International: Where's the benefit?

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frankmorris
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International: Where's the benefit?

Post by frankmorris » Wed May 17, 2017 7:24 pm

Just ran 2 hypothetical portfolios through Portfolio Visualizer out of curiosity, with returns generated from 1990-2017 (27 years)

CAGR:

1: Total US: 9.48%
2: Total Global ex-US: 3.82%

Simple question: Where's the premium or benefit from adding Global/International? I know our CAPE 10 ratios are different and international is under-valued, but I'd hate to think I'd have decided to go 50/50 US/international in 1990.

Then computed the same PV hypothetical going back to 1980, and international caught up, and clearly destroyed in the 80s.

So: How many of you are banking solidly on something that hasn't been valuable since the 80s?

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Re: International: Where's the benefit?

Post by livesoft » Wed May 17, 2017 7:27 pm

I would not rely on Portfolio Visualizer myself because it cannot rebalance the way I rebalance. But then you are not me either.
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Theoretical
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Re: International: Where's the benefit?

Post by Theoretical » Wed May 17, 2017 7:34 pm

ONE country has been dragging International down since that date (after pulling it way ahead). Japan.

European stocks, Asia ex-Japan, and Emerging markets have all been diversifiers with high returns. Moreover, Japan Value has had decent returns as well.

This is exactly the reason why International diversification is valuable, though one can debate on the methodology to achieve that.

Mainlandjones
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Re: International: Where's the benefit?

Post by Mainlandjones » Wed May 17, 2017 7:55 pm

If I can rephrase your question a bit - "hey it seems that international is not highly correlated to US, so what is the benefit?"

Answer - some folks like diversification. :beer

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Re: International: Where's the benefit?

Post by masteraleph » Wed May 17, 2017 7:59 pm

As Theoretical noted, the starting date makes all the difference. Starting from 5/17/2000 (so 17 years ago), Morningstar shows VTSAX (total US admiral) outperforming VTIAX (total international admiral)...but only starting in 2012. If you start at the beginning of 1999, And it's way below for a lot of that time. Japan kills you if you're starting precisely in 1990, and Europe's slow recovery (and recession) from the 2008 bust, probably augmented by the plunge in commodities (and therefore underperformance in resource rich countries) a couple of years ago also hurts.

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Re: International: Where's the benefit?

Post by lack_ey » Wed May 17, 2017 8:09 pm

Diversification is generally worse than owning the better asset, yeah. Just pick whatever's going to do better and you're good to go.

Investing results vary widely from one period to another. The outcome is more up to chance (or effectively unpredictable circumstances, if you prefer) than anything else. So what's going to happen next? How good is your read and how much do you want to bet on it?

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Re: International: Where's the benefit?

Post by AlohaJoe » Wed May 17, 2017 8:25 pm

frankmorris wrote:So: How many of you are banking solidly on something that hasn't been valuable since the 80s?


There have been a staggering number of threads on this topic. It is probably the most discussed topic on bogleheads. Could we take just this one week off of rehashing it and rely on searching the voluminous archives for past conversations instead?

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Re: International: Where's the benefit?

Post by gkaplan » Wed May 17, 2017 8:29 pm

AlohaJoe wrote:
frankmorris wrote:So: How many of you are banking solidly on something that hasn't been valuable since the 80s?


There have been a staggering number of threads on this topic. It is probably the most discussed topic on bogleheads. Could we take just this one week off of rehashing it and rely on searching the voluminous archives for past conversations instead?



Yes, please.
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whaleknives
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Re: International: Where's the benefit?

Post by whaleknives » Wed May 17, 2017 8:33 pm

Looking at an average over 27 years may be the wrong approach. Look at 2003-2012 in the Callan periodic table of investment returns.
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Re: International: Where's the benefit?

Post by nisiprius » Wed May 17, 2017 8:38 pm

I don't think there's any compelling evidence that international stocks have either helped much or hurt much in the past.

Presentations of data that show a benefit usually show a hair-thin benefit that can go either way depending on small changes in choice of endpoints, or on the use of stock categories or indexes that don't cover a very long period of time.

The data in e.g. Dimson & al in Credit Suisse Global Investment Returns Yearbook 2017 show a pretty simple story: a) U.S. and ex-U.S. about the same ever since the end of World War II; b) ex-U.S. quite a bit lower than U.S. for any period of time that includes World War II (i.e. all the very long periods of time).

Vanguard's paper, Considerations for investing in non-U.S. equity contains a wealth of information and is definitely worth reading. Read it.

25% of my equities allocation is international, for no good reason. I'm not comfortable being too far out of the "conventional wisdom," I'm not comfortable at zero, I'm not comfortable at full cap-weighting, and 25% is a small enough portion--and has done well enough--that I haven't been seriously concerned by the recent underperformance of international.

The arguments are endless precisely because the evidence of the past is inconclusive. Some people say "there's no evidence that it has made much difference, therefore we might as well be 100% U.S." Others say, "there's no evidence that it has made much difference, therefore we might as well be fully cap-weighted (about 50/50 U.S./international).
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frankmorris
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Re: International: Where's the benefit?

Post by frankmorris » Wed May 17, 2017 8:50 pm

Thanks everyone - Didn't mean to start an old and repetitive argument AlohoJoe. I realize I'm new here. I've been a member at another forum (totally different topic) for quite a few years and do know the feeling when someone new comes along and thinks they've discovered the next undiscovered topic. Eye rolls ensue. At the same time, I appreciate the new energy of those people, the fresh perspectives, and the periodic revisiting of topics that might have been dormant for a while - especially if the newcomers are respectful and add something. Hopefully I've been the former, I doubt I've been the latter.

I kept going with PV to see what different returns I could generate, and yes - I see everyone's point that sometimes international outperforms. Just doesn't seem to have done so nearly as much over the past 30 years. Perhaps that's a Japan thing - yes. Forgot that 1990 might not have been the best starting year. And yes - recency does play a role when interpreting graphs. Still, the average differences are staggering - certainly makes one realize that - even if you're in the long, long-term game, if you enter the market at the wrong time, you could be pretty much permanently at a disadvantage.

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Re: International: Where's the benefit?

Post by TropikThunder » Wed May 17, 2017 10:56 pm

AlohaJoe wrote:
frankmorris wrote:So: How many of you are banking solidly on something that hasn't been valuable since the 80s?


There have been a staggering number of threads on this topic. It is probably the most discussed topic on bogleheads. Could we take just this one week off of rehashing it and rely on searching the voluminous archives for past conversations instead?

That was my reflexive reaction, too. But then OP responded:
frankmorris wrote:Thanks everyone - Didn't mean to start an old and repetitive argument AlohoJoe. I realize I'm new here. I've been a member at another forum (totally different topic) for quite a few years and do know the feeling when someone new comes along and thinks they've discovered the next undiscovered topic. Eye rolls ensue. At the same time, I appreciate the new energy of those people, the fresh perspectives, and the periodic revisiting of topics that might have been dormant for a while.

... and I decided to suppress my own eye rolls and see if anyone added any new responses.

To OP:
frankmorris wrote:Just ran 2 hypothetical portfolios through Portfolio Visualizer out of curiosity, with returns generated from 1990-2017 (27 years)

CAGR:
1: Total US: 9.48%
2: Total Global ex-US: 3.82%

Simple question: Where's the premium or benefit from adding Global/International?

With only semi-snark, nice! You found what worked better in the last 27 years on PV. Which site do you use to find what will work better in the next 27 years? PV won't let me use anything later then today as an end point. :twisted:

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Re: International: Where's the benefit?

Post by Dirghatamas » Wed May 17, 2017 11:01 pm

Theoretical wrote:ONE country has been dragging International down since that date (after pulling it way ahead). Japan.


Ding ding ding. Theoretical's point is the key one. OP, just to give you some perspective (because I was in college at the time), Japan circa 1985-1989 was absolutely killing it. Its market cap had gotten to ~>40% of the world market cap. Its market cap was GREATER than entire US! Think about that for a country that small. Then the bottom fell off with no limits. Its market cap today is 7.9% of the world stock while US is presently ~53% of the world stock.

Clearly, going from 40% market share to 7.9% market share is a huge loss that is hard to miss. Those of us who invested in world stock during this timeframe (I have invested constantly in world stock since 1992) have already paid that price and it is behind us. The question is what does this predict for the future? Japan at 7.9% can't possibly hurt you that much (beyond the damage it has already done). However, just like Japan was at 40% when I started and then tanked for >25 years, some other country is now at 53% and our future is unknown..what do you think is the prudent course of action?

The Japanese investor puts 100% of his money in 1989 in the world's best performing stock market, in its most innovative country, in its most dynamic society that will take over the world and then proceeds to lose his shirt over the next 25 years.

US is one of the world's best performing stock markets in the last 25 years, has the biggest GDP and innovative companies as well as a dynamic society... :happy :shock:

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Re: International: Where's the benefit?

Post by MossySF » Wed May 17, 2017 11:26 pm

Open up Portfolio Visualizer and enter this instead:

-- 100% Apple

Then you can ask the question what's the benefit of adding the U.S. stock market when Apple outperformed by 100000000000%.

The same answer that worked for your initial scenario works exactly for this scenario also. Whenever you diversify, you will NEVER out-perform the top asset/stock during that period. However, the inverse is true -- you will also never under-perform the worse asset/stock during that period. You can find periods where Apple was about to croak just like you can find periods of International outperformance (roll back the period to include the 80's when Japan was on fire).

What's more important to you? Do you want to reduce the odds of catastrophic risk or increase the odds of hitting aspirational targets?

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Re: International: Where's the benefit?

Post by AlohaJoe » Wed May 17, 2017 11:39 pm

frankmorris wrote:1: Total US
2: Total Global ex-US


Which 2 funds did you use for this?

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Re: International: Where's the benefit?

Post by lazyday » Thu May 18, 2017 6:08 am

I'm sure we could find studies showing that past performance is negatively related to future performance.

Performance chasing might make sense if you're following recent momentum such as over the past year. For periods over 3 years, you'd probably be better off selling what has done well.

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Re: International: Where's the benefit?

Post by gclancer » Thu May 18, 2017 6:37 am

Dirghatamas wrote:The Japanese investor puts 100% of his money in 1989 in the world's best performing stock market, in its most innovative country, in its most dynamic society that will take over the world and then proceeds to lose his shirt over the next 25 years.

US is one of the world's best performing stock markets in the last 25 years, has the biggest GDP and innovative companies as well as a dynamic society... :happy :shock:


As a US-based investor, this is what actually made up my mind regarding my nearly-market weight allocation to international. A Japanese investor with who had a 50% stock allocation to ex-Japan (so not market weighted, but a significant chunk) a fixed income allocation and rebalanced along the way (that is, they were properly diversified) ended up ok (albeit with less than spectacular returns). I figure a rising tide lifts all boats, and if the US continues doing well (which I think it will - no Japan-doom predictions here), any drag on my portfolio due to my international allocation won't be that material in the grand scheme of things - an insurance premium of sorts. The fact that there could be mean reversion and international will actually outperform would just be gravy.

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Re: International: Where's the benefit?

Post by rkhusky » Thu May 18, 2017 6:56 am

whaleknives wrote:Looking at an average over 27 years may be the wrong approach. Look at 2003-2012 in the Callan periodic table of investment returns.

+1. You can't tell which sectors are going to outperform in the future, so own all the sectors. I own small value, small growth, mid value, mid growth, large value, and large growth, for both International and US.

NiceUnparticularMan
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Re: International: Where's the benefit?

Post by NiceUnparticularMan » Thu May 18, 2017 7:23 am

frankmorris wrote:So: How many of you are banking solidly on something that hasn't been valuable since the 80s?


Actually, if you run it 2000 to 2010, you'll find Global ex-US beats US.

The pattern recently has been there are longish periods of time in which one beats the other. So the results of your sort of test are sensitive to both the start AND end dates.

frankmorris
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Re: International: Where's the benefit?

Post by frankmorris » Thu May 18, 2017 7:25 am

TropikThunder wrote:
frankmorris wrote:Just ran 2 hypothetical portfolios through Portfolio Visualizer out of curiosity, with returns generated from 1990-2017 (27 years)

CAGR:
1: Total US: 9.48%
2: Total Global ex-US: 3.82%

Simple question: Where's the premium or benefit from adding Global/International?

With only semi-snark, nice! You found what worked better in the last 27 years on PV. Which site do you use to find what will work better in the next 27 years? PV won't let me use anything later then today as an end point. :twisted:


The only reason anyone invests in stocks is because they've worked historically. If you found another asset class that provided more reward with similar or less risk with equal amounts of work, would it make sense to invest in stocks? I'm more than happy to be corrected if my data is wrong, but the assumption that we don't use past data to make future bets is not exactly accurate.

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Re: International: Where's the benefit?

Post by NiceUnparticularMan » Thu May 18, 2017 7:36 am

frankmorris wrote:The only reason anyone invests in stocks is because they've worked historically.


That's not quite accurate as applied to me. I invest in stocks because doing that provides me with diversified ownership shares in the means of production, and I believe that is a good idea when you are thinking about trying to live off your wealth in the future.

Now if stocks had NOT worked historically, I'd have to revisit my conclusion. But they have worked historically--actually, better than I would have thought--so I can continue on with my plan.

If you found another asset class that provided more reward with similar or less risk with equal amounts of work, would it make sense to invest in stocks?


For any given historic period, you probably could do that. It might be something like baseball cards, or land in some particular place, or so on. If nothing else, you could pick one stock, rather than a diversified portfolio of stocks.

So you really should think carefully about why you would not just buy one stock that has outperformed a diversified portfolio of stocks over the same historic period you are looking at. The reasons why you would not do that apply to asset classes as well.
Last edited by NiceUnparticularMan on Thu May 18, 2017 7:37 am, edited 1 time in total.

Da5id
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Re: International: Where's the benefit?

Post by Da5id » Thu May 18, 2017 7:37 am

frankmorris wrote:
TropikThunder wrote:
frankmorris wrote:Just ran 2 hypothetical portfolios through Portfolio Visualizer out of curiosity, with returns generated from 1990-2017 (27 years)

CAGR:
1: Total US: 9.48%
2: Total Global ex-US: 3.82%

Simple question: Where's the premium or benefit from adding Global/International?

With only semi-snark, nice! You found what worked better in the last 27 years on PV. Which site do you use to find what will work better in the next 27 years? PV won't let me use anything later then today as an end point. :twisted:


The only reason anyone invests in stocks is because they've worked historically. If you found another asset class that provided more reward with similar or less risk with equal amounts of work, would it make sense to invest in stocks? I'm more than happy to be corrected if my data is wrong, but the assumption that we don't use past data to make future bets is not exactly accurate.


While what you say is largely true, it needs to be applied cautiously. You otherwise end up chasing the overperforming sectors/styles for the time frame you examine.

I think people just get a bit tired of this topic because it seems to devolve into "Bogle/Buffett say international isn't needed" vs "efficient frontier" vs "CAPE" vs Japan history etc with relatively new ground covered. That most topics in bogleheads are in some fashion retreads of old topics is a given -- that is the nature of the beast, as investing principles don't change that rapidly. This topic in particular seems to come up much more frequently than any other, and often feels like the "renting vs owning" or "100% stocks" topics, which don't converge on answers and are often people talking past one another. That said, the one true answer is 33% international, that being what I've selected by a highly scientific method for myself :)

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Re: International: Where's the benefit?

Post by asif408 » Thu May 18, 2017 7:47 am

NiceUnparticularMan wrote:
frankmorris wrote:So: How many of you are banking solidly on something that hasn't been valuable since the 80s?


Actually, if you run it 2000 to 2010, you'll find Global ex-US beats US.

The pattern recently has been there are longish periods of time in which one beats the other. So the results of your sort of test are sensitive to both the start AND end dates.

And it was an even longer period of outperformance for ex-US stocks from March 2003 to July 2014: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I'd say 11 years of outperformance is a pretty long time.

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Re: International: Where's the benefit?

Post by nisiprius » Thu May 18, 2017 7:47 am

Frank, the thing is that I found that until I stopped looking at comparisons of performance over a single particular chosen period of time, and started soaking myself in a personal exploration of how results vary when you change the endpoints, I just didn't "get" how variable financial data is. Our intuition tells us that a 10 or a 27-year track record must be reasonably predictive going forward. Our intuition is wrong. Financial data is full of bursty huge events that are so big they can pull up or drag down a fifty or a ninety-year average. And then, unconsciously or not, there is a tendency to choose time periods that include or exclude those bursty events depending on whether they are favorable or unfavorable.

The fact is that financial data is not Gaussian and that ninety years of data does not mean ninety independent samples. On the contrary, financial data is perceived by the eye as falling into "secular bull and bear" markets that last a decade or so. Now, there is disagreement as to whether this these are "cycles" that can be possibly be predicted, "mean reversion," or just another kind of random noise, but the large-scale structure is there whether it is predictable in advance or observed only in hindsight. And it means that a 27-year sample means you are averaging, not 27 "things," but only two or three or four "things."

So the question is how much predictive power there is in the actual past performance has over a limited period of time... and how much predictive power there is in the fundamental idea of more diversification by investing in the entire world instead of just in the United States (which is half the world in terms of stock investing).

I personally don't believe there's much in either, but nevertheless that's the decision-making process.
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Re: International: Where's the benefit?

Post by frankmorris » Thu May 18, 2017 7:52 am

Reading through the rest of responses here: Apologies for seeming to have hand-selected convenient data. To clarify, I'm not trying to make a point, as much as I am trying to look into the data and understand it. We all based our investing decisions on history - if the stock market yielded historically lower returns than another equally safe asset class, we'd look at it. The idea of diversification only works if the other asset class either adds equal or higher return, or lower volatility.

Personally, I want to allocate toward international because I agree with the thesis that the US isn't the only possible contributor to world economic growth, but I want to make sure that's based on data.

I ended up running several more comparisons on PV with multiple start dates throughout the 70s, 80s, & 90s, and end dates at either present or 2000, which was of course following the "lost decade" in the US. There wasn't a single time in which the US allocation didn't beat international by more than 2 points, other than if you had invested in the late 90s bubble and sold after the 2008 crash.

Again, not trying to be argumentative or prove an absolute point - where am I seeing this wrong everyone? Is it possible that the US is just a better economic engine in modern day times? Not arguing that couldn't reverse, but if there aren't data to support two asset classes produce roughly the same risk-adjusted return, is it smart to go with that asset class on a "what if next 10 years is different" kind of hypothesis?

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Re: International: Where's the benefit?

Post by frankmorris » Thu May 18, 2017 7:54 am

Da5id wrote:
frankmorris wrote:
TropikThunder wrote:
frankmorris wrote:Just ran 2 hypothetical portfolios through Portfolio Visualizer out of curiosity, with returns generated from 1990-2017 (27 years)

CAGR:
1: Total US: 9.48%
2: Total Global ex-US: 3.82%

Simple question: Where's the premium or benefit from adding Global/International?

With only semi-snark, nice! You found what worked better in the last 27 years on PV. Which site do you use to find what will work better in the next 27 years? PV won't let me use anything later then today as an end point. :twisted:


The only reason anyone invests in stocks is because they've worked historically. If you found another asset class that provided more reward with similar or less risk with equal amounts of work, would it make sense to invest in stocks? I'm more than happy to be corrected if my data is wrong, but the assumption that we don't use past data to make future bets is not exactly accurate.


While what you say is largely true, it needs to be applied cautiously. You otherwise end up chasing the overperforming sectors/styles for the time frame you examine.

I think people just get a bit tired of this topic because it seems to devolve into "Bogle/Buffett say international isn't needed" vs "efficient frontier" vs "CAPE" vs Japan history etc with relatively new ground covered. That most topics in bogleheads are in some fashion retreads of old topics is a given -- that is the nature of the beast, as investing principles don't change that rapidly. This topic in particular seems to come up much more frequently than any other, and often feels like the "renting vs owning" or "100% stocks" topics, which don't converge on answers and are often people talking past one another. That said, the one true answer is 33% international, that being what I've selected by a highly scientific method for myself :)


That makes sense. I apologize for dragging the argument up yet again.

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Re: International: Where's the benefit?

Post by frankmorris » Thu May 18, 2017 8:00 am

nisiprius wrote:Frank, the thing is that I found that until I stopped looking at comparisons of performance over a single particular chosen period of time, and started soaking myself in a personal exploration of how results vary when you change the endpoints, I just didn't "get" how variable financial data is. Our intuition tells us that a 10 or a 27-year track record must be reasonably predictive going forward. Our intuition is wrong. Financial data is full of bursty huge events that are so big they can pull up or drag down a fifty or a ninety-year average. And then, unconsciously or not, there is a tendency to choose time periods that include or exclude those bursty events depending on whether they are favorable or unfavorable.

The fact is that financial data is not Gaussian and that ninety years of data does not mean ninety independent samples. On the contrary, financial data is perceived by the eye as falling into "secular bull and bear" markets that last a decade or so. Now, there is disagreement as to whether this these are "cycles" that can be possibly be predicted, "mean reversion," or just another kind of random noise, but the large-scale structure is there whether it is predictable in advance or observed only in hindsight. And it means that a 27-year sample means you are averaging, not 27 "things," but only two or three or four "things."

So the question is how much predictive power there is in the actual past performance has over a limited period of time... and how much predictive power there is in the fundamental idea of more diversification by investing in the entire world instead of just in the United States (which is half the world in terms of stock investing).

I personally don't believe there's much in either, but nevertheless that's the decision-making process.


Thank you, and this is very fair, and something that I admit to not fully understanding when I first started diving into these things. It seems, though, that with international vs US, you sort of have to hand-pick years that international actually worked, rather than an argument that I've just hand-picked dates in which they didn't. Just posted that I again tried multiple start and end dates, even picking ones that specifically avoided the Japan situation, and specifically dis-favored US, and found that you'd have had to go in the US market at one of the two recent US bubbles, and exit at market low, to find international value.

I guess I'm saying that the idea that "sometimes it works, sometimes it doesn't" can't apply equally to all asset classes. Are folks here really saying that the historic returns in modern history are really equally distributed amongst US & international? If so, I want to keep looking at the data, because again I'm looking to be convinced & looking to be wrong, not the other way around.

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Re: International: Where's the benefit?

Post by Da5id » Thu May 18, 2017 8:06 am

frankmorris wrote:That makes sense. I apologize for dragging the argument up yet again.


All good, no apologies needed! Just often a good idea to scan recent posts to see if your question has answered to your satisfaction recently.

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Re: International: Where's the benefit?

Post by lazyday » Thu May 18, 2017 8:30 am

frankmorris wrote:The only reason anyone invests in stocks is because they've worked historically.

That's a good reason to consider equities, but a terrible reason to buy.

It didn't work out well for those who in late 1989 Japan or early 2000 US blindly bought just because stocks have done well historically. There were better options at the time, such as global equities in 1989 or 30 year TIPS in 2000.

What are you buying when you buy stocks? What to you expect to get in return? Is it a good investment compared to alternatives?

I would not buy without answering those questions, even if your answers aren't very thorough.

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Re: International: Where's the benefit?

Post by tadamsmar » Thu May 18, 2017 8:36 am

frankmorris wrote:Just ran 2 hypothetical portfolios through Portfolio Visualizer out of curiosity, with returns generated from 1990-2017 (27 years)

CAGR:

1: Total US: 9.48%
2: Total Global ex-US: 3.82%


Where's the benefit in Total US given that you can dwarf it by running the numbers for a small value stock fund using your super power of 20-20 hindsight?

Where's the benefit in 20-20 hindsight?

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Re: International: Where's the benefit?

Post by NiceUnparticularMan » Thu May 18, 2017 8:47 am

Let's try this. Here are two portfolios--which should you choose?

Image

Portfolio 2 is a no-brainer, right? Much higher return, less volatility, much lower max drawdown, much higher Sharpe Ratio. What's not to like?

OK, Portfolio 1 is Buffett-style 90% SP500, 10% Total Bond. Portfolio 2 is 40% Eaton Vance stock, 60% Total Bond. Does this change your mind?

Now suppose you were talking to someone who had Portfolio 2, and they tell you the following:

I've been an employee and investor in Eaton Vance all my life, Eaton Vance is a great company, and my loyalty to Eaton Vance has made me rich. I see no reason why anyone should invest in any other stock but Eaton Vance. People will say if Eaton Vance is great, it should already be priced into its stock, but I think the markets still don't understand just how great Eaton Vance really is. People will say I should diversify, but Eaton Vance gets its money from managing diversified investments, so isn't that really the same thing? People will say sometimes great companies go bad, but that has never happened to Eaton Vance! And just look at my backtest--it proves that putting all your stocks in Eaton Vance is better than putting it in a broad-market index.

So, nothing you could possibly say will change my mind--I am 100% Eaton Vance for life.

What would you say to such a person? What COULD you say to such a person? Are they even wrong? Should you consider putting 100% of your stock in Eaton Vance?

I know my answer as to why I shouldn't put all my stock in Eaton Vance, but at some point you need to come up with your own answer that you really understand and believe. And then you can revisit the arguments for being 100% in U.S. stocks, and see if they hold up any better than the arguments of our 100% Eaton Vance investor.

Or you can invest 100% in Eaton Vance. That's up to you.

NiceUnparticularMan
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Re: International: Where's the benefit?

Post by NiceUnparticularMan » Thu May 18, 2017 9:19 am

frankmorris wrote:I guess I'm saying that the idea that "sometimes it works, sometimes it doesn't" can't apply equally to all asset classes. Are folks here really saying that the historic returns in modern history are really equally distributed amongst US & international? If so, I want to keep looking at the data, because again I'm looking to be convinced & looking to be wrong, not the other way around.


It all depends on how you define "modern".

This source linked earlier provides some different time slices. One it looks at is just the last 50 years, so starting in 1967:

https://publications.credit-suisse.com/ ... 52F61BA0B4

If you look for it, you will see in that time U.S. equities have returned 5.8% real annually and World ex-USA has returned 5.5% real annually. So, not much different, and that is really sensitive to the end point.

But is that the right time period? Longer periods of time will get you into WWII and its aftermath, when all this becomes VERY sensitive to starting points as WWII was very bad for some very large countries' stocks, but then some of them also experienced relatively rapid recovery periods. If you start thinking about whether there might be more wars in the future, and whether the U.S. stocks are likely to be more or less exposed to those wars, I don't know if that helps clarify anything.

My conclusion is it is at least possible that U.S. stocks will be more exposed to such wars, so we should diversify for that reason (among others). But that's not based on history so much as the sort of more fundamental reasoning about the future and what it might hold that you appear to be struggling to accept.

Farther back you also get into WWI, and also into the issue that in effect the U.S. becomes a sort of "emerging market" from the perspective of the older more-established industrial countries.

What about more recently than 1967? Here is a chart you might find handy:

Image

This is rolling three-year returns, and you can see that up until the 1990s, U.S. stocks spent more time underperforming ex-US stocks than vice-versa, and since the early 1990s it has been more the opposite (hence your backtest results)--but even then, ex-US stocks clawed back in the 2000s, and only just recently did U.S. stocks get out ahead again.

So, are you confident that this chart indicates there is a new regime that will forever-after cause U.S. stocks to outperform international? No matter what wars may happen, what political events, monetary policy, the continued development of emerging markets, valuation differences, and so on?

I'm sure not. But if you are relying on your backtests, that is implicitly what you are saying--you know from this chart that something changed in the early 1990s and it is NEVER changing back (and don't pay attention to what happened in the 2000s).

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Re: International: Where's the benefit?

Post by avalpert » Thu May 18, 2017 10:09 am

NiceUnparticularMan wrote:
frankmorris wrote:I guess I'm saying that the idea that "sometimes it works, sometimes it doesn't" can't apply equally to all asset classes. Are folks here really saying that the historic returns in modern history are really equally distributed amongst US & international? If so, I want to keep looking at the data, because again I'm looking to be convinced & looking to be wrong, not the other way around.


...My conclusion is it is at least possible that U.S. stocks will be more exposed to such wars, so we should diversify for that reason (among others). But that's not based on history so much as the sort of more fundamental reasoning about the future and what it might hold that you appear to be struggling to accept...

...So, are you confident that this chart indicates there is a new regime that will forever-after cause U.S. stocks to outperform international? No matter what wars may happen, what political events, monetary policy, the continued development of emerging markets, valuation differences, and so on?

I'm sure not. But if you are relying on your backtests, that is implicitly what you are saying--you know from this chart that something changed in the early 1990s and it is NEVER changing back (and don't pay attention to what happened in the 2000s).


I think these points nicely sum up the problem here.

We don't invest in stocks because they happened to perform better than other assets in the past - we invest in them because we believe (whether as compensation for risk or some other reason) that they will likely perform better in the future.

The problem when you start to break it down to specific outcomes (this is true of U.S. (or Australia) vs. world, Eaton Vance vs. market or any other isolated comparison) is that you have only one historical sequence to look at. To conclude that that historical sequence is truly informative about the future you have to think that there is something fundamental to those assets - the US's dominance is a continued historical inevitability, Eaton Vance has inherently better management than every other company regardless of the particular managers...

When it comes to your home country, as a good patriot, it is easy to believe that our performance in the 20th century is an inevitable result of us being a light unto the nations and will of course repeat itself in the 21st century - and just like every other cognitive bias that may blind us to rational deliberation we need to work hard to avoid letting that drive decisions. The real problem with leaning on historical performance alone here is that, at least for US investors, not only does it not help us take the step back and evaluate it rationally but it reinforces our inherent biases.

There is nothing that prevents us over the next couple of decades from being like late 20th century Japan or early 20th century Russia - my hope and belief is we won't be either or anything similar, but I know that that isn't inevitable and no amount of analyzing the historical path of the 20th century can help overturn that reality.

Tamalak
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Re: International: Where's the benefit?

Post by Tamalak » Thu May 18, 2017 10:11 am

There is no benefit to international, clearly. Never buy a stock that's down. Performance chasing is the only way to go!

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Re: International: Where's the benefit?

Post by SeeMoe » Thu May 18, 2017 1:52 pm

Mainlandjones wrote:If I can rephrase your question a bit - "hey it seems that international is not highly correlated to US, so what is the benefit?"

Answer - some folks like diversification. :beer


Good point per stock diversification, but can the same be said for, say, the total international bond index market? A lot of posters here don't think it is worth the trouble per hedging and currency manipulation/exchange rates. I tend to agree. Still have about 27%, currently, invested in the Vanguard total international stock index fund, but exchanged our total international bond index fund to the total bond index fund.

SeeMoe.. :dollar
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Re: International: Where's the benefit?

Post by vitaflo » Thu May 18, 2017 2:09 pm

frankmorris wrote: Still, the average differences are staggering - certainly makes one realize that - even if you're in the long, long-term game, if you enter the market at the wrong time, you could be pretty much permanently at a disadvantage.


I see this type of thing said a lot and I find it to be totally wrong. When you enter the market your portfolio will be the smallest it ever (most likely) will be. Entering at "the wrong time" does very little to damage your long term portfolio. I entered at the hight of the dot-com bubble with $3k, all in the SP500. Yes that $3k dropped in value very shortly thereafter but $3k wasn't the total sum I was going to put into the market. I was able to buy stocks "on sale" for years with new contributions after this. That initial $3k is <0.1% of my portfolio value now.

It's not entering the market at the wrong time you need to worry about, it's exiting it. That's when your portfolio will be the highest and you'll have the most to lose right at the time you actually need the money.

NiceUnparticularMan
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Re: International: Where's the benefit?

Post by NiceUnparticularMan » Thu May 18, 2017 3:45 pm

SeeMoe wrote:Good point per stock diversification, but can the same be said for, say, the total international bond index market? A lot of posters here don't think it is worth the trouble per hedging and currency manipulation/exchange rates. I tend to agree. Still have about 27%, currently, invested in the Vanguard total international stock index fund, but exchanged our total international bond index fund to the total bond index fund.


I certainly think it is a good question. At the moment, fixed-income plays a limited role for me and I don't see a place for international bonds (I actually have extremely few bonds at all--most of my fixed income is in a stable value fund and a cash-balance pension). At some point if I start making more use of bonds, I will consider international bonds.

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Re: International: Where's the benefit?

Post by NiceUnparticularMan » Thu May 18, 2017 3:48 pm

vitaflo wrote:
frankmorris wrote: Still, the average differences are staggering - certainly makes one realize that - even if you're in the long, long-term game, if you enter the market at the wrong time, you could be pretty much permanently at a disadvantage.


I see this type of thing said a lot and I find it to be totally wrong. When you enter the market your portfolio will be the smallest it ever (most likely) will be. Entering at "the wrong time" does very little to damage your long term portfolio. I entered at the hight of the dot-com bubble with $3k, all in the SP500. Yes that $3k dropped in value very shortly thereafter but $3k wasn't the total sum I was going to put into the market. I was able to buy stocks "on sale" for years with new contributions after this. That initial $3k is <0.1% of my portfolio value now.

It's not entering the market at the wrong time you need to worry about, it's exiting it. That's when your portfolio will be the highest and you'll have the most to lose right at the time you actually need the money.


As an aside, I agree with all of this, and I really wish the standard "default" backtest was not something like a single $10,000 contribution at the beginning, but instead was a realistic schedule of contributions followed by a realistic schedule of withdrawals.

Even that would be misleading, because in the real world contributions and withdrawals are risky variables, and the risks might be correlated with market/asset risks. But at least having a more realistic baseline scenario would start these conversations in a more productive place.

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Re: International: Where's the benefit?

Post by simplesimon » Thu May 18, 2017 3:49 pm

OP - you can't look at asset performance in isolation, you need to look at how a portfolio performs. How has a portfolio with both assets compared to the performance of a single asset? Correlation is important and sometimes US and international are correlated and sometimes they're not.

What was the CAGR of bonds over that 27-year period and how has a portfolio that included bonds performed relative to the individual asset classes? Same kind of idea but obviously bonds have a much lower correlation so you'll likely see better results.

So: How many of you are banking solidly on something that hasn't been valuable since the 80s?


Would you call international worthless or undervalued then?

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Re: International: Where's the benefit?

Post by frankmorris » Fri May 19, 2017 7:56 am

Thanks everyone - I appreciate the specific comments challenging the data on international vs US. NiceUnparticularMan - thank you for the data breakdown and extended discussion. This definitely shed some light on the issue.

I'd reassert that it would be silly to not look at historical performance to understand investment decisions moving forward. I would strongly agree that HOW we do that is important, such as not isolating or hand-picking entry/exit dates, and considering actual scenarios of investment (e.g., do you deposit a lump sum on a particular date or invest gradually over time). Still, if we had no history of the stock market - if it had been invented yesterday and we had no sense of if or how it may perform going forward - not on a day-to-day basis, but a general sense that it can work, you'd simply be a speculator. On that sense, I don't believe it's valid to dismiss my question about international on the basis of "the past isn't the future." Clearly. But for anyone considering anything other than a 100% TISM investment, from a simple stock bond split to factor-tilting, you're not just basing your investment on some investment thesis or belief - you've examined the data to suggest a plausibility of return.

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Re: International: Where's the benefit?

Post by asif408 » Fri May 19, 2017 8:55 am

frankmorris wrote:I ended up running several more comparisons on PV with multiple start dates throughout the 70s, 80s, & 90s, and end dates at either present or 2000, which was of course following the "lost decade" in the US. There wasn't a single time in which the US allocation didn't beat international by more than 2 points, other than if you had invested in the late 90s bubble and sold after the 2008 crash.

Again, not trying to be argumentative or prove an absolute point - where am I seeing this wrong everyone? Is it possible that the US is just a better economic engine in modern day times? Not arguing that couldn't reverse, but if there aren't data to support two asset classes produce roughly the same risk-adjusted return, is it smart to go with that asset class on a "what if next 10 years is different" kind of hypothesis?
So your endpoints were right after years of significant US outperformance vs. international. What if you try 1971-1988, 1983-2007, or 2002-2011?

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Re: International: Where's the benefit?

Post by frankmorris » Fri May 19, 2017 10:30 am

asif408 wrote:
frankmorris wrote:I ended up running several more comparisons on PV with multiple start dates throughout the 70s, 80s, & 90s, and end dates at either present or 2000, which was of course following the "lost decade" in the US. There wasn't a single time in which the US allocation didn't beat international by more than 2 points, other than if you had invested in the late 90s bubble and sold after the 2008 crash.

Again, not trying to be argumentative or prove an absolute point - where am I seeing this wrong everyone? Is it possible that the US is just a better economic engine in modern day times? Not arguing that couldn't reverse, but if there aren't data to support two asset classes produce roughly the same risk-adjusted return, is it smart to go with that asset class on a "what if next 10 years is different" kind of hypothesis?
So your endpoints were right after years of significant US outperformance vs. international. What if you try 1971-1988, 1983-2007, or 2002-2011?


Very fair questions, indeed.

I think part of my reliance of Portfolio Visualizer is I'm not aware of a better way of evaluating long-term returns. What other tools are out there if I want to compare two different investments over time? Many folks seem to argue against simply using average returns, as they ignore investment periods. Then, people argue against Portfolio Visualizer because it uses investment periods.

It seems like it would be helpful to have a program where I could enter a broad period of time, with the program returning ranges of possible returns based on market entry/exit, etc. along with correlations to the comparison asset class over time, etc. For example, instead of starting at 1972 and ending in 2017, a program might suggest an average of all possible 10 year investment windows, 15 year investment windows, etc. with a choice between a fixed starting amount and rolling contributions, then with withdraw options, etc. The program might, then, say your average returns for any given 10 year window for ex-US vs US had a median of __ with a range of ___ to ____, and a standard deviation of ____ to ____.

Yes, you'd still have to interpret those results as understanding the initial time frame you selected, and couldn't use those results to make firm predictions of the future, but it would be nice to be able to use data to understand how different markets have performed over long periods of time.

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Re: International: Where's the benefit?

Post by CantPassAgain » Fri May 19, 2017 10:38 am

frankmorris wrote:
CantPassAgain wrote:All I want to know is, have you figured out how to open an investment account yet?


Not sure if this was a serious question or an insult, but yes - I've had one for about 10 years, despite being quite behind in both saving and learning. I'm hoping that by asking questions and seeking information, I can become more effective in the future. I apologize if my questions have seemed ill-informed or as if I was trying to make convenient arguments without all of the data.


Not meant as an insult, but maybe a little bit tongue in cheek. I was referencing this post where you mention needing help with knowing how to open an account:

frankmorris wrote:Thanks everyone - really appreciate everyone's time with responses. It's a huge help for folks like myself who want to learn some the basics of the mechanics of how to do this - not just the theory and philosophy (which is also huge), but the basics of even simple things like opening an account.


To be clear, there is absolutely nothing wrong with asking for help regarding opening an account, I just thought it humorous because that's a long way from things like from "Tilting: Will lowered contextual risk of factors eventually eliminate the risk premium?" and the like.
Last edited by CantPassAgain on Fri May 19, 2017 11:03 am, edited 1 time in total.

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Re: International: Where's the benefit?

Post by Valuethinker » Fri May 19, 2017 10:50 am

Dirghatamas wrote:
The Japanese investor puts 100% of his money in 1989 in the world's best performing stock market, in its most innovative country, in its most dynamic society that will take over the world and then proceeds to lose his shirt over the next 25 years.

US is one of the world's best performing stock markets in the last 25 years, has the biggest GDP and innovative companies as well as a dynamic society... :happy :shock:


There were lots of warning signs with Japan-- the degree of financial speculation by Japanese companies, the very high PE ("but Japan is different"), the very low dividend yield (less than 1.0%).

US? Well on some measures it is not the biggest GDP any more (but maybe Chinese GDP is suspect anyways).

I think the key point (which you are making?) is that all we know is what the market already knows. There's no "secret sauce" to economic and corporate performance that we can discover and keep hidden from the stock market whilst we place our bets. All the valuation stuff I note above doesn't give you a strong enough signal of future performance*.

So knowing that, since 1989, the US has massively outperformed Japan doesn't tell us about the future.

* maybe at the extremes, it does. Cue question of whether the current levels are extreme enough to tell us anything meaningful about the future.

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Re: International: Where's the benefit?

Post by asif408 » Fri May 19, 2017 11:12 am

frankmorris wrote:Very fair questions, indeed.

I think part of my reliance of Portfolio Visualizer is I'm not aware of a better way of evaluating long-term returns. What other tools are out there if I want to compare two different investments over time? Many folks seem to argue against simply using average returns, as they ignore investment periods. Then, people argue against Portfolio Visualizer because it uses investment periods.
The only thing I can think of is using Morningstar to compare actual funds. For example, Vanguard has International Growth and Value funds that have been around since the early 80s. Comparing their results to the Vanguard 500 index fund, like this:

1985-1994:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

1982-2011 (only growth fund, since value fund looks like it didn't start until later):
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Admittedly, this is not apples to apples comparison, as they are active funds and the 500 is an index. But it's the closest I can get to a real-life scenario. It looks like the early 80s and early 90s were favorable times for international. But it is interesting that starting in 1982 international outperformed for over 12 years.

You can create your own time periods and slide the chart to see how your starting and ending points effects your results. You'll quickly see that looking at the 10 year results starting in a period of outperformance for one asset class will make that one look more favorable. So 1985-1995 & 2003-2013 makes international looks great. But looking at 1995-2005 or 2007-present you'd think US is the way to go. Main point I'm trying to make it that from these charts the performance is cyclical and there doesn't appear to be any consistent long-term outperformance by either US or international.

For instance a lot of folks poo-poo Vanguard's International fund performance since inception (1996) as a justification for not holding it or limiting their holdings in it. 1996 also just so happened to be at the early part of the tech boom and of US outperformance vs. international. And of course, if your ending point is now, you are stopping at a period of underperformance for international. So when you look at a time period starting when international began to perform poorly and ending when it had been performing poorly the results will look poor.

It will be interesting to see if you look back in 5 years at the 20 year performance of US vs. international, when you would be starting at a time of international outperformance in 2002 and ending in 2022, which may be preceded by a period of international outperformance.

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Re: International: Where's the benefit?

Post by CantPassAgain » Fri May 19, 2017 11:23 am

frankmorris wrote:Thanks everyone - I appreciate the specific comments challenging the data on international vs US. NiceUnparticularMan - thank you for the data breakdown and extended discussion. This definitely shed some light on the issue.

I'd reassert that it would be silly to not look at historical performance to understand investment decisions moving forward. I would strongly agree that HOW we do that is important, such as not isolating or hand-picking entry/exit dates, and considering actual scenarios of investment (e.g., do you deposit a lump sum on a particular date or invest gradually over time). Still, if we had no history of the stock market - if it had been invented yesterday and we had no sense of if or how it may perform going forward - not on a day-to-day basis, but a general sense that it can work, you'd simply be a speculator. On that sense, I don't believe it's valid to dismiss my question about international on the basis of "the past isn't the future." Clearly. But for anyone considering anything other than a 100% TISM investment, from a simple stock bond split to factor-tilting, you're not just basing your investment on some investment thesis or belief - you've examined the data to suggest a plausibility of return.


You seem to think that it's just down to history that shows ownership in the means of production will provide a return in the future. That doesn't make sense. If I'm a caveman and I'm the only one who knows how to make fire (essentially owning a 100% share of privately held company Fire, Inc.), and all the other Cavemen need fire real bad, I'm gonna benefit. History really hasn't got anything to do with it.

Ownership in the means of production. That is what you are buying. We aren't trading baseball cards here. We expect to benefit from this ownership. We just don't know how much. The variability of returns is too great and is impossible to predict. Because the world is constantly changing. The 20th century was an amazing time, two world wars, the industrial revolution, cold war, Vietnam, savings and loan bust, tech boom, etc etc etc. It didn't look too much like the 19th century. What will the rest of the 21st century look like? No idea. I especially have no idea which economies with thrive more than other economies. And you are concerned about what happened since 1990? Pfft, that's nothing but a blip, just a snapshot of what happened that period in human history.

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Re: International: Where's the benefit?

Post by Dirghatamas » Fri May 19, 2017 12:51 pm

Valuethinker wrote:
Dirghatamas wrote:
The Japanese investor puts 100% of his money in 1989 in the world's best performing stock market, in its most innovative country, in its most dynamic society that will take over the world and then proceeds to lose his shirt over the next 25 years.

US is one of the world's best performing stock markets in the last 25 years, has the biggest GDP and innovative companies as well as a dynamic society... :happy :shock:


There were lots of warning signs with Japan-- the degree of financial speculation by Japanese companies, the very high PE ("but Japan is different"), the very low dividend yield (less than 1.0%).

US? Well on some measures it is not the biggest GDP any more (but maybe Chinese GDP is suspect anyways).

I think the key point (which you are making?) is that all we know is what the market already knows. There's no "secret sauce" to economic and corporate performance that we can discover and keep hidden from the stock market whilst we place our bets. All the valuation stuff I note above doesn't give you a strong enough signal of future performance*.

So knowing that, since 1989, the US has massively outperformed Japan doesn't tell us about the future.


Right. There are limits to how many smileys are allowed in a post and I thought I had used them copiously. My position on US was obviously tongue in cheek (so many posts here about US exceptionalism and manifest destiny) to draw parallels to how a bullish Japanese investor with similar home country bias, would have felt about rising Japan in the late eighties. I am a strictly passive investor and always go with market consensus (it is all priced in) and as a result always invest by global cap weighted ratios without home country (US) bias.

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Re: International: Where's the benefit?

Post by tchoupitoulas » Fri May 19, 2017 1:53 pm

Try portfoliocharts.com

It is an awesome website full of great data visualizations built by a guy who is annoyed by many of the problems being raised on this thread in response to your post- returns being dependent on which period you selected, people acting as if "starting" at a given time means putting all the money you'll ever invest in the market at that time, etc. etc.

NiceUnparticularMan
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Re: International: Where's the benefit?

Post by NiceUnparticularMan » Fri May 19, 2017 5:18 pm

frankmorris wrote:Still, if we had no history of the stock market - if it had been invented yesterday and we had no sense of if or how it may perform going forward - not on a day-to-day basis, but a general sense that it can work, you'd simply be a speculator.


I think that's fair. I do start with a more fundamental sense of what I am trying to accomplish, but I also look at historic data to make sure my chosen tools have done (more or less) what I am hoping they will do. For example, I like the idea of REITs, but this sort of analysis confirmed for me that REITs have actually done more or less what I expect them to do:

https://personal.vanguard.com/pdf/icreecr.pdf

And I probably wouldn't invest in REITs without such supporting evidence that they are what I think they are.

I think the problems arise when you slip from supporting relatively general propositions to making relatively specific predictions based on historic outcomes which might well not repeat. I do think you can use history to suggest possible scenarios, but not all possible scenarios for any given asset are necessarily contained in the historic data.

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Re: International: Where's the benefit?

Post by Johnnie » Fri May 19, 2017 7:27 pm

nisiprius wrote:I don't think there's any compelling evidence that international stocks have either helped much or hurt much in the past.

Presentations of data that show a benefit usually show a hair-thin benefit that can go either way depending on small changes in choice of endpoints, or on the use of stock categories or indexes that don't cover a very long period of time.


Nisiprius, a joke thread posted last summer announcing the launch of a fictional "Manifest Destiny" all-U.S. thread was quickly shut down as non-actionable by our own Lady Ga-Ga, but it set wheels to turning in my head and they haven't stopped. There or elsewhere I think you have framed the question something like this: Maybe returns lag in other places because they just aren't very good investments compared to the U.S. Period.

I had been planning to go 50% international for the long haul but made it 40%. That call was eased by another concept that sticks, that 10 percent won't matter much either way on these judgement calls.

Finally, part of my rationale is consciousness having been raised decades ago about what happened to the dollar in the 1970s - that could hurt you. (I lived in Europe for a while in the late 1960s, was busy here doing other things in the 1970s, and the next time I looked up around 1979 the dollar was 25% what it had been against the currencies I used to buy lunch with.)
"I know nothing."

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