Rationale for a 30% ex-US equity allocation

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foodhype
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Rationale for a 30% ex-US equity allocation

Post by foodhype » Mon Jan 01, 2018 4:53 pm

"Rationale for my ex-US equity allocation" Google doc: https://goo.gl/ZWsyi7

I have spent roughly 6-8 weeks in sum thinking about how to settle on an ex-US equity allocation and recently decided to document my rationale. Although the thoughts in this document will ultimately influence my personal international equity allocation, and include some personal biases, I considered the topic of ex-US asset allocation as a percentage of all equities in a portfolio to be general enough to include in the "Investing - Theory, News, & General" section.

I would like to hear your thoughts on any flaws in the fundamentals of my analysis.

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elgob.bogle
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Re: Rationale for a 30% ex-US equity allocation

Post by elgob.bogle » Mon Jan 01, 2018 5:06 pm

Good Analysis! Make sure you put this in your IPS.

elgob
Last edited by elgob.bogle on Tue Jan 02, 2018 7:54 am, edited 1 time in total.

HEDGEFUNDIE
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Re: Rationale for a 30% ex-US equity allocation

Post by HEDGEFUNDIE » Mon Jan 01, 2018 7:56 pm

I really don’t understand the aversion to true global market cap weighting on this forum. The US only represents a quarter of global GDP, and therefore we’re already over-represented in market cap indexes at 50%.

If nothing else, at least consider that international has lagged US for years now; keeping your international allocation fixed at 30% will mean missing out on any international recovery.

foodhype
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Re: Rationale for a 30% ex-US equity allocation

Post by foodhype » Mon Jan 01, 2018 8:10 pm

I don't have any reason to believe that the US or ex-US market is more likely to have unexpected growth than the other. Growth isn't what drives up prices; unexpected growth is. Expected growth is baked into the price, and unexpected growth is, well, unexpected. I won't be missing out on an international recovery, I will be 30% invested in it.
Last edited by foodhype on Mon Jan 01, 2018 8:12 pm, edited 2 times in total.

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Phineas J. Whoopee
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Re: Rationale for a 30% ex-US equity allocation

Post by Phineas J. Whoopee » Mon Jan 01, 2018 8:11 pm

HEDGEFUNDIE wrote:
Mon Jan 01, 2018 7:56 pm
I really don’t understand the aversion to true global market cap weighting on this forum. The US only represents a quarter of global GDP, and therefore we’re already over-represented in market cap indexes at 50%.
Hi HEDGEFUNDIE.

Is there a reason one's market-weight portfolio should instead be GDP weighted? I'm echoing a point poster nisiprius makes, that I agree with. People say proportional to GDP as if it's clearly a better thing. Is there reasoning, or is it intuitively obvious?
HEDGEFUNDIE wrote: If nothing else, at least consider that international has lagged US for years now; keeping your international allocation fixed at 30% will mean missing out on any international recovery.
Are you suggesting past performance, or its opposite, guarantees future results?

In the equity portion of my portfolio I'm 60% US, 40% international. I began with market weight, then adjusted to account for the fact I'm in the US, and expect to stay in, spend money in, and retire in the US. The minor bias is to take account of foreign exchange risk. I'm not trying to convince you or anybody else to do the same. I'm just sharing my reasoning.

PJW
Last edited by Phineas J. Whoopee on Mon Jan 01, 2018 8:22 pm, edited 1 time in total.

OldSport
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Re: Rationale for a 30% ex-US equity allocation

Post by OldSport » Mon Jan 01, 2018 8:17 pm

I'm also 60% US/40% International. The fact that Vanguard has the Target Retirement and 529 equity portfolios at 60/40 with automatic rebalancing makes investing easier for me.

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Re: Rationale for a 30% ex-US equity allocation

Post by BigPrince » Mon Jan 01, 2018 8:23 pm

My investment plan for US/International is to roughly mimic the proportion Vanguard Total World Stock Index Fund Investor Shares (VTWSX).

I made this decision after learning about how the Japanese economy hit ridiculously high in the late 80's and then went on a decades long slow streak down and sideways to eventually losing 80% of its value in the mid 2000's.

I often tend to have a slight bias toward US though the recent year saw international do better so I am approx 50/50. I will rebalance with contributions toward something approaching 60/40.

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Re: Rationale for a 30% ex-US equity allocation

Post by HEDGEFUNDIE » Mon Jan 01, 2018 9:04 pm

Phineas J. Whoopee wrote:
Mon Jan 01, 2018 8:11 pm
HEDGEFUNDIE wrote:
Mon Jan 01, 2018 7:56 pm
I really don’t understand the aversion to true global market cap weighting on this forum. The US only represents a quarter of global GDP, and therefore we’re already over-represented in market cap indexes at 50%.
Hi HEDGEFUNDIE.

Is there a reason one's market-weight portfolio should instead be GDP weighted? I'm echoing a point poster nisiprius makes, that I agree with. People say proportional to GDP as if it's clearly a better thing. Is there reasoning, or is it intuitively obvious?
HEDGEFUNDIE wrote: If nothing else, at least consider that international has lagged US for years now; keeping your international allocation fixed at 30% will mean missing out on any international recovery.
Are you suggesting past performance, or its opposite, guarantees future results?

In the equity portion of my portfolio I'm 60% US, 40% international. I began with market weight, then adjusted to account for the fact I'm in the US, and expect to stay in, spend money in, and retire in the US. The minor bias is to take account of foreign exchange risk. I'm not trying to convince you or anybody else to do the same. I'm just sharing my reasoning.

PJW
One reason why one might want to weight by GDP is that it more closely reflects returns on global assets (public, private, and state-owned assets), to deliver better diversification. One assumption you would have to make is that a country’s public equities are reflective of that country’s private and state-owned assets as well. It’s a hard assumption to swallow for most foreign countries, so I actually don’t weight by GDP myself.
Last edited by HEDGEFUNDIE on Mon Jan 01, 2018 9:16 pm, edited 1 time in total.

PFInterest
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Re: Rationale for a 30% ex-US equity allocation

Post by PFInterest » Mon Jan 01, 2018 9:05 pm

You know Vanguard did a paper on this.

foodhype
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Re: Rationale for a 30% ex-US equity allocation

Post by foodhype » Mon Jan 01, 2018 9:38 pm

PFInterest wrote:
Mon Jan 01, 2018 9:05 pm
You know Vanguard did a paper on this.
I added a citation for it at the bottom of my doc. "Global equities: Balancing home bias and diversification": https://personal.vanguard.com/pdf/ISGGEB.pdf

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Re: Rationale for a 30% ex-US equity allocation

Post by Valuethinker » Tue Jan 02, 2018 4:49 am

HEDGEFUNDIE wrote:
Mon Jan 01, 2018 7:56 pm
I really don’t understand the aversion to true global market cap weighting on this forum. The US only represents a quarter of global GDP, and therefore we’re already over-represented in market cap indexes at 50%.

If nothing else, at least consider that international has lagged US for years now; keeping your international allocation fixed at 30% will mean missing out on any international recovery.
The theoretically correct answer is:

- you diversify your equities by global market cap weighting

- you hedge your currency 100% to your home currency (more correctly, you hedge your currency to match your future expenditure pattern, e.g. imports of foreign wine, trips to Europe etc.)

Now in fact equity funds don't normally hedge, and neither do most here. However the portfolio of personal assets (job, home equity etc.) is weighted towards USD, and holding the fixed income in USD (given the availability of the risk free asset, the T Bond) seems to be a reasonable proxy.

Not holding non US stocks is about, therefore, reducing volatility (arising from currency as well as equity volatility).d

If you look at the US index, the reason (I believe) the US market has done so well is the tech stocks, and in particular the FAANGs. Meaning one has to take a view whether that will go on.

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Re: Rationale for a 30% ex-US equity allocation

Post by danielc » Tue Jan 02, 2018 5:37 am

HEDGEFUNDIE wrote:
Mon Jan 01, 2018 7:56 pm
I really don’t understand the aversion to true global market cap weighting on this forum. The US only represents a quarter of global GDP, and therefore we’re already over-represented in market cap indexes at 50%.

The US might be 25% of global GDP, but it's about 50% of the global investable market. In general, Anglo-Saxon countries have disproportionately large market caps relative to their GDP. Canada has a larger market cap than Germany, even though the German economy is more than twice the size. Germany may have a lot more companies than Canada, but those companies are private and are not available for you to invest in. If your Germany vs Canada allocation was proportional to GDP, you would need to put a very disproportionate amount of money on the few German companies that trade in exchanges. In contrast, a market-cap weight means that you buy an equal percentage of every public company in the world. Doesn't that seem more sensible?

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danielc
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Re: Rationale for a 30% ex-US equity allocation

Post by danielc » Tue Jan 02, 2018 5:39 am

HEDGEFUNDIE wrote:
Mon Jan 01, 2018 9:04 pm
One reason why one might want to weight by GDP is that it more closely reflects returns on global assets (public, private, and state-owned assets), to deliver better diversification.
But those assets do not provide diversification if you cannot buy them. Market-cap weighing means that you match the assets that you can actually buy.

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Re: Rationale for a 30% ex-US equity allocation

Post by Call_Me_Op » Tue Jan 02, 2018 6:49 am

I am 50-50 US-International. I do not view the currency issue so much as a risk, but instead as a form of diversification.
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foodhype
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Re: Rationale for a 30% ex-US equity allocation

Post by foodhype » Tue Jan 02, 2018 11:13 am

I guess my biggest concern is that perhaps my conclusions are correct, but perhaps I am not prioritizing them in the right order; and that may have led me to select 30% over 40%.

For example, the two reasons I cited for going with 30% were:
1. Perhaps some degree of home bias is warranted because my expenditures are in my home country and because of the points made in the Vanguard paper from 2012 ("The role of home bias in global asset allocation decisions").
2. There is a cost difference of about 10 basis points.

So, then the question is am I missing the forest for the trees?

1. The first point seems stronger, but I don't know how much it matters. Even Vanguard now suggests 40% instead of 30%. I just want to know what logical process they went through in order to decide that 40% was the sweet spot. Did they publish a research paper explaining why? How do I determine a ballpark quantitative range on the potential impact of the home bias argument difference vs the diversification benefit difference?
2. Those 10 basis points probably don't matter much compared to the impact of the 10% difference in my allocation on my returns.

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Re: Rationale for a 30% ex-US equity allocation

Post by exigent » Tue Jan 02, 2018 11:18 am

We are 60/40 for stocks/bonds. Within the equity portion, we target 2/3 domestic, 1/3 international. Within the bond portion, we are 2/3 total bond (or intermediate tax exempt in taxable) and 1/3 inflation protected (TIPS and Series I Saving Bonds).

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Re: Rationale for a 30% ex-US equity allocation

Post by asif408 » Tue Jan 02, 2018 11:33 am

foodhype wrote:
Tue Jan 02, 2018 11:13 am
So, then the question is am I missing the forest for the trees?
Yes, I think so. You mention in your analysis that 30% vs. 40% won't make much difference for the reasons you've chosen. I don't see anything wrong with taking time to do analysis and think it through, but at some point you have to make a decision, and it's seems like you've already addressed the major issues. If that's what you're comfortable with, go with it.

I would also suggest re-evaluating after a period of international outperformance to see if you still feel the same, whenever that happens, since we've had a number of years of US outperformance. I've always thought 50/50 would be the path of least regret, but you may not agree even after international outperforms, and stick with your current plan.

Over the long haul, this decision you are fretting over probably won't make as much of a difference as ensuring low costs, consistent and regular additions to retirement accounts, and limiting emotion miscues like buying high and selling low. So I wouldn't spend too much time worrying about it.

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Re: Rationale for a 30% ex-US equity allocation

Post by nexchap » Tue Jan 02, 2018 11:41 am

Has anyone seen any work quantifying the tax drag of international vs domestic funds (in taxable accounts, obviously)? International pays out less (in the case of emerging, much less) QDI. There's also a portion of dividend income that goes to foreign taxes, which is recoverable (in theory) as a tax credit -- but I don't have enough data points to know whether that tax credit is always used up. I'm working through my own math on this now because the loss of SALT deductions will push up my marginal rates, but I want to make sure I'm not missing something in the calculation.

In my mind, these costs don't change the decision on having an ex-US allocation. But if it amounts to an additional drag of xx basis points it might figure into the decision to be at 70/30 vs 60/40.

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bumski
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Re: Rationale for a 30% ex-US equity allocation

Post by bumski » Tue Jan 02, 2018 2:07 pm

I have been reading Larry Swedroe's book The Only Guide to a Winning Investment Strategy. He had some interesting comments about international exposure:
He feels that for most investors that 30% is a good allocation to consider as he feels that investors are more willing to tolerate poor performance from their own country more than poor performance from outside countries. With the following side comments....
- Increasing allocation to 40% increased returns and reduced risk IE volatility/SD
- Increasing allocation to 20% reduced the possibility of negative returns by one third
- If an investor only has 10% International allocation they could be 98% confident of reducing risk by increasing their international allocation
- If an investor only has 22% International allocation they could be 90% confident of reducing risk by increasing their international allocation

I have set my allocation at 30% because I believe my investment behavior would fall in line with Larry's comments about not tolerating poor international performance for long periods of time.
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Re: Rationale for a 30% ex-US equity allocation

Post by Osp62 » Tue Jan 02, 2018 4:02 pm

I personally believe 30% intl is too high. I used to be at 30% plus for many years but reduced it down to 20% now. Not even sure I need 20 percent but I have some costs in non-USD so for now I am fine with 20%.

My first point is that you might want to think harder about how important it is to reduce annualized volatility. Is reducing volatility really that important if you are investing for 10 or 20 years plus. For me it is not.

Next, do you really think that US can have a Japan type meltdown and if it happens, does a 30 percent non-us equity really protect you. US and non-us equities have become quite correlated and it seems that non-us drops more than US when US has a problem. Just look at 2008-2009.

When we look at performance, US equity keeps outperforming non-us equity unless the dollar is weak. If your costs are in USD then any foreign outperformance just based on weak usd is not that important. Over the long run you have to believe usd will do ok. It is also hard to ignore the fact that US companies are outstanding, corporate governance is as good as anywhere, capital markets are as good as anywhere and USD remains the dominant currency. In most periods when non-us equities outperformed US equities, it was because of a weak USD (early 2000,s and 2017). So having a non-us equity position seems similar to a long us equity position plus a short USD. Do you really want a short USD position combined with your long US equity position.

Also remember that equities in any market are generally priced to provide an adequate risk adjusted return in the local currency. I understand that foreign currency buyers and sellers do exist here but for most markets local currency buyer-sellers are the dominant price setters. So if you believe that the market is pricing a security to provide an adequate risk adjusted return in a local currency, you might wonder why one should expect an adequate return in USD. There are many moving parts that determine exchange rates so it seems like a stretch to believe that unhedged non USD equity markets have to provide adequate risk adjusted returns to the USD investor.

Perhaps what I say next may appear cynical but look at it from the standpoint of managers of asset management companies. They need to grow and diversify their businesses. This has to be their goal and this is what they are compensated for. Then you start wondering why Vanguard, other investment companies, and advisors keep pushing international. If you look at Vanguard papers all they can say is that 30% non-us equity minimized volatility for the recent past (I think since 1970’s or so). Is the slight improvement in volatility and even smaller improvement in sharpe ratio that important to justify such a significant decision? How important is this for long term US based investors whose costs are all in USD? Then without any explanation Vanguard goes ahead a few years later and raises their recommended allocation to 40 percent. I have not seen any published rationale for this.

One wonders if advisors and investment companies are not biased in favor of non-us equities because the us equity fund management business has been commoditized and the ER has dropped to sub 5 basis points. Higher fees can still be charged for non-us equity funds. It also allows US asset managers to grow their non-us equity management funds and then try to diversify their companies by leveraging the non-us equity business that they built using US investor money and then acquiring more non-us investors. You can see that Vanguard, fidelity and Schwab are all trying to expand outside the US and are going after non-us based customers. These international operations still seem very small but it has to be clear to these companies that this is the area where they can get the easiest growth. All these non-US customers will want non-us equity holdings and it seems to make sense to leverage the us investor base to build these capabilities and fund assets.

It is hard for advisers to justify their fees if they just recommend US Total stock market so recommending non-us equities and then rebalancing annually allows them another reason to justify their fees.

Lastly, it is noteworthy that two of the most knowledgeable investors alive (Buffet and Bogle) generally recommend 100 percent US equity for the average investor. They can both be considered more unbiased than the average fund manager because Mr Bogle is retired from Vanguard and apparently just wants to do what he thinks is right and good for investors and Mr Buffet recommends SP500 NOT Berkshire Hathaway. He manages Berkshire Hathaway and asks others to invest in sp500. Their advice seems quite unbiased to me and it is hard to say that Mr Bogle or Mr Buffet understand this issue with any less nuance than the average adviser or executive at any asset management company.

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Re: Rationale for a 30% ex-US equity allocation

Post by alex_686 » Tue Jan 02, 2018 4:23 pm

Phineas J. Whoopee wrote:
Mon Jan 01, 2018 8:11 pm
Is there a reason one's market-weight portfolio should instead be GDP weighted? I'm echoing a point poster nisiprius makes, that I agree with. People say proportional to GDP as if it's clearly a better thing. Is there reasoning, or is it intuitively obvious?
The first problem with this line of logic is that it would require the under-weighting of the US market. Is that what you are advocating?

More generally, why weigh by GDP? What is the logic? I think what people are intuiting incorrectly is that there is some relationship between a nation's GNP and stock market value. There might have been a link in the past but it is weakening fast. Most market weighted indexes are dominated by multinational companies which are influenced more by global economic factors than by local ones.

As an exercise, work though most DM indexes. You will find them stuffed with Nestle (Swiss), Swiss Banks, and Swiss pharmaceutical companies. These may have headquarters in Switzerland but have little economic activity actually in Switzerland.

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Re: Rationale for a 30% ex-US equity allocation

Post by ruralavalon » Tue Jan 02, 2018 4:45 pm

foodhype wrote:
Tue Jan 02, 2018 11:13 am
I guess my biggest concern is that perhaps my conclusions are correct, but perhaps I am not prioritizing them in the right order; and that may have led me to select 30% over 40%.

For example, the two reasons I cited for going with 30% were:
1. Perhaps some degree of home bias is warranted because my expenditures are in my home country and because of the points made in the Vanguard paper from 2012 ("The role of home bias in global asset allocation decisions").
2. There is a cost difference of about 10 basis points.

So, then the question is am I missing the forest for the trees?

1. The first point seems stronger, but I don't know how much it matters. Even Vanguard now suggests 40% instead of 30%. I just want to know what logical process they went through in order to decide that 40% was the sweet spot. Did they publish a research paper explaining why? [emphasis added] How do I determine a ballpark quantitative range on the potential impact of the home bias argument difference vs the diversification benefit difference?
2. Those 10 basis points probably don't matter much compared to the impact of the 10% difference in my allocation on my returns.
I don't know what logical process Vanguard went through in moving from 30% to 40% of stocks in international stocks. Awhile back I had nothing useful to do and so re-read several Vanguard papers on this subject.

1) A 2008 Vanguard paper very concisely stated in its Executive Summary "Empirical and practical issues suggest a starting allocation to international stocks of 20%, with an upper limit based on the proportion of the global market they represent". "International Equity: Considerations and Recommendations" (p. 1). " . . . while mean-variance analysis suggests that an investor would have been best off in terms of lowest average volatility by allocating 40% of an equity portfolio to foreign stocks, a significant portion of the benefit can be achieved through lower allocations." (p. 5).

That paper used data through December 31, 2007.

2) A March 2012 Vanguard paper, "Considerations for investing in non-U.S. equities", stated that historically allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). Their graph depicting volatility has a very flat shallow curve between 20-50%, indicating to me that it made little difference where the investor was in that range (Fig. 3, p. 5).

3) A June 2012 Vanguard paper, "The role of home bias in global asset allocation decisions", has a graph describing "Risk and returns for various equity portfolios: 1988–2011" showing the better risk/return combination for a U.S. investor between 20% and 30% of stocks in international stocks (Fig 1, p. 3). The paper does say that historical performance is not the sole factor to consider (pp. 8-12).

The two 2012 Vanguard papers use data through December 31, 2011.

4) A February 2014 Vanguard paper, "Global equities: Balancing home bias and diversification", noted that U.S. equities were 49% of the global market, with a recent high of 55% of the global but remained significantly above the all-time low of 29% (p. 2, and Fig. 1, p.3). Again a graph of "Average annualized change in portfolio volatility" has a flat shallow curve between 20-50%, indicating to me that it made little difference where the investor was in that range (Fig. 3, p. 5).

From the February 2014 Vanguard paper -- "What’s striking about Figure 3 is that U.S. investors would have obtained substantial (relative) diversification benefits from allocations to non-U.S. stocks far short of the current market-proportional portfolio (now about 51% and historically approximately 50%, on average). . . . . . Looking at the blue line in Figure 3, which represents a portfolio composed entirely of equities, the maximum historical diversification benefit would have been achieved by allocating approximately 30% of an equity portfolio to non-U.S. equities (although the difference between 30% non-U.S. and 40% non-U.S. is within 0.02%), with a net reduction in volatility of 71 basis points. Allocating 20% of an equity portfolio to non-U.S. stocks would have captured 60 of those 71 basis points, or about 85% of the maximum possible benefit. " (p.6). "On average, dedicating 30% of equities to non-U.S. stocks has provided most of the maximum possible diversification benefit" (Fig. 4, p 7).

Also from the February 2014 Vanguard paper -- "Rising correlations mean less impact from global diversification" (Fig. 5, p.9). "High relative volatility means less impact from global diversification" (Fig.6, p.9).

The 2014 Vanguard paper uses data through December 31, 2013.

In 2015 Vanguard increased the interntional stock allocation in their target date funds from 30% to 40% of stocks.

I am not aware of any other or more recent Vanguard papers on the issue of the desirable amount of international stock allocation. I had thought there were more recent papers, but did not locate any.

I personally prefer the lower end of the 20-40% range, thinking there is no reason to take the extra international-related risks (like currency risk, political risk) for little or no readily apparent benefit. We have 25% of stocks in international stocks.
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Re: Rationale for a 30% ex-US equity allocation

Post by alex_686 » Tue Jan 02, 2018 5:03 pm

1. By authority. Nope, I would strike this section. No logic here. Some are based on off the cuff comments, others are just reiterations of what others have said, etc. Tell me why they think this.

2. Backtesting, 2 issues. First, Secular changes. Things change. The 1970s was dominated by fragmented markets and local companies. Today it is dominated by integrated markets and multinational companies. Second, miss-specification. I have seen a fair number of studies where the difference is better explained by value factor than the international factor. After all, international tends to be more value oriented.

3. Reason

“Consider that there is inherently higher cost, currency risk, and market volatility”. Cite please, because I have them on the other side. In a given year the standard deviation from these factors are under 1%. In a 10 year period these factors don’t even meet statistical significance.

As an aside, on the Japan issue, I really would like some citations on that. I have no proof but gut tells me this is wrong. I know that the Nikkei crashed hard. But the Nikkei is a price average index. What I really want to know is how a global cap weighted index would have done. Japan had real float issues at the time with cross-holdings and other locked up shares that I just don’t think the Nikkei is the index we want.

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Re: Rationale for a 30% ex-US equity allocation

Post by Phineas J. Whoopee » Tue Jan 02, 2018 8:47 pm

alex_686 wrote:
Tue Jan 02, 2018 4:23 pm
Phineas J. Whoopee wrote:
Mon Jan 01, 2018 8:11 pm
Is there a reason one's market-weight portfolio should instead be GDP weighted? I'm echoing a point poster nisiprius makes, that I agree with. People say proportional to GDP as if it's clearly a better thing. Is there reasoning, or is it intuitively obvious?
The first problem with this line of logic is that it would require the under-weighting of the US market. Is that what you are advocating?
...
No.

PJW

foodhype
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Re: Rationale for a 30% ex-US equity allocation

Post by foodhype » Tue Jan 02, 2018 9:05 pm

I updated my paper:
* I omitted "Arguments from Authority". I had intentionally labeled them "Arguments from Authority" and included caveat notes to emphasize their limitations.
* The "Backtesting" section now includes more data, more citations, and a note that market conditions change over time. I thought this was implicit, but I included it anyway.
* I renamed the "Rationale" section (previously "Arguments from Reason") now includes a few more details of limited importance on the June 2012 Vanguard paper that suggested U.S. investors may benefit to some degree from home bias.

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Re: Rationale for a 30% ex-US equity allocation

Post by Sirjames » Sun Mar 25, 2018 1:53 pm

Fascinating conversation that was all very helpful to me. Bumping for any others who may have helpful points to weigh in with?

At 31 and rounding out my first year of “bogleheads” investing, I think I’ve settled on a long term allocation of equity at 65% US, 35% ex-US at 20% developed, 10% emerging, 5% “extra” small cap tilt (mostly developed but a little EM).
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Re: Rationale for a 30% ex-US equity allocation

Post by columbia » Sun Mar 25, 2018 3:08 pm

Valuethinker wrote:
Tue Jan 02, 2018 4:49 am
HEDGEFUNDIE wrote:
Mon Jan 01, 2018 7:56 pm
I really don’t understand the aversion to true global market cap weighting on this forum. The US only represents a quarter of global GDP, and therefore we’re already over-represented in market cap indexes at 50%.

If nothing else, at least consider that international has lagged US for years now; keeping your international allocation fixed at 30% will mean missing out on any international recovery.
The theoretically correct answer is:

- you diversify your equities by global market cap weighting

- you hedge your currency 100% to your home currency (more correctly, you hedge your currency to match your future expenditure pattern, e.g. imports of foreign wine, trips to Europe etc.)

Now in fact equity funds don't normally hedge, and neither do most here. However the portfolio of personal assets (job, home equity etc.) is weighted towards USD, and holding the fixed income in USD (given the availability of the risk free asset, the T Bond) seems to be a reasonable proxy.

Not holding non US stocks is about, therefore, reducing volatility (arising from currency as well as equity volatility).d

If you look at the US index, the reason (I believe) the US market has done so well is the tech stocks, and in particular the FAANGs. Meaning one has to take a view whether that will go on.
Am I understanding you correctly: you believe that international holdings should be in a hedged fund/etf?

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SeeMoe
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Re: Rationale for a 30% ex-US equity allocation

Post by SeeMoe » Mon Mar 26, 2018 10:32 pm

We are retired and have a 45/55 AA. Currently 25% of the stock portion is invested in the Vanguard total international stock fund and that is going to be our limit. I’ve seen posts here that suggest a retiree should invest all monies into the country they are retired in. That edict is meant more so for bonds, I recall?

SeeMoe.. :o
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Agggm
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Re: Rationale for a 30% ex-US equity allocation

Post by Agggm » Mon Mar 26, 2018 10:48 pm

HEDGEFUNDIE wrote:
Mon Jan 01, 2018 7:56 pm
I really don’t understand the aversion to true global market cap weighting on this forum. The US only represents a quarter of global GDP, and therefore we’re already over-represented in market cap indexes at 50%.

If nothing else, at least consider that international has lagged US for years now; keeping your international allocation fixed at 30% will mean missing out on any international recovery.
100% agree.

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fortyofforty
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Re: Rationale for a 30% ex-US equity allocation

Post by fortyofforty » Wed Mar 28, 2018 6:27 am

It has been much easier of late to dismiss international (ex-U.S.) investing due to the relative underperformance of that asset sub-class. Also, the movement of domestic and international stocks seems to be increasingly correlated, at least from the perspective of watching the performance of my personal investments, so the benefit might be mitigated.
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alex_686
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Re: Rationale for a 30% ex-US equity allocation

Post by alex_686 » Wed Mar 28, 2018 11:35 am

columbia wrote:
Sun Mar 25, 2018 3:08 pm
Am I understanding you correctly: you believe that international holdings should be in a hedged fund/etf?
I would say no. International indexes have a standard deviation of 10% to 14% per year. The inflation adjusted currency risk is about 1% per year. If you look at data sets over 10 years you can't even find currency risk - it gets washed away by other statistical noise.

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