The "American companies I invest in already have international exposure" argument --- valid or not?

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JustinR
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The "American companies I invest in already have international exposure" argument --- valid or not?

Post by JustinR » Fri Mar 30, 2018 6:40 pm

People like JL Collins argue that they don't need an international allocation because the companies in US total stock market already do business internationally.

Is this actually a valid argument? I feel like this is different from investing in non-American companies.

Does this line of thinking have merit or not?

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by livesoft » Fri Mar 30, 2018 6:42 pm

Sure it has merit. Another thing that has merit is that International companies already have American exposure.

One can argue and discuss this forever and still change no one's mind and perhaps even come to no conclusion.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by triceratop » Fri Mar 30, 2018 6:46 pm

International companies also have US exposure. If one's goal is diversification and avoiding pickings winners and losers, why reduce diversification?

See also this recent topic: Global Revenue Exposure of Your Stock Portfolio?
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by retiredjg » Fri Mar 30, 2018 6:52 pm

Isn't that exactly what Jack Bogle has been saying for years?

It's a valid argument. It's a matter of opinion about whether it is right or not. Luckily, everyone gets to make their own decision. :D

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by jhfenton » Fri Mar 30, 2018 6:56 pm

It's an argument. At least one person I respect makes it.

I find it completely unconvincing.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by moneywise3 » Fri Mar 30, 2018 7:05 pm

That doesn't completely cover it. There are many aspects of an international investment - the market there, currency exposure, political risk.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Theoretical » Fri Mar 30, 2018 7:18 pm

jhfenton wrote:
Fri Mar 30, 2018 6:56 pm
It's an argument. At least one person I respect makes it.

I find it completely unconvincing.
Ditto.

Honda, Toyota, Sony, and etc... all had enormous international exposure while being Japanese companies. It has not worked out too well for Japan only investors by the same logic.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by DanMahowny » Fri Mar 30, 2018 7:31 pm

I don't buy that argument.

Jack Bogle is wrong.

Of course, I could be wrong. I'm wrong often- just ask my wife.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by nisiprius » Fri Mar 30, 2018 7:42 pm

One rough observation: over the period when Total Stock and Total International have both existed, their monthly correlation has been 0.85.

I think it's reasonable to interpret this as meaning that about 85% of your Total International allocation is not actually doing anything different from your US allocation. So, it is adding some diversification, but not very much. Although by adding Total International, you are adding 6,000-odd stocks to the 3,500-odd you have in Total Stock, those 6,000 do pretty much the same thing as the 3,500 you already have.

Some recipes for Indian pudding call for cinnamon, nutmeg, ginger, and cloves. If you leave out the cloves and the ginger, the result is ... another recipe for Indian pudding. You can argue as much as you like about whether you "need" the cloves and the ginger.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by baw703916 » Fri Mar 30, 2018 7:59 pm

DanMahowny wrote:
Fri Mar 30, 2018 7:31 pm
I don't buy that argument.

Jack Bogle is wrong.

Of course, I could be wrong. I'm wrong often- just ask my wife.
So, does your wife think Jack Bogle is wrong?
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by JoMoney » Fri Mar 30, 2018 8:07 pm

"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by nisiprius » Fri Mar 30, 2018 8:17 pm

Wow. Now that is an example of what Edward Tufte calls "Chartjunk." Wikipedia defines Chartjunk as "visual elements in charts and graphs that are not necessary to comprehend the information represented on the graph, or that distract the viewer from this information." The word "Africa" communicates something about the pie slice. The decoration on that pie slice seems to be communicating "I am having an ocular migraine."
Last edited by nisiprius on Fri Mar 30, 2018 8:22 pm, edited 2 times in total.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Silk McCue » Fri Mar 30, 2018 8:21 pm

nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
One rough observation: over the period when Total Stock and Total International have both existed, their monthly correlation has been 0.85%.

I think it's reasonable to interpret this as meaning that about 85% of your Total International allocation is not actually doing anything different from your US allocation. So, it is adding some diversification, but not very much. Although by adding Total International, you are adding 6,000-odd stocks to the 3,500-odd you have in Total Stock, those 6,000 do pretty much the same thing as the 3,500, so you are not actually adding very much diversification.
Since there is a high correlation between Total US Stock and the S&P500 “we are not actually adding very much diversification” by holding Total US. We can just buy the S&P500. That’s reasonable. If we can now just find the 10 US stocks that have an 85% correlation with the S&P500 and thus by a inference Total US Stock Market and thus further the Total International we can be extremely efficient in owning the entire world in only 10 stocks. Eureka I am ready to write the book!

I am of course not serious in the least but I am very comfortable with the albeit moderate diversity provided by holding Total US and Total International for my equities.

Can you imagine the contentious posts at onlytenstockheads.org when someone suggests holding 20 stocks. Boy, that post would get locked very quickly. ;)

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Clever_Username » Fri Mar 30, 2018 8:35 pm

It's certainly a part of why I'm not eager to increase my international exposure.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Noobvestor » Fri Mar 30, 2018 9:04 pm

nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
One rough observation: over the period when Total Stock and Total International have both existed, their monthly correlation has been 0.85%.

I think it's reasonable to interpret this as meaning that about 85% of your Total International allocation is not actually doing anything different from your US allocation. So, it is adding some diversification, but not very much. Although by adding Total International, you are adding 6,000-odd stocks to the 3,500-odd you have in Total Stock, those 6,000 do pretty much the same thing as the 3,500 you already have.

Some recipes for Indian pudding call for cinnamon, nutmeg, ginger, and cloves. If you leave out the cloves and the ginger, the result is ... another recipie for Indian pudding. You can argue as much as you like about whether you "need" the cloves and the ginger.
It's not about correlations but dispersion of potential returns. I suspect (but don't have data) that the Japanese stock market has gone up and down more or less with the rest of the global stock market (i.e. had a high correlation) despite its decades of dismal under-performance. So it's not about them moving in different directions, it's about the magnitude of the movements.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by saltycaper » Fri Mar 30, 2018 10:21 pm

It is true statement that people with various cognitive biases use as a justification for tilting their portfolio; however, the argument is a non sequitur. If doing business internationally was the same thing as being a foreign company, the other arguments regarding the increased risks of investing in foreign companies, often made by the same said people with cognitive biases, would be nullified. They are tripping over their own arguments.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by TropikThunder » Fri Mar 30, 2018 11:04 pm

JoMoney wrote:
Fri Mar 30, 2018 8:07 pm
MarketWatch(2015): S&P 500 companies generate barely over half their revenue at home
Image
Anyone know where the graph is that shows the distribution of US sales from foreign companies? I. e., what % of sales in the US come from German, Japanese, British, Canadian, Mexican, etc etc companies?

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by TropikThunder » Fri Mar 30, 2018 11:13 pm

saltycaper wrote:
Fri Mar 30, 2018 10:21 pm
It is true statement that people with various cognitive biases use as a justification for tilting their portfolio; however, the argument is a non sequitur. If doing business internationally was the same thing as being a foreign company, the other arguments regarding the increased risks of investing in foreign companies, often made by the same said people with cognitive biases, would be nullified. They are tripping over their own arguments.
I totally agree. Just looking at automobiles, which is a better earnings stream to have a piece of: what Ford sells in Germany or what Volkswagen sells in the US? And that's not even taking into consideration foreign companies that build cars here. The leading US auto exporter in terms of value is the BWM plant in SC. (Vanguard is the third largest institutional holder of BMW stock)
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by drk » Fri Mar 30, 2018 11:21 pm

The international companies I invest in already have American exposure. That's an equally good argument to invest solely ex-US. Is it valid? Sure, if we assume that non-zero sales exposure is sufficient to capture the benefits of international diversification. Is it true? Without a more elaborate argument, it's hard to say.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by SimpleGift » Fri Mar 30, 2018 11:54 pm

TropikThunder wrote:
Fri Mar 30, 2018 11:04 pm
Anyone know where the graph is that shows the distribution of US sales from foreign companies? I. e., what % of sales in the US come from German, Japanese, British, Canadian, Mexican, etc etc companies?
Slightly different from what you're asking (and the data is a few years old), but the chart below shows the sales to North America (U.S. and Canada, in blue) from countries in the various MSCI regional indexes:
For example, 18% of sales from companies in the Europe Index were to North America, 11% of Pacific companies, and 7% of emerging market companies. Most surprising, emerging markets appear to mostly sell to each other, with rather small penetrations into the developed countries so far — at least as of 2014.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by TropikThunder » Sat Mar 31, 2018 12:24 am

SimpleGift wrote:
Fri Mar 30, 2018 11:54 pm
TropikThunder wrote:
Fri Mar 30, 2018 11:04 pm
Anyone know where the graph is that shows the distribution of US sales from foreign companies? I. e., what % of sales in the US come from German, Japanese, British, Canadian, Mexican, etc etc companies?
Slightly different from what you're asking (and the data is a few years old), but the chart below shows the sales to North America (U.S. and Canada, in blue) from countries in the various MSCI regional indexes:
For example, 18% of sales from companies in the Europe Index were to North America, 11% of Pacific companies, and 7% of emerging market companies. Most surprising, emerging markets appear to mostly sell to each other, with rather small penetrations into the developed countries so far — at least as of 2014.
That's very helpful (this graph is only one year older than the S&P 500 pie chart, so not too far off). We'd need to know the revenue numbers to translate the percentages into dollars but then you could get estimates for how much revenue generated in North America came from companies outside North America. That might be my homework assignment for tonight. :twisted:

You make an interesting observation about where EM countries get revenue. For example, one might expect South Korean companies (still EM per MSCI) to have decent sales in Japan, Hong Kong, New Zealand and Australia (nearby Pacific DM countries) but the EM index only gets 4% of its revenue from Pacific DM markets.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by heyyou » Sat Mar 31, 2018 12:38 am

Warning: Geezer with story to tell-
In the late 1990s, the America Abroad mutual fund bought only the S&P500 stocks that had significant foreign revenues, hoping to have diversification from domestic stocks. It didn't work since those particular stocks' buyers and sellers did not care about the % of foreign revenues during domestic market turmoil. The fund's stocks tracked with the other domestic-only 500 index components. Succinctly, having foreign revenues is not the same as owning shares of foreign based businesses.

Also, consider the large amount of foreign revenues of those Japanese businesses in the boom then the decade long bust of their domestic stock market in the 1990s. Some here are betting that couldn't happen to us. Often, those proponents came of age when foreign businesses did not subscribe to our higher accounting standards and the fees for trading foreign shares were expensive. Much has changed since the 1960s.

A fresher counterargument would be that since all national economies are now so interlocked, domestic-only exposure is enough, but Japanese history refutes that one.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by jalbert » Sat Mar 31, 2018 12:47 am

The argument has merit, but it also has limitations. Relative to the world market cap portfolio, the US market has a bit of a tech sector tilt. Int’l diversification leads to a portfolio that is closer to the distribution of industries across world GDP.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by SimpleGift » Sat Mar 31, 2018 1:03 am

TropikThunder wrote:
Sat Mar 31, 2018 12:24 am
That's very helpful (this graph is only one year older than the S&P 500 pie chart, so not too far off).
If interested, one can find more recent revenue data in this short report. It breaks down the various revenue sources of the MSCI USA Index, Europe Index, Japan Index, and Emerging Markets Index as of 12/31/16.

EDIT: The data above is now summarized in a new thread: Where Do Companies Earn Their Global Revenues?

Note also that the S&P 500 pie chart upthread is not only "chart junk," but probably "data junk" as well. Nowhere else have I seen foreign revenues of U.S. companies listed as high as 48%. MSCI lists it as 37% in 2016, and S&P Dow Jones has it about 31% today.
Last edited by SimpleGift on Sat Mar 31, 2018 2:59 pm, edited 1 time in total.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by JoMoney » Sat Mar 31, 2018 1:30 am

SimpleGift wrote:
Sat Mar 31, 2018 1:03 am
TropikThunder wrote:
Sat Mar 31, 2018 12:24 am
That's very helpful (this graph is only one year older than the S&P 500 pie chart, so not too far off).
If interested, one can find more recent revenue data in this short study. It breaks down the various revenue sources of the MSCI USA Index, Europe Index, Japan Index, and Emerging Markets Index as of 12/31/16.

Note also that the S&P 500 pie chart upthread is not only "chart junk," but probably "data junk" as well. Nowhere else have I seen foreign revenues of U.S. companies listed as high as 48%. MSCI lists it as 37% in 2016, and S&P Dow Jones has it about 31% today.
It looks consistent with what S&P reported for 2014 Foreign Sales, which would have been a release in July of 2015 about the time of the article.
I don't think there's a huge difference between index providers, but there is something to distinguish between "U.S. Companies" and S&P 500 constituents. The idea of a "U.S. company", especially with regard to talking about giant multi-national companies is a bit of tangled mess. It's more like companies that primarily trade on a U.S. stock exchange and conform with SEC regulations.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by MoneyMarathon » Sat Mar 31, 2018 1:41 am

Noobvestor wrote:
Fri Mar 30, 2018 9:04 pm
It's not about correlations but dispersion of potential returns.
This is a good point, IMO.
Noobvestor wrote:
Fri Mar 30, 2018 9:04 pm
I suspect (but don't have data) that the Japanese stock market has gone up and down more or less with the rest of the global stock market (i.e. had a high correlation) despite its decades of dismal under-performance.
Image

Using: https://www.portfoliovisualizer.com/asset-correlations

Equities are all correlated, but EWJ historically was a bit less correlated. That may change (and it's increased).

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by retiredjg » Sat Mar 31, 2018 7:29 am

nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
Some recipes for Indian pudding call for cinnamon, nutmeg, ginger, and cloves. If you leave out the cloves and the ginger, the result is ... another recipie for Indian pudding. You can argue as much as you like about whether you "need" the cloves and the ginger.
I just love this analogy! You're the best, Nisi. :happy

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by bgf » Sat Mar 31, 2018 8:05 am

An investor who invests only in a market weight Biotech ETF is a more active investor than one who invests only in US Large Caps who is a more active investor than one who invests in the US Total Market who is more active than one who invests in the Total World Stock index.

How active do you want to be?

Beyond that, everything is speculation and rationalization.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by columbia » Sat Mar 31, 2018 8:11 am

nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
One rough observation: over the period when Total Stock and Total International have both existed, their monthly correlation has been 0.85%.

I think it's reasonable to interpret this as meaning that about 85% of your Total International allocation is not actually doing anything different from your US allocation. So, it is adding some diversification, but not very much. Although by adding Total International, you are adding 6,000-odd stocks to the 3,500-odd you have in Total Stock, those 6,000 do pretty much the same thing as the 3,500 you already have.

Some recipes for Indian pudding call for cinnamon, nutmeg, ginger, and cloves. If you leave out the cloves and the ginger, the result is ... another recipie for Indian pudding. You can argue as much as you like about whether you "need" the cloves and the ginger.
My Roth is split between VTI and VT. Add my 403b and I’m between 15-20% international equities. When I read something like the above, it makes feel pretty ok with said choice: some skin in the international game, but nothing to fret (or rejoice) over at any given time.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Dandy » Sat Mar 31, 2018 8:35 am

It might suggest that the more recent push for global weighting of equities may not be all that critical.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by afan » Sat Mar 31, 2018 8:39 am

As was pointed out above, the recent correlation between US and international stocks has been so high that there is limited diversification benefit. Not zero, but lower. If the correlation were to drop then the diversification benefit would be greater. No one knows what the correlation will be in the future. Right now, adding international to an all US portfolio does increase diversification, just not by much.

At current correlations one is not changing expected portfolio performance much by varying the international allocation. My take on this is "it hardly matters, don't worry about it"

I keep a less than market cap but significant international allocation. No great reason for the figure I have and no great reason to change it.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by TropikThunder » Sat Mar 31, 2018 1:58 pm

afan wrote:
Sat Mar 31, 2018 8:39 am
At current correlations one is not changing expected portfolio performance much by varying the international allocation. My take on this is "it hardly matters, don't worry about it"

I keep a less than market cap but significant international allocation. No great reason for the figure I have and no great reason to change it.
Well stated. What I (and likely many others) take issue with is the US-only advocates who speak from an unfounded sense of certainty of what the next 20 years will look like.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by pascalwager » Sat Mar 31, 2018 3:30 pm

JustinR wrote:
Fri Mar 30, 2018 6:40 pm
People like JL Collins argue that they don't need an international allocation because the companies in US total stock market already do business internationally.

Is this actually a valid argument? I feel like this is different from investing in non-American companies.

Does this line of thinking have merit or not?
Collins has also said that he might switch to Total World Stock if the fees were lower.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by stemikger » Sun Apr 01, 2018 6:53 am

nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
One rough observation: over the period when Total Stock and Total International have both existed, their monthly correlation has been 0.85%.

I think it's reasonable to interpret this as meaning that about 85% of your Total International allocation is not actually doing anything different from your US allocation. So, it is adding some diversification, but not very much. Although by adding Total International, you are adding 6,000-odd stocks to the 3,500-odd you have in Total Stock, those 6,000 do pretty much the same thing as the 3,500 you already have.

Some recipes for Indian pudding call for cinnamon, nutmeg, ginger, and cloves. If you leave out the cloves and the ginger, the result is ... another recipie for Indian pudding. You can argue as much as you like about whether you "need" the cloves and the ginger.
+1
This should be included in every argument pertaining to this matter.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Doc » Sun Apr 01, 2018 7:06 am

nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
One rough observation: over the period when Total Stock and Total International have both existed, their monthly correlation has been 0.85%
And how much of that remaining 15% is due to currency which many people hedge away at an added cost.

To get the best diversity from my foreign holdings I use mostly small cap on the theory that will exclude a lot of the multinationals that make up much of the large cap portions of both markets.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by lostdog » Sun Apr 01, 2018 8:21 am

stemikger wrote:
Sun Apr 01, 2018 6:53 am
nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
One rough observation: over the period when Total Stock and Total International have both existed, their monthly correlation has been 0.85%.

I think it's reasonable to interpret this as meaning that about 85% of your Total International allocation is not actually doing anything different from your US allocation. So, it is adding some diversification, but not very much. Although by adding Total International, you are adding 6,000-odd stocks to the 3,500-odd you have in Total Stock, those 6,000 do pretty much the same thing as the 3,500 you already have.

Some recipes for Indian pudding call for cinnamon, nutmeg, ginger, and cloves. If you leave out the cloves and the ginger, the result is ... another recipie for Indian pudding. You can argue as much as you like about whether you "need" the cloves and the ginger.
+1
This should be included in every argument pertaining to this matter.
I saw this in another international thread. This should she used in these arguments.

"Always perplexed by how many Bogleheads insist on not picking single stocks to simply take what the market will bear. Yet have no issue holding a US only or US dominant portfolio that's so far out of line with global market proportions.

The disconnect here often sounds premised on a borderline jingoistic view of American exceptionalism."
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Dandy » Sun Apr 01, 2018 9:03 am

I didn't read every post but from what I saw nothing I read suggested American exceptionalism etc. People talked about whether there was sufficient correlation to justify a global weighting or if many firms had a large percent of income from abroad was international investing or global weighting is necessary. If the correlation was lower I think the global weighting case would be better.

When your country's economy is very large, well diversified and has a large percentage of major companies income from abroad that is a lot different than countries that don't have those conditions. Nothing saying those conditions/advantages will last or that some other countries might have similar conditions now or in the future.

We all tend to have some bias in investing, some irrational fears or comforts. I think there can be a case for global weighting and a case can be made that it isn't required -- both can be made without being biased toward home country.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by oldcomputerguy » Sun Apr 01, 2018 12:58 pm

nisiprius wrote:
Fri Mar 30, 2018 8:17 pm
Wow. Now that is an example of what Edward Tufte calls "Chartjunk." Wikipedia defines Chartjunk as "visual elements in charts and graphs that are not necessary to comprehend the information represented on the graph, or that distract the viewer from this information." The word "Africa" communicates something about the pie slice. The decoration on that pie slice seems to be communicating "I am having an ocular migraine."
Nisiprius, thank you for that. My wife (who does print and web work for one of the National Labs) laughed out loud over this. (She says she is also impressed that you knew who Edward Tufte was. :wink: )
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by nedsaid » Sun Apr 01, 2018 1:44 pm

Oh boy, next thing you know there will be a revenue weighted index fund that weights by revenue by country. I am sure there is somebody in Academia working hard on this right now and soon we will see a Larry Swedroe article on this. :wink: Revenue tilting.

The idea has merit, there is really no right or wrong answer on this. For me, it is more a philosophical argument. Pretty much I argue that I want to own the best countries in the world regardless of where they are headquartered, that with broad international diversification you get better diversification across industry sectors as the US is very tech heavy, and that you diversify your political and currency risk. Larry Swedroe has seemed to argue that there is a "corruption premium" out there, sort of like the "sin" premium.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Noobvestor » Sun Apr 01, 2018 2:06 pm

Dandy wrote:
Sun Apr 01, 2018 9:03 am
I didn't read every post but from what I saw nothing I read suggested American exceptionalism etc. People talked about whether there was sufficient correlation to justify a global weighting or if many firms had a large percent of income from abroad was international investing or global weighting is necessary. If the correlation was lower I think the global weighting case would be better.

When your country's economy is very large, well diversified and has a large percentage of major companies income from abroad that is a lot different than countries that don't have those conditions. Nothing saying those conditions/advantages will last or that some other countries might have similar conditions now or in the future.

We all tend to have some bias in investing, some irrational fears or comforts. I think there can be a case for global weighting and a case can be made that it isn't required -- both can be made without being biased toward home country.
I agree with multiple points of yours: (1) global investing is less of an imperative for a US investor, (2) a US-only investor is more diversified than, say, a CA or UK or other single-country investor, (3) some people have irrational fears or seek emotional comfort.

But the problems remain: (1) global investing is still a default position - there needs to be a justification to tilt away from that, (2) a US-only investor is still tilted toward certain sectors and geographic, economic and political conditions, (3) investors should at least seek to be rational.

I see a lot of arguments that are explicitly based on American exceptionalism (in many threads here on Bogleheads), but the bigger question is: why argue that 'some' diversification is 'enough' in terms of geography, but not sectors or individual stocks?

To return to the precise original question title "The 'American companies I invest in already have international exposure' argument --- valid or not?" - the very phrasing of this suggests a certain default position of US-only investing. I suggest starting with a total (GLOBAL) market approach, then asking: "The 'I plan on leaving out the international half of the market' argument -- valid or not?"
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Noobvestor » Sun Apr 01, 2018 2:30 pm

MoneyMarathon wrote:
Sat Mar 31, 2018 1:41 am
Noobvestor wrote:
Fri Mar 30, 2018 9:04 pm
It's not about correlations but dispersion of potential returns.
This is a good point, IMO.
Noobvestor wrote:
Fri Mar 30, 2018 9:04 pm
I suspect (but don't have data) that the Japanese stock market has gone up and down more or less with the rest of the global stock market (i.e. had a high correlation) despite its decades of dismal under-performance.
Image

Using: https://www.portfoliovisualizer.com/asset-correlations

Equities are all correlated, but EWJ historically was a bit less correlated. That may change (and it's increased).
Thanks for charting that. It's crazy to me that a lot of US-only arguments are about the size/diversification and increased correlation of the US market with other markets. Easy to forget that Japan is the largest ex-US market in the world, and has done poorly for decades.
nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
One rough observation: over the period when Total Stock and Total International have both existed, their monthly correlation has been 0.85.

I think it's reasonable to interpret this as meaning that about 85% of your Total International allocation is not actually doing anything different from your US allocation. So, it is adding some diversification, but not very much. Although by adding Total International, you are adding 6,000-odd stocks to the 3,500-odd you have in Total Stock, those 6,000 do pretty much the same thing as the 3,500 you already have.

Some recipes for Indian pudding call for cinnamon, nutmeg, ginger, and cloves. If you leave out the cloves and the ginger, the result is ... another recipe for Indian pudding. You can argue as much as you like about whether you "need" the cloves and the ginger.
That is indeed (in your words) a very, very rough observation. Correlation of Japanese to American stocks has been almost entirely .5+ (looks like around .75 on average) since 2000. By your logic, we might expect Japan to have at least 50-75% the returns, too. Alas, it's around 10%.

[Note: I edited the above numbers. I'm bad with percentages. Underlying point stands.]

Image

So if you bet entirely on one of the two largest stock markets in 2000 (note that this graph starts after Japan's big crash and gets much, much, much worse if you go back another 5 or 10 years), and you picked wrong, you'd have had dismal returns versus great returns.
Last edited by Noobvestor on Sun Apr 01, 2018 3:23 pm, edited 1 time in total.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Doc » Sun Apr 01, 2018 2:50 pm

Noobvestor wrote:
Sun Apr 01, 2018 2:30 pm
That is indeed (in your words) a very, very rough observation. Correlation of Japanese to American stocks has been almost entirely .5+ (looks like around .75 on average) since 2000. By your logic, we might expect Japan to have at least 50-75% the returns, too. Alas, it's less than 1%.
I'm not sure what you are trying to point out here, but here's another way to look at the same data:

24 month rolling return for same timeframe.

Image
http://quotes.morningstar.com/chart/fun ... 22%3A24%7D

Growth charts are not the best way to look at correlations over different time periods.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Noobvestor » Sun Apr 01, 2018 3:08 pm

[Deleted - Duplicate]
Last edited by Noobvestor on Sun Apr 01, 2018 3:24 pm, edited 2 times in total.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by SeeMoe » Sun Apr 01, 2018 3:16 pm

Q. Can this same argument be made Regards USA bond funds too holding some international bonds as well? Sometimes I feel uneasy per diversification across the board by not holding 20%-50% of the International bond index fund that Vanguard recommends. (After seeing articles here on the subject, I traded my Vanguard international bond index fund in for the Vanguard total bond index fund.) just curious Regards international bonds and USA centric bonds in the scheme of things...

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by PFInterest » Sun Apr 01, 2018 3:17 pm

JustinR wrote:
Fri Mar 30, 2018 6:40 pm
People like JL Collins argue that they don't need an international allocation because the companies in US total stock market already do business internationally.

Is this actually a valid argument? I feel like this is different from investing in non-American companies.

Does this line of thinking have merit or not?
Nope. It's short sided.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Noobvestor » Sun Apr 01, 2018 3:19 pm

Doc wrote:
Sun Apr 01, 2018 2:50 pm
I'm not sure what you are trying to point out here, but here's another way to look at the same data:

24 month rolling return for same timeframe.

Growth charts are not the best way to look at correlations over different time periods.
Note: I had to amend my percentages in the original post you quoted (my apologies), but the underlying point stands.

Let's back up. Nis's argument implied that a .85 correlation meant that we could expect around 85% similar returns from US and international. I am refuting the implication that correlation and returns are coupled in that way. I am not concerned with correlations as such, but rather with the danger of ignoring diversification benefits between highly correlated assetss, because dispersion of returns is important to your wealth.
nisiprius wrote:
Fri Mar 30, 2018 7:42 pm
I think it's reasonable to interpret this as meaning that about 85% of your Total International allocation is not actually doing anything different from your US allocation. So, it is adding some diversification, but not very much.
I do not see this as a reasonable interpretation. By this logic, 75% of Japanese stocks would 'not actually be doing anything different' from a US allocation. And yet, if we look at actual returns - not just correlations - we see that US stocks returned 283% while Japanese stocks returned 20%. So if we're going to be reductive, and compare correlations directly to returns, we find an incongruity: 75% does not equal or resemble 10%.

I have a lot of respect for you Nis, but the pudding analogy is dangerously misleading, IMHO. A Japanese investor who ignored a 'few key ingredients' (i.e. international stocks) would not have wound up with 'another pudding,' but something more closely resembling cow dung.
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Hyperborea » Sun Apr 01, 2018 4:17 pm

I'm thinking about investing only in California companies. They make up 73 out of the 500 US companies in the S&P 500 which is a far higher percentage than their population. The returns are likely greater as they have most of the really innovative high tech growth companies. To round it out there are a lot of consumer product, energy, pharmaceutical, and others. They sell their products to not only the rest of the US but the rest of the world so I'm getting exposure to everywhere else. Why do I need to invest in companies in other US states never mind other countries? :beer
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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by retiredjg » Sun Apr 01, 2018 4:30 pm

Too bad we don't have a sarcasm emoji.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Silk McCue » Sun Apr 01, 2018 5:33 pm

Hyperborea wrote:
Sun Apr 01, 2018 4:17 pm
I'm thinking about investing only in California companies. They make up 73 out of the 500 US companies in the S&P 500 which is a far higher percentage than their population. The returns are likely greater as they have most of the really innovative high tech growth companies. To round it out there are a lot of consumer product, energy, pharmaceutical, and others. They sell their products to not only the rest of the US but the rest of the world so I'm getting exposure to everywhere else. Why do I need to invest in companies in other US states never mind other countries? :beer
Thanks for sharing that 73 of the S&P companies are in California, I now realize that I am overweight in foreign country equities.

Yeah retiredjg it’s too bad we don’t have a sarcasm emoji.

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Re: The "American companies I invest in already have international exposure" argument --- valid or not?

Post by Doc » Sun Apr 01, 2018 5:40 pm

Image
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