The overselling of international diversification

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CULater
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The overselling of international diversification

Post by CULater » Tue Oct 17, 2017 3:17 pm

The lower correlation between U.S. and non-U.S. stock returns has to do mostly with bull markets in U.S. stocks, during which foreign stocks typically don't do as well (as recently has been the case). During bear markets in U.S. stocks, foreign stocks are also hit, so the correlation with U.S.stocks is high and foreign stocks don't provide any diversification benefit. In other words, international stock diversification works the wrong way: correlations are low with U.S. stocks when U.S. stocks have good returns, and high when U.S. stocks have poor returns. There may be good reasons to invest in foreign stocks, but the diversification argument based on market correlations is one of the weaker ones. The more important concern is how much the investor should allocate to stocks overall regardless of international diversification.

http://www.marketwatch.com/story/intern ... =fa_center
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Re: The overselling of international diversification

Post by Big Dog » Tue Oct 17, 2017 3:22 pm

gotta get me some popcorn to watch the carnage develop on this thread. :beer

jalbert
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Re: The overselling of international diversification

Post by jalbert » Tue Oct 17, 2017 3:30 pm

The article's results were enabled by cherry-picked data. In particular, the data is for returns starting 1/1/1980. The 1970's was when int'l equity diversification would have helped US investors significantly. And 2002-2008 was a US bull market when US equities underperformed non-US equities, falsifying the article's claim that non-US equities always under-perform US equities during bull markets.

The benefits of int'l equity diversification for US investors may be oversold, but the article does not make a very convincing case of it.
Last edited by jalbert on Tue Oct 17, 2017 9:57 pm, edited 1 time in total.
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Re: The overselling of international diversification

Post by 3funder » Tue Oct 17, 2017 3:32 pm

Big Dog wrote:
Tue Oct 17, 2017 3:22 pm
gotta get me some popcorn to watch the carnage develop on this thread. :beer
These threads are always fun.

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Re: The overselling of international diversification

Post by pptiger » Tue Oct 17, 2017 3:36 pm

Here is another article more or less echoing your point

https://earlyretirementnow.com/2017/08/ ... ification/

Quote from the article
It’s less about whether diversification works. It’s more about when diversification works and especially when it doesn’t.
I don't necessarily agree with what the author said, but it's an interesting analysis.

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Re: The overselling of international diversification

Post by garlandwhizzer » Tue Oct 17, 2017 4:18 pm

CULater wrote:
In other words, international stock diversification works the wrong way: correlations are low with U.S. stocks when U.S. stocks have good returns, and high when U.S. stocks have poor returns.
This is true for backtesting over the period chosen for this paper. US equities have outperformed INTL in the main over recent decades. That does not, however, prove that the same will happen going forward into the future. For example, US stocks yielded more than bonds consistently for 80 years until that completely reversed in the 1950s. For the next 60 years except for a few brief periods in recent years due to hyper-aggressive FED policy, bonds have yielded more than stocks. A 100% change that contradicts 80 years of consistent backtesting. What changed was the underlying economy which after struggling through the Great Depression and WW 2, took off in an unprecedented way.

I, for one, get suspicious when someone tells me what is going to happen in the market's future based on backtesting especially when current fundamentals which ultimately underly asset prices are divergent significantly from that past history. The US market and the US economy underwent enormous economic growth and labor productivity growth, far greater than INTL on average, during the period in question. Few now expect the US economy to crank out productivity and corporate profit growth like it did during that backtesting period. It may turn out that in 30 years, ours will be the third largest economy in the world after China and India, a bizarre thought no one would have even contemplated 30 years ago. Times change and so do both economies and investment returns.

Investing would be incredibly simple if we could automatically draw firm conclusions about the future from what happened in the past over a given time frame. There are reasons now (valuation differences between US and INTL which are currently wider than historical norms, widely disparate economic growth rates between the US and EM) that suggest a real possibility that INTL may even outperform US in the future. No one IMO knows for sure whether US or INTL will outperform in the future. This backtesting period was a time when the US led the world in productivity growth and economic output. Productivity growth in the US is about zero now and our economy continues to struggle with sluggish growth 8 years into the slowest recovery from recession is US history, in spite of maximal monetary policy stimulus. IMO all crystal balls are cloudy as to the future of US versus INTL.

I believe much, perhaps most, of backtesting-derived academic "research" on investing is a lot like examining fresh sheep entrails by a campfire to determine the outcome of tomorrows's battle.


Garland Whizzer

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Re: The overselling of international diversification

Post by Dead Man Walking » Tue Oct 17, 2017 4:21 pm

What about international bonds? Is there a correlation with US bonds?

DMW

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Re: The overselling of international diversification

Post by PuddlesTheDuck » Tue Oct 17, 2017 4:42 pm

Dead Man Walking wrote:
Tue Oct 17, 2017 4:21 pm
What about international bonds? Is there a correlation with US bonds?

DMW
The correlation appears to be the same as the correlation between US stocks and Non-US stocks

I didn't spend too much time, but this is an alright table I found (though having no dates on it makes it not super useful): https://admainnew.morningstar.com/webhe ... lasses.htm

Basically:
US Stocks to Foreign Stocks (Developed and Emerging) has a correlation between 0.5 and 0.6

US Investment Grade Bonds to Non-US Bonds has a correlation between 0.4 and 0.5

US Stocks to US Investment Grade Bonds has a correlation between 0.1 and 0.2
US Stocks to Non-US Bonds has a correlation right around 0

Foreign Develop Country Stocks to US Investment Grade Bonds has a correlation between 0.1 and 0.2
Emerging Markets Stocks to US Investment Grade Bonds has a correlation right around 0

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Re: The overselling of international diversification

Post by patrick013 » Tue Oct 17, 2017 4:48 pm

Recently internationals have shown increased revenues, profits,
and most importantly increased exports. I think increased exports
is very important as many of those economies are smaller than the
US economy and therefore depend on exports for bullish economic
results. With the info available that's MO.
age in bonds, buy-and-hold, 10 year business cycle

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Re: The overselling of international diversification

Post by mengo » Tue Oct 17, 2017 4:57 pm

I buy international, in part, because of currency risk. Living internationally and traveling a lot are important for us as options during retirement, and if international outperforms (especially emerging) i want to be able to travel, etc. Not sure if this makes sense, but it's how i think.

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Re: The overselling of international diversification

Post by Woodshark » Tue Oct 17, 2017 5:26 pm

I've read and followed with great interest the overriding question of how much to invest (from a USA prospective) in international. 0 to 10 percent sayeth Bogle and Buffett. "No, no, the US has peaked so 50 percent is the safest bet" says the maximum diversity folks. In an annual conversation with Vanguard last week, my adviser recommended a base minimum of 30%. He had some good points but I'm more comfortable with a mere 20-25 percentage of my investments abroad. I've not found the "best" right answer to this question yet so I will stay in my chosen lane until something changes my mind.

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Re: The overselling of international diversification

Post by CULater » Tue Oct 17, 2017 6:14 pm

According to Portfolio Visualizer for the last 30+ years, the efficient frontier for US and Global ex-US indicates lowest risk (SD) for 80% US / 20% Global ex-US (SD = 14.77%), but highest risk-adjusted return for 100% U.S. (Sharpe = .551, SD = 15.06%). Max drawdown was 50.9% for 100% U.S. vs. 52.5% for 80/20. So, it appears that since data have been available for Global ex-US in 1986 you would have been better off with US stocks. If adding global foreign stocks, no more than 20% but that didn't do much more than lower your return by about 0.5% per year. Hard sell. Bogle says that if you must, then no more than 20%. Seems to align with the data.
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Re: The overselling of international diversification

Post by nedsaid » Tue Oct 17, 2017 6:30 pm

The efficient frontiers that I have seen show that the sweet spot of International diversification is about 30% of a stock portfolio. Actually, I didn't see all that much difference between 20% and 50%. Currently, Vanguard is recommending an allocation of 40% of stocks to International. I am at 28%.
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Re: The overselling of international diversification

Post by oldzey » Tue Oct 17, 2017 8:24 pm

0% International works for me.
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Re: The overselling of international diversification

Post by Random Walker » Tue Oct 17, 2017 8:54 pm

I think international small value, even more so than emerging markets, is where the best diversification effect is. Get SV diversification plus small companies more subject to local economy effects.

Dave

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Re: The overselling of international diversification

Post by jainn » Tue Oct 17, 2017 9:07 pm

I feel lucky that vtsax (us total stock admiral) is a little more than double the share price as vtiax(total intl admiral). I went with owning exactly the same number of shares of both....it comes to 68/32 us/intl...and when we sell equities as part of our spending we sell exact same quantity of each fund..keeping the same quantity owned for each...it helps behaviorally..if intl does better we end up selling more % of it and vice versa...

Jainn
Last edited by jainn on Tue Oct 17, 2017 10:00 pm, edited 2 times in total.

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Re: The overselling of international diversification

Post by triceratop » Tue Oct 17, 2017 9:47 pm

Woodshark wrote:
Tue Oct 17, 2017 5:26 pm
I've read and followed with great interest the overriding question of how much to invest (from a USA prospective) in international. 0 to 10 percent sayeth Bogle and Buffett. "No, no, the US has peaked so 50 percent is the safest bet" says the maximum diversity folks. In an annual conversation with Vanguard last week, my adviser recommended a base minimum of 30%. He had some good points but I'm more comfortable with a mere 20-25 percentage of my investments abroad. I've not found the "best" right answer to this question yet so I will stay in my chosen lane until something changes my mind.
This is a misrepresentation of how those who argue for diversification feel. It's not that we feel the US has peaked. It's that we apply the same logic that leads one to choose a total market index fund to the question of where one the world to invest in equities.
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Re: The overselling of international diversification

Post by JBTX » Tue Oct 17, 2017 10:11 pm

garlandwhizzer wrote:
Tue Oct 17, 2017 4:18 pm
CULater wrote:
In other words, international stock diversification works the wrong way: correlations are low with U.S. stocks when U.S. stocks have good returns, and high when U.S. stocks have poor returns.
This is true for backtesting over the period chosen for this paper. US equities have outperformed INTL in the main over recent decades. That does not, however, prove that the same will happen going forward into the future. For example, US stocks yielded more than bonds consistently for 80 years until that completely reversed in the 1950s. For the next 60 years except for a few brief periods in recent years due to hyper-aggressive FED policy, bonds have yielded more than stocks. A 100% change that contradicts 80 years of consistent backtesting. What changed was the underlying economy which after struggling through the Great Depression and WW 2, took off in an unprecedented way.

I, for one, get suspicious when someone tells me what is going to happen in the market's future based on backtesting especially when current fundamentals which ultimately underly asset prices are divergent significantly from that past history. The US market and the US economy underwent enormous economic growth and labor productivity growth, far greater than INTL on average, during the period in question. Few now expect the US economy to crank out productivity and corporate profit growth like it did during that backtesting period. It may turn out that in 30 years, ours will be the third largest economy in the world after China and India, a bizarre thought no one would have even contemplated 30 years ago. Times change and so do both economies and investment returns.

Investing would be incredibly simple if we could automatically draw firm conclusions about the future from what happened in the past over a given time frame. There are reasons now (valuation differences between US and INTL which are currently wider than historical norms, widely disparate economic growth rates between the US and EM) that suggest a real possibility that INTL may even outperform US in the future. No one IMO knows for sure whether US or INTL will outperform in the future. This backtesting period was a time when the US led the world in productivity growth and economic output. Productivity growth in the US is about zero now and our economy continues to struggle with sluggish growth 8 years into the slowest recovery from recession is US history, in spite of maximal monetary policy stimulus. IMO all crystal balls are cloudy as to the future of US versus INTL.

I believe much, perhaps most, of backtesting-derived academic "research" on investing is a lot like examining fresh sheep entrails by a campfire to determine the outcome of tomorrows's battle.


Garland Whizzer

To your point, the US stock market has been better for a long time. It doesn't mean it will be in the future. In my eyes, the main benefit to international is not so much the marginal risk reduction of broader portfolio diversification, but more to diversify against systemic negative events that could be specific to the U.S. It is probably true if the US economy and markets tank, international markets will tank too, but it could be that over the long term international markets recover much more robustly.

I always look to the Japan example. If you were a Japanese investor in the late 80's, clearly international diversification would have greatly benefited you over the following decades. I don't think we are, or are going to become Japan. But it is theoretically possible that the US could take a long term dive and the rest of the world either doesn't get hit as hard, and/or recovers better in the long run.

Somewhat the same holds through on the currency exchange aspect. I have seen it written here that currency risk is an added risk with no associated reward premium. That certainly may be true over our history. But again, if the US were hit with a unique and systemic event, it is likely the dollar would fall and international holdings would increase in relative value, just on exchange rate. Again, Japanese investors would have greatly benefited from international stocks as the yen continued to fall.

In short, international diversification is in case the U.S. goes to hell in a handbag for unforeseeable reason. I don't think that will happen any time soon, but is a theoretical risk I would like to hedge against.

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Re: The overselling of international diversification

Post by dccboone » Tue Oct 17, 2017 11:59 pm

I won’t argue pro or con regarding whether or not there is or isn’t a correlation between U.S. and non-U.S. stock returns. Right or wrong, I believe my risk is better spread over 9,899 company stocks rather than only 3,636 (Total Stock Index (VTSAX) represents 3,636 U.S. companies, plus Total International Stock Index (VTIAX) represents an additional 6,273 companies). In the end I sleep better at night. It’s the same reason I invest in index funds and not individual stocks. I just feel better spreading the risk. To each his own. :happy

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Re: The overselling of international diversification

Post by CULater » Wed Oct 18, 2017 12:01 am

I respect the "Armageddon" argument for buying foreign stocks, but it's overdone, IMO. For example, I don't understand is why anyone who is willing to something as significant as investing their hard-earned money in foreign stocks as a hedge apparently doesn't consider other hedges that would make even more sense, such as buying a home outside the U.S., seeking a dual citizenship, learning a foreign language and making sure their children do also, or even just making sure they have a current passport. Armageddon is a disproportionately exaggerated rationale for doing something that requires almost no effort, buying some shares in a foreign stock fund or ETF. With due respect to those who feel differently, there may be good reasons to buy foreign stocks, but I don't think Armageddon is one of them -- at least for me.
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Re: The overselling of international diversification

Post by stemikger » Wed Oct 18, 2017 12:36 am

oldzey wrote:
Tue Oct 17, 2017 8:24 pm
0% International works for me.
+1

Me too! Less risk and less to worry about. When I started investing in my 401K we didn't even have an international option.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: The overselling of international diversification

Post by gsmith » Wed Oct 18, 2017 3:35 am

Let's say I was a domestic Boglehead, who was sold on tax efficient investing, and minimum expenses.
Can someone make the case for international?

I imagine the "efficient market theory" that BH depends on doesn't apply internationally, especially to developing countries where transparency, rule of law, and minimal corruption is an issue.
Are the foreign taxes and increased expenses offset by the non-correlation to US equities, or do they make risk adjusted returns to compensate?
Otherwise, the croupier at my local casino assures me that betting a sizable position of the portfolio on black will provide the non-correlated we're looking for....

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Re: The overselling of international diversification

Post by Top99% » Wed Oct 18, 2017 7:02 am

+1
My favorite visual piece of evidence for the value of diversification. I am also part way through Tyler Cowen's "The Complacent Class" and this book is also convincing me not to put 100% of my equity eggs in the US basket.
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Re: The overselling of international diversification

Post by jadd806 » Wed Oct 18, 2017 7:06 am

triceratop wrote:
Tue Oct 17, 2017 9:47 pm
Woodshark wrote:
Tue Oct 17, 2017 5:26 pm
I've read and followed with great interest the overriding question of how much to invest (from a USA prospective) in international. 0 to 10 percent sayeth Bogle and Buffett. "No, no, the US has peaked so 50 percent is the safest bet" says the maximum diversity folks. In an annual conversation with Vanguard last week, my adviser recommended a base minimum of 30%. He had some good points but I'm more comfortable with a mere 20-25 percentage of my investments abroad. I've not found the "best" right answer to this question yet so I will stay in my chosen lane until something changes my mind.
This is a misrepresentation of how those who argue for diversification feel. It's not that we feel the US has peaked. It's that we apply the same logic that leads one to choose a total market index fund to the question of where one the world to invest in equities.
+1. This is how I arrived at the conclusion to invest internationally at market cap weights. I don't want to pick winners.

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Re: The overselling of international diversification

Post by rustymutt » Wed Oct 18, 2017 7:15 am

Long Term diversification does work, but most of us don't have the patience to hang in there that long. I didn't, and hold US equities at this time.
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Re: The overselling of international diversification

Post by dh » Wed Oct 18, 2017 7:41 am

Vanguard has a video on "home bias" (buying what you know), that may further our discussion:
https://investornews.vanguard/be-aware- ... investing/

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Re: The overselling of international diversification

Post by Ari » Wed Oct 18, 2017 7:43 am

gsmith wrote:
Wed Oct 18, 2017 3:35 am
I imagine the "efficient market theory" that BH depends on doesn't apply internationally, especially to developing countries where transparency, rule of law, and minimal corruption is an issue.
Why is that? Do other investors not know about these issues, or do they systematically misprice them in a way that you can take advantage of because you are smarter?
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Re: The overselling of international diversification

Post by lostdog » Wed Oct 18, 2017 8:21 am

I side with Vanguard. Vanguard Total World Index Fund. The most bogleheadish fund in existence.
"Our life is frittered away by detail. Simplify, simplify." -Thoreau

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Re: The overselling of international diversification

Post by Tamalak » Wed Oct 18, 2017 8:25 am

patrick013 wrote:
Tue Oct 17, 2017 4:48 pm
Recently internationals have shown increased revenues, profits,
and most importantly increased exports.
...and by the time you see this it's too late to profitably invest.

That's why I invest in everything, all the time, the Total Market. That's the philosophy Bogle and his followers originally recommended.. I have no idea why they're making an exception for international. Okay, I do have an idea because I've read his reasoning and it makes no sense at all.

I don't oversell the diversification benefits. I don't need to. If you own all the companies starting with the letters A thru M there's not a lot of diversification benefit in adding N thru Z. But why exclude them?
Last edited by Tamalak on Wed Oct 18, 2017 8:28 am, edited 2 times in total.

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Re: The overselling of international diversification

Post by stemikger » Wed Oct 18, 2017 8:26 am

Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

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Re: The overselling of international diversification

Post by MindTheGAAP » Wed Oct 18, 2017 9:08 am

stemikger wrote:
Wed Oct 18, 2017 8:26 am
I will listen to the smartest mind in the business. I like his 65 plus years of experience on the matter. No need to search further. Listen to Jack.
While I understand all of the positives that JB has done, doesn't it seem an awful amount of risk concentration to stick with just a single opinion because of other good work he's done? IE he was a pioneer in the low-cost, passive approach - does that mean he's the best thinker on international diversification?
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Re: The overselling of international diversification

Post by CULater » Wed Oct 18, 2017 9:11 am

I disagree with the argument that equates owning everything with being maximally diversified. There's a point at which things become redundant. There is one heck of a lot of redundancy in owning a piece of virtually every capitalized company in the world. For example, how many oil companies do you need to own a piece of? How many pharmaceutical companies? You own a whole bunch of most of the major business enterprises in the world by just owning the U.S. domiciled ones. Don't know if you ever noticed, but when you adjust for currency differences the returns from industry sectors across global markets are virtually the same. You are diversifying currencies more than anything else and that's a zero-sum game over the long run.
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Re: The overselling of international diversification

Post by columbia » Wed Oct 18, 2017 9:24 am

I believe that if international outpaces the US over the next 30 years, the locus will be China. As I don't own an EM fund, I don't have any of those class A shares. If they enter the VT index, I won't quibble.

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Re: The overselling of international diversification

Post by TD2626 » Wed Oct 18, 2017 9:43 am

jadd806 wrote:
Wed Oct 18, 2017 7:06 am
triceratop wrote:
Tue Oct 17, 2017 9:47 pm
Woodshark wrote:
Tue Oct 17, 2017 5:26 pm
I've read and followed with great interest the overriding question of how much to invest (from a USA prospective) in international. 0 to 10 percent sayeth Bogle and Buffett. "No, no, the US has peaked so 50 percent is the safest bet" says the maximum diversity folks. In an annual conversation with Vanguard last week, my adviser recommended a base minimum of 30%. He had some good points but I'm more comfortable with a mere 20-25 percentage of my investments abroad. I've not found the "best" right answer to this question yet so I will stay in my chosen lane until something changes my mind.
This is a misrepresentation of how those who argue for diversification feel. It's not that we feel the US has peaked. It's that we apply the same logic that leads one to choose a total market index fund to the question of where one the world to invest in equities.
+1. This is how I arrived at the conclusion to invest internationally at market cap weights. I don't want to pick winners.
+2

I wonder: Do those who advocate a bias towards home country stocks carefully read annual reports of Apple and Samsung, Ford and Toyota, Exxon and Shell, and so on and so forth to support their tilts? Any departure from global cap weight (e.g. overweighting Apple relative to Samsung) inherently involves this kind of speculation. I buy gas at a variety of gas stations (foreign and domestic owned), and have used both foreign and domestic cars. I haven't read these companies annual reports, so I don't feel comfortable speculating that one company will do better than another. I just don't know.

Yes, uncompensated currency risk in international may be something to avoid - but most efficient frontiers show 20-40% international is best, not 0-10%. Given the small, but possible, likelihood of a Japan-type scenario in any single country and the inherent speculation that dramatically underweighting international involves, I feel that those with 0-10% international are making a serious error. There is a reason why Vanguard's default is 40% in target date funds and LifeStrategy funds, why Vanguard advisors tend to strongly counsel investors to have sufficient international, and why default allocations (in Target Date or Target Risk type products) at a variety of fund shops generally end up with substantial international allocations.

If you've read the thousands of annual reports of all the companies in Total Stock and Total International, and have carefully justified reasons for a bias against foreign stocks, then OK... though even reading annual reports isn't that predictive. Obviously, no one here has done this, it would be too much work. Instead, much of the bias against foreign stocks is could be a behavioral error, often described by those who have little in international as a "preference for the familiarity" of domestic stocks.

To quote a post I found in an old thread (viewtopic.php?f=1&t=144519#p2150805):
stan1 wrote:
Sun Aug 10, 2014 10:44 am
To me U.S. only investing is an active play that Ford and GM will do better than Toyota and Hyundai; that Exxon will do better than BP and Shell; that Apple will do better than Samsung and Sony; and so on. Do you believe this to be true? Why? The reason can be logical or emotional and doesn't have to be justified to anyone but yourself (and your wife if she cares) but I do think you owe it to yourself to think through the rationale. Arguments of the past such as international investing was too expensive are no longer valid. American exceptionalism might be based on nostalgic or xenophobic feelings; fine, but be honest with yourself if that's your decision since you don't know what will happen in the future. Simplicity might be valid but if that's the rationale it seems like a single target retirement fund that includes international holdings would better achieve the goal.

I don't go with world capitalization weightings because I don't want that much currency risk. There's a middle ground which for me is about 2/3 domestic and 1/3 international.
Of course, this is all just my opinion, and I'm no expert. But recognize that some who are experts (e.g. Vanguard/Fidelity Target Date funds, Swedroe, Makiel, Sharpe) suggest substantial international.

However, those who advocate 0-10% international have their own experts to cite, e.g. Bogle and Buffet. Everyone has their own decisions they need to make for themselves based on their own risk tolerance and beliefs and their own situations and circumstances.

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Re: The overselling of international diversification

Post by patrick013 » Wed Oct 18, 2017 1:43 pm

Tamalak wrote:
Wed Oct 18, 2017 8:25 am
patrick013 wrote:
Tue Oct 17, 2017 4:48 pm
Recently internationals have shown increased revenues, profits,
and most importantly increased exports.
...and by the time you see this it's too late to profitably invest.

That's why I invest in everything, all the time, the Total Market. That's the philosophy Bogle and his followers originally recommended.. I have no idea why they're making an exception for international. Okay, I do have an idea because I've read his reasoning and it makes no sense at all.

I don't oversell the diversification benefits. I don't need to. If you own all the companies starting with the letters A thru M there's not a lot of diversification benefit in adding N thru Z. But why exclude them?
Well you can't tell a statistician how to invest that's for sure. If the valuations are still low
I'd increase AA for EM as the 500 has ample Intl exposure otherwise. More long term
optimism with current fundamentals. Smallish indications of negative correlation as a
static benefit when business activity was low has jumped into recent optimism. My AA for Intl
is small anyway so if I increase it I'd hope it beats the 500 total return anyway. Diversification ?
I can decrease my portfolio beta nicely with a good utility fund and the usual bond fund.
age in bonds, buy-and-hold, 10 year business cycle

Da5id
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Re: The overselling of international diversification

Post by Da5id » Wed Oct 18, 2017 2:06 pm

MindTheGAAP wrote:
Wed Oct 18, 2017 9:08 am
stemikger wrote:
Wed Oct 18, 2017 8:26 am
I will listen to the smartest mind in the business. I like his 65 plus years of experience on the matter. No need to search further. Listen to Jack.
While I understand all of the positives that JB has done, doesn't it seem an awful amount of risk concentration to stick with just a single opinion because of other good work he's done? IE he was a pioneer in the low-cost, passive approach - does that mean he's the best thinker on international diversification?
Moreover, seems to me to violate the second commandment...

I'm sure someone somewhere has been persuaded by these arguments. However cognitive dissonance is an amazing thing in all of us. The arguments against international seem really weak to me. The arguments for it seem strong. Clearly vice-versa for those who have taken the opposite choice. We want to feel good in our choices/beliefs, and it makes it hard to see the opposite.

As a wise man once said, "buy the haystack" :)
Last edited by Da5id on Wed Oct 18, 2017 3:04 pm, edited 1 time in total.

wxturtle
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Re: The overselling of international diversification

Post by wxturtle » Wed Oct 18, 2017 2:11 pm

I'm probably fairly ignorant on this but as someone who is 70/30 what is the downside of international diversification?

Is it that international stocks will underperform US stocks going forward? Therefore diversification lowers overall return rate?
Or is it that the costs (ER) of international funds (index or otherwise) tend to be higher? Therefore diversification eats into capital?

If it's the former, that feels a bit like "home bias."

I could see some compelling arguments for the latter, particularly with the reach of US companies globally, but given ERs aren't outrageously disparate, that seems to be splitting hairs.

hilink73
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Re: The overselling of international diversification

Post by hilink73 » Wed Oct 18, 2017 2:25 pm

Big Dog wrote:
Tue Oct 17, 2017 3:22 pm
gotta get me some popcorn to watch the carnage develop on this thread. :beer
Well, as a European, calling everything non-US "international" is kind of amusing.

I'm about 25% US, 28% West-Europe, 10% Japan and 37% Emerging Markets (so more less a GDP weighting) with four ETFs.
Now, let the carnage continue. :-)

Big Dog
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Re: The overselling of international diversification

Post by Big Dog » Wed Oct 18, 2017 4:17 pm

^^Touche! (Make Europe Great Again??) :mrgreen:

CULater
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Re: The overselling of international diversification

Post by CULater » Wed Oct 18, 2017 8:09 pm

wxturtle wrote:
Wed Oct 18, 2017 2:11 pm
I'm probably fairly ignorant on this but as someone who is 70/30 what is the downside of international diversification?

Is it that international stocks will underperform US stocks going forward? Therefore diversification lowers overall return rate?
Or is it that the costs (ER) of international funds (index or otherwise) tend to be higher? Therefore diversification eats into capital?

If it's the former, that feels a bit like "home bias."

I could see some compelling arguments for the latter, particularly with the reach of US companies globally, but given ERs aren't outrageously disparate, that seems to be splitting hairs.
I guess Jack feels that (a) it isn't necessary, (b) it adds complexity and cost, and (c) it adds currency risk. So he would default to "why do it?", as opposed to "why not do it?"
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

Dottie57
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Re: The overselling of international diversification

Post by Dottie57 » Wed Oct 18, 2017 8:33 pm

CULater wrote:
Wed Oct 18, 2017 12:01 am
I respect the "Armageddon" argument for buying foreign stocks, but it's overdone, IMO. For example, I don't understand is why anyone who is willing to something as significant as investing their hard-earned money in foreign stocks as a hedge apparently doesn't consider other hedges that would make even more sense, such as buying a home outside the U.S., seeking a dual citizenship, learning a foreign language and making sure their children do also, or even just making sure they have a current passport. Armageddon is a disproportionately exaggerated rationale for doing something that requires almost no effort, buying some shares in a foreign stock fund or ETF. With due respect to those who feel differently, there may be good reasons to buy foreign stocks, but I don't think Armageddon is one of them -- at least for me.
I have considered much of what you have listed (dual citizenship, passport and housing). But I try to tamp down fears and act somewhat rationally. Owning some international works for me. (20% of stock- which may move to 30% -I do not move fast)

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dumbbunny
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Re: The overselling of international diversification

Post by dumbbunny » Wed Oct 18, 2017 8:48 pm

40% Total US Stock Index
20% Total International Stock Index
40% Total US Bond Index
Done.
“It’s the curse of old men to realize that in the end we control nothing." "Homeland" episode, "Gerontion"

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raven15
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Re: The overselling of international diversification

Post by raven15 » Wed Oct 18, 2017 8:59 pm

My understanding is that US/Int have lowest correlation over periods of around 2-5 years. Usually people never examine periods longer than 1 year though. Especially not those cited in this thread.
It's Time. Adding Interest.

sambb
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Re: The overselling of international diversification

Post by sambb » Wed Oct 18, 2017 9:03 pm

Why does the historical data matter? Thats in the past. Past performance does not indicate or guarantee future results.
In the past there have been a lot of companies and countries that did well, but doesnt mean they will in the future, right?
Dont get why the past matters.

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Taylor Larimore
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"How Much International Stock? A Suggestion"

Post by Taylor Larimore » Wed Oct 18, 2017 9:18 pm

Bogleheads:

I wrote a post on the subject:

How Much International Stock? A Suggestion.

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

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3CT_Paddler
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Re: The overselling of international diversification

Post by 3CT_Paddler » Thu Oct 19, 2017 8:05 am

Several years ago this board was predominantly in support of a global cap-weighted portfolio (after some really good years for international) with many posters strongly advocating that global cap weighting is the only way to go. Now it's almost a 180 here as far as vocal support for a US only equity position.

Depending on the investing time frame, both parties may be right.

asif408
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Re: The overselling of international diversification

Post by asif408 » Thu Oct 19, 2017 8:40 am

3CT_Paddler wrote:
Thu Oct 19, 2017 8:05 am
Several years ago this board was predominantly in support of a global cap-weighted portfolio (after some really good years for international) with many posters strongly advocating that global cap weighting is the only way to go. Now it's almost a 180 here as far as vocal support for a US only equity position.

Depending on the investing time frame, both parties may be right.
When it comes to investing, on average the posters here are lemmings like the rest of humanity. It's really been several years of primarily negative posts on foreign stocks, varying from indifference to outright abomination. I'm looking forward to coming back in 5 or 10 years on here and hearing about how important international stocks are based on backtesting, how we should be 100% emerging markets, etc. And there will be a new batch of posters falling in to the same performance chasing traps, I'm sure.

Da5id
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Re: The overselling of international diversification

Post by Da5id » Thu Oct 19, 2017 8:42 am

3CT_Paddler wrote:
Thu Oct 19, 2017 8:05 am
Several years ago this board was predominantly in support of a global cap-weighted portfolio (after some really good years for international) with many posters strongly advocating that global cap weighting is the only way to go. Now it's almost a 180 here as far as vocal support for a US only equity position.

Depending on the investing time frame, both parties may be right.
First of all, I think it is hard to just what the actual behavior of bogleheads membership is, you only see those who choose to post in the international investing threads. Since these threads are pretty repetitive some give up. But certainly years of US out performance will cause those subject to recency bias to trend that way. If we get some years of international out performance (this year is good for intl so far) it may swing back. After the next big crash (likely always is a next big crash, question is when), perhaps those advocating 100% stock will go into hiding for a bit.

I also think judging correctness by past results in different time frames isn't wise.

I think many of the arguments against international could be made against US sectors, why not avoid them? For example, many large US based multinationals are exposed to foreign currency issues. I think believing that if the US is simply a superior business environment is all well and good (may or may not be so in the future, but OK), but it is hard for me to believe that that "secret" isn't priced into the market. Or that the "inferior prospects" of overseas markets isn't priced into those markets. If one is unconditional asserting that "us stocks are better investments" that suggests projecting forward that US market cap will grow as a percentage of global cap indefinitely? If one isn't asserting then, when and under what conditions does one invest internationally?

That said, while "nobody knows nothin" and "buy the haystack" seem to say buy international at market weight, can't quite get there myself. My equities are 2/3 US and 1/3 international, so I certainly can't be accused of intellectual consistency.

Random Walker
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Re: The overselling of international diversification

Post by Random Walker » Thu Oct 19, 2017 9:02 am

3CT_paddler wrote
Several years ago this board was predominantly in support of a global cap-weighted portfolio (after some really good years for international) with many posters strongly advocating that global cap weighting is the only way to go. Now it's almost a 180 here as far as vocal support for a US only equity position.

Depending on the investing time frame, both parties may be right.
I disagree (and perhaps 3CT_Paddler actually does as well). Investing decisions are made before the fact. We can’t judge the quality of an ex ante decision by the ex post result. Decisions need to be evaluated based on the information available at the time the decision is made. In this case, since no one knows whether US or Int will do better, it only makes sense to diversify into both. People can argue on the relative proportions from global market cap to something less because of cost or retirement spending in US dollars, but ex ante I think it really only makes sense to diversify into both.

Dave

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