mkt cap average except Canada over the last 115 & 50 years. The world average is also more heavily weighted by this group so the less-free markets group has lagged by even a great amount than the premium over the average would imply.

Also is it not a coincidence that other 3 countries in your foreign return test all fall into the Dutch/Anglo/Scandi group, the group with free markets in their veins.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by LadyGeek » Sun Mar 19, 2017 9:21 am

AlohaJoe wrote:
White Coat Investor wrote:
siamond wrote:A new article was published on Financial Page

Feedback welcome.


Can you tell us more about Financial Page, who owns it, who writes for it, how the writers are chosen, how it is related to Bogleheads.org and how it is related to the John C. Bogle Financial Literacy Center?


The blog was originally announced here: viewtopic.php?f=10&t=134520
A few months later it was moved to the current location: viewtopic.php?t=146538

From what I can tell (but I'm not positive), the answers to your questions are:

- It is owned by Barry Barnitz
- It will probably accept anyone who wants to publish something
- It used to be the official Bogleheads blog but is not anymore, it remains as an unofficial Bogleheads blog
- I don't know but since it is maintained​ by Barry Barnitz personally I'm guessing it no longer has any relationship?

Let me clarify -

- It is a continuation of the blog started on this site. Since our first effort never took off, Barry Barnitz continued the effort at WordPress.com.
- Financial Page is the official Bogleheads community blog, note the tagline "A Bogleheads® blog"
- FYI: Barry Barnitz is the wiki's founder
- Any member who wants to write for the blog is welcome to do so. Please PM Barry Barnitz with your request.
- I'm a blog administrator
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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by White Coat Investor » Sun Mar 19, 2017 9:49 am

LadyGeek wrote:
AlohaJoe wrote:
White Coat Investor wrote:
siamond wrote:A new article was published on Financial Page

Feedback welcome.


Can you tell us more about Financial Page, who owns it, who writes for it, how the writers are chosen, how it is related to Bogleheads.org and how it is related to the John C. Bogle Financial Literacy Center?


The blog was originally announced here: viewtopic.php?f=10&t=134520
A few months later it was moved to the current location: viewtopic.php?t=146538

From what I can tell (but I'm not positive), the answers to your questions are:

- It is owned by Barry Barnitz
- It will probably accept anyone who wants to publish something
- It used to be the official Bogleheads blog but is not anymore, it remains as an unofficial Bogleheads blog
- I don't know but since it is maintained​ by Barry Barnitz personally I'm guessing it no longer has any relationship?

Let me clarify -

- It is a continuation of the blog started on this site. Since our first effort never took off, Barry Barnitz continued the effort at WordPress.com.
- Financial Page is the official Bogleheads community blog, note the tagline "A Bogleheads® blog"
- FYI: Barry Barnitz is the wiki's founder
- Any member who wants to write for the blog is welcome to do so. Please PM Barry Barnitz with your request.
- I'm a blog administrator


So it's official then. Perhaps the tagline should be changed to "The Bogleheads Blog."

What are the posting guidelines?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by LadyGeek » Sun Mar 19, 2017 10:35 am

Regarding the blog, please PM me if you have any questions.

The images were a bit difficult to read. You can now click on the image to view it full-size (opens in a new browser window).

See: Investing in the World – Part 1
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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by LadyGeek » Sun Mar 19, 2017 10:41 am

I think the article would make more sense if the relative size of the US vs. World markets is placed in context.

See the wiki: Category:International domiciles

Relative sizes of world stock markets at the end of 2016.
Image
Source: Credit Suisse Global Investment Returns Yearbook 2017
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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sun Mar 19, 2017 11:23 am

Thanks a lot for the help, Ladygeek. Clickable images are certainly much better!

About per-country market caps, I had included the following graph in the Japanese study, but you're right, I should have included it again for proper context. The one which is truly useful, I believe, is the historical evolution. Here it is, and yes, this is a clickable image! :wink:

Image

I think this nicely illustrates where the equity premium for the US comes from, as well as the big Japanese run of the 80s and the subsequent fall.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by White Coat Investor » Sun Mar 19, 2017 11:23 am

LadyGeek wrote:Regarding the blog, please PM me if you have any questions.


PM sent asking for the posting guidelines.
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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sun Mar 19, 2017 11:28 am

This being said, please hold for Part 2 of the write-up before discussing too much US vs. International! I know it is very tempting to jump to this discussion (many of us are passionate about it, and... well... may have deeply ingrained pre-conceptions about it!), but the data I provided in Part 1 of this article is solely about global returns, and the effect of currency & inflation rates.

I was planning to publish Part 2 today, but I'm having a private discussion with somebody who might help me to assemble per-country domestic bonds data series, so I will hold off to see if we can make it happen, as using global bonds is really not satisfying for such per-country analysis.

So... let's try to stay focused on currency rates and inflation rates for now? :wink:

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by kolea » Sun Mar 19, 2017 2:06 pm

Hi Siamond,
I have been puzzling over the chart that shows exchange rates vs. inflation. What is puzzling to me is why exchange rate does not have inflation built into it. I would expect to see a positive correlation between the two but it is just the opposite - they seem to be inversely related. I guess that is more of a macro-economic question than an investing question but any thoughts from you would be appreciated.

Why did you choose to look at inflation as well as currency exchange rates? Granted, inflation is a risk, but there are other country-specific risks that add to the overall risk of investing in securities that are not denominated in dollars. Cost of borrowing, for instance, since high interest rates tend to dampen economic performance. Why not look at the other risks too?

Anyway, great work! Looking forward to part II.
Kolea (pron. ko-lay-uh). Golden plover.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sun Mar 19, 2017 6:58 pm

kolea wrote:I have been puzzling over the chart that shows exchange rates vs. inflation. What is puzzling to me is why exchange rate does not have inflation built into it. I would expect to see a positive correlation between the two but it is just the opposite - they seem to be inversely related. I guess that is more of a macro-economic question than an investing question but any thoughts from you would be appreciated.

I will readily admit that my knowledge of macro-economics is extremely thin. I was actually hoping that this blog post would trigger more discussion along those lines.

At the intuitive level, it does make sense to me that inflation and exchange rates are inversely related. If a locally manufactured item price suffers from local inflation, you're better sell to a lower price when exporting it to a country with a lower inflation level, or you will not be able to compete. So if local inflation increases, the local currency should decrease. And you can make the reverse reasoning for imports. But this is just my naive intuition at work here, nothing more...

kolea wrote:Why did you choose to look at inflation as well as currency exchange rates? Granted, inflation is a risk, but there are other country-specific risks that add to the overall risk of investing in securities that are not denominated in dollars. Cost of borrowing, for instance, since high interest rates tend to dampen economic performance. Why not look at the other risks too?

For me, what truly matters to an investor/retiree is purchasing power. The amount of money you accumulate is just a mean to an end, the real goal is to be able to buy stuff making your life more enjoyable. Purchasing power is a real (inflation-adjusted) quantity, using a local currency. Furthermore, if we want to compare apples to apples between two countries, then we'd better adjust for the local inflation. Hence my math accounting for local currencies and subtracting local inflation. I hesitated to show nominal volatility and drawdowns as nominal quantities (as those emotional facets of risk are usually perceived by people in nominal terms), but then I couldn't compare apple to apple. Plus the Safe Withdrawal Rate is clearly an inflation-adjusted quantity. So I settled on doing everything in real terms, to normalize.

As to other risks, I hope to address interest rates (and domestic bond returns) in a follow-up article, but the historical information is harder to gather than stock returns, inflation rates and currency rates. Working on it... Thank you for the feedback!

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by AlohaJoe » Sun Mar 19, 2017 9:58 pm

larryswedroe wrote:US only investing induces the currency risk--currency risk isn't a one way risk, it's two way, reflecting both economic and geopolitical risks. Failing to understand this is one of the most common and IMO one of the worst mistakes investors can make.
Larry


To add to Larry's point, way back in Bogle's early book, the 1994 version of Common Sense on Mutual Funds, one of the arguments he makes for avoiding foreign investing was that even though foreign stocks had outperformed recently, he said it was entirely due to the performance of the US dollar. In other word, Bogle was saying that US was "innately" better than foreign investing but currency risk meant it had underperformed for over a decade.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by packer16 » Sun Mar 19, 2017 10:22 pm

It would be interesting to see if Bogle's observation in 1994 still holds, namely that foreign stock outperformance is the result of the declining dollar.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sun Mar 19, 2017 11:33 pm

AlohaJoe wrote:To add to Larry's point, way back in Bogle's early book, the 1994 version of Common Sense on Mutual Funds, one of the arguments he makes for avoiding foreign investing was that even though foreign stocks had outperformed recently, he said it was entirely due to the performance of the US dollar. In other word, Bogle was saying that US was "innately" better than foreign investing but currency risk meant it had underperformed for over a decade.

The performance of the US dollar against what?

packer16 wrote:It would be interesting to see if Bogle's observation in 1994 still holds, namely that foreign stock outperformance is the result of the declining dollar.

Well, declining... against what? How do I calibrate such a test? I could easily compare two specific countries (will do in Part 2), but I am not sure how to proceed to compare the US against the rest of the world in such a manner? Any idea?

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by AlohaJoe » Mon Mar 20, 2017 12:37 am

siamond wrote:
AlohaJoe wrote:To add to Larry's point, way back in Bogle's early book, the 1994 version of Common Sense on Mutual Funds, one of the arguments he makes for avoiding foreign investing was that even though foreign stocks had outperformed recently, he said it was entirely due to the performance of the US dollar. In other word, Bogle was saying that US was "innately" better than foreign investing but currency risk meant it had underperformed for over a decade.

The performance of the US dollar against what?


Against foreigners. I don't think he Bogle was very precise at the time. He was speaking about whether the dollar was "strong" or "weak", so I guess measured against a basket of other currencies?

"The inordinate weakness in the dollar had more than doubled the cumulative international return [for the 1984-1994 period]."

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Mon Mar 20, 2017 1:04 am

AlohaJoe wrote:
Siamond wrote:
AlohaJoe wrote:The performance of the US dollar against what?

Against foreigners. I don't think Bogle was very precise at the time. He was speaking about whether the dollar was "strong" or "weak", so I guess measured against a basket of other currencies?

"The inordinate weakness in the dollar had more than doubled the cumulative international return [for the 1984-1994 period]."

Yes, sure, I got that. My real question was 'how can I perform such a test' (which implies to be precise)...

This isn't a fully significant test (admittedly I am cherry-picking a tad!), but I took a quick look to Sweden and US domestic equity returns, from 1970 and 2016, and this theory doesn't explain the delta at all. US real CAGR = 5.7% (USD). Sweden real CAGR = 9.3% (local currency, SEK). The exchange rate variation was -1.2% (the SEK actually *lost* quite some value compared to the US dollar). Inflation was around 4% in both cases (actually a bit higher for Sweden). Well, there is something special in those Swedish meatballs, I guess. :wink:

For sure, a weakening dollar makes foreign investments better in USD, but I suspect we might be reading too much in Mr Bogle's statement here.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by packer16 » Mon Mar 20, 2017 7:41 am

How about adjusting a non-US index by the US dollar index over time or just comparing the non-US index in local currency versus a dollar denominated index.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Mon Mar 20, 2017 9:27 am

packer16 wrote:How about adjusting a non-US index by the US dollar index over time or just comparing the non-US index in local currency versus a dollar denominated index.

When picking a giving currency, we pick a given country. That is basically what I did for the Sweden against US example I provided in the previous post (using the Sweden equity index and the US equity index; plus USD and SEK currencies). But I readily admitted I was cherry picking by focusing on a single country. The real question is US against the rest of the world. I am intrigued by the question, I just don't know how to analyze it.

As AlohaJoe said, trying to determine if the USD was weakening or strengthening at times implies to compare to a basket of other currencies, and I am not sure how to weigh them. Maybe we could do a simple average of the annual exchange rates (an equal-weight approach!), and this might be good enough to get an idea? Then look at various periods, e.g. rolling 10 years, and compare MSCI US to MSCI World? I'm not quite sure 45 years is enough of a timeframe for this type of analysis though. But ok, I'll give it a try.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Mon Mar 20, 2017 9:30 am

siamond wrote:As to other risks, I hope to address interest rates (and domestic bond returns) in a follow-up article, but the historical information is harder to gather than stock returns, inflation rates and currency rates. Working on it... Thank you for the feedback!

Quick update on this. We're actually in much better shape now! We found an IMF database of government bonds yields, and we have all the numbers since 1970 (except for Hong-Kong and Singapore, I'll drop them from the dataset, they were kind of oddballs compared to the 16 others anyway). So we should be able to infer a decent model for domestic bond returns, using the usual bond fund model. Stay tuned, this is promising!

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by in_reality » Mon Mar 20, 2017 9:35 am

packer16 wrote:It would be interesting to see if Bogle's observation in 1994 still holds, namely that foreign stock outperformance is the result of the declining dollar.


I'd want to know if it's cyclical.

Maybe there isn't enough data to say, but it's said a strong currency exports economic strength. Also, higher inflation (from a booming economy) will lead to a weakened currency.

So in the same way that high valuations work against themselves for future returns, I wonder if currency strength might do the same.

Even if currency in the longest run can offer no reward, over my accumulating horizon it just feels better to be purchasing both strong and weak currencies in the same way that I buy stocks with both higher and lower valuations.

Not sure what the numbers say but that's my intuition at least.
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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by LadyGeek » Mon Mar 20, 2017 7:20 pm

White Coat Investor wrote:
LadyGeek wrote:Regarding the blog, please PM me if you have any questions.


PM sent asking for the posting guidelines.

PM received, thanks. The posting guidelines are now in the blog: About | Financial Page

Further questions can be asked in the Local Chapters and Bogleheads Community forum (or PM me).
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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Mon Mar 20, 2017 10:56 pm

siamond wrote:
packer16 wrote:How about adjusting a non-US index by the US dollar index over time or just comparing the non-US index in local currency versus a dollar denominated index.

[...] As AlohaJoe said, trying to determine if the USD was weakening or strengthening at times implies to compare to a basket of other currencies, and I am not sure how to weigh them. Maybe we could do a simple average of the annual exchange rates (an equal-weight approach!), and this might be good enough to get an idea?

I gave it a quick try. For every year between 1970 and 2016, I computed an equal-weighted average of the exchange rates between US$ and the local currency of the 18 countries from MSCI. Then plotted the corresponding values. And this was going up and down like crazy, and frankly I couldn't extract anything useful out of it, it was way too sensitive to the start date.

Then I had another idea. I have the (nominal) annual returns of each of the 18 countries tracked by MSCI since 1970, expressed in either USD or local currency. Why not define an equal-weighted portfolio made of those 18 data series (including the US), and check the USD version of it, or the local currency (for each of the 18 countries) version of it. One might argue the latter better reflects the 'intrinsic' performance of the various local economies (I guess ?!).

Then let's add MSCI USA (expressed in USD) as a third portfolio. The following chart is a telltale chart, with the reference being the S&P 500. In other words, this tracks the growth of each of those 3 portfolios relative to the growth of the S&P 500. Such telltale charts are great at giving us a good idea of what happens over time.

Image

What can we see? Well, first, MSCI USA and S&P 500 are well in sync (unsurprisingly). Next, this equal-weighted 'global' portfolio would have done quite well. More interestingly, the premium of this equal-weighted portfolio when expressed in USD is a tad better than when expressed in local currencies, but this doesn't change the premium very much. So yes, when the USD depreciates over time, the returns expressed in USD are getting a boost. And as we can see on the chart, the boost can go both ways. Actually, if we had started in 1974, the two lines would have overlapped much more.

I am not sure we can draw that much of a conclusion here, except that currency risk can certainly play games with your portfolio... And as Larry pointed out, this goes both ways.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Mon Mar 20, 2017 11:50 pm

Then, I removed MSCI USA to make room on the graph, and added MSCI World (USD currency, nominal), which is a cap-weighted portfolio. And I added an 'adjusted' MSCI World portfolio, adjusting by the difference between the equal-weighted global portfolios (the USD one and the local-currencies one).

Image

And the outcome is quite interesting. Check how the regular MSCI World portfolio goes up and down, relative to S&P 500. Not much of a premium one way or another here if one avoids recency bias. The adjusted series probably makes Jack Bogle's point more clear. Look at it from the perspective of 1994. The MSCI World performance in the late 80s (relative to S&P 500) certainly looks less impressive with the currency adjustment.

Then there are the last 20 years. Where the adjusted World trajectory is clearly disappointing. Personally, this doesn't impress me very much, we've seen multi-decade cycles like that several times since 1900 in stock returns, and there seem to be a reasonable agreement that the US market is currently quite overvalued compared to the rest of the world. But well, this is just one possible interpretation...

Finally... There is something to be said for equal-weighted portfolios! :wink:

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by AlohaJoe » Tue Mar 21, 2017 2:06 am

siamond wrote:Well, declining... against what? How do I calibrate such a test? I could easily compare two specific countries (will do in Part 2), but I am not sure how to proceed to compare the US against the rest of the world in such a manner? Any idea?


The Federal Reserve tracks the "Foreign Exchange Value of the Dollar" where the weights of the currencies of a "large group of major U.S. trading partners" is turned into an index. "The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares"

The index is at: https://www.federalreserve.gov/releases ... exbc_m.htm

Currently the US Dollar is at 107.6163 (I think 100 is the baseline), which means it is "strong", I guess. Or at least, higher than the baseline. I'm not sure how the baseline was determined but it is probably linked somewhere in that page.

The Federal Reserve also publishes the weights of currencies (and what the historical weights were as well, which is pretty cool):

https://www.federalreserve.gov/releases/h10/weights/

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Tue Mar 21, 2017 2:23 pm

AlohaJoe wrote:The Federal Reserve tracks the "Foreign Exchange Value of the Dollar" where the weights of the currencies of a "large group of major U.S. trading partners" is turned into an index. "The index weights, which change over time, are derived from U.S. export shares and from U.S. and foreign import shares".

Nice find, AlohaJoe! Count on the Fed to track every possible number... I found an article which describes their methodology. I skimmed through it, and I have a couple of observations:
- the H.10 index starts in 1973, and the value 100 is somewhat arbitrary, this is March 1973 (I guess they backtracked Jan and Feb-73)
- the weights are a function of the amount of trade (import/export) with a given country, and evolve over time
- the index can be expressed in either real (inflation-adjusted) terms or nominal terms (H.10 real; H.10 nominal), the article makes clear that the real index is more meaningful

Overall, this is a great find, but I am not too sure this is entirely relevant to the question we were trying to explore, given the way the weights are calculated (trade volume). Still, out of curiosity, I assembled an index based on the multiplier (the adjustment factor) I used in the past couple of posts, and started it in 1973 with the same value as the H.10 index, and then compared. It does line up reasonably well. So I guess that my previous graphs weren't completely off-mark. Although frankly, the whole thing leaves me a bit cold, all I care about as a US investor is my returns expressed in USD.

Image

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Sun Apr 02, 2017 10:43 pm

Just a quick bump to say that I updated the blog post (Part 1) to address a couple of issues:

1. I did a copy and paste mistake for the Netherlands, mixing up USD and local currency series. Many thanks to Tyler who spotted the issue. Part 2 and Part 3 did use the corrected data series. This is fixed now.

2. I switched to Barclays series for global bonds, this made it easier to focus on treasury bonds only, and to compare apple to apple with the domestic bonds data series used in Part 2 and Part 3. The Citigroup WGBI index is about investment-grade bonds at large.

Many thanks for all the folks who provided words of encouragement and constructive feedback.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by ignition » Tue Apr 04, 2017 4:02 am

siamond wrote:
larryswedroe wrote:US only investing induces the currency risk--currency risk isn't a one way risk, it's two way, reflecting both economic and geopolitical risks.

That is a very nice quote, Larry. I took the liberty of paraphrasing it while tuning a bit my conclusion, I hope this is ok. This is really what I am trying to look at through those International studies. What happened to some other countries may happen to the US in the future, we just don't know.


I think though if the US has a Japanese style meltdown, most other countries will have a big problem too. It always strikes me as strange to compare Japan to the US.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by lazyday » Tue Apr 04, 2017 6:30 am

ignition wrote:I think though if the US has a Japanese style meltdown, most other countries will have a big problem too. It always strikes me as strange to compare Japan to the US.


US from 2000-2027 could look like a less extreme version of Japan 1990-2017, and I don't see why that would mean that other countries would be in big trouble.

Economically, even Japan isn't in big trouble. The stock market was much too expensive in 1990, and isn't as expensive now. The same could happen here on a smaller scale, starting in 2000.

And of course, US might have economic problems and have a truly disastrous stock market. This would affect other countries, but they might do much better than the US.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by ignition » Tue Apr 04, 2017 7:25 am

lazyday wrote:US from 2000-2027 could look like a less extreme version of Japan 1990-2017, and I don't see why that would mean that other countries would be in big trouble.

Economically, even Japan isn't in big trouble. The stock market was much too expensive in 1990, and isn't as expensive now. The same could happen here on a smaller scale, starting in 2000.


Yes, that's one of the reasons I find it strange to compare Japan to the US and to say a similar thing might happen in the US. CAPE was like 95 for Japan compared to 29 now for the US. Don't really see the same thing happening now unless there is a huge recession. And if a huge recession happens in the US, a lot of other countries will be dragged down with it.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by lazyday » Tue Apr 04, 2017 7:35 am

Yeah, from today, it seems unlikely a US only investor will suffer like an investor in Japan from 1990.

Still, our CAPE is double that of several other markets now. Even if not nearly as extreme as Japan, it seems that international diversification reduces risk.

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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by harvestbook » Tue Apr 04, 2017 7:57 am

larryswedroe wrote:US only investing induces the currency risk--currency risk isn't a one way risk, it's two way, reflecting both economic and geopolitical risks. Failing to understand this is one of the most common and IMO one of the worst mistakes investors can make.
Larry


Agreed. What a lot of people call "currency risk" is something I consider another form of diversification. It's not like the US dollar carries zero risk.
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Re: Investing in the World - Part 1 [Financial Page blog article]

Post by siamond » Tue Apr 04, 2017 9:18 am

ignition wrote:Yes, that's one of the reasons I find it strange to compare Japan to the US and to say a similar thing might happen in the US. CAPE was like 95 for Japan compared to 29 now for the US. Don't really see the same thing happening now unless there is a huge recession. And if a huge recession happens in the US, a lot of other countries will be dragged down with it.

I wasn't crying wolf about today's situation, even if US valuations are indeed high. My line of thinking is more long term (over the coming few decades), and things certainly change a lot in such time frame. I certainly agree that there is no accurate analogy here, just very coarse ones. Japan is different from the US, which is different from Italy, which is different from Spain, etc. The US today is also quite different from the US during the great depression or the oil crisis. But if any of those large economies went in such level of troubles, then it can happen again, in one shape or form, everywhere. And if global diversification demonstrably helped mitigate the most severe issues in the past in various countries, then why being shy of using it. That's all I was trying to illustrate. But yes, I agree with you that Japan is (was) really an oddball situation.

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