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

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

Post by laotzu » Fri Feb 16, 2018 12:42 pm

I am adding several of the links listed here to my reading list. I haven't see this topic approached from the other side. I feel like doing so would be more "bogleheady" by removing emotion/bias from the equation. Specifically, how would you answer these questions:

1) What percentage of equities should a non-US investor invest in the US? Why? Should it be a part of an international bucket? Why/Why not?

2) What level of US tilt would you advise for a US person living outside of the US? What if they earn in non-USD? Why?

3) What level of US tilt would you advise for a US resident who intends to retire to an unknown and likely non-USD functional currency location? Why?

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

Post by Lauretta » Fri Feb 16, 2018 3:14 pm

laotzu wrote:
Fri Feb 16, 2018 12:42 pm

1) What percentage of equities should a non-US investor invest in the US? Why? Should it be a part of an international bucket? Why/Why not?
As a Eurozone investor I have about 15% invested in the US (~10% in the S&P500 and ~10% in a world small/mid cap value ETF, half of which (thus 5%) is in the US).
I underweight the US relative to market cap because it is one of the most expensive markets in the world and because I don't want to take too much currency risk.
If the US CAPE were lower I suppose I would have more US but I'd currency hedge part of the exposure as the dollar index is also high compared to historical average.
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hilink73
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by hilink73 » Sat Feb 17, 2018 3:03 am

Lauretta wrote:
Fri Feb 16, 2018 3:14 pm
laotzu wrote:
Fri Feb 16, 2018 12:42 pm

1) What percentage of equities should a non-US investor invest in the US? Why? Should it be a part of an international bucket? Why/Why not?
As a Eurozone investor I have about 15% invested in the US (~10% in the S&P500 and ~10% in a world small/mid cap value ETF, half of which (thus 5%) is in the US).
I underweight the US relative to market cap because it is one of the most expensive markets in the world and because I don't want to take too much currency risk.
If the US CAPE were lower I suppose I would have more US but I'd currency hedge part of the exposure as the dollar index is also high compared to historical average.
Hi Lauretta, as a Swiss investor I feel similar although my US allocation is a little bit higher at 25 (EUR 28%, JAP 10% and EM 37%).

I don't not have a home bias (no separate Swiss equity ETFs) but all diversified globally.

In the other hand, having read Siamonds great article (https://finpage.blog/2017/03/25/investi ... ld-part-3/) I'm wondering if I should increase my allocation to Swiss stocks to maintain an appropriate SWR later.
The regular advice (going global) does not seem to fit very well for the Swiss situation.

Looking at the table at https://blbarnitz4.files.wordpress.com/ ... -table.jpg a US investor would have benefited from are global asset allocation, while a Swiss investor would have been better off tilting to Swiss stocks 100%.


Slightly terrifying. Although I know having a global allocation is the way to go.
Any thoughts? Any Swiss investors?

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

Post by minimalistmarc » Sat Feb 17, 2018 5:23 am

Lauretta wrote:
Fri Feb 16, 2018 3:14 pm
laotzu wrote:
Fri Feb 16, 2018 12:42 pm

1) What percentage of equities should a non-US investor invest in the US? Why? Should it be a part of an international bucket? Why/Why not?
As a Eurozone investor I have about 15% invested in the US (~10% in the S&P500 and ~10% in a world small/mid cap value ETF, half of which (thus 5%) is in the US).
I underweight the US relative to market cap because it is one of the most expensive markets in the world and because I don't want to take too much currency risk.
If the US CAPE were lower I suppose I would have more US but I'd currency hedge part of the exposure as the dollar index is also high compared to historical average.
You are at the stage I was several years ago, where I thought I could use my brain to get better returns (UK investor).

I have since learned to ignore my brain, keep it very simple, as intelligence seems to reduce your returns from the market (which often does the opposite of what you think).

I am 100% equities, vanguard all world, don’t care how much US/uk/japan/emerging markets I am holding as long as it is market cap.

Learn to fight your intelligent brain is my advice. Or don’t just do something, stand there!

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

Post by Lauretta » Sat Feb 17, 2018 6:02 am

minimalistmarc wrote:
Sat Feb 17, 2018 5:23 am
Lauretta wrote:
Fri Feb 16, 2018 3:14 pm
laotzu wrote:
Fri Feb 16, 2018 12:42 pm

1) What percentage of equities should a non-US investor invest in the US? Why? Should it be a part of an international bucket? Why/Why not?
As a Eurozone investor I have about 15% invested in the US (~10% in the S&P500 and ~10% in a world small/mid cap value ETF, half of which (thus 5%) is in the US).
I underweight the US relative to market cap because it is one of the most expensive markets in the world and because I don't want to take too much currency risk.
If the US CAPE were lower I suppose I would have more US but I'd currency hedge part of the exposure as the dollar index is also high compared to historical average.
You are at the stage I was several years ago, where I thought I could use my brain to get better returns (UK investor).

I have since learned to ignore my brain, keep it very simple, as intelligence seems to reduce your returns from the market (which often does the opposite of what you think).

I am 100% equities, vanguard all world, don’t care how much US/uk/japan/emerging markets I am holding as long as it is market cap.

Learn to fight your intelligent brain is my advice. Or don’t just do something, stand there!
:D :D haha good point. I have to fight that tendency sometimes. To do that I try to remind myself e.g. that Newton was a terrinble investor. :wink:
I think you did very well to invest in a World Etf (in which more than 90% of stocks are denominated in currencies other than the pound) because after Brexit and the devaluation of the pound all those stocks went up overnight in your currency.
But think about it the other way round. I knew people living in the Eurozone who owned property in the UK, and the value of those properties (and of the rent they would get in future from them) went down overnight by more than 10% in euro terms (the euro being the currency these people used for their living expenses).
So these investments had a lot of currency risk and I believe that, like Mr Bogle says, if you spend dollars it makes sense to have the majority of your investements in dollar denominated assets. I feel it makes sense for EU or Uk based investors too. Though like I said it can work either way: since the pound devaluated your choice proved to be excellent! :sharebeer 8-)
Last edited by Lauretta on Sat Feb 17, 2018 7:22 am, edited 1 time in total.
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minimalistmarc
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by minimalistmarc » Sat Feb 17, 2018 6:08 am

but now I have to buy everything with devalued currency so it balances out, although my timing was quite fortunate because I had a large lump sum which was invested just prior to Brexit.

Trying to market time currency markets is even more futile than trying to time the stock market

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

Post by Lauretta » Sat Feb 17, 2018 6:29 am

hilink73 wrote:
Sat Feb 17, 2018 3:03 am
Lauretta wrote:
Fri Feb 16, 2018 3:14 pm
laotzu wrote:
Fri Feb 16, 2018 12:42 pm

1) What percentage of equities should a non-US investor invest in the US? Why? Should it be a part of an international bucket? Why/Why not?
As a Eurozone investor I have about 15% invested in the US (~10% in the S&P500 and ~10% in a world small/mid cap value ETF, half of which (thus 5%) is in the US).
I underweight the US relative to market cap because it is one of the most expensive markets in the world and because I don't want to take too much currency risk.
If the US CAPE were lower I suppose I would have more US but I'd currency hedge part of the exposure as the dollar index is also high compared to historical average.
Hi Lauretta, as a Swiss investor I feel similar although my US allocation is a little bit higher at 25 (EUR 28%, JAP 10% and EM 37%).

I don't not have a home bias (no separate Swiss equity ETFs) but all diversified globally.

In the other hand, having read Siamonds great article (https://finpage.blog/2017/03/25/investi ... ld-part-3/) I'm wondering if I should increase my allocation to Swiss stocks to maintain an appropriate SWR later.
The regular advice (going global) does not seem to fit very well for the Swiss situation.

Looking at the table at https://blbarnitz4.files.wordpress.com/ ... -table.jpg a US investor would have benefited from are global asset allocation, while a Swiss investor would have been better off tilting to Swiss stocks 100%.


Slightly terrifying. Although I know having a global allocation is the way to go.
Any thoughts? Any Swiss investors?
Hi hilink73 thanks for the links to the interesting article and table.

First of all I see you have a very high allocation in EM (I also overweight EM though not as much as you - I am close to 20%); it seems to be the asset that has the highest expected long term returns; I also recently saw a video of the 2017 Boglehead conference where in the panel of experts both Mr Clements and Mr Bernstein spoke favourably of EM, (though they seem to recommend lower proportions than what you have).

Concerning the currency risk yes it seems to me that, particularly as one gets close to retirement, it makes sense to have the majority of one's assets denominated in the currency you will spend.
Since the yields of Swiss bonds are even lower than the Eurozone ones, I guess it would make sense for a Swiss investor to have cash rather than bonds, and then probably overweight the Swiss market, and/or consider currency hedging some of the exposure on the Int'l market (though interest rate differentials would work against you so the cost of hedging would be non-neglectable).

Please note however that all I say just reflects my own understanding and what I would personally would feel comfortable doing in your place, but it's not a suggestion as I am really quite new to thinking about investing.
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Lauretta
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by Lauretta » Sat Feb 17, 2018 6:42 am

minimalistmarc wrote:
Sat Feb 17, 2018 6:08 am
but now I have to buy everything with devalued currency so it balances out, although my timing was quite fortunate because I had a large lump sum which was invested just prior to Brexit.

Trying to market time currency markets is even more futile than trying to time the stock market
Yes I agree, I remember reading an article by Anatole Kaletsky shortly before Brexit in which he argued that foreign investors should buy pounds because he was sure Remain woud win and the pound had a long way up to go!... The article was intelligently written and seemed quite convincing - I don't know whether many people followed that suggestion...

Anyway glad to hear about your lump sum investment before Brexit :happy
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hilink73
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by hilink73 » Sat Feb 17, 2018 7:30 am

Lauretta wrote:
Sat Feb 17, 2018 6:29 am
Since the yields of Swiss bonds are even lower than the Eurozone ones, I guess it would make sense for a Swiss investor to have cash rather than bonds,
Yes, I do not own any bond funds. That doesn't make sense right now.
All my safe assets are in Swiss saving accounts (where I fortunately get a good interest rate due to working for a financial institution).
Also, we have negative consumer price development/"inflation" in CH for some years now, so even if I held real cash, it wouldn't be so bad. :-)

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

Post by BuyAndHoldOn » Sat Feb 17, 2018 8:42 am

alfaspider wrote:
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.
I agree. I have been trying to invest more in EM since ~early 2017 (not perfect but I try) and I ended up using IEMG (Fidelity account). 55%+ is China, Taiwan, and S. Korea. But I tried.


WRT the CAPE discussion: CAPE is very much worth discussing and knowing about. I think the Global market portfolio [equities] makes a lot of sense, particularly with stretched US valuations. ==> maybe they will be more normal with strong earnings + the financial crisis falling out of the CAPE 10; we'll see.

The US has been at a CAPE of 26 (on average) since 1996, which makes me wonder if comparative CAPE within a country is more important than a globally *average* CAPE. ==> What is the CAPE of Russia, Poland, or _________ your choice of country? It may have been cheap for a while on CAPE, and I think you need to know about more than just CAPE when considering investing there. [I am aware Russia is in Total Intl + EM; but it is not a large holding + Russia is Cheap...like always :happy ]. I picked extreme examples as I do think CAPE overall is quite useful, but not perfect and not the only thing to look at.

(I agree with using CAPE for investing purposes, I just wonder if it will "different this time" like it is every time).

hilink73
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by hilink73 » Sat Feb 17, 2018 12:28 pm

hilink73 wrote:
Sat Feb 17, 2018 3:03 am

Hi Lauretta, as a Swiss investor I feel similar although my US allocation is a little bit higher at 25 (EUR 28%, JAP 10% and EM 37%).

I don't not have a home bias (no separate Swiss equity ETFs) but all diversified globally.

In the other hand, having read Siamonds great article (https://finpage.blog/2017/03/25/investi ... ld-part-3/) I'm wondering if I should increase my allocation to Swiss stocks to maintain an appropriate SWR later.
The regular advice (going global) does not seem to fit very well for the Swiss situation.

Looking at the table at https://blbarnitz4.files.wordpress.com/ ... -table.jpg a US investor would have benefited from are global asset allocation, while a Swiss investor would have been better off tilting to Swiss stocks 100%.


Slightly terrifying. Although I know having a global allocation is the way to go.
Any thoughts? Any Swiss investors?
After looking at the table again, a 25% Swiss/75% global mix might do as well with a SWR of > 4%
So, maybe not too bad.

Another point:
given the small global market cap of Switzerland of almost 3% (compared to 50% US), one would not even need to perform complex calculations for an appropriate asset allocation.
Example: 25% Swiss equities and 75% global equities would result in a total of 27% Swiss equities.

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

Post by chatbotte » Sat Feb 17, 2018 2:03 pm

willthrill81,
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.
That sounds like arbitrage to me: sell international and buy domestic to earn riskfree real return.
willthrill81 wrote:
Wed Feb 14, 2018 11:05 am
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.
That contradicts your argument above. Investors shying away from international means higher domestic prices, eroding higher expected domestic returns.

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

Post by eye.surgeon » Sat Feb 17, 2018 2:19 pm

asif408 wrote:
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.
There is a bias that is the opposite of recency bias that isn't discussed as much. It's the bias investors have who are educated regarding recency bias, and in response assume the opposite bias, which is to say they assume that because something has happened in the past, it will not happen in the future.

That bias is manifest, for example, in saying that because internationals have underperformed domestics for decades, that at some point in the future the reverse will be true. While this may or may not be the case, there are situations where past performance IS predictive of future performance. For example, if domestic markets are inherently more efficient than international, favoring domestics is not recency bias but rather reality bias. This reality bias is why Bogle recommends no or little international stocks.

As a simple example of this, Mr investor hits his thumb with a hammer, and it hurts. Being educated on recency bias, he continues to hit his thumb with the hammer, thinking that his fear of the pain is simply recency bias making him think past performance will predict the future. In reality it will continue to hurt because there is an inherent underlying reason why it hurts.
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by willthrill81 » Sat Feb 17, 2018 2:23 pm

chatbotte wrote:
Sat Feb 17, 2018 2:03 pm
willthrill81 wrote:
Wed Feb 14, 2018 11:05 am
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.
That contradicts your argument above. Investors shying away from international means higher domestic prices, eroding higher expected domestic returns.
You'd think so, wouldn't you? Except that hasn't yet materialized with actual returns. U.S. destroyed international in the 1990s, lagged a little in the 2000s, but has again destroyed international since 2010.

Over the next ten years, international may blow the U.S. out of the water. We just don't know.
“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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Lauretta
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by Lauretta » Sat Feb 17, 2018 2:45 pm

willthrill81 wrote:
Sat Feb 17, 2018 2:23 pm
chatbotte wrote:
Sat Feb 17, 2018 2:03 pm
willthrill81 wrote:
Wed Feb 14, 2018 11:05 am
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.
That contradicts your argument above. Investors shying away from international means higher domestic prices, eroding higher expected domestic returns.
You'd think so, wouldn't you? Except that hasn't yet materialized with actual returns. U.S. destroyed international in the 1990s, lagged a little in the 2000s, but has again destroyed international since 2010.

Over the next ten years, international may blow the U.S. out of the water. We just don't know.
As this article shows however,
From 1970 to 2009, the S&P 500 compounded at 9.87%, and MSCI Europe at 9.88%. The entire outperformance of the last 47 years occurred during the last seven years.
https://blogs.cfainstitute.org/investor ... he-return/
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by RRAAYY3 » Sat Feb 17, 2018 2:47 pm

I love how people gloss over the period where Int’l outperforms US as if it didn’t happen

Why bet on 1 country when you can bet on the world? “Past performance doesn’t guarantee future blah blah blah”, right?

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

Post by willthrill81 » Sat Feb 17, 2018 3:07 pm

RRAAYY3 wrote:
Sat Feb 17, 2018 2:47 pm
I love how people gloss over the period where Int’l outperforms US as if it didn’t happen

Why bet on 1 country when you can bet on the world? “Past performance doesn’t guarantee future blah blah blah”, right?
Of course there have been periods where international has outperformed the U.S. But this notion that international has lagged for a while so it's likely to outperform in the near-term future is fraught with risk. For a buy-and-hold investor (which I'm admittedly not), I don't think that the decision as to where to allocate one's capital shouldn't be based on these kinds of factors. A strict EMH person would say that one should own a globally cap weighted portfolio of equities.

And for the record, I have a significant holding in EM right now, so I'm not opposed to int'l in the slightest.
“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 RRAAYY3 » Sat Feb 17, 2018 3:14 pm

I stay 50/50 (+\- 5%) because I acknowledge I have no idea who will win / outperform

I’m also young enough to not cling to the US past dominance- this world and its economy are a lot different.

As a buy and hold investor, I also think this allocation will
somewhat reduce the extreme volatility 100/0 provides

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

Post by drk » Sat Feb 17, 2018 3:27 pm

willthrill81 wrote:
Sat Feb 17, 2018 3:07 pm
And for the record, I have a significant holding in EM right now, so I'm not opposed to int'l in the slightest.
Do you also pursue your trend-following strategy internationally? Do you use any tilt within your EM allocation or have a preferred fund?

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

Post by willthrill81 » Sat Feb 17, 2018 3:34 pm

drk wrote:
Sat Feb 17, 2018 3:27 pm
willthrill81 wrote:
Sat Feb 17, 2018 3:07 pm
And for the record, I have a significant holding in EM right now, so I'm not opposed to int'l in the slightest.
Do you also pursue your trend-following strategy internationally? Do you use any tilt within your EM allocation or have a preferred fund?
In my trend following, I do not discriminate between U.S. and international. I am always invested in whichever asset class I have access to in each of my accounts that has had the best relative performance over the prior 7 months. In my 401k, that's currently U.S. large cap growth. In our IRAs, that's currently EM.
“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 chatbotte » Sun Feb 18, 2018 8:10 am

RRAAYY3 wrote:
Sat Feb 17, 2018 3:14 pm
I stay 50/50 (+\- 5%) because I acknowledge I have no idea who will win / outperform
Sure, but why don't you weight by free-float market cap? Does the 50/50 split improve your risk/return tradeoff in any way?

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

Post by nedsaid » Sun Feb 18, 2018 10:26 am

willthrill81 wrote:
Wed Feb 14, 2018 9:55 pm

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 is good to know that stocks had an acceptable return from 1976-1981 and thanks for that information. My posts about a decade long period that it took for stock investors to receive their inflation adjustment centered on the 1970's stagflation and oil shocks. My suspicion is that if you extended your time period to include the 1973-74 bear market that the numbers would look worse. Stock prices were also flat from about 1968 until about 1984, the returns from stocks would have all come from dividends.

So look at 1973-74 from a retiree's viewpoint. If you had perfect insight in the future, you would have told him that everything would eventually be okay but that he would have to wait 12-14 years or more to get his inflation adjustment, your counsel would have been of little comfort.
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 drk » Sun Feb 18, 2018 10:51 am

chatbotte wrote:
Sun Feb 18, 2018 8:10 am
RRAAYY3 wrote:
Sat Feb 17, 2018 3:14 pm
I stay 50/50 (+\- 5%) because I acknowledge I have no idea who will win / outperform
Sure, but why don't you weight by free-float market cap? Does the 50/50 split improve your risk/return tradeoff in any way?
I suspect that 50/50 is just simpler than 52.4/47.6. The current 2.4 percentage point tilt should be pretty harmless.

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

Post by RRAAYY3 » Sun Feb 18, 2018 12:12 pm

drk wrote:
Sun Feb 18, 2018 10:51 am
chatbotte wrote:
Sun Feb 18, 2018 8:10 am
RRAAYY3 wrote:
Sat Feb 17, 2018 3:14 pm
I stay 50/50 (+\- 5%) because I acknowledge I have no idea who will win / outperform
Sure, but why don't you weight by free-float market cap? Does the 50/50 split improve your risk/return tradeoff in any way?
I suspect that 50/50 is just simpler than 52.4/47.6. The current 2.4 percentage point tilt should be pretty harmless.
Ha, I just noticed I’m literally at 52/48 at the moment ... I aim for 50/50 but it can deviate +/- 5% before I bother caring

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

Post by asif408 » Sun Feb 18, 2018 9:49 pm

eye.surgeon wrote:
Sat Feb 17, 2018 2:19 pm
As a simple example of this, Mr investor hits his thumb with a hammer, and it hurts. Being educated on recency bias, he continues to hit his thumb with the hammer, thinking that his fear of the pain is simply recency bias making him think past performance will predict the future. In reality it will continue to hurt because there is an inherent underlying reason why it hurts.
It is a simple example and a poor analogy to investing, because international stocks have outperformed during prevous time periods (see 1970s, mid 1980s, and mid 2000s). OTOH, everyone that has ever hit their thumb with a hammer has inflicted pain on themselves. If there is such a person please let me know who they are.

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

Post by Noobvestor » Mon Feb 19, 2018 1:40 am

kosomoto wrote:
Wed Feb 14, 2018 2:28 pm
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.
Citation please? Quoting Bill Bernstein regarding a series of simulated 15-stock portfolios (my bold), albeit not the 'largest 40':
the TWD of these 15-stock portfolios is staggering—three-quarters of them failed to beat "the market" ... the scatter of returns was quite high, with more than a few portfolios underperforming "the market" by 5%-10% per annum.

The reason is simple: a grossly disproportionate fraction of the total return came from a very few "superstocks" like Dell Computer, which increased in value over 550 times. If you didn’t have one of the half-dozen or so of these in your portfolio, then you badly lagged the market. (The odds of owing one of the 10 superstocks are approximately one in six.) Of course, by owning only 15 stocks you also increase your chances of becoming fabulously rich. But unfortunately, in investing, it is all too often true that the same things that maximize your chances of getting rich also maximize your chances of getting poor.

If the O’Neal data are generalizable to stocks, and I believe that they are, then even 100 stocks are not nearly enough to eliminate this very important source of financial risk.

So, yes, Virginia, you can eliminate nonsytematic portfolio risk, as defined by Modern Portfolio Theory, with a relatively few stocks. It’s just that nonsystematic risk is only a small part of the puzzle. Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market.
http://www.efficientfrontier.com/ef/900/15st.htm
kosomoto wrote:
Wed Feb 14, 2018 2:28 pm
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?
Not if you were Japanese.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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

Post by chatbotte » Mon Feb 19, 2018 9:20 am

Noobvestor wrote:
Mon Feb 19, 2018 1:40 am
kosomoto wrote:
Wed Feb 14, 2018 2:28 pm
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.
Citation please? Quoting Bill Bernstein regarding a series of simulated 15-stock portfolios (my bold), albeit not the 'largest 40':
the TWD of these 15-stock portfolios is staggering—three-quarters of them failed to beat "the market" ... the scatter of returns was quite high, with more than a few portfolios underperforming "the market" by 5%-10% per annum.

The reason is simple: a grossly disproportionate fraction of the total return came from a very few "superstocks" like Dell Computer, which increased in value over 550 times. If you didn’t have one of the half-dozen or so of these in your portfolio, then you badly lagged the market. (The odds of owing one of the 10 superstocks are approximately one in six.) Of course, by owning only 15 stocks you also increase your chances of becoming fabulously rich. But unfortunately, in investing, it is all too often true that the same things that maximize your chances of getting rich also maximize your chances of getting poor.

If the O’Neal data are generalizable to stocks, and I believe that they are, then even 100 stocks are not nearly enough to eliminate this very important source of financial risk.

So, yes, Virginia, you can eliminate nonsytematic portfolio risk, as defined by Modern Portfolio Theory, with a relatively few stocks. It’s just that nonsystematic risk is only a small part of the puzzle. Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market.
http://www.efficientfrontier.com/ef/900/15st.htm
kosomoto wrote:
Wed Feb 14, 2018 2:28 pm
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?
Not if you were Japanese.
I like the Asness argument that diversification works (eventually). Correlations between markets rise close to +1 in big global market downturns, but the worst of long-term global market portfolio returns are higher than the worst of same-period local country returns. So you're better off going global, because you protect yourself against secular local bear markets, rather than large one-time local downswings, which tend to be highly correlated between markets.

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

Post by kayanco » Mon Feb 19, 2018 12:58 pm

Lauretta wrote:
Sat Feb 17, 2018 6:29 am
Concerning the currency risk yes it seems to me that, particularly as one gets close to retirement, it makes sense to have the majority of one's assets denominated in the currency you will spend.
I came across this thread. I'd like to understand, what is the reasoning behind this? ("have the majority of one's assets denominated in the currency you will spend.")

I'm guessing this would only be true if you anticipate spending in a country with a strong currency, like maybe UK, Australia. But if you'll retire in a 3rd world country, whose currency isn't strong, then having assets in USD might be better?

Thanks.

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

Post by asif408 » Mon Feb 19, 2018 1:38 pm

kayanco wrote:
Mon Feb 19, 2018 12:58 pm
I came across this thread. I'd like to understand, what is the reasoning behind this? ("have the majority of one's assets denominated in the currency you will spend.")

I'm guessing this would only be true if you anticipate spending in a country with a strong currency, like maybe UK, Australia. But if you'll retire in a 3rd world country, whose currency isn't strong, then having assets in USD might be better?

Thanks.
I asked a related question here that might help with your question: viewtopic.php?f=10&t=229900&p=3576355&h ... k#p3576355

I never really got a consensus answer. In theory, as one of the posters in the topic suggested, currencies are bounded by purchasing power parity (PPP), so a weak currency in theory will eventually get stronger, though it can take a while. Of course, that doesn't help if your 3rd world country goes bankrupt or their stock market goes to 0 in the process. So if I was retiring to a 3rd world country I don't think I would overweight my stock and bond ownership there. In fact, I don't believe in doing that even in my developed country (USA), but as you may have noticed that is a minority view among Bogleheads.

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

Post by chatbotte » Mon Feb 19, 2018 1:40 pm

kayanco wrote:
Mon Feb 19, 2018 12:58 pm
Lauretta wrote:
Sat Feb 17, 2018 6:29 am
Concerning the currency risk yes it seems to me that, particularly as one gets close to retirement, it makes sense to have the majority of one's assets denominated in the currency you will spend.
I came across this thread. I'd like to understand, what is the reasoning behind this? ("have the majority of one's assets denominated in the currency you will spend.")

I'm guessing this would only be true if you anticipate spending in a country with a strong currency, like maybe UK, Australia. But if you'll retire in a 3rd world country, whose currency isn't strong, then having assets in USD might be better?

Thanks.
Holding foreign assets doesn't protect you from currency risk. However, a stock portfolio consisting of domestic stocks only could possibly be more volatile than a portfolio containing both domestic and foreign-currency assets. Also, a stock portfolio consisting of domestic stocks only could contain more long-term local bear-market risk (see my Asness post above) than a global portfolio.

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

Post by Lauretta » Mon Feb 19, 2018 1:54 pm

Noobvestor wrote:
Mon Feb 19, 2018 1:40 am
Quoting Bill Bernstein regarding a series of simulated 15-stock portfolios (my bold), albeit not the 'largest 40':
the TWD of these 15-stock portfolios is staggering—three-quarters of them failed to beat "the market" ... the scatter of returns was quite high, with more than a few portfolios underperforming "the market" by 5%-10% per annum.

The reason is simple: a grossly disproportionate fraction of the total return came from a very few "superstocks" like Dell Computer, which increased in value over 550 times. If you didn’t have one of the half-dozen or so of these in your portfolio, then you badly lagged the market. (The odds of owing one of the 10 superstocks are approximately one in six.) Of course, by owning only 15 stocks you also increase your chances of becoming fabulously rich. But unfortunately, in investing, it is all too often true that the same things that maximize your chances of getting rich also maximize your chances of getting poor.

If the O’Neal data are generalizable to stocks, and I believe that they are, then even 100 stocks are not nearly enough to eliminate this very important source of financial risk.

So, yes, Virginia, you can eliminate nonsytematic portfolio risk, as defined by Modern Portfolio Theory, with a relatively few stocks. It’s just that nonsystematic risk is only a small part of the puzzle. Fifteen stocks is not enough. Thirty is not enough. Even 200 is not enough. The only way to truly minimize the risks of stock ownership is by owning the whole market.
http://www.efficientfrontier.com/ef/900/15st.htm

This paper develops a similar argument:
http://csinvesting.org/wp-content/uploa ... -Bills.pdf
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 Lauretta » Mon Feb 19, 2018 2:01 pm

kayanco wrote:
Mon Feb 19, 2018 12:58 pm
Lauretta wrote:
Sat Feb 17, 2018 6:29 am
Concerning the currency risk yes it seems to me that, particularly as one gets close to retirement, it makes sense to have the majority of one's assets denominated in the currency you will spend.
I came across this thread. I'd like to understand, what is the reasoning behind this? ("have the majority of one's assets denominated in the currency you will spend.")

I'm guessing this would only be true if you anticipate spending in a country with a strong currency, like maybe UK, Australia. But if you'll retire in a 3rd world country, whose currency isn't strong, then having assets in USD might be better?

Thanks.
The reasoning can be illustrated by this example: I have friends from the UK who came to live in Italy in early retirement. They were relying on rental property in the UK (and I think on a UK pension). The day after Brexit their purchasing power of their money in the country where they were now living had dropped by more than 10%...

Yes probably if you retire to a developing country it's good to have savings in USD - I haven't thought about this though so I don't really know.
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 kayanco » Mon Feb 19, 2018 2:27 pm

Lauretta wrote:
Mon Feb 19, 2018 2:01 pm
kayanco wrote:
Mon Feb 19, 2018 12:58 pm
Lauretta wrote:
Sat Feb 17, 2018 6:29 am
Concerning the currency risk yes it seems to me that, particularly as one gets close to retirement, it makes sense to have the majority of one's assets denominated in the currency you will spend.
I came across this thread. I'd like to understand, what is the reasoning behind this? ("have the majority of one's assets denominated in the currency you will spend.")

I'm guessing this would only be true if you anticipate spending in a country with a strong currency, like maybe UK, Australia. But if you'll retire in a 3rd world country, whose currency isn't strong, then having assets in USD might be better?

Thanks.
The reasoning can be illustrated by this example: I have friends from the UK who came to live in Italy in early retirement. They were relying on rental property in the UK (and I think on a UK pension). The day after Brexit their purchasing power of their money in the country where they were now living had dropped by more than 10%...

Yes probably if you retire to a developing country it's good to have savings in USD - I haven't thought about this though so I don't really know.
asif408 wrote:
Mon Feb 19, 2018 1:38 pm
kayanco wrote:
Mon Feb 19, 2018 12:58 pm
I came across this thread. I'd like to understand, what is the reasoning behind this? ("have the majority of one's assets denominated in the currency you will spend.")

I'm guessing this would only be true if you anticipate spending in a country with a strong currency, like maybe UK, Australia. But if you'll retire in a 3rd world country, whose currency isn't strong, then having assets in USD might be better?

Thanks.
I asked a related question here that might help with your question: viewtopic.php?f=10&t=229900&p=3576355&h ... k#p3576355

I never really got a consensus answer. In theory, as one of the posters in the topic suggested, currencies are bounded by purchasing power parity (PPP), so a weak currency in theory will eventually get stronger, though it can take a while. Of course, that doesn't help if your 3rd world country goes bankrupt or their stock market goes to 0 in the process. So if I was retiring to a 3rd world country I don't think I would overweight my stock and bond ownership there. In fact, I don't believe in doing that even in my developed country (USA), but as you may have noticed that is a minority view among Bogleheads.
Thanks for sharing this link. I went through that thread, but I didn't understand even one word :(
I will try to read it again.

I'm not sure but I think the question I was curious about might be a little different. Let me try to explain:

- Let's say you are a dual-citizen (US + a 3rd world country like Sri lanka).
- You work in the US, but will retire in Sri lanka. Let's say you want 100% total world stock (e.g. Vanguard VT).
- Should you open a brokerage account in the US and hold VT in USD? Or should you open a brokerage account in Sri Lanka and hold a VT equivalent world stock fund in Sri lankan Rupee.
- And remit dollar savings to Sri lanka every month to buy more.

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

Post by Lauretta » Mon Feb 19, 2018 2:37 pm

kayanco wrote:
Mon Feb 19, 2018 2:27 pm

I'm not sure but I think the question I was curious about might be a little different. Let me try to explain:

- Let's say you are a dual-citizen (US + a 3rd world country like Sri lanka).
- You work in the US, but will retire in Sri lanka. Let's say you want 100% total world stock (e.g. Vanguard VT).
- Should you open a brokerage account in the US and hold VT in USD? Or should you open a brokerage account in Sri Lanka and hold a VT equivalent world stock fund in Sri lankan Rupee.
- And remit dollar savings to Sri lanka every month to buy more.
Hi, if the world stock fund is not currency hedged, it will not make any difference what the accountancy currency of the fund is (i.e. whether it's denominated in dollars and you buy it in the US or in Rupees and you buy it in Sri Lanka).
If someone wants to have less currency risk close to retirement they should either currency hedge the exposure to foreign currencies or overweight their own country.
Last edited by Lauretta on Mon Feb 19, 2018 2:51 pm, edited 1 time in total.
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by chatbotte » Mon Feb 19, 2018 2:49 pm

Lauretta wrote:
Mon Feb 19, 2018 2:01 pm
kayanco wrote:
Mon Feb 19, 2018 12:58 pm
Lauretta wrote:
Sat Feb 17, 2018 6:29 am
Concerning the currency risk yes it seems to me that, particularly as one gets close to retirement, it makes sense to have the majority of one's assets denominated in the currency you will spend.
I came across this thread. I'd like to understand, what is the reasoning behind this? ("have the majority of one's assets denominated in the currency you will spend.")

I'm guessing this would only be true if you anticipate spending in a country with a strong currency, like maybe UK, Australia. But if you'll retire in a 3rd world country, whose currency isn't strong, then having assets in USD might be better?

Thanks.
The reasoning can be illustrated by this example: I have friends from the UK who came to live in Italy in early retirement. They were relying on rental property in the UK (and I think on a UK pension). The day after Brexit their purchasing power of their money in the country where they were now living had dropped by more than 10%...

Yes probably if you retire to a developing country it's good to have savings in USD - I haven't thought about this though so I don't really know.
It is good to the extent it reduces portfolio risk (e.g. SD).

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

Post by chatbotte » Mon Feb 19, 2018 3:20 pm

Lauretta wrote:
Mon Feb 19, 2018 2:37 pm
kayanco wrote:
Mon Feb 19, 2018 2:27 pm

I'm not sure but I think the question I was curious about might be a little different. Let me try to explain:

- Let's say you are a dual-citizen (US + a 3rd world country like Sri lanka).
- You work in the US, but will retire in Sri lanka. Let's say you want 100% total world stock (e.g. Vanguard VT).
- Should you open a brokerage account in the US and hold VT in USD? Or should you open a brokerage account in Sri Lanka and hold a VT equivalent world stock fund in Sri lankan Rupee.
- And remit dollar savings to Sri lanka every month to buy more.
Hi, if the world stock fund is not currency hedged, it will not make any difference what the accountancy currency of the fund is (i.e. whether it's denominated in dollars and you buy it in the US or in Rupees and you buy it in Sri Lanka).
If someone wants to have less currency risk close to retirement they should either currency hedge the exposure to foreign currencies or overweight their own country.
Overweighting your own country can increase portfolio risk (SD) and/or long-term bear-market risk. A currency hedge can increase portfolio SD if the nominal exchange rate highly negatively correlates with foreign-currency returns (see e.g. a paper by Vanguard).

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

Post by Lauretta » Mon Feb 19, 2018 3:41 pm

chatbotte wrote:
Mon Feb 19, 2018 3:20 pm

A currency hedge can increase portfolio SD if the nominal exchange rate highly negatively correlates with foreign-currency returns (see e.g. a paper by Vanguard).
Yes but if it positively correlates the SD is higher for an unhedged portfolio. The USDX is positively correlated to the performance of the US stock market relative to Int'l. So as a Eurozone investor I would get lower SD if I hedged (but actually as a matter of fact I don't hedge; this is an endless debate and I think there's no objective solution and what I was saying here is that it's up to the individual investor and their preference).
Overweighting your own country can increase portfolio risk (SD) and/or long-term bear-market risk.
Not sure what you mean. Again, a non Japanese investor who was invested in MSCI World just before the Japanese stock market collapsed would have had a worse and longer DD than someone who had overweighted their own country. Someone who had ignored MSCI World and had only invested in their own country (provided it wasn't Japan) would have been the one with the least DD.

You write as if there were an absolute truth on this matter, I personally prefer to be non dogmatic and I believe that it depends.

You quote Vanguard, but some people, e.g. those at Wisdom Tree and AQR, are in favour of hedging. Of course part of the reason is that they sell hedged products, but the thing is that a case can seriously be made in favour of hedging. I really think there's no 'right' answer.
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by chatbotte » Mon Feb 19, 2018 3:52 pm

Lauretta wrote:
Mon Feb 19, 2018 3:41 pm
chatbotte wrote:
Mon Feb 19, 2018 3:20 pm

A currency hedge can increase portfolio SD if the nominal exchange rate highly negatively correlates with foreign-currency returns (see e.g. a paper by Vanguard).
Yes but if it positively correlates the SD is higher for an unhedged portfolio. The USDX is positively correlated to the performance of the US stock market relative to Int'l. So as a Eurozone investor I would get lower SD if I hedged (but actually as a matter of fact I don't hedge; this is an endless debate and I think there's no objective solution and what I was saying here is that it's up to the individual investor and their preference).
Overweighting your own country can increase portfolio risk (SD) and/or long-term bear-market risk.
Not sure what you mean. Again, a non Japanese investor who was invested in MSCI World just before the Japanese stock market collapsed would have had a worse and longer DD than someone who had overweighted their own country.
Please read the Larry Swedroe article. It's all in there. Long-term economic performance matters, not short-term co-variation in risk appetite (i.e. not time-varying risk premia): "The worst cases for the global portfolios are significantly better (their losses were much smaller) than the worst cases for the local portfolios. The longer the horizon, the wider the gap favoring the global portfolios becomes."
You write as if there were an absolute truth on this matter, I personally prefer to be non dogmatic and I believe that it depends.
No, it does not. Please read the article. You're basically contesting the main thrust of the paper that's the topic of this thread. Why? Any data to support what you're saying? What does it depend on?
You quote Vanguard, .
Yes, I do. Please read the paper. It's all about positive and negative correlations and the relative merits of hedging, plus variable parameters, and much more, including derivation of the optimal hedging formula.

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

Post by kayanco » Mon Feb 19, 2018 4:13 pm

Lauretta wrote:
Mon Feb 19, 2018 2:37 pm
kayanco wrote:
Mon Feb 19, 2018 2:27 pm

I'm not sure but I think the question I was curious about might be a little different. Let me try to explain:

- Let's say you are a dual-citizen (US + a 3rd world country like Sri lanka).
- You work in the US, but will retire in Sri lanka. Let's say you want 100% total world stock (e.g. Vanguard VT).
- Should you open a brokerage account in the US and hold VT in USD? Or should you open a brokerage account in Sri Lanka and hold a VT equivalent world stock fund in Sri lankan Rupee.
- And remit dollar savings to Sri lanka every month to buy more.
Hi, if the world stock fund is not currency hedged, it will not make any difference what the accountancy currency of the fund is (i.e. whether it's denominated in dollars and you buy it in the US or in Rupees and you buy it in Sri Lanka).
If someone wants to have less currency risk close to retirement they should either currency hedge the exposure to foreign currencies or overweight their own country.
Thanks. Can you please explain a bit more (I have poor background knowledge to pick what you are saying)? Especially, what do you mean by "currency hedge"? And which fund would need to be currency hedged for it to "not make any difference" (i.e. the VT fund, or the equivalent Sri lankan fund)?

On the same topic, I don't believe Vanguard funds like Total US, Total International (those in the 3-fund portfolio) are currency hedged. How much of a difference does it make?

If you are in the US, can you hedge against a foreign currency being weaker in the future if you want to retire in that country?

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

Post by chatbotte » Mon Feb 19, 2018 4:21 pm

kayanco wrote:
Mon Feb 19, 2018 4:13 pm
If you are in the US, can you hedge against a foreign currency being weaker in the future if you want to retire in that country?
Why would you do that? That's a good thing. If you're in the US with US assets and want to retire to the UK, then a weaker pound means more pounds for your dollars, increasing your pound return and improving your UK retirement lifestyle, other things equal, i.e. not accounting for different inflation rates that could possibly have wiped out any benefits of a weaker pound (i.e. assuming no real exchange rate movement).

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

Post by Lauretta » Mon Feb 19, 2018 4:22 pm

chatbotte wrote:
Mon Feb 19, 2018 3:52 pm

Please read the Larry Swedroe article. It's all in there. Long-term economic performance matters, not short-term co-variation in risk appetite (i.e. not time-varying risk premia): "The worst cases for the global portfolios are significantly better (their losses were much smaller) than the worst cases for the local portfolios. The longer the horizon, the wider the gap favoring the global portfolios becomes."
Thank you for the information. I will try to study the material you quote and see if I can correct my wrong understanding of the matter (I had actually already read the Swedroe and the Vanguard article, but I'll read them again: I'm not very intelligent and I hadn't concluded that one should never hedge).

As you see in your quote above however, the question of the time horizon is invoked (and indeed I had gathered from some reading of Dimson and Siegel I did, that if the time horizon is very long, not hedging seems to be preferable). In what I wrote above, however, I was referring to people close to or in retirement, who therefore by definition don't have a long time horizon.

I also provide a link to an interesting article in favour of hedging.
https://www.aqr.com/library/aqr-publica ... fx-hedging
Should you want to explain to the authors of this paper too that they are wrong, you should be able to easily find their contact details.

Anyway thanks again for explaining all this to me, we have no need to discuss this further.
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by chatbotte » Mon Feb 19, 2018 4:32 pm

Lauretta wrote:
Mon Feb 19, 2018 4:22 pm
chatbotte wrote:
Mon Feb 19, 2018 3:52 pm

Please read the Larry Swedroe article. It's all in there. Long-term economic performance matters, not short-term co-variation in risk appetite (i.e. not time-varying risk premia): "The worst cases for the global portfolios are significantly better (their losses were much smaller) than the worst cases for the local portfolios. The longer the horizon, the wider the gap favoring the global portfolios becomes."
Thank you for the information. I will try to study the material you quote and see if I can correct my wrong understanding of the matter.

As you see in your quote above however, the question of the time horizon is invoked (and indeed I had gathered from some reading of Dimson and Siegel I did, that if the time horizon is very long, not hedging seems to be preferable). In what I wrote above, however, I was referring to people close to or in retirement, who therefore by definition don't have a long time horizon.

I also provide a link to an interesting article in favour of hedging.
https://www.aqr.com/library/aqr-publica ... fx-hedging
Should you want to explain to the authors of this paper too that they are wrong, you should be able to easily find their contact details.

Anyway thanks again for explaining all this to me, we have no need to discuss this further.
I'm not saying you shouldn't hedge. You seem to be mixing up two things. What I'm saying is the benefit of hedging crucially depends on currency and asset return co-movements (correlation), among other things. That's what the Vanguard paper is about.

You said non-Japanese investors would have been better off holding something other than a global portfolio just before Japan went belly up. I agree with you on that one, but that's not what the quote from the Swedroe article says: The worst local (country) returns are worse than the worst global returns. So a global portfolio protects you more on the downside than country portfolios. That's the benefit of global diversification.

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

Post by kayanco » Mon Feb 19, 2018 4:36 pm

chatbotte wrote:
Mon Feb 19, 2018 4:21 pm
kayanco wrote:
Mon Feb 19, 2018 4:13 pm
If you are in the US, can you hedge against a foreign currency being weaker in the future if you want to retire in that country?
Why would you do that? That's a good thing. If you're in the US with US assets and want to retire to the UK, then a weaker pound means more pounds for your dollars, increasing your pound return and improving your UK retirement lifestyle, other things equal, i.e. not accounting for different inflation rates that could possibly have wiped out any benefits of a weaker pound (i.e. assuming no real exchange rate movement).
Hmm ... yea, that makes sense. Okay, how about the reverse:

How could people in the UK hedge against such a scenario? (i.e. weaker pound)
or
If you are in the US, can you hedge against the USD being weaker against a foreign currency in the future if you want to retire in that country?

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

Post by chatbotte » Mon Feb 19, 2018 5:09 pm

kayanco wrote:
Mon Feb 19, 2018 4:36 pm
chatbotte wrote:
Mon Feb 19, 2018 4:21 pm
kayanco wrote:
Mon Feb 19, 2018 4:13 pm
If you are in the US, can you hedge against a foreign currency being weaker in the future if you want to retire in that country?
Why would you do that? That's a good thing. If you're in the US with US assets and want to retire to the UK, then a weaker pound means more pounds for your dollars, increasing your pound return and improving your UK retirement lifestyle, other things equal, i.e. not accounting for different inflation rates that could possibly have wiped out any benefits of a weaker pound (i.e. assuming no real exchange rate movement).
Hmm ... yea, that makes sense. Okay, how about the reverse:

How could people in the UK hedge against such a scenario? (i.e. weaker pound)
Why would they do that? If they hold US assets, then a weaker pound means they get more pounds for their dollars. So that's a good thing again.
kayanco wrote:
Mon Feb 19, 2018 4:36 pm
If you are in the US, can you hedge against the USD being weaker against a foreign currency in the future if you want to retire in that country?
Enter into a currency forward to buy pounds with dollars at a predefined future date. The forward rate will reflect the interest rate differential, or the difference between the countries' respective interest rates.

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

Post by kayanco » Mon Feb 19, 2018 5:27 pm

chatbotte wrote:
Mon Feb 19, 2018 5:09 pm
kayanco wrote:
Mon Feb 19, 2018 4:36 pm
chatbotte wrote:
Mon Feb 19, 2018 4:21 pm
kayanco wrote:
Mon Feb 19, 2018 4:13 pm
If you are in the US, can you hedge against a foreign currency being weaker in the future if you want to retire in that country?
Why would you do that? That's a good thing. If you're in the US with US assets and want to retire to the UK, then a weaker pound means more pounds for your dollars, increasing your pound return and improving your UK retirement lifestyle, other things equal, i.e. not accounting for different inflation rates that could possibly have wiped out any benefits of a weaker pound (i.e. assuming no real exchange rate movement).
Hmm ... yea, that makes sense. Okay, how about the reverse:

How could people in the UK hedge against such a scenario? (i.e. weaker pound)
Why would they do that? If they hold US assets, then a weaker pound means they get more pounds for their dollars. So that's a good thing again.
I mean someone in the UK with investments in pounds, wanting to hedge that in the future the pound would be weaker than the dollar. What would they do?

Thanks.

chatbotte
Posts: 295
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Re: A Case for Higher Int'l Allocation? Larry Swedroe article on home bias

Post by chatbotte » Tue Feb 20, 2018 5:01 am

kayanco wrote:
Mon Feb 19, 2018 5:27 pm
chatbotte wrote:
Mon Feb 19, 2018 5:09 pm
kayanco wrote:
Mon Feb 19, 2018 4:36 pm
chatbotte wrote:
Mon Feb 19, 2018 4:21 pm
kayanco wrote:
Mon Feb 19, 2018 4:13 pm
If you are in the US, can you hedge against a foreign currency being weaker in the future if you want to retire in that country?
Why would you do that? That's a good thing. If you're in the US with US assets and want to retire to the UK, then a weaker pound means more pounds for your dollars, increasing your pound return and improving your UK retirement lifestyle, other things equal, i.e. not accounting for different inflation rates that could possibly have wiped out any benefits of a weaker pound (i.e. assuming no real exchange rate movement).
Hmm ... yea, that makes sense. Okay, how about the reverse:

How could people in the UK hedge against such a scenario? (i.e. weaker pound)
Why would they do that? If they hold US assets, then a weaker pound means they get more pounds for their dollars. So that's a good thing again.
I mean someone in the UK with investments in pounds, wanting to hedge that in the future the pound would be weaker than the dollar. What would they do?

Thanks.
Sorry, I don't understand. Do you mean you're invested in pounds, spend in pounds and worry about a weak pound?

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

Post by in_reality » Tue Feb 20, 2018 5:06 am

chatbotte wrote:
Tue Feb 20, 2018 5:01 am
kayanco wrote:
Mon Feb 19, 2018 5:27 pm
chatbotte wrote:
Mon Feb 19, 2018 5:09 pm
kayanco wrote:
Mon Feb 19, 2018 4:36 pm
chatbotte wrote:
Mon Feb 19, 2018 4:21 pm

Why would you do that? That's a good thing. If you're in the US with US assets and want to retire to the UK, then a weaker pound means more pounds for your dollars, increasing your pound return and improving your UK retirement lifestyle, other things equal, i.e. not accounting for different inflation rates that could possibly have wiped out any benefits of a weaker pound (i.e. assuming no real exchange rate movement).
Hmm ... yea, that makes sense. Okay, how about the reverse:

How could people in the UK hedge against such a scenario? (i.e. weaker pound)
Why would they do that? If they hold US assets, then a weaker pound means they get more pounds for their dollars. So that's a good thing again.
I mean someone in the UK with investments in pounds, wanting to hedge that in the future the pound would be weaker than the dollar. What would they do?

Thanks.
Sorry, I don't understand. Do you mean you're invested in pounds, spend in pounds and worry about a weak pound?
A UK investor would buy an ETF denominated in pounds (ie bought and sold with pounds) that holds US (or other non-UK stocks) stocks. When the ETF is sold, you will get USD (or other non-pound currencies) for the stocks which get converted to pounds by the fund. So as chatbotte said, the USD (or other non-UK ) stocks will earn you lots of pounds.

It doesn't matter that the ETF is denominated in pounds, and that is the confusing part. It is the underlying holdings within the ETF though that determine your currency exposure.

kayanco
Posts: 739
Joined: Sat Jun 07, 2014 12:20 am

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

Post by kayanco » Tue Feb 20, 2018 10:41 am

chatbotte wrote:
Tue Feb 20, 2018 5:01 am
kayanco wrote:
Mon Feb 19, 2018 5:27 pm
chatbotte wrote:
Mon Feb 19, 2018 5:09 pm
kayanco wrote:
Mon Feb 19, 2018 4:36 pm
chatbotte wrote:
Mon Feb 19, 2018 4:21 pm

Why would you do that? That's a good thing. If you're in the US with US assets and want to retire to the UK, then a weaker pound means more pounds for your dollars, increasing your pound return and improving your UK retirement lifestyle, other things equal, i.e. not accounting for different inflation rates that could possibly have wiped out any benefits of a weaker pound (i.e. assuming no real exchange rate movement).
Hmm ... yea, that makes sense. Okay, how about the reverse:

How could people in the UK hedge against such a scenario? (i.e. weaker pound)
Why would they do that? If they hold US assets, then a weaker pound means they get more pounds for their dollars. So that's a good thing again.
I mean someone in the UK with investments in pounds, wanting to hedge that in the future the pound would be weaker than the dollar. What would they do?

Thanks.
Sorry, I don't understand. Do you mean you're invested in pounds, spend in pounds and worry about a weak pound?
Yes, that is what I was curious about. A british investor living and investing in pounds (e.g. at a british equivalent of Vanguard, fidelity), but thinking that in the future the pound wouldn't be much weaker compared to other currencies (like USD or Euro). I was wondering what could they do to protect against that.

It sounds like the answer is provided by the post below by in_reality, i.e. hold foreign stocks, even if denominated in pounds.

kayanco
Posts: 739
Joined: Sat Jun 07, 2014 12:20 am

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

Post by kayanco » Tue Feb 20, 2018 10:58 am

in_reality wrote:
Tue Feb 20, 2018 5:06 am
chatbotte wrote:
Tue Feb 20, 2018 5:01 am
kayanco wrote:
Mon Feb 19, 2018 5:27 pm
chatbotte wrote:
Mon Feb 19, 2018 5:09 pm
kayanco wrote:
Mon Feb 19, 2018 4:36 pm


Hmm ... yea, that makes sense. Okay, how about the reverse:

How could people in the UK hedge against such a scenario? (i.e. weaker pound)
Why would they do that? If they hold US assets, then a weaker pound means they get more pounds for their dollars. So that's a good thing again.
I mean someone in the UK with investments in pounds, wanting to hedge that in the future the pound would be weaker than the dollar. What would they do?

Thanks.
Sorry, I don't understand. Do you mean you're invested in pounds, spend in pounds and worry about a weak pound?
A UK investor would buy an ETF denominated in pounds (ie bought and sold with pounds) that holds US (or other non-UK stocks) stocks. When the ETF is sold, you will get USD (or other non-pound currencies) for the stocks which get converted to pounds by the fund. So as chatbotte said, the USD (or other non-UK ) stocks will earn you lots of pounds.

It doesn't matter that the ETF is denominated in pounds, and that is the confusing part. It is the underlying holdings within the ETF though that determine your currency exposure.
You explained this very well ! Thank you. This is exactly what I was wondering about. You also figured out exactly what the confusion was. I was thinking that the UK investor would need to hold a fund/ETF denominated in USD (or another foreign currency) to mitigate their fear of a weaker Pound in the future.

So just to clarify along the same lines, those who hold the Vanguard or Fidelity total international fund, are they protected against the USD being weak in the future? If so, then why isn't international investing accepted unanimously on this forum (a lot of folks only like holding the total US stock)?

Also, I'd really appreciate it if you can explain how concept of "currency hedge" ties into the above discussion. Maybe explain in simple words what it is. I read that the Vanguard total international fund (VTIAX) isn't currency hedged. What would be different (pro/con) if it were?
Is there any merit to buying funds/ETFs which are currency hedged?

(I hear claims around USD not being the dominant world currency in the future. Is my post and your reply related to that? Or is that completely different than what we are talking about here. I'm a little confused on this.)

Thanks.

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

Post by Noobvestor » Tue Feb 20, 2018 2:44 pm

kayanco wrote:
Tue Feb 20, 2018 10:58 am
So just to clarify along the same lines, those who hold the Vanguard or Fidelity total international fund, are they protected against the USD being weak in the future? If so, then why isn't international investing accepted unanimously on this forum (a lot of folks only like holding the total US stock)?
For some people, the US is the end-all, be-all exceptional country that will always come out on top. Therefore, why invest anywhere else? I do not subscribe to this position, and humbly accept I don't know what countries' equities or currencies will do better or worse.

That said, there is a legitimate concern in being too exposed to international currencies - on the bond side, for instance, it adds a lot of volatility where you want stability. Plus, we're presumably going to spend most of our money in home-country currency.

My position is that I get plenty of US (home country) currency exposure between all of my bonds being in USD as well as half of my stocks, and then I balance that with some (unhedged) international stocks. I don't know what the optimal weighting is, but in my case it's 70/30 USD/other.

Maybe someone else has better links about how hedging works, but this could be a place to start: https://www.firstasset.com/resources/ed ... cy+Hedging
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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