A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

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A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by AtlasShrugged? » Wed Feb 14, 2018 7:49 am

Bogleheads....Larry Swedroe wrote a great article about home country bias and investing. Thought provoking.

http://www.etf.com/sections/index-inves ... derail-you
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by asif408 » Wed Feb 14, 2018 10:47 am

Another good article from Larry. Unfortunately, I think recency bias is one of the strongest biases among investors, and a primary reason for the avoidance of international stocks by many investors. The combination of underperformance of international stocks from 2011-2016, along with its high correlation with US markets and bigger fall in the 2007-2009 crash, has meant that international stocks have been a burden on portfolios for over a decade, providing no correlation benefit during times of stress and poorer performance vs. the S&P.

I think the most important lesson for investors to understand is that diversification with US and International doesn't always work, but it doesn't always fail either, at least historically. It was easier to convince investors of international stock diversification benefits in the decade prior (1998-2007), when international (and particularly emerging markets stocks) provided a combination of more diversification through lower correlation and outperformance. I don't know if that diversification will come back, but I sure wouldn't bet against it 100% by only owning US stocks.

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Larry Swedroe: Bias Can Derail You

Post by Random Walker » Wed Feb 14, 2018 11:03 am

[moved RandomWalker's post and its replies into this existing thread - moderator prudent]

http://www.etf.com/sections/index-inves ... nopaging=1

Excellent article on the potential benefit of international diversification. International developed is currently about 3/8 world market cap and emerging markets about 1/8. World market cap weighting is a good starting point when determining one’s equity allocation. Most of us US investors are less than 50% international. Market timing generally not a good idea, but given current relative valuations, if one wants to move their allocation towards world market cap, this seems to be a very rational time to do it. I myself have done this within the last couple of years. International diversification is a long term strategy. In short term financial crises, we expect correlations to head towards one. In the long run the market is a weighing machine, and the long term economic performance weights of countries can vary substantially and surprisingly. Diversification is the only free lunch in investing.

Dave

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by willthrill81 » Wed Feb 14, 2018 11:05 am

There are actually some logical reasons for having a home country tilt, not the least of which is the fact that your home country's inflation, which impacts your spending power, also has a much greater impact on domestic stock market returns than international returns. Tyler at Portfolio Charts had a great post on this.

That being said, an obvious reason why many investors shy away from international stocks is that, in total, they have dramatically underperformed the U.S. market for almost the last 30 years. From 1989-2017, the difference between the two was almost six percent annualized ((10.32% vs. 4.53%). That's not an easy sell to someone who isn't entirely convinced of the benefits of global diversification. Some bring up the "What if the U.S. mimics Japan" argument, but I would argue that if that occurs, international may (IMHO, almost certainly would) perform poorly as well. That being said, I think that 'some' international exposure is appropriate. How much is anyone's guess.
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by azanon » Wed Feb 14, 2018 11:22 am

I see a number of things really from the opposite point of view that Will expressed above:

I would say the U.S. has outperformed the basket of international stocks the last 30 years, not say it the other way around. It's important to think of it that way, because you could dive into that basket of international stocks and find a few other countries that have matched or beaten the US. I don't have his data in front of me, but I have one showing 1967-2016 showing Finland and Sweden outperforming the U.S. by 3.5% annualized over 67-16' (from Credit Suisse), to just give an example.

Another point; If anything, someone telling me our particular country outperformed the basket of International stocks by some 6% over the past 30 years would cause me to want to own international stock more, all other things being equal. The "why" is pretty simple really; It's the same asset class, but mean reversion and currency reversion might be logically more likely to occur over the next 30 yrs.

A third point; the fact that I reside in the U.S. would, all things being equal, wouldn't cause me to want to "double-down" on U.S. stocks, when I'm already vested enough in the U.S. in terms of employment, an eventual government pension, and government social security. If I layer all or mostly all U.S. stock holdings onto everything else I have that's financially tied to the U.S, I'm either going to hit the ball completely out of the park, or conversely, I might end up like that Enron employee who had all company stock, and nothing else. I prefer to diversify where I can, and now you can with cheap international stock.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by spangineer » Wed Feb 14, 2018 11:26 am

willthrill81 wrote:
Wed Feb 14, 2018 11:05 am
There are actually some logical reasons for having a home country tilt, not the least of which is the fact that your home country's inflation, which impacts your spending power, also has a much greater impact on domestic stock market returns than international returns. Tyler at Portfolio Charts had a great post on this.
Hmm; I'm not sure I follow. Wouldn't higher-than-average local inflation correspond with a weaker dollar on foreign currency exchanges? So if I own international stocks in a dollar-denominated mutual fund, wouldn't my returns (in dollar terms) be higher, roughly in line with local inflation?

I need to read more on this topic, and I'm happy to be corrected, but I would think dollar-denominated international diversification would be a net benefit in a high-dollar-inflation environment.

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Re: Larry Swedroe: Bias Can Derail You

Post by Sandtrap » Wed Feb 14, 2018 12:00 pm

Thanks, Dave.
The uncertain shuffling across the global economic-political landscape adds to the unpredictability of things.
True?

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by IlliniDave » Wed Feb 14, 2018 12:14 pm

Diversification is good, but when it comes to comparing relative performance across national borders I'm not sure it's always apples/apples. Currency fluctuation aside countries vary in their laws, taxation, demographics, etc. So I'm cautious looking out over the world for a big value opportunity.
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by willthrill81 » Wed Feb 14, 2018 12:15 pm

spangineer wrote:
Wed Feb 14, 2018 11:26 am
willthrill81 wrote:
Wed Feb 14, 2018 11:05 am
There are actually some logical reasons for having a home country tilt, not the least of which is the fact that your home country's inflation, which impacts your spending power, also has a much greater impact on domestic stock market returns than international returns. Tyler at Portfolio Charts had a great post on this.
Hmm; I'm not sure I follow. Wouldn't higher-than-average local inflation correspond with a weaker dollar on foreign currency exchanges? So if I own international stocks in a dollar-denominated mutual fund, wouldn't my returns (in dollar terms) be higher, roughly in line with local inflation?

I need to read more on this topic, and I'm happy to be corrected, but I would think dollar-denominated international diversification would be a net benefit in a high-dollar-inflation environment.
It's simpler than that. If we assume 5% inflation in the U.S. and 1% in international, we can expect nominal stock returns to be higher in the U.S. than international as a consequence. Equal weighting or overweighting international disconnects investors from those 'inflated' returns. The post I linked to explains this much better.
Last edited by willthrill81 on Wed Feb 14, 2018 12:27 pm, edited 2 times in total.
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by willthrill81 » Wed Feb 14, 2018 12:23 pm

azanon wrote:
Wed Feb 14, 2018 11:22 am
I would say the U.S. has outperformed the basket of international stocks the last 30 years, not say it the other way around. It's important to think of it that way, because you could dive into that basket of international stocks and find a few other countries that have matched or beaten the US. I don't have his data in front of me, but I have one showing 1967-2016 showing Finland and Sweden outperforming the U.S. by 3.5% annualized over 67-16' (from Credit Suisse), to just give an example.
You can certainly find pockets of the world that have outperformed the rest of the world or even the U.S., but a 4.53% nominal (1.98% real)return is a pittance for the volatility involved. Intermediate term Treasuries in the U.S. had a 1.74% higher return and with far lower volatility. It's not just that the U.S. outperformed; it's that the rest of the world's equities had very poor returns for a long time.
azanon wrote:
Wed Feb 14, 2018 11:22 am
Another point; If anything, someone telling me our particular country outperformed the basket of International stocks by some 6% over the past 30 years would cause me to want to own international stock more, all other things being equal. The "why" is pretty simple really; It's the same asset class, but mean reversion and currency reversion might be logically more likely to occur over the next 30 yrs.
I understand your logic, but that can be dangerous. It can take a long time for mean reversion to kick in, and there's no guarantee that it ever will. Someone might have concluded 20 years that international was bound to catch up and overweighted it, yet it has only continued to fall further and further behind. Again, I'm not saying to avoid international at all, but don't expect to be rewarded in any way for holding it.
azanon wrote:
Wed Feb 14, 2018 11:22 am
A third point; the fact that I reside in the U.S. would, all things being equal, wouldn't cause me to want to "double-down" on U.S. stocks, when I'm already vested enough in the U.S. in terms of employment, an eventual government pension, and government social security. If I layer all or mostly all U.S. stock holdings onto everything else I have that's financially tied to the U.S, I'm either going to hit the ball completely out of the park, or conversely, I might end up like that Enron employee who had all company stock, and nothing else. I prefer to diversify where I can, and now you can with cheap international stock.
I'll grant you that one. :beer I find this the most compelling reason by far to own international stocks.

Actually, I think that there is a decent argument to hold a portion of one's fixed income in emerging market bonds. I think that the current premium is worth the risk. Cambria's Sovereign Bond fund currently has a yield of 4.76%.
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 12:37 pm

willthrill81 wrote:
Wed Feb 14, 2018 11:05 am
There are actually some logical reasons for having a home country tilt, not the least of which is the fact that your home country's inflation, which impacts your spending power, also has a much greater impact on domestic stock market returns than international returns. Tyler at Portfolio Charts had a great post on this.

That being said, an obvious reason why many investors shy away from international stocks is that, in total, they have dramatically underperformed the U.S. market for almost the last 30 years. From 1989-2017, the difference between the two was almost six percent annualized ((10.32% vs. 4.53%). That's not an easy sell to someone who isn't entirely convinced of the benefits of global diversification. Some bring up the "What if the U.S. mimics Japan" argument, but I would argue that if that occurs, international may (IMHO, almost certainly would) perform poorly as well. That being said, I think that 'some' international exposure is appropriate. How much is anyone's guess.
4.5% is unacceptable for equity returns over a thirty year period. There is something fundamentally wrong with international stocks. They are ALWAYS cheap on a PE basis. They were cheap 30 years ago and still returns were bad. With 30 years of poor returns, the PE ratio should be under 5 if earnings grew as fast as US companies and the dividend yield should be double digits. Sure it’s possible foreign stocks will suddenly outperform US stocks over the long run but why would that happen? People argue valuations are lower but they were ALWAYS lower so that’s a poor argument.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by jadd806 » Wed Feb 14, 2018 12:53 pm

One does not need to "make a case" for a 50% international allocation. You can't get more passive than just taking the entire world of investable equities at market cap weight.

Those who choose to make an active bet and significantly overweight the US in their portfolio are the ones who need to make their case. Their arguments do not hold up to scrutiny and can all be explained by biases, behavioral fallacies, and most commonly greed (i.e. curve fitting their portfolio to historical performance where the US was an outlier and hoping for a repeat).

Another well written and thought-provoking article from Mr. Swedroe.

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Re: Larry Swedroe: Bias Can Derail You

Post by Random Walker » Wed Feb 14, 2018 12:55 pm

For sure!

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 1:16 pm

jadd806 wrote:
Wed Feb 14, 2018 12:53 pm
One does not need to "make a case" for a 50% international allocation. You can't get more passive than just taking the entire world of investable equities at market cap weight.

Those who choose to make an active bet and significantly overweight the US in their portfolio are the ones who need to make their case. Their arguments do not hold up to scrutiny and can all be explained by biases, behavioral fallacies, and most commonly greed (i.e. curve fitting their portfolio to historical performance where the US was an outlier and hoping for a repeat).

Another well written and thought-provoking article from Mr. Swedroe.
Do you own bitcoin and gold at market weight as well? Real estate? Nobody owns every asset at market weight.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by asif408 » Wed Feb 14, 2018 1:30 pm

kosomoto wrote:
Wed Feb 14, 2018 12:37 pm
They are ALWAYS cheap on a PE basis. They were cheap 30 years ago and still returns were bad. With 30 years of poor returns, the PE ratio should be under 5 if earnings grew as fast as US companies and the dividend yield should be double digits. Sure it’s possible foreign stocks will suddenly outperform US stocks over the long run but why would that happen? People argue valuations are lower but they were ALWAYS lower so that’s a poor argument.
Not sure what PE you use, but according to PE10, international stocks were very expensive 30 years ago relative to US stocks, and for most of the 1980s and early 1990s had a higher PE10: http://blogs.wf.com/assetmanagement/wp- ... 731993.png.

Can you provide a link or some data to show how they have always been cheap?

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Re: Larry Swedroe: Bias Can Derail You

Post by whodidntante » Wed Feb 14, 2018 1:42 pm

Sandtrap wrote:
Wed Feb 14, 2018 12:00 pm
Thanks, Dave.
The uncertain shuffling across the global economic-political landscape adds to the unpredictability of things.
True?

Mahalo🌺
Jim
The uncertain shuffling across the US economic-political landscape adds to the unpredictability of things.
True?

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 1:43 pm

asif408 wrote:
Wed Feb 14, 2018 1:30 pm
kosomoto wrote:
Wed Feb 14, 2018 12:37 pm
They are ALWAYS cheap on a PE basis. They were cheap 30 years ago and still returns were bad. With 30 years of poor returns, the PE ratio should be under 5 if earnings grew as fast as US companies and the dividend yield should be double digits. Sure it’s possible foreign stocks will suddenly outperform US stocks over the long run but why would that happen? People argue valuations are lower but they were ALWAYS lower so that’s a poor argument.
Not sure what PE you use, but according to PE10, international stocks were very expensive 30 years ago relative to US stocks, and for most of the 1980s and early 1990s had a higher PE10: http://blogs.wf.com/assetmanagement/wp- ... 731993.png.

Can you provide a link or some data to show how they have always been cheap?
I don’t have free data but the global valuation database looks different, but granted it doesn’t go back a full 30 years, it’s just a few years short:

https://selz.com/item/5947c9ba6edca00cbc572676

Edit: I found free data.

https://www.starcapital.de/fileadmin/us ... imling.pdf

As you can see in the research paper, median for all country cape is under 18 while for US it is nearly 20 since the late 70s. International stocks were cheaper in aggregate.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by jadd806 » Wed Feb 14, 2018 1:48 pm

kosomoto wrote:
Wed Feb 14, 2018 1:16 pm
jadd806 wrote:
Wed Feb 14, 2018 12:53 pm
One does not need to "make a case" for a 50% international allocation. You can't get more passive than just taking the entire world of investable equities at market cap weight.

Those who choose to make an active bet and significantly overweight the US in their portfolio are the ones who need to make their case. Their arguments do not hold up to scrutiny and can all be explained by biases, behavioral fallacies, and most commonly greed (i.e. curve fitting their portfolio to historical performance where the US was an outlier and hoping for a repeat).

Another well written and thought-provoking article from Mr. Swedroe.
Do you own bitcoin and gold at market weight as well? Real estate? Nobody owns every asset at market weight.
Huh? We're talking about diversification within a single asset class here. International equities are a subcategory of the equity asset class, not a separate asset.

My comment said "the entire world of investable equities," not "the entire world of investable assets."

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 1:52 pm

jadd806 wrote:
Wed Feb 14, 2018 1:48 pm
kosomoto wrote:
Wed Feb 14, 2018 1:16 pm
jadd806 wrote:
Wed Feb 14, 2018 12:53 pm
One does not need to "make a case" for a 50% international allocation. You can't get more passive than just taking the entire world of investable equities at market cap weight.

Those who choose to make an active bet and significantly overweight the US in their portfolio are the ones who need to make their case. Their arguments do not hold up to scrutiny and can all be explained by biases, behavioral fallacies, and most commonly greed (i.e. curve fitting their portfolio to historical performance where the US was an outlier and hoping for a repeat).

Another well written and thought-provoking article from Mr. Swedroe.
Do you own bitcoin and gold at market weight as well? Real estate? Nobody owns every asset at market weight.
Huh? We're talking about diversification within a single asset class here. International equities are a subcategory of the equity asset class, not a separate asset.

My comment said "the entire world of investable equities," not "the entire world of investable assets."
Okay, then do you also own private equity at market weight? My point is that choosing how much stock to own is fundamentally arbitrary and choosing market weights doesn’t make investment decisions less arbitrary.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by alfaspider » Wed Feb 14, 2018 1:55 pm

The bogglehead ideal would be an index fund that efficiently captures all global economic growth. The problem is, that doesn't exist.

Most international investors really just add Europe, Japan, and maybe Korea to their portfolios. Nothing wrong with that per-se, but they tend to be strongly correlated with U.S. markets. Emerging market funds sound great, but you have the problem that many of those countries do not have well-regulated and efficient equity markets- meaning you may not really capture the underlying emerging market growth by investing in such funds. As such, I would argue there is no perfect solution to home-country bias.

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Re: Larry Swedroe: Bias Can Derail You

Post by Sandtrap » Wed Feb 14, 2018 2:09 pm

whodidntante wrote:
Wed Feb 14, 2018 1:42 pm
Sandtrap wrote:
Wed Feb 14, 2018 12:00 pm
Thanks, Dave.
The uncertain shuffling across the global economic-political landscape adds to the unpredictability of things.
True?

Mahalo🌺
Jim
The uncertain shuffling across the US economic-political landscape adds to the unpredictability of things.
True?
Yes. Also.
Good one.
J🌺

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by jadd806 » Wed Feb 14, 2018 2:14 pm

kosomoto wrote:
Wed Feb 14, 2018 1:52 pm
jadd806 wrote:
Wed Feb 14, 2018 1:48 pm
kosomoto wrote:
Wed Feb 14, 2018 1:16 pm
jadd806 wrote:
Wed Feb 14, 2018 12:53 pm
One does not need to "make a case" for a 50% international allocation. You can't get more passive than just taking the entire world of investable equities at market cap weight.

Those who choose to make an active bet and significantly overweight the US in their portfolio are the ones who need to make their case. Their arguments do not hold up to scrutiny and can all be explained by biases, behavioral fallacies, and most commonly greed (i.e. curve fitting their portfolio to historical performance where the US was an outlier and hoping for a repeat).

Another well written and thought-provoking article from Mr. Swedroe.
Do you own bitcoin and gold at market weight as well? Real estate? Nobody owns every asset at market weight.
Huh? We're talking about diversification within a single asset class here. International equities are a subcategory of the equity asset class, not a separate asset.

My comment said "the entire world of investable equities," not "the entire world of investable assets."
Okay, then do you also own private equity at market weight? My point is that choosing how much stock to own is fundamentally arbitrary and choosing market weights doesn’t make investment decisions less arbitrary.
Private equity is neither an accessible, practical, or affordable investment for you or I. You already knew that though.

Why don't you own say, just a dozen stocks then? Why invest in US stocks at all, when South African stocks would serve you just fine? After all, it's "fundamentally arbitrary."

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by retireearly » Wed Feb 14, 2018 2:23 pm

asif408 wrote:
Wed Feb 14, 2018 1:30 pm
kosomoto wrote:
Wed Feb 14, 2018 12:37 pm
They are ALWAYS cheap on a PE basis. They were cheap 30 years ago and still returns were bad. With 30 years of poor returns, the PE ratio should be under 5 if earnings grew as fast as US companies and the dividend yield should be double digits. Sure it’s possible foreign stocks will suddenly outperform US stocks over the long run but why would that happen? People argue valuations are lower but they were ALWAYS lower so that’s a poor argument.
Not sure what PE you use, but according to PE10, international stocks were very expensive 30 years ago relative to US stocks, and for most of the 1980s and early 1990s had a higher PE10: http://blogs.wf.com/assetmanagement/wp- ... 731993.png.

Can you provide a link or some data to show how they have always been cheap?
Great post, Asif. Your point about expensive is right on because by the time US starting beating Int handily in late 80s and 90s, International had a much better run up from the 70s compared to US. I forget if it was Rick Ferri or Bernstein, maybe Paul Merriman?, that talked about what if looked like if in the 70s, you only had US, you would have taken a huge hit because US stocks performed poorly and then coupled with inflation, it was a greater hit. However, International had done so much better that it smoothed out the portfolio and then by rebalancing back into US, you did even better in US.

It is also cherry picking to say 30 years of returns when that is simply a snapshot of time. If one goes back 10 or 20 before that 30 year window start date, then Int looks much more attractive.

I'm pretty confident that 10 to 15 years from today, 100k in the total us market will come up short against a split of Int large, small and EM, because valuations do matter. That said, I'm only willing to take a small gamble (risk) and during the last year, I've moved from about 55/45 US to Int to about 45/55 INT and will continue to overweight EM!
Age:45, about to be single for first time since 1995. Kids 8/13. Current AA 70/30, Desired stock AA 50/50, overweight EM, Int SC and US SCV.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 2:28 pm

jadd806 wrote:
Wed Feb 14, 2018 2:14 pm
kosomoto wrote:
Wed Feb 14, 2018 1:52 pm
jadd806 wrote:
Wed Feb 14, 2018 1:48 pm
kosomoto wrote:
Wed Feb 14, 2018 1:16 pm
jadd806 wrote:
Wed Feb 14, 2018 12:53 pm
One does not need to "make a case" for a 50% international allocation. You can't get more passive than just taking the entire world of investable equities at market cap weight.

Those who choose to make an active bet and significantly overweight the US in their portfolio are the ones who need to make their case. Their arguments do not hold up to scrutiny and can all be explained by biases, behavioral fallacies, and most commonly greed (i.e. curve fitting their portfolio to historical performance where the US was an outlier and hoping for a repeat).

Another well written and thought-provoking article from Mr. Swedroe.
Do you own bitcoin and gold at market weight as well? Real estate? Nobody owns every asset at market weight.
Huh? We're talking about diversification within a single asset class here. International equities are a subcategory of the equity asset class, not a separate asset.

My comment said "the entire world of investable equities," not "the entire world of investable assets."
Okay, then do you also own private equity at market weight? My point is that choosing how much stock to own is fundamentally arbitrary and choosing market weights doesn’t make investment decisions less arbitrary.
Private equity is neither an accessible, practical, or affordable investment for you or I. You already knew that though.

Why don't you own say, just a dozen stocks then? Why invest in US stocks at all, when South African stocks would serve you just fine? After all, it's "fundamentally arbitrary."
Private equity is now accessible to non accredited investors due to the jobs act. I personally have funds in Fundrise and Realty Mogul.

I don’t own a dozen stocks because rebalancing on my own would be a pain - also I saw a study that showed owning the largest 40 companies provided substantially the same diversification effects as the S&P 500 so I wouldn’t be too opposed to only having 40 companies.

Blindly owning anything is bad, you need to understand why you own something. South African returns have been higher than US returns since inception according to Credit Suisse I believe, but owning only South African funds is too risky for me when Cape Town is literally running out of running water this year.

I bring up the arbitrary decision to go with market weights because unless you believe that will have better results, why go with it? Just because it’s the market weight? It hasn’t worked in the past why would it in the future?

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by retireearly » Wed Feb 14, 2018 2:31 pm

kosomoto wrote:
Wed Feb 14, 2018 1:43 pm
asif408 wrote:
Wed Feb 14, 2018 1:30 pm
kosomoto wrote:
Wed Feb 14, 2018 12:37 pm
They are ALWAYS cheap on a PE basis. They were cheap 30 years ago and still returns were bad. With 30 years of poor returns, the PE ratio should be under 5 if earnings grew as fast as US companies and the dividend yield should be double digits. Sure it’s possible foreign stocks will suddenly outperform US stocks over the long run but why would that happen? People argue valuations are lower but they were ALWAYS lower so that’s a poor argument.
Not sure what PE you use, but according to PE10, international stocks were very expensive 30 years ago relative to US stocks, and for most of the 1980s and early 1990s had a higher PE10: http://blogs.wf.com/assetmanagement/wp- ... 731993.png.

Can you provide a link or some data to show how they have always been cheap?
I don’t have free data but the global valuation database looks different, but granted it doesn’t go back a full 30 years, it’s just a few years short:

https://selz.com/item/5947c9ba6edca00cbc572676

Edit: I found free data.

https://www.starcapital.de/fileadmin/us ... imling.pdf

As you can see in the research paper, median for all country cape is under 18 while for US it is nearly 20 since the late 70s. International stocks were cheaper in aggregate.
A few things.

-Even those like me, I don't think, compare US P/B, P/E, Cape, etc, completely apples to apples to Int or EM. So, those like me that appreciate value don't get terribly excited if the SP5 had a cape of 20 and EAFE or EM had 18 or 19. However, today, the SP5 has a cape that is well over 30, PE at 20 or so, PB of over 3. Compare that to EM with a PB of 1.83 and PE of below 14 makes me stop and think one of those two are a better value right now.

-If you looked at CAPE 10 years before that (problem is a lot of Int metrics weren't available going back too far), the delta would be greater 2, meaning non-US cape was most likely much lower than 18...
Age:45, about to be single for first time since 1995. Kids 8/13. Current AA 70/30, Desired stock AA 50/50, overweight EM, Int SC and US SCV.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by azanon » Wed Feb 14, 2018 2:34 pm

willthrill81 wrote:
Wed Feb 14, 2018 12:23 pm
azanon wrote:
Wed Feb 14, 2018 11:22 am
I would say the U.S. has outperformed the basket of international stocks the last 30 years, not say it the other way around. It's important to think of it that way, because you could dive into that basket of international stocks and find a few other countries that have matched or beaten the US. I don't have his data in front of me, but I have one showing 1967-2016 showing Finland and Sweden outperforming the U.S. by 3.5% annualized over 67-16' (from Credit Suisse), to just give an example.
You can certainly find pockets of the world that have outperformed the rest of the world or even the U.S., but a 4.53% nominal (1.98% real)return is a pittance for the volatility involved. Intermediate term Treasuries in the U.S. had a 1.74% higher return and with far lower volatility. It's not just that the U.S. outperformed; it's that the rest of the world's equities had very poor returns for a long time.
azanon wrote:
Wed Feb 14, 2018 11:22 am
Another point; If anything, someone telling me our particular country outperformed the basket of International stocks by some 6% over the past 30 years would cause me to want to own international stock more, all other things being equal. The "why" is pretty simple really; It's the same asset class, but mean reversion and currency reversion might be logically more likely to occur over the next 30 yrs.
I understand your logic, but that can be dangerous. It can take a long time for mean reversion to kick in, and there's no guarantee that it ever will. Someone might have concluded 20 years that international was bound to catch up and overweighted it, yet it has only continued to fall further and further behind. Again, I'm not saying to avoid international at all, but don't expect to be rewarded in any way for holding it.
azanon wrote:
Wed Feb 14, 2018 11:22 am
A third point; the fact that I reside in the U.S. would, all things being equal, wouldn't cause me to want to "double-down" on U.S. stocks, when I'm already vested enough in the U.S. in terms of employment, an eventual government pension, and government social security. If I layer all or mostly all U.S. stock holdings onto everything else I have that's financially tied to the U.S, I'm either going to hit the ball completely out of the park, or conversely, I might end up like that Enron employee who had all company stock, and nothing else. I prefer to diversify where I can, and now you can with cheap international stock.
I'll grant you that one. :beer I find this the most compelling reason by far to own international stocks.

Actually, I think that there is a decent argument to hold a portion of one's fixed income in emerging market bonds. I think that the current premium is worth the risk. Cambria's Sovereign Bond fund currently has a yield of 4.76%.
> Long-term under-performance of global stock is not unprecedented. One of the real risks of stocks is that they can easily under-perform for a very long time. So saying it's pittance/expressing frustration when the great risks didn't generate great returns is the cost of taking that risk in the first place. So the US was an exception this past 30 years, just like Japan was for some 20 years in the past. But if you're saying that consistence out-performance over bonds should always show in the results, then I would say you're confusing expected return with guaranted return. If it helps, and I don't think you're accepting this yet, the "expected return" of International stock going forward is about 4-5% more real than US stock. (source: several sites such as RA or gurufocus).

Also, you do realize you're comparing global stock to intermediate-term bond performance during perhaps one of the strongest 30-yr bond bull markets on record. So that's only going to impress those that don't know that history.

>Dangerous, and illogical, is advocating holding mostly/all US stock at greater than 30 times 10-yr earnings when the rest of the world's stock trades for almost half that valuation. From a valuation-corrected standpoint, there actually is parity among US stock vs. all other countries. At today's prices, you get about half as much much stock for your money. If you "valuation level" all of the stock, actually the returns would be pretty close.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 2:39 pm

retireearly wrote:
Wed Feb 14, 2018 2:31 pm
kosomoto wrote:
Wed Feb 14, 2018 1:43 pm
asif408 wrote:
Wed Feb 14, 2018 1:30 pm
kosomoto wrote:
Wed Feb 14, 2018 12:37 pm
They are ALWAYS cheap on a PE basis. They were cheap 30 years ago and still returns were bad. With 30 years of poor returns, the PE ratio should be under 5 if earnings grew as fast as US companies and the dividend yield should be double digits. Sure it’s possible foreign stocks will suddenly outperform US stocks over the long run but why would that happen? People argue valuations are lower but they were ALWAYS lower so that’s a poor argument.
Not sure what PE you use, but according to PE10, international stocks were very expensive 30 years ago relative to US stocks, and for most of the 1980s and early 1990s had a higher PE10: http://blogs.wf.com/assetmanagement/wp- ... 731993.png.

Can you provide a link or some data to show how they have always been cheap?
I don’t have free data but the global valuation database looks different, but granted it doesn’t go back a full 30 years, it’s just a few years short:

https://selz.com/item/5947c9ba6edca00cbc572676

Edit: I found free data.

https://www.starcapital.de/fileadmin/us ... imling.pdf

As you can see in the research paper, median for all country cape is under 18 while for US it is nearly 20 since the late 70s. International stocks were cheaper in aggregate.
A few things.

-Even those like me, I don't think, compare US P/B, P/E, Cape, etc, completely apples to apples to Int or EM. So, those like me that appreciate value don't get terribly excited if the SP5 had a cape of 20 and EAFE or EM had 18 or 19. However, today, the SP5 has a cape that is well over 30, PE at 20 or so, PB of over 3. Compare that to EM with a PB of 1.83 and PE of below 14 makes me stop and think one of those two are a better value right now.

-If you looked at CAPE 10 years before that (problem is a lot of Int metrics weren't available going back too far), the delta would be greater 2, meaning non-US cape was most likely much lower than 18...
Yes the data is awful, especially given that passive indexes that you could invest in didn’t really exist until the 80s. 100 years from now the data will be a lot better.

Do you have emerging market PE or CAPE historical data? I have a feeling they have been cheaper than the US for a while as well but I have no data.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by willthrill81 » Wed Feb 14, 2018 2:45 pm

azanon wrote:
Wed Feb 14, 2018 2:34 pm
willthrill81 wrote:
Wed Feb 14, 2018 12:23 pm
azanon wrote:
Wed Feb 14, 2018 11:22 am
I would say the U.S. has outperformed the basket of international stocks the last 30 years, not say it the other way around. It's important to think of it that way, because you could dive into that basket of international stocks and find a few other countries that have matched or beaten the US. I don't have his data in front of me, but I have one showing 1967-2016 showing Finland and Sweden outperforming the U.S. by 3.5% annualized over 67-16' (from Credit Suisse), to just give an example.
You can certainly find pockets of the world that have outperformed the rest of the world or even the U.S., but a 4.53% nominal (1.98% real)return is a pittance for the volatility involved. Intermediate term Treasuries in the U.S. had a 1.74% higher return and with far lower volatility. It's not just that the U.S. outperformed; it's that the rest of the world's equities had very poor returns for a long time.
azanon wrote:
Wed Feb 14, 2018 11:22 am
Another point; If anything, someone telling me our particular country outperformed the basket of International stocks by some 6% over the past 30 years would cause me to want to own international stock more, all other things being equal. The "why" is pretty simple really; It's the same asset class, but mean reversion and currency reversion might be logically more likely to occur over the next 30 yrs.
I understand your logic, but that can be dangerous. It can take a long time for mean reversion to kick in, and there's no guarantee that it ever will. Someone might have concluded 20 years that international was bound to catch up and overweighted it, yet it has only continued to fall further and further behind. Again, I'm not saying to avoid international at all, but don't expect to be rewarded in any way for holding it.
azanon wrote:
Wed Feb 14, 2018 11:22 am
A third point; the fact that I reside in the U.S. would, all things being equal, wouldn't cause me to want to "double-down" on U.S. stocks, when I'm already vested enough in the U.S. in terms of employment, an eventual government pension, and government social security. If I layer all or mostly all U.S. stock holdings onto everything else I have that's financially tied to the U.S, I'm either going to hit the ball completely out of the park, or conversely, I might end up like that Enron employee who had all company stock, and nothing else. I prefer to diversify where I can, and now you can with cheap international stock.
I'll grant you that one. :beer I find this the most compelling reason by far to own international stocks.

Actually, I think that there is a decent argument to hold a portion of one's fixed income in emerging market bonds. I think that the current premium is worth the risk. Cambria's Sovereign Bond fund currently has a yield of 4.76%.
> Long-term under-performance of global stock is not unprecedented. One of the real risks of stocks is that they can easily under-perform for a very long time. So saying it's pittance/expressing frustration when the great risks didn't generate great returns is the cost of taking that risk in the first place. So the US was an exception this past 30 years, just like Japan was for some 20 years in the past. But if you're saying that consistence out-performance over bonds should always show in the results, then I would say you're confusing expected return with guaranted return. If it helps, and I don't think you're accepting this yet, the "expected return" of International stock going forward is about 4-5% more real than US stock. (source: several sites such as RA or gurufocus).
I know full well that expected return does not equate to a guarantee. But 30 years of huge underperformance is not to be taken lightly.

And those "expected returns" are built on assumptions that have not been very accurate in the past, so I wouldn't place too much weight on them. We were hearing those arguments a decade ago when U.S. stocks were at 1/4 of where they are now.
azanon wrote:
Wed Feb 14, 2018 2:34 pm
Also, you do realize you're comparing global stock to intermediate-term bond performance during perhaps one of the strongest 30-yr bond bull markets on record. So that's only going to impress those that don't know that history.
FWIW, research on this topic has indicated that the falling interest rates over this period only bumped up total bond market returns by around 1% annualized. So even if we take that away, ITT still beat international equity in absolute returns for a 30 year period. Only twice have long-term Treasuries beaten U.S. equities over a 30 year period.
azanon wrote:
Wed Feb 14, 2018 2:34 pm
>Dangerous, and illogical, is advocating holding mostly/all US stock at greater than 30 times 10-yr earnings when the rest of the world's stock trades for almost half that valuation. From a valuation-corrected standpoint, there actually is parity among US stock vs. all other countries. At today's prices, you get about half as much much stock for your money. If you "valuation level" all of the stock, actually the returns would be pretty close.
Again, you're falling back on the valuation argument, and that just hasn't been a good predictor of returns for the last 30 years. Maybe it will work again someday, but I wouldn't hold my breath.

Please remember that I said from the outset that I think investors should have 'some' international exposure.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by asif408 » Wed Feb 14, 2018 2:49 pm

kosomoto wrote:
Wed Feb 14, 2018 2:39 pm
Do you have emerging market PE or CAPE historical data? I have a feeling they have been cheaper than the US for a while as well but I have no data.
This is the only long-term CAPE data for EM that I am aware of: https://www.researchaffiliates.com/cont ... VERLAY.jpg. And this shows US vs. EM relative CAPE: http://www.etf.com/sites/default/files/ ... _Fig3b.jpg

Since the EM index didn't begin until 1988 or 1989 I don't think there would be much of any reliable EM data prior to then. From 2006-2011 EM was about the same or more expensive than US. From 2011-2016 EM valuations dropped while US increased, creating the relative disparity. I think starting in 2017 the valuation disparity has narrowed slightly, since EM outperformed, but not by much.
Last edited by asif408 on Wed Feb 14, 2018 2:52 pm, edited 2 times in total.

kosomoto
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 2:49 pm

azanon wrote:
Wed Feb 14, 2018 2:34 pm
willthrill81 wrote:
Wed Feb 14, 2018 12:23 pm
azanon wrote:
Wed Feb 14, 2018 11:22 am
I would say the U.S. has outperformed the basket of international stocks the last 30 years, not say it the other way around. It's important to think of it that way, because you could dive into that basket of international stocks and find a few other countries that have matched or beaten the US. I don't have his data in front of me, but I have one showing 1967-2016 showing Finland and Sweden outperforming the U.S. by 3.5% annualized over 67-16' (from Credit Suisse), to just give an example.
You can certainly find pockets of the world that have outperformed the rest of the world or even the U.S., but a 4.53% nominal (1.98% real)return is a pittance for the volatility involved. Intermediate term Treasuries in the U.S. had a 1.74% higher return and with far lower volatility. It's not just that the U.S. outperformed; it's that the rest of the world's equities had very poor returns for a long time.
azanon wrote:
Wed Feb 14, 2018 11:22 am
Another point; If anything, someone telling me our particular country outperformed the basket of International stocks by some 6% over the past 30 years would cause me to want to own international stock more, all other things being equal. The "why" is pretty simple really; It's the same asset class, but mean reversion and currency reversion might be logically more likely to occur over the next 30 yrs.
I understand your logic, but that can be dangerous. It can take a long time for mean reversion to kick in, and there's no guarantee that it ever will. Someone might have concluded 20 years that international was bound to catch up and overweighted it, yet it has only continued to fall further and further behind. Again, I'm not saying to avoid international at all, but don't expect to be rewarded in any way for holding it.
azanon wrote:
Wed Feb 14, 2018 11:22 am
A third point; the fact that I reside in the U.S. would, all things being equal, wouldn't cause me to want to "double-down" on U.S. stocks, when I'm already vested enough in the U.S. in terms of employment, an eventual government pension, and government social security. If I layer all or mostly all U.S. stock holdings onto everything else I have that's financially tied to the U.S, I'm either going to hit the ball completely out of the park, or conversely, I might end up like that Enron employee who had all company stock, and nothing else. I prefer to diversify where I can, and now you can with cheap international stock.
I'll grant you that one. :beer I find this the most compelling reason by far to own international stocks.

Actually, I think that there is a decent argument to hold a portion of one's fixed income in emerging market bonds. I think that the current premium is worth the risk. Cambria's Sovereign Bond fund currently has a yield of 4.76%.
> Long-term under-performance of global stock is not unprecedented. One of the real risks of stocks is that they can easily under-perform for a very long time. So saying it's pittance/expressing frustration when the great risks didn't generate great returns is the cost of taking that risk in the first place. So the US was an exception this past 30 years, just like Japan was for some 20 years in the past. But if you're saying that consistence out-performance over bonds should always show in the results, then I would say you're confusing expected return with guaranted return. If it helps, and I don't think you're accepting this yet, the "expected return" of International stock going forward is about 4-5% more real than US stock. (source: several sites such as RA or gurufocus).

Also, you do realize you're comparing global stock to intermediate-term bond performance during perhaps one of the strongest 30-yr bond bull markets on record. So that's only going to impress those that don't know that history.

>Dangerous, and illogical, is advocating holding mostly/all US stock at greater than 30 times 10-yr earnings when the rest of the world's stock trades for almost half that valuation. From a valuation-corrected standpoint, there actually is parity among US stock vs. all other countries. At today's prices, you get about half as much much stock for your money. If you "valuation level" all of the stock, actually the returns would be pretty close.
CAPE will drop after 2019 for US valuations. The financial crisis screwed with CAPE. Also, CAPE has had very litttle predictive power. It’s a really flawed metric and I really wish it wasn’t used so much. International stocks on a current PE basis are just a bit cheaper than US stocks per Vanguard so you’re not getting much more. It’s dangerous in my opinion to believe International will suddenly do well even though they haven’t in the past. The valuation argument doesn’t work well for international, otherwise from 1980 on international would have outperformed US. It didn’t come close.

azanon
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by azanon » Wed Feb 14, 2018 3:20 pm

kosomoto wrote:
Wed Feb 14, 2018 2:49 pm
azanon wrote:
Wed Feb 14, 2018 2:34 pm
willthrill81 wrote:
Wed Feb 14, 2018 12:23 pm
azanon wrote:
Wed Feb 14, 2018 11:22 am
I would say the U.S. has outperformed the basket of international stocks the last 30 years, not say it the other way around. It's important to think of it that way, because you could dive into that basket of international stocks and find a few other countries that have matched or beaten the US. I don't have his data in front of me, but I have one showing 1967-2016 showing Finland and Sweden outperforming the U.S. by 3.5% annualized over 67-16' (from Credit Suisse), to just give an example.
You can certainly find pockets of the world that have outperformed the rest of the world or even the U.S., but a 4.53% nominal (1.98% real)return is a pittance for the volatility involved. Intermediate term Treasuries in the U.S. had a 1.74% higher return and with far lower volatility. It's not just that the U.S. outperformed; it's that the rest of the world's equities had very poor returns for a long time.
azanon wrote:
Wed Feb 14, 2018 11:22 am
Another point; If anything, someone telling me our particular country outperformed the basket of International stocks by some 6% over the past 30 years would cause me to want to own international stock more, all other things being equal. The "why" is pretty simple really; It's the same asset class, but mean reversion and currency reversion might be logically more likely to occur over the next 30 yrs.
I understand your logic, but that can be dangerous. It can take a long time for mean reversion to kick in, and there's no guarantee that it ever will. Someone might have concluded 20 years that international was bound to catch up and overweighted it, yet it has only continued to fall further and further behind. Again, I'm not saying to avoid international at all, but don't expect to be rewarded in any way for holding it.
azanon wrote:
Wed Feb 14, 2018 11:22 am
A third point; the fact that I reside in the U.S. would, all things being equal, wouldn't cause me to want to "double-down" on U.S. stocks, when I'm already vested enough in the U.S. in terms of employment, an eventual government pension, and government social security. If I layer all or mostly all U.S. stock holdings onto everything else I have that's financially tied to the U.S, I'm either going to hit the ball completely out of the park, or conversely, I might end up like that Enron employee who had all company stock, and nothing else. I prefer to diversify where I can, and now you can with cheap international stock.
I'll grant you that one. :beer I find this the most compelling reason by far to own international stocks.

Actually, I think that there is a decent argument to hold a portion of one's fixed income in emerging market bonds. I think that the current premium is worth the risk. Cambria's Sovereign Bond fund currently has a yield of 4.76%.
> Long-term under-performance of global stock is not unprecedented. One of the real risks of stocks is that they can easily under-perform for a very long time. So saying it's pittance/expressing frustration when the great risks didn't generate great returns is the cost of taking that risk in the first place. So the US was an exception this past 30 years, just like Japan was for some 20 years in the past. But if you're saying that consistence out-performance over bonds should always show in the results, then I would say you're confusing expected return with guaranted return. If it helps, and I don't think you're accepting this yet, the "expected return" of International stock going forward is about 4-5% more real than US stock. (source: several sites such as RA or gurufocus).

Also, you do realize you're comparing global stock to intermediate-term bond performance during perhaps one of the strongest 30-yr bond bull markets on record. So that's only going to impress those that don't know that history.

>Dangerous, and illogical, is advocating holding mostly/all US stock at greater than 30 times 10-yr earnings when the rest of the world's stock trades for almost half that valuation. From a valuation-corrected standpoint, there actually is parity among US stock vs. all other countries. At today's prices, you get about half as much much stock for your money. If you "valuation level" all of the stock, actually the returns would be pretty close.
CAPE will drop after 2019 for US valuations. The financial crisis screwed with CAPE. Also, CAPE has had very litttle predictive power. It’s a really flawed metric and I really wish it wasn’t used so much. International stocks on a current PE basis are just a bit cheaper than US stocks per Vanguard so you’re not getting much more. It’s dangerous in my opinion to believe International will suddenly do well even though they haven’t in the past. The valuation argument doesn’t work well for international, otherwise from 1980 on international would have outperformed US. It didn’t come close.
CAPE worked in 99' and 07', what makes you think it won't work this time? CAPE actually has the most predictive power of any valuation metric (please don't take my word for it, ask an expert like Larry S.). International has done well in the past - study the 80s, and International did outperform US in the 80s. Valuation actually predicts global markets great, and for research evidence on that I recommend the book Global Value by Mebane Faber.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by azanon » Wed Feb 14, 2018 3:28 pm

willthrill81 wrote:
Wed Feb 14, 2018 2:45 pm
FWIW, research on this topic has indicated that the falling interest rates over this period only bumped up total bond market returns by around 1% annualized. So even if we take that away, ITT still beat international equity in absolute returns for a 30 year period. Only twice have long-term Treasuries beaten U.S. equities over a 30 year period.

...
Again, you're falling back on the valuation argument, and that just hasn't been a good predictor of returns for the last 30 years. Maybe it will work again someday, but I wouldn't hold my breath.
>Considering that the very long term return of IT treasuries is in the neighborhood of 2% real, 1% extra is a lot.

> As I mentioned to Kosomoto, (high) "valuations" coincided with or preceded both the 99' and 07' drop. Falling back on an indicator that hasn't struck out yet is not such a bad thing. When has it not worked? It's 30+ now, ... get back to me in 5-7 years and let's see where the S&P 500 is. You/We'll be lucky if it's even the same value and we will have made dividends only.

> CAPE is 30+ now, and surely you've noticed a particular thread that seems to be at the top quite a bit and a lot of people posting in it. Please don't say this is yet another coincidence to go along with 99' and 07'.

fennewaldaj
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by fennewaldaj » Wed Feb 14, 2018 3:35 pm

I am drawn to a close to market weight allocation because it lowers to dispersion of possible outcomes. It is kinda a bonus that international happens to be attractively priced now when I a really upping my savings rate but that is not why I like market weight. IT is very well possible that the US only champions (or those that allocate 70+%US or so) will do better but it is also possible they will do worse. I am not really all that concerned with what actually happens but I want to set myself up for what ever happens. I think market weight does that.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 3:39 pm

azanon wrote:
Wed Feb 14, 2018 3:20 pm
kosomoto wrote:
Wed Feb 14, 2018 2:49 pm
azanon wrote:
Wed Feb 14, 2018 2:34 pm
willthrill81 wrote:
Wed Feb 14, 2018 12:23 pm
azanon wrote:
Wed Feb 14, 2018 11:22 am
I would say the U.S. has outperformed the basket of international stocks the last 30 years, not say it the other way around. It's important to think of it that way, because you could dive into that basket of international stocks and find a few other countries that have matched or beaten the US. I don't have his data in front of me, but I have one showing 1967-2016 showing Finland and Sweden outperforming the U.S. by 3.5% annualized over 67-16' (from Credit Suisse), to just give an example.
You can certainly find pockets of the world that have outperformed the rest of the world or even the U.S., but a 4.53% nominal (1.98% real)return is a pittance for the volatility involved. Intermediate term Treasuries in the U.S. had a 1.74% higher return and with far lower volatility. It's not just that the U.S. outperformed; it's that the rest of the world's equities had very poor returns for a long time.
azanon wrote:
Wed Feb 14, 2018 11:22 am
Another point; If anything, someone telling me our particular country outperformed the basket of International stocks by some 6% over the past 30 years would cause me to want to own international stock more, all other things being equal. The "why" is pretty simple really; It's the same asset class, but mean reversion and currency reversion might be logically more likely to occur over the next 30 yrs.
I understand your logic, but that can be dangerous. It can take a long time for mean reversion to kick in, and there's no guarantee that it ever will. Someone might have concluded 20 years that international was bound to catch up and overweighted it, yet it has only continued to fall further and further behind. Again, I'm not saying to avoid international at all, but don't expect to be rewarded in any way for holding it.
azanon wrote:
Wed Feb 14, 2018 11:22 am
A third point; the fact that I reside in the U.S. would, all things being equal, wouldn't cause me to want to "double-down" on U.S. stocks, when I'm already vested enough in the U.S. in terms of employment, an eventual government pension, and government social security. If I layer all or mostly all U.S. stock holdings onto everything else I have that's financially tied to the U.S, I'm either going to hit the ball completely out of the park, or conversely, I might end up like that Enron employee who had all company stock, and nothing else. I prefer to diversify where I can, and now you can with cheap international stock.
I'll grant you that one. :beer I find this the most compelling reason by far to own international stocks.

Actually, I think that there is a decent argument to hold a portion of one's fixed income in emerging market bonds. I think that the current premium is worth the risk. Cambria's Sovereign Bond fund currently has a yield of 4.76%.
> Long-term under-performance of global stock is not unprecedented. One of the real risks of stocks is that they can easily under-perform for a very long time. So saying it's pittance/expressing frustration when the great risks didn't generate great returns is the cost of taking that risk in the first place. So the US was an exception this past 30 years, just like Japan was for some 20 years in the past. But if you're saying that consistence out-performance over bonds should always show in the results, then I would say you're confusing expected return with guaranted return. If it helps, and I don't think you're accepting this yet, the "expected return" of International stock going forward is about 4-5% more real than US stock. (source: several sites such as RA or gurufocus).

Also, you do realize you're comparing global stock to intermediate-term bond performance during perhaps one of the strongest 30-yr bond bull markets on record. So that's only going to impress those that don't know that history.

>Dangerous, and illogical, is advocating holding mostly/all US stock at greater than 30 times 10-yr earnings when the rest of the world's stock trades for almost half that valuation. From a valuation-corrected standpoint, there actually is parity among US stock vs. all other countries. At today's prices, you get about half as much much stock for your money. If you "valuation level" all of the stock, actually the returns would be pretty close.
CAPE will drop after 2019 for US valuations. The financial crisis screwed with CAPE. Also, CAPE has had very litttle predictive power. It’s a really flawed metric and I really wish it wasn’t used so much. International stocks on a current PE basis are just a bit cheaper than US stocks per Vanguard so you’re not getting much more. It’s dangerous in my opinion to believe International will suddenly do well even though they haven’t in the past. The valuation argument doesn’t work well for international, otherwise from 1980 on international would have outperformed US. It didn’t come close.
CAPE worked in 99' and 07', what makes you think it won't work this time? CAPE actually has the most predictive power of any valuation metric (please don't take my word for it, ask an expert like Larry S.). International has done well in the past - study the 80s, and International did outperform US in the 80s. Valuation actually predicts global markets great, and for research evidence on that I recommend the book Global Value by Mebane Faber.
What do you mean by “CAPE worked?” US returns since 99 and 2000 have still been higher than international last I checked. So therefore CAPE didn’t work?

Not to mention nobody invests in lump sums at the top of the market. Using portfolio visualizor you can see that a more realistic addition of funds over time has higher yields for US stocks even if you include the 80s bull market in international.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by azanon » Wed Feb 14, 2018 3:46 pm

kosomoto wrote:
Wed Feb 14, 2018 3:39 pm
What do you mean by “CAPE worked?” US returns since 99 and 2000 have still been higher than international last I checked. So therefore CAPE didn’t work?

Not to mention nobody invests in lump sums at the top of the market. Using portfolio visualizor you can see that a more realistic addition of funds over time has higher yields for US stocks even if you include the 80s bull market in international.
> I'm not sure why this is going without saying. US set a CAPE record in late 99. Head over to Morningstar and chart the US market's next 3 years performance, and let me know what you come up with. When you confirm that the performance.... wasn't great, let me know if you think it was a coincidence that our CAPE value was at a record level in 99'.

> You "reinvest" essentially every single day. You don't get a pass to just ignore what stocks costs simply because you've already been invested for a long time.

Now if you think stocks are always the same value every day, then we were always at an impasse. I think there was something useful to learn from the Efficient Market Hypothesis but for me it's not a law. Ok, it isn't a law as the name implies, but I am aware that some consider it a law.

> I never said International has performed as well as US stocks in the past. I did say International beat US stocks in the 80s, ... and they did.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by kosomoto » Wed Feb 14, 2018 3:51 pm

azanon wrote:
Wed Feb 14, 2018 3:46 pm
kosomoto wrote:
Wed Feb 14, 2018 3:39 pm
What do you mean by “CAPE worked?” US returns since 99 and 2000 have still been higher than international last I checked. So therefore CAPE didn’t work?

Not to mention nobody invests in lump sums at the top of the market. Using portfolio visualizor you can see that a more realistic addition of funds over time has higher yields for US stocks even if you include the 80s bull market in international.
> I'm not sure why this is going without saying. US set a CAPE record in late 99. Head over to Morningstar and chart the US market's next 3 years performance, and let me know what you come up with. When you confirm that the performance.... wasn't great, let me know if you think it was a coincidence that our CAPE value was at a record level in 99'.

> You "reinvest" essentially every single day. You don't get a pass to just ignore what stocks costs simply because you've already been invested for a long time.

Now if you think stocks are always the same value every day, then we were always at an impasse. I think there was something useful to learn from the Efficient Market Hypothesis but for me it's not a law. Ok, it isn't a law as the name implies, but I am aware that some consider it a law.

> I never said International has performed as well as US stocks in the past. I did say International beat US stocks in the 80s, ... and they did.
What is the significance of three year stock returns? Nobody is invested for three years only.

People here are advocating investing internationally due to CAPE valuations. If you would have invested in international stocks when CAPE was lower for international stocks in the past the returns until now would have been lower than US despite the higher CAPE, so that argument falls flat on its face.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by azanon » Wed Feb 14, 2018 3:52 pm

Ima bail on this one Koso/Will. With the #'s and the strong recency bias, I'm outgunned. Good luck with that US stock. I have nothing further to add with respect to the original topic.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by patrick013 » Wed Feb 14, 2018 3:54 pm

I think Larry's reasoning is weak for foreign investing. Based on
statistical and behavioral bias only, as well as his PE's are not
accurate or are based on operating PE's only. Not good.

When you think of all the risk in foreign investing is bias really
that bad ? Currency risk, freezing assets, bond defaults, closing
exchanges...

If I was going into something geographically separate more than
a 10% AA I would go with China or Asian-Pacific, take my chances
there. I mean Global Small Cap fund is in alot of countries I haven't
even heard of. So there's foreign risk, over-diversification risk,
no mention of fundamentals in the article at all.
age in bonds, buy-and-hold, 10 year business cycle

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by Random Walker » Wed Feb 14, 2018 3:59 pm

Patrick013,
Don’t you think all the risks you mention are already incorporated into prices?

Dave

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by Lauretta » Wed Feb 14, 2018 4:11 pm

Good article, I have overweighted EM also after reading the Keppler and Encinosa paper quoted by LS. Whilst I overweight Europe and EM because of valuations (and for the Eurozone's case also because I don't want to take too much currency risk) I have seen arguments according to which the higher CAPE in the US can be explained by the different sector concentration
http://www.fortunefinancialadvisors.com ... gated-data
Would be interested in your take on this.
When everyone is thinking the same, no one is thinking at all

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by patrick013 » Wed Feb 14, 2018 4:13 pm

Random Walker wrote:
Wed Feb 14, 2018 3:59 pm
Patrick013,
Don’t you think all the risks you mention are already incorporated into prices?

Dave
Definitely not. Especially as he's using operating
PE's again. Wonder why for that ?

Looking at all the coins in the box to put money in for safety SE Asia
is the best coin in the box IMO even if actual returns are mediocre
going forward.
age in bonds, buy-and-hold, 10 year business cycle

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by Random Walker » Wed Feb 14, 2018 7:23 pm

Markets price risk and I gotta believe any differences between the riskiness of our markets and foreign markets are already reflected in the prices. And lower prices and valuations imply higher perceived risk and higher expected return.

Dave

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by patrick013 » Wed Feb 14, 2018 8:22 pm

Random Walker wrote:
Wed Feb 14, 2018 7:23 pm
Markets price risk and I gotta believe any differences between the riskiness of our markets and foreign markets are already reflected in the prices. And lower prices and valuations imply higher perceived risk and higher expected return.

Dave
Perhaps but they might just as well be a value trap highly dependent
on exports with low expected returns. That could be the real lesson.
But lately doing good I think. Just have to wait and see.

To base a decision including economic, fundamental, and statistical
info would be needed. Lesson 1 and lesson 2 ?
age in bonds, buy-and-hold, 10 year business cycle

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by nedsaid » Wed Feb 14, 2018 8:38 pm

willthrill81 wrote:
Wed Feb 14, 2018 12:15 pm
spangineer wrote:
Wed Feb 14, 2018 11:26 am
willthrill81 wrote:
Wed Feb 14, 2018 11:05 am
There are actually some logical reasons for having a home country tilt, not the least of which is the fact that your home country's inflation, which impacts your spending power, also has a much greater impact on domestic stock market returns than international returns. Tyler at Portfolio Charts had a great post on this.
Hmm; I'm not sure I follow. Wouldn't higher-than-average local inflation correspond with a weaker dollar on foreign currency exchanges? So if I own international stocks in a dollar-denominated mutual fund, wouldn't my returns (in dollar terms) be higher, roughly in line with local inflation?

I need to read more on this topic, and I'm happy to be corrected, but I would think dollar-denominated international diversification would be a net benefit in a high-dollar-inflation environment.
It's simpler than that. If we assume 5% inflation in the U.S. and 1% in international, we can expect nominal stock returns to be higher in the U.S. than international as a consequence. Equal weighting or overweighting international disconnects investors from those 'inflated' returns. The post I linked to explains this much better.
Well, the problem is that 5% inflation would be a killer for US Stocks, particularly after many years of falling interest rates and low inflation. We even flirted with deflation. The market would eventually adjust but it could take a decade or more, meanwhile the US could have subpar results compared to the rest of the world. Think of the 1970's stagflation, not a good time for stocks or bonds. Stock investors didn't get their inflation adjustment until the 1980s when both interest rates and inflation rates fell. It is a big myth that inflation is good for stocks.

The biggest thing that causes variability between US stock returns and International stock returns are currency. A weakening dollar creates tailwinds for International Stocks and a strengthening dollar creates headwinds.
A fool and his money are good for business.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by willthrill81 » Wed Feb 14, 2018 9:55 pm

nedsaid wrote:
Wed Feb 14, 2018 8:38 pm
willthrill81 wrote:
Wed Feb 14, 2018 12:15 pm
spangineer wrote:
Wed Feb 14, 2018 11:26 am
willthrill81 wrote:
Wed Feb 14, 2018 11:05 am
There are actually some logical reasons for having a home country tilt, not the least of which is the fact that your home country's inflation, which impacts your spending power, also has a much greater impact on domestic stock market returns than international returns. Tyler at Portfolio Charts had a great post on this.
Hmm; I'm not sure I follow. Wouldn't higher-than-average local inflation correspond with a weaker dollar on foreign currency exchanges? So if I own international stocks in a dollar-denominated mutual fund, wouldn't my returns (in dollar terms) be higher, roughly in line with local inflation?

I need to read more on this topic, and I'm happy to be corrected, but I would think dollar-denominated international diversification would be a net benefit in a high-dollar-inflation environment.
It's simpler than that. If we assume 5% inflation in the U.S. and 1% in international, we can expect nominal stock returns to be higher in the U.S. than international as a consequence. Equal weighting or overweighting international disconnects investors from those 'inflated' returns. The post I linked to explains this much better.
Well, the problem is that 5% inflation would be a killer for US Stocks, particularly after many years of falling interest rates and low inflation. We even flirted with deflation. The market would eventually adjust but it could take a decade or more, meanwhile the US could have subpar results compared to the rest of the world. Think of the 1970's stagflation, not a good time for stocks or bonds. Stock investors didn't get their inflation adjustment until the 1980s when both interest rates and inflation rates fell. It is a big myth that inflation is good for stocks.
You'll note that I didn't say inflation was good for stocks. But everything else being equal, higher inflation can be expected to lead to higher nominal stock returns. I suggest that you take a look at Tyler's post at Portfolio Charts that I linked to; it demonstrates why this issue is important.

And even during the very high inflationary period of 1976-1981, U.S. stocks still returned 3.66% real.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by whodidntante » Wed Feb 14, 2018 10:01 pm

I'm slightly > 50% international because the USA has been lagging.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by Random Walker » Thu Feb 15, 2018 10:19 am

I think the really great international diversifier is international small value, perhaps even better than emerging markets. International small much more influenced by local economic conditions than the large multinational companies.

Dave

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by jhfenton » Thu Feb 15, 2018 10:38 am

Random Walker wrote:
Thu Feb 15, 2018 10:19 am
I think the really great international diversifier is international small value, perhaps even better than emerging markets. International small much more influenced by local economic conditions than the large multinational companies.

Dave
I agree. (As a practical matter I own ex-US small/mid blend.) In order to simplify things, I completely dropped ex-US developed large cap. Our 50% ex-US stake is entirely VSS/VFSVX and emerging markets. Ex-US small has all the diversification benefits of ex-US large plus, as you said, greater exposure to local economic conditions. If ex-US small cap also outperforms because it's "small", that's just a bonus.

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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by Lauretta » Thu Feb 15, 2018 10:40 am

Random Walker wrote:
Thu Feb 15, 2018 10:19 am
I think the really great international diversifier is international small value, perhaps even better than emerging markets. International small much more influenced by local economic conditions than the large multinational companies.

Dave
Yes excellent point about international small as a diversifier. Question: why do you say
the really great international diversifier is international small value
?
You mean that SCV are better at diversifying than SC? (or simply that SCV should outperform SC in the long run?)
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by Random Walker » Thu Feb 15, 2018 12:35 pm

Yes, I think small value is superior diversifier to small. I think VG has no ISV fund, so I didn’t go all the way there. In general I think the goal is to diversify away from market beta (we all have enough of that already in our portfolios). I use DFA ISV Fund.

Dave

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