Article-Argument against Buffet and Bogle's International Advice

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lostdog
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Article-Argument against Buffet and Bogle's International Advice

Postby lostdog » Mon Apr 17, 2017 9:36 am

Here is an article that is against Bogle and Buffet's international advice.

The one piece of investing advice from Bogle and Buffett you may want to reject
http://www.cnbc.com/2017/04/17/a-stubbo ... ffett.html

"To my mind, saying 'I get exposure only through buying the S&P' is like saying 'I get plenty of exposure, but I only buy company names that begin with A through M and don't buy any N through Z."
-Tim McCarthy, author of "The Safe Investor" and former CEO of Tokyo-based Nikko Asset Management
100% Vanguard Total World Stock Index Fund | | "Our life is frittered away by detail. Simplify, simplify." -Thoreau

NiceUnparticularMan
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby NiceUnparticularMan » Mon Apr 17, 2017 12:15 pm

Yeah, I've never quite understood why "total markets" people would be satisfied with just the embedded international component of large U.S. companies, since that is not exactly representative of the total international market. It did feed into my decision to be only 40% international and then to target tilting my international to small, value, and EM (to cut back on the overlap in that 40%). But you can't really treat it as a proxy for total international.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby bayview » Tue Apr 18, 2017 7:44 pm

NiceUnparticularMan wrote:Yeah, I've never quite understood why "total markets" people would be satisfied with just the embedded international component of large U.S. companies, since that is not exactly representative of the total international market. It did feed into my decision to be only 40% international and then to target tilting my international to small, value, and EM (to cut back on the overlap in that 40%). But you can't really treat it as a proxy for total international.

I do that, but in a very lazy way. Our international equities are in VFSVX, Vanguard FTSE All-World Ex-US Small-Cap Index. Too lazy to go for the value factor, but it does include EM, and it avoids the overlap with the big US stocks.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

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nedsaid
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby nedsaid » Tue Apr 18, 2017 9:10 pm

I want to own the best companies in the world regardless of where they are headquartered. I also don't buy the argument that the S&P 500 gives you International diversification because these large American companies have substantial overseas revenues. You could make the reverse argument and ask why you need to invest in U.S. companies; particularly when International companies do so much of their business right here in the United States.
A fool and his money are good for business.

swguy
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby swguy » Tue Apr 18, 2017 9:27 pm

I think Bogle's advice is to keep it simple and find a low cost fund that satisfies your international preference. That he isn't interested in an allocation to international isn't advice, it's merely his preference.

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Taylor Larimore
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How much international?

Postby Taylor Larimore » Tue Apr 18, 2017 10:17 pm

Bogleheads:

To help investors decide how much international stocks to own, I wrote this post:
Bogleheads:

Our Boglehead "Search" engine reports 22,400 results for the question: "How much international stock?" It is a question without a definitive answer because no investor knows the future. We are all guessing.

There are many reasons for holding, or not holding, international stocks in our portfolio. The purpose of this post is to suggest a reasonable percentage.

Two very knowledgeable expert sources wrote:

In February 2014, Vanguard Research published a 15-page study titled, "Global equities: Balancing home bias and diversification."
"This paper concludes that although no one answer fits all investors, the empirical and practical considerations suggest a reasonable starting allocation to non-U.S. stocks of 20%, with an upper limit based on global market capitalization, subject to the investor's perspective on the short- and long-term trade-offs."


Our mentor, Jack Bogle, in Common Sense on Mutual Funds (published in 2010), wrote 26 pages about international investing with this conclusion:
"So, I'd approach this relatively new wave of international investing with caution, and stick to my recommendation that international funds--including BRIC funds--do not exceed one-fifth (20%) of an investor's equity position."


So there we have it:

Vanguard researchers believe no less than a 20% international stock allocation is reasonable.

Jack Bogle believes no more than a 20% international stock allocation is reasonable.

When 20% is the only percentage of stocks that these two expert sources agree on, I feel comfortable using that 20% figure.


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

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JoMoney
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby JoMoney » Wed Apr 19, 2017 3:59 am

There all sorts of wacky investments out there people try to justify in the name of increasing "diversification".
Having an international stock portfolio isn't all that 'wacky', but it is more costly, and does have risks that just aren't necessary for a U.S. investor to take.
The folks that seem to think everyone needs an international portfolio usually put forth a story that it should somehow decrease risk and increase returns. So far, over the history of having low cost easily accessible funds to have such a portfolio, neither the promise of lower risk or increased returns has been true.
Seems to me, the next step after they sell you on your 'need' of International, then they sell you on the importance of rebalancing and how you need to find the optimal amount and trading 'rebalancing' scheme to get a bonus. Then they start pushing the slice-n-dice alternatives like REITS and commodities, or 'Factor' funds.... Bogle and Buffett provide simple sound advice that anyone can follow and will likely do better than those chasing other schemes (especially if they're paying higher fees to do so).
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby spectec » Wed Apr 19, 2017 4:34 am

Personally I'm OK with home country bias. After all, that is the currency in which my retirement dollars are paid. And I think the embedded international exposure in VTI is a significant factor. Keeping it simple here. But to each his own, because international exposure really is a personal preference rather than an established principle. The wide variety of opinions on the subject make that point clear.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby Bendee » Wed Apr 19, 2017 8:03 am

spectec wrote:Personally I'm OK with home country bias. After all, that is the currency in which my retirement dollars are paid. And I think the embedded international exposure in VTI is a significant factor. Keeping it simple here. But to each his own, because international exposure really is a personal preference rather than an established principle. The wide variety of opinions on the subject make that point clear.


I keep a significant 40% in International simply to ensure I don't have all my eggs in one basket. I would tell someone in real estate not to tilt their retirement towards REITs in the off chance that sector has a long-term implosion. People at Enron, for example, learned the hard way why it is a a bad idea.

In that sense, I work in the US for a company that would suffer massively if there is a significant long-term downturn in the US economy. I shouldn't put all of my retirement here in case there is a long-term recession/depression that could cost me my job.

Do I think it is likely? Nah. That doesn't mean it isn't a possibility that I should try to mitigate the risk of.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby Tamalak » Wed Apr 19, 2017 8:14 am

My problem with settling on a number like 20% international is '20%' means different things as the market cap drifts. It doesn't really make sense to leave it as a constant. I invest in International at cap because my plan won't need to change even if the future is very different from the present. That means I won't have to make *decisions* and won't fall into the many traps active investors make.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby TimeRunner » Wed Apr 19, 2017 8:43 am

I just float along using Vanguard Total World. As of the end of last month, it was US 53.3%, the rest International. That number moves a fraction up/down each month. I never worry about market timing or rebalancing. :beer
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby learning_head » Wed Apr 19, 2017 8:58 am

Bendee wrote:I keep a significant 40% in International simply to ensure I don't have all my eggs in one basket. I would tell someone in real estate not to tilt their retirement towards REITs in the off chance that sector has a long-term implosion. People at Enron, for example, learned the hard way why it is a a bad idea.

In that sense, I work in the US for a company that would suffer massively if there is a significant long-term downturn in the US economy. I shouldn't put all of my retirement here in case there is a long-term recession/depression that could cost me my job.


I used to think along the same lines. However, upon further reading I realized that a lot of international returns are based on strength of US dollar vs other currencies, and I did not want to have so much currency risk in my portfolio. Difference with Enron is that your spending will be in USD, not in weighted average of world currencies. So, I decided country bias is warranted after all. I approx. halved international exposure as a result.
Last edited by learning_head on Wed Apr 19, 2017 2:33 pm, edited 1 time in total.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby deltaneutral83 » Wed Apr 19, 2017 9:10 am

nedsaid wrote:I want to own the best companies in the world regardless of where they are headquartered. I also don't buy the argument that the S&P 500 gives you International diversification because these large American companies have substantial overseas revenues. You could make the reverse argument and ask why you need to invest in U.S. companies; particularly when International companies do so much of their business right here in the United States.


That depends on where you fall in the "currency, unstable govt, etc" debate. The higher expense ratio is certain though. I have a feeling over the next 40 years it really isn't going to matter a whole lot if you allocated some to the Total International as opposed to all of it in VTI with regards to your equity allocations. And that's where the Int folks will say if it's all else equal you should be 20% in for the extra diversification. Although now is the time to re balance International if you are firm believer, Int has been pummeled the last 6 years after taking a look at my ten year chart against VTI. I think I am about 15-18% Int. I am much closer to Bogle/Buffet at 0% than I am the purists who have the market weight of 50% (of their equity allocation).
Last edited by deltaneutral83 on Wed Apr 19, 2017 9:21 am, edited 1 time in total.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby MnD » Wed Apr 19, 2017 9:14 am

TimeRunner wrote:I just float along using Vanguard Total World. As of the end of last month, it was US 53.3%, the rest International. That number moves a fraction up/down each month. I never worry about market timing or rebalancing. :beer


Which is a record high for the US % going by the MSCI All-World index and more than double our global share of GDP.
In the late 80's Japan was 44% of the MSCI all-world, also far more than double their share of GDP at the time and that % fell over the past decades to under 10% and the large multiple to GDP disappeared.

As a global cap investor I worry more about the 54% weight I have in US being too high. All the discussion here about 20% international or none at all is really a tremendous single country bet. Even global market cap is now a very big position in a single country that appears fully priced.

http://www.economist.com/news/finance-a ... l-americas

Image

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby bikechuck » Wed Apr 19, 2017 9:40 am

I have a small allocation to international equities because I value the diversification. I also understand and hate that it exposes me to the risk of currency fluctuations on top of the normal market risk that comes from investing in U.S. based companies. That said, I intend to stay the course and continue with international as a small part of my mix approximating 20% which I agree is somewhat arbitrary.

I do not invest in international bonds as the purpose of my bond investments are stability and I do not need or want to expose myself to currency risk in that portion of my portfolio.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby Dominic » Wed Apr 19, 2017 9:51 am

MnD wrote:
TimeRunner wrote:I just float along using Vanguard Total World. As of the end of last month, it was US 53.3%, the rest International. That number moves a fraction up/down each month. I never worry about market timing or rebalancing. :beer


Which is a record high for the US % going by the MSCI All-World index and more than double our global share of GDP.
In the late 80's Japan was 44% of the MSCI all-world, also far more than double their share of GDP at the time and that % fell over the past decades to under 10% and the large multiple to GDP disappeared.

As a global cap investor I worry more about the 54% weight I have in US being too high. All the discussion here about 20% international or none at all is really a tremendous single country bet. Even global market cap is now a very big position in a single country that appears fully priced.

http://www.economist.com/news/finance-a ... l-americas

Image


I feel that just the GDP percentage and market cap percentage don't tell the whole story. What is the total "market cap" of wholly government owned companies and private companies? If we add those in, I would hope that this improves a little.

With that said, I suppose you'd want to weight your portfolio according to each country's weight, rather than the weight of just the equity you're able to buy.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby backpacker » Wed Apr 19, 2017 12:32 pm

lostdog wrote:Here is an article that is against Bogle and Buffet's international advice.

The one piece of investing advice from Bogle and Buffett you may want to reject
http://www.cnbc.com/2017/04/17/a-stubbo ... ffett.html

"To my mind, saying 'I get exposure only through buying the S&P' is like saying 'I get plenty of exposure, but I only buy company names that begin with A through M and don't buy any N through Z."
-Tim McCarthy, author of "The Safe Investor" and former CEO of Tokyo-based Nikko Asset Management


In a sense this argument is exactly backwards. If investing in only domestic stocks was like picking 50% of the market at random, there would be no reason to own international stocks. If you pick 4,000 our of the 8,000 publicly trade companies at random, those companies will almost certainly have almost exactly the same returns as the 8,000. This is why sampling works for funds that can't invest in an entire index for whatever reason.

Thinking about it another way: Try to imagine a scenario where the companies with N-Z have higher returns for 30 years than the companies A-M. I have no idea what that would look like. But I can pretty easily imagine a single country lagging the rest of the world for 30 years. How likely that is for the US is of course up for debate, but I can at least imagine it.

The reason to invest in international stocks is that they are different than domestic stocks, not that they are just 4,000 more companies with no real difference to the 4,000 you already own.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby learning_head » Wed Apr 19, 2017 2:47 pm

bikechuck wrote:I have a small allocation to international equities because I value the diversification. I also understand and hate that it exposes me to the risk of currency fluctuations on top of the normal market risk that comes from investing in U.S. based companies. That said, I intend to stay the course and continue with international as a small part of my mix approximating 20% which I agree is somewhat arbitrary.


This is where I ended up with as well approximately, and it happens to match what Taylor has been posting as well (for the other reasons he had mentioned). Finally, it is roughly consistent with Vanguard's LifeStrategy funds as a bonus! :beer

backpacker wrote:Try to imagine a scenario where the companies with N-Z have higher returns for 30 years than the companies A-M. I have no idea what that would look like. But I can pretty easily imagine a single country lagging the rest of the world for 30 years.


To make the example more complete, imagine there is a weighted basket of non-USD currencies called say "Peso-Pounds" and
- A-M companies stock returns depend on USD profits
- N-Z companies stock returns depend on Peso-Pound profits + conversion of currencies from Peso-Pounds to USD.

Granted, large US companies depend on non-US markets and vice versa, but overall your (USD denominated) N-Z companies investments depend on relative USD strength much more than A-M companies.

Over long periods of time USD moves a lot vs rest of currencies. What are the chances you think it will move in favorable direction in next 30 years?

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby friar1610 » Wed Apr 19, 2017 4:33 pm

bikechuck wrote:I have a small allocation to international equities because I value the diversification. I also understand and hate that it exposes me to the risk of currency fluctuations on top of the normal market risk that comes from investing in U.S. based companies. That said, I intend to stay the course and continue with international as a small part of my mix approximating 20% which I agree is somewhat arbitrary.

I do not invest in international bonds as the purpose of my bond investments are stability and I do not need or want to expose myself to currency risk in that portion of my portfolio.


For me as a moderately conservative investor in my early 70s, both points above make perfect sense. 20% international feels about right to me; I'd let it drift to 25% before I felt the need to rebalance but not go higher. I've never understood the argument for international bonds. Unfortunately, those two considerations mean the otherwise attractive Life Cycle and Target Date funds are not options for me.
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby NiceUnparticularMan » Wed Apr 19, 2017 4:52 pm

bayview wrote:I do that, but in a very lazy way. Our international equities are in VFSVX, Vanguard FTSE All-World Ex-US Small-Cap Index. Too lazy to go for the value factor, but it does include EM, and it avoids the overlap with the big US stocks.


Seems reasonable to me. And my understanding is that index is a little valuey too, which would make it even more of a decent all-around anti-overlap fund.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby hightower » Wed Apr 19, 2017 4:55 pm

I personally don't see the value in having 20% of ones portfolio in international stocks. That just feels like too much. But, it seems reasonable to me to have a smaller amount. So, I chose 10% for my total international exposure (VXUS). Will I regret or be glad about that decision 30 years from now? I don't know and neither does anyone else:)
It seems like a thread like this comes up every week on these boards.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby NiceUnparticularMan » Wed Apr 19, 2017 5:02 pm

hightower wrote:I personally don't see the value in having 20% of ones portfolio in international stocks. That just feels like too much. But, it seems reasonable to me to have a smaller amount. So, I chose 10% for my total international exposure (VXUS).


If you are just thinking maybe international stocks will slightly outperform US stocks, but maybe not, then it doesn't much matter.

If you are concerned about the possibility that for some country-specific reason, US stocks will significantly underperform international stocks, it becomes a higher stakes issue and a large allocation may be warranted.

As it is often put, basically the issue is whether you think something like what happened in Japan could happen here. If you think, "No way, not here!", then it will end up being hard to motivate much of an international allocation. If you think, "Of course it could happen here, why not?", then you might actually keep worrying about whether you have enough . . . .

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby backpacker » Wed Apr 19, 2017 5:26 pm

learning_head wrote:
backpacker wrote:Try to imagine a scenario where the companies with N-Z have higher returns for 30 years than the companies A-M. I have no idea what that would look like. But I can pretty easily imagine a single country lagging the rest of the world for 30 years.


To make the example more complete, imagine there is a weighted basket of non-USD currencies called say "Peso-Pounds" and
- A-M companies stock returns depend on USD profits
- N-Z companies stock returns depend on Peso-Pound profits + conversion of currencies from Peso-Pounds to USD.

Granted, large US companies depend on non-US markets and vice versa, but overall your (USD denominated) N-Z companies investments depend on relative USD strength much more than A-M companies.

Over long periods of time USD moves a lot vs rest of currencies. What are the chances you think it will move in favorable direction in next 30 years?


On this way of thinking about things, domestic stocks are equivalent to (stocks + bet on USD going up) and foreign stocks are (stocks + bet on foreign currency going up). The idea being, we should buy foreign stocks to get the bet on foreign currency going up because it will diversify our existing bet that USD will go up.

The usual response is that owning US stocks is not a bet that the dollar will go up for US investors, and this because our expenses are in dollars. If the dollar goes down in value, my US stocks go down in value, but my expense go down by the same amount, so I haven't lost anything in real terms. I can still buy the same all the same stuff. If that's right, then buying foreign stocks is strictly worse than buying US stocks, since foreign stocks are just like US stocks, but come with an unwanted bet on foreign currency.

That's the response, but I don't completely buy it myself, and in fact hold international stocks at market weight. The reason I don't buy the argument is that there seems to be some evidence that stock returns are inversely related to currency returns. This is actually pretty intuitive when you think about it. As the dollar goes up in value, US goods become more expensive for international buyers, so international buyers buy less, and US profits go down. The reverse happens when the dollar goes down in value to other currencies.

The other reason is that even if a US consumer is only literally buying things in dollars, it does not follow that her expenses are not sensitive to the movement of foreign currencies. Suppose I'm a fanatic about Black Forest cuckoo clocks, but only buy them from a US distributor. I never actually own any Euros but, as the Euro increases in value, the price of my cuckoo clocks will go up in US dollars. So even US investors who never step foot outside the country do have expenses that are 100% in US dollars.

The way I think about it, foreign stocks are worth owning because they are not the same US stocks. Currency risk makes international stocks worse than they would be without that risk, but not so much that its worth underweighting them or hedging them, or at least not for US investors.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby hightower » Wed Apr 19, 2017 5:38 pm

NiceUnparticularMan wrote:
hightower wrote:I personally don't see the value in having 20% of ones portfolio in international stocks. That just feels like too much. But, it seems reasonable to me to have a smaller amount. So, I chose 10% for my total international exposure (VXUS).


If you are just thinking maybe international stocks will slightly outperform US stocks, but maybe not, then it doesn't much matter.

If you are concerned about the possibility that for some country-specific reason, US stocks will significantly underperform international stocks, it becomes a higher stakes issue and a large allocation may be warranted.

As it is often put, basically the issue is whether you think something like what happened in Japan could happen here. If you think, "No way, not here!", then it will end up being hard to motivate much of an international allocation. If you think, "Of course it could happen here, why not?", then you might actually keep worrying about whether you have enough . . . .


Fair enough, but I'm in the camp that believes if the US economy becomes like Japan's, the entire world economy becomes Japan. I don't think owning 20% or more VXUS in my portfolio is going to help me at all in that scenario;)

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby oldzey » Wed Apr 19, 2017 5:53 pm

I'm with Jack and Warren - 0% International works for me. :D
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby Johnnie » Wed Apr 19, 2017 9:33 pm

learning_head wrote:I used to think along the same lines. However, upon further reading I realized that a lot of international returns are based on strength of US dollar vs other currencies, and I did not want to have so much currency risk in my portfolio. ...your spending will be in USD, not in weighted average of world currencies. So, I decided country bias is warranted after all. I approx. halved international exposure as a result.


Hmm... That made me think of the 1970s though, when "spending in USD" meant getting eaten alive by inflation. Meanwhile I am told, international equities and currencies created and preserved wealth then.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby learning_head » Wed Apr 19, 2017 10:06 pm

backpacker wrote:The usual response is that owning US stocks is not a bet that the dollar will go up for US investors, and this because our expenses are in dollars. If the dollar goes down in value, my US stocks go down in value, but my expense go down by the same amount, so I haven't lost anything in real terms. I can still buy the same all the same stuff. If that's right, then buying foreign stocks is strictly worse than buying US stocks, since foreign stocks are just like US stocks, but come with an unwanted bet on foreign currency.


Exactly. Thanks for laying it out.

backpacker wrote:That's the response, but I don't completely buy it myself, and in fact hold international stocks at market weight. The reason I don't buy the argument is that there seems to be some evidence that stock returns are inversely related to currency returns. This is actually pretty intuitive when you think about it. As the dollar goes up in value, US goods become more expensive for international buyers, so international buyers buy less, and US profits go down. The reverse happens when the dollar goes down in value to other currencies.


Do you have any data to back up inverse correlation?

I would not go based on that intuition alone, because one could also argue that all that cheap labor in other countries suddenly becomes even cheaper for such corporations, and thus profits would go up.

I tried to quickly google this and just picked first few that came up:

2015 research paper here suggests "there is no systematic relationship between local currency equity returns and currency returns".

Investopedia suggests correlation is positive ~0.3-0.4.

This one seems to suggest it depends on emerging vs developed markets: "Capital tends to move out of emerging into developed countries in global down markets, leading to depreciation (appreciation) of emerging (developed) currencies. This generates a positive (negative) correlation between currency and equity in emerging (developed) markets which is amplified by the magnitude of the capital movement."

This one finds little as well: "The empirical results were somewhat weak. I find support for the hypothesis that a depreciation of the currency may
depress the stock market—the stock market will react with a less than one percent decline to a one percent depreciation of the exchange rate. This also implies that an appreciating exchange rate boosts the stock market. As to my other assertion, that a booming stock market would lead to currency depreciation, I do not find support in the data for the US/ UK over 1990—2004. The results were insignificant. "

backpacker wrote:The other reason is that even if a US consumer is only literally buying things in dollars, it does not follow that her expenses are not sensitive to the movement of foreign currencies. Suppose I'm a fanatic about Black Forest cuckoo clocks, but only buy them from a US distributor. I never actually own any Euros but, as the Euro increases in value, the price of my cuckoo clocks will go up in US dollars. So even US investors who never step foot outside the country do have expenses that are 100% in US dollars.


Interesting point. However, overall, most expenses I envision for retirement (food, shelter, medicine, entertainment) would be primarily US based. Plus, if it becomes cheaper for producer of Black Forest cuckoo clocks to make them in US, they just might move that production over here or a competitor might come up with something similar. In other words, more generally, you could do some substituting of foreign products for domestic ones when possible. This is only a partial answer to your good point.

backpacker wrote:The way I think about it, foreign stocks are worth owning because they are not the same US stocks. Currency risk makes international stocks worse than they would be without that risk, but not so much that its worth underweighting them or hedging them, or at least not for US investors.


IIRC, with roughly 50% international stocks, you get ~17% in pure currency investment in your portfolio. That's too much for me just for the currency bucket. I get more comfortable around 20% international.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby stemikger » Thu Apr 20, 2017 1:23 am

I think it is more important to stick with a plan whether it has international or not. It will make your life a lot easier.

I sleep well at night with my two fund all U.S. portfolio, but others may sleep well holding international. IMHO that is the secret. Stick with a portfolio with assets you can hold through good times and bad.
Stay the Course!! ~ Press on Regardless!!!

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby stemikger » Thu Apr 20, 2017 1:24 am

oldzey wrote:I'm with Jack and Warren - 0% International works for me. :D


+1 me too!
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby NiceUnparticularMan » Thu Apr 20, 2017 7:34 am

hightower wrote:Fair enough, but I'm in the camp that believes if the US economy becomes like Japan's, the entire world economy becomes Japan. I don't think owning 20% or more VXUS in my portfolio is going to help me at all in that scenario;)


Maybe. But rather than a sudden event, this could be just a long period of relative economic malaise. Or maybe a long period of relative economic malaise followed by a sudden event. Could the world adjust to such sequences of events occurring in the United States? I personally think so.

Also, if you are worried about U.S. "contagion", you might try to seek out international stocks with less exposure to the United States economy. That could be tough to do directly, but you might view classes like international small, and maybe EM and value, as at least helpful proxies for localization. And I believe correlation studies have suggested a least a mild effect like that exists.

And international REITs (at least true REIT-type structures) could also be relatively localized.
Last edited by NiceUnparticularMan on Thu Apr 20, 2017 8:00 am, edited 2 times in total.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby Valuethinker » Thu Apr 20, 2017 7:44 am

friar1610 wrote:
bikechuck wrote:I have a small allocation to international equities because I value the diversification. I also understand and hate that it exposes me to the risk of currency fluctuations on top of the normal market risk that comes from investing in U.S. based companies. That said, I intend to stay the course and continue with international as a small part of my mix approximating 20% which I agree is somewhat arbitrary.

I do not invest in international bonds as the purpose of my bond investments are stability and I do not need or want to expose myself to currency risk in that portion of my portfolio.


For me as a moderately conservative investor in my early 70s, both points above make perfect sense. 20% international feels about right to me; I'd let it drift to 25% before I felt the need to rebalance but not go higher. I've never understood the argument for international bonds. Unfortunately, those two considerations mean the otherwise attractive Life Cycle and Target Date funds are not options for me.


So nice to hear the voice of Moderate Reason!

Much in absence these recent years in the world ;-).

Yes. You don't want too much volatility. 20 to 30% is the historic range that has enhanced returns without increasing volatility too much.

But zero is throwing out diversification benefits.

Since your Social Security, your housing equity and perhaps other assets like bonds (pension etc.) are valued in USD, in your total asset portfolio this is not a huge exposure to exchange rate risk.

For those of us who do *not* live in the USA, the problem of Home Country Bias is much more significant, and cannot be ignored. Being underweight US market last 25 years has really hurt me.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby friar1610 » Thu Apr 20, 2017 11:47 am

hightower wrote:I personally don't see the value in having 20%of ones portfolio in international stocks. That just feels like too much. But, it seems reasonable to me to have a smaller amount. So, I chose 10% for my total international exposure (VXUS). Will I regret or be glad about that decision 30 years from now? I don't know and neither does anyone else:)
It seems like a thread like this comes up every week on these boards.


Can't speak for others but when I mention a percentage of international, I mean as a percentage of equities, not a percentage of total portfolio. So, depending on your overall AA, you and I may be in violent agreement.
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Re: Article-Argument against Buffet and Bogle's International Advice

Postby backpacker » Thu Apr 20, 2017 2:59 pm

learning_head wrote:
backpacker wrote:That's the response, but I don't completely buy it myself, and in fact hold international stocks at market weight. The reason I don't buy the argument is that there seems to be some evidence that stock returns are inversely related to currency returns. This is actually pretty intuitive when you think about it. As the dollar goes up in value, US goods become more expensive for international buyers, so international buyers buy less, and US profits go down. The reverse happens when the dollar goes down in value to other currencies.


Do you have any data to back up inverse correlation?

I would not go based on that intuition alone, because one could also argue that all that cheap labor in other countries suddenly becomes even cheaper for such corporations, and thus profits would go up.


This is a nice point. Foreign demand for US products would go down, but the price of foreign labor for US companies would also go down. Whether this on the whole hurts returns on the whole is hard to tell.

As far as data, it seems that a past version of my self once posted this chart from the book Triumph of the Optimists. It shows real currency fluctuations to generally be negatively correlated with with stock returns across several countries.

Image

There is also a nice article called "Currency Matters" in the 2012 Credit Suisse Yearbook.

That various other studies seem to get different results is interesting and I really should read more about this to have any strong opinion. It may be that they are measuring currency risk in nominal rather than real terms. Real currency risk is what matters for those of us buying foreign stock rather than holding foreign cash or bonds.

I completely agree with your point that the vast majority of expenses for most people will still be in their home currency. It is surprising I think how many things are eight imported or are made out of parts that are imported.

My current position, I think, is that for US investors, currency risk doesn't matter much. It's hard to know how much is the "right" amount to match consumption. Insofar as US companies have overseas operations, they will have have their own foreign currency risk. The reverse will somewhat reduced the foreign currency risk of international companies. If real foreign currency risk is negatively correlated with stocks, then foreign currency risk matters even less.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby hightower » Thu Apr 20, 2017 5:23 pm

friar1610 wrote:
hightower wrote:I personally don't see the value in having 20%of ones portfolio in international stocks. That just feels like too much. But, it seems reasonable to me to have a smaller amount. So, I chose 10% for my total international exposure (VXUS). Will I regret or be glad about that decision 30 years from now? I don't know and neither does anyone else:)
It seems like a thread like this comes up every week on these boards.


Can't speak for others but when I mention a percentage of international, I mean as a percentage of equities, not a percentage of total portfolio. So, depending on your overall AA, you and I may be in violent agreement.


Might be:) Mine is 10% of my total portfolio (I'm 80/20 stocks and bonds and have no other investments other than my primary home).

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby rollsound » Fri Apr 21, 2017 11:58 am

bayview wrote:
NiceUnparticularMan wrote:Yeah, I've never quite understood why "total markets" people would be satisfied with just the embedded international component of large U.S. companies, since that is not exactly representative of the total international market. It did feed into my decision to be only 40% international and then to target tilting my international to small, value, and EM (to cut back on the overlap in that 40%). But you can't really treat it as a proxy for total international.

I do that, but in a very lazy way. Our international equities are in VFSVX, Vanguard FTSE All-World Ex-US Small-Cap Index. Too lazy to go for the value factor, but it does include EM, and it avoids the overlap with the big US stocks.

I do exactly the same thing. Glad to see I'm not alone. I'm 80% VTSAX and 20% VFSVX. You?

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby NibbanaBanana » Fri Apr 21, 2017 12:48 pm

bikechuck wrote:I have a small allocation to international equities because I value the diversification. I also understand and hate that it exposes me to the risk of currency fluctuations on top of the normal market risk that comes from investing in U.S. based companies. That said, I intend to stay the course and continue with international as a small part of my mix approximating 20% which I agree is somewhat arbitrary.

I do not invest in international bonds as the purpose of my bond investments are stability and I do not need or want to expose myself to currency risk in that portion of my portfolio.


That. And the reason that last time I checked, total international bond index was paying 77 basis points. That's seventy seven one hundredths of a percent! Sorry, not enough.

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Re: Article-Argument against Buffet and Bogle's International Advice

Postby bayview » Fri Apr 21, 2017 9:03 pm

rollsound wrote:
bayview wrote:
NiceUnparticularMan wrote:Yeah, I've never quite understood why "total markets" people would be satisfied with just the embedded international component of large U.S. companies, since that is not exactly representative of the total international market. It did feed into my decision to be only 40% international and then to target tilting my international to small, value, and EM (to cut back on the overlap in that 40%). But you can't really treat it as a proxy for total international.

I do that, but in a very lazy way. Our international equities are in VFSVX, Vanguard FTSE All-World Ex-US Small-Cap Index. Too lazy to go for the value factor, but it does include EM, and it avoids the overlap with the big US stocks.

I do exactly the same thing. Glad to see I'm not alone. I'm 80% VTSAX and 20% VFSVX. You?

Pretty much the same, but I have about 5% in mid-caps (index fund), so there's the slightest bit of a tilt there. This is because I get a bit uneasy with the ten largest stocks in VTSAX making up 16% of its assets. Also, some of the total US is in fact split between S&P 500 and completion, due to the fund choices available in TSP. I do attempt to make that total US, although it bounces around.
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