Theory: Total World Index a Sure Fire Win [VT/VTWSX]

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guyesmith
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by guyesmith » Wed May 23, 2018 12:26 pm

JoeRetire wrote:
Wed May 23, 2018 12:06 pm
guyesmith wrote:
Wed May 23, 2018 11:51 am
Now, in all seriousness, 'sure fire win' has to mean it will beat inflation and grow with our globalized economy. Greater spending power than the savings account or the gun safe.
So the attributes of a "sure fire win" are:
- beat inflation
- grows
- higher return than a savings account

By that definition, there are lots of "sure fire wins". Most of them involve some risk.
Come on man. I'm proposing a theory to be discussed. I'm not being dogmatic and bashing everyone's response. Friendly discussion. Forgive me if I'm reading incorrectly reading emotion into your comments. Communication is more than words.

By sure fire win I mean it will match (revert to the mean of) the ENTIRE WORLD ECONOMY. Yes, it's a risk. Fairly low risk though wouldn't you agree? Unless all world economies crash and we go back to bartering or trading beads then a total world investment is a successful long term investment. The real risk IMO is generating lower returns than investing with home-bias for the US investor.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by jalbert » Wed May 23, 2018 12:46 pm

According to the Total World Index (free-float) the U.S. is 51% of the market cap weighted. If an investor chooses to allocate their investments at 60% U.S., they're betting the U.S. will outperform the other 49% of the world.
They could just be betting that the difference in return between 60% US and 51% US is likely to be negligible, and noting that 60% US takes less currency risk.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by guyesmith » Wed May 23, 2018 1:17 pm

jalbert wrote:
Wed May 23, 2018 12:46 pm
According to the Total World Index (free-float) the U.S. is 51% of the market cap weighted. If an investor chooses to allocate their investments at 60% U.S., they're betting the U.S. will outperform the other 49% of the world.
They could just be betting that the difference in return between 60% US and 51% US is likely to be negligible, and noting that 60% US takes less currency risk.
That's true. Vanguard is playing it close but still choosing their own allocation at 60/40. I wonder if they'll change in the future if the US drops to 25% or something.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Jags4186 » Wed May 23, 2018 1:35 pm

I can’t pretend to argue with efficient market hypothesis but my personal feelings are that which means I am not 100% total world market weight. I don’t want to be invested in Russia even if it’s 1% or less. I don’t want to be invested in Africa. I don’t want to be invested in South America. I don’t care if that ends up lowering my return. I just don’t trust those places with my money. I do believe small cap will outperform large cap, value will outperform growth, and my portfolio reflects that. Am I making a bet? Sure. But we’re all making a bet that stocks are the best place to be as well so I don’t see it as much different.

I’m sure companies in the mutual funds and ETFs I own make money in these places. Perhaps in a few of my international funds there actually are companies located in these places. I choose not to worry about it :-). Call me a hypocrite...but the decision to own the fund is because of the style of the fund, not because of the market cap weight.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by bargainhuntingking » Wed May 23, 2018 1:45 pm

I agree with the original poster. FYI the ER for the ETF is only 0.10%

I slice and dice now and have some tilts but I'm not deluding myself that it's necessarily going to work out any better than just buying the total world stock index.
Last edited by bargainhuntingking on Mon Aug 20, 2018 4:29 am, edited 1 time in total.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by spdoublebass » Wed May 23, 2018 2:04 pm

A Few Comments and thoughts...

I'm glad this isn't turning into another debate on if we need international or not. I totally understand that one could be just fine with US only, and that a domestic only portfolio might end up with a better end result for some than a Global portfolio. To each their own.

I am a big fan of this fund. I want to once again point out Siamond's paper:
https://finpage.blog/2017/03/25/investi ... ld-part-3/

This describes the merit in investing 25% in your home country and 75% at the world market weight. So yes, there is overlap, or a domestic tilt. An example for the US investor would be 25% VTI/VTSMX and 75% VT/VTWSX.
Which would put you at 36.5% International overall, pretty close to what Vanguard recommends.

In regards to the ER of VTSMX. I read this forum about non Admiral Share funds....One solution I have found is this:
I am totally ok with either .19 for the index fund and .1 for the ETF, but it does bug me that If I wanted to use index funds I would be paying much more than for the ETF. So I just hold $3000 in the Index fund, then keep contributing to it, then when I reach a certain dollar amount say $5000 I convert $2000 to ETF's. Then I'm still at the 3K minimum and can still buy the index fund at NAV. If I remember correctly, they conversion from Index fund to ETF happens at the NAV as well at the close of market the day you convert. You cannot however convert from ETF to Mutual Fund.
Last edited by spdoublebass on Wed May 23, 2018 4:25 pm, edited 1 time in total.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by finvestor » Wed May 23, 2018 3:04 pm

Interesting thread...

One question emerged when reading the various posts: The relative weights of different countries in the world index may change because of two main reasons:

(i) In some countries new companies are being listed more in the stock exchange than in other countries.

(ii) The market cap of the existing, already listed companies of some countries appreciates more than in other countries.

Does anyone have an idea which is (or has been historically) the dominating mechanism?

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by JoeRetire » Wed May 23, 2018 3:09 pm

guyesmith wrote:
Wed May 23, 2018 12:26 pm
Come on man. I'm proposing a theory to be discussed. I'm not being dogmatic and bashing everyone's response. Friendly discussion. Forgive me if I'm reading incorrectly reading emotion into your comments. Communication is more than words.
I was tying to understand your criteria. Sorry that wasn't clear.
By sure fire win I mean it will match (revert to the mean of) the ENTIRE WORLD ECONOMY.
Okay. That's understandable, but certainly would never match the term "sure fire win" in my mind.

Thanks for clarifying.
Yes, it's a risk. Fairly low risk though wouldn't you agree? Unless all world economies crash and we go back to bartering or trading beads then a total world investment is a successful long term investment. The real risk IMO is generating lower returns than investing with home-bias for the US investor.
Sorry, you lost me again.

You seem to be conflating terms like "win" and "successful" but then seem to imply that it wouldn't be a win if "investing with home-bias for the US investor" produces better returns. Perhaps I am misinterpreting here.

I'm pretty sure that the "Entire World Economy" could produce better returns for some periods of time, and the "home-bias for the US investor" could produce better returns for some periods of time. And I suspect that both would be "a successful long term investment" over many long terms. But I honestly can't tell if that means a "sure fire win" for either, given your definition.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by lostdog » Wed May 23, 2018 3:45 pm

When Vanguard starts offering Admiral shares of this fund I guarantee some will have second thoughts of their home bias because of the cost and simplicity of VT/VTWSX.
Hear the clock ticking? That’s your life flying by while you listen to market pundits and watch stock prices fluctuate. -Humble Dollar

jalbert
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by jalbert » Wed May 23, 2018 4:22 pm

guyesmith wrote:
Wed May 23, 2018 1:17 pm
jalbert wrote:
Wed May 23, 2018 12:46 pm
According to the Total World Index (free-float) the U.S. is 51% of the market cap weighted. If an investor chooses to allocate their investments at 60% U.S., they're betting the U.S. will outperform the other 49% of the world.
They could just be betting that the difference in return between 60% US and 51% US is likely to be negligible, and noting that 60% US takes less currency risk.
That's true. Vanguard is playing it close but still choosing their own allocation at 60/40. I wonder if they'll change in the future if the US drops to 25% or something.
If you look at the Vanguard white paper that makes the case for non-US equities being 40% of equities, they plot a curve of volatility on the y-axis, and percentage of non-US equity on the x-axis. The curve is virtually flat from 30-40% non-US equity and that’s the range that minimized volatility. See Figure 4 in:

https://www.vanguard.com/pdf/ISGGEB

It is close to flat from 20-50% non-US equity, and interestingly, at 100% equity allocation, 30% non-US seems to minimize volatility.

But it is likely that sample bias limits statistical significance enough that it would be difficult to draw a definitive conclusion that any point in the range of 20-50% minimizes future volatility.

Figure 2b is also interesting. While an individual emerging country equity market is more volatile than a developed market country, when all EM countries are held at cap weight, the aggregate has volatility similar to a DM country.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Artsdoctor » Wed May 23, 2018 5:08 pm

asset_chaos wrote:
Tue May 22, 2018 11:04 pm
Total world index is pretty close to a sure fire way to earn a fair share of global stock market returns. Whether stocks are a "win" over any particular time period you care about, however, is much less certain. However, the a priori odds of stocks doing well over your investment lifetime are, I think, good enough to make stocks a compelling investment, and total world index is a pretty good way to make that investment.
Just remember: when you're investing in international stocks, you're not just capturing "global stock market returns." You're also capturing currency valuations as well. Foreign markets can be going sky-high but if the dollar is also going sky-high, you're not going to capture those market gains. Most world market funds are not hedged (and none of Vanguard's international equity holdings are hedged), so currency changes can play a bigger factor than most realize.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by aburntoutcase » Wed May 23, 2018 5:51 pm

Artsdoctor wrote:
Wed May 23, 2018 5:08 pm
Just remember: when you're investing in international stocks, you're not just capturing "global stock market returns." You're also capturing currency valuations as well. Foreign markets can be going sky-high but if the dollar is also going sky-high, you're not going to capture those market gains. Most world market funds are not hedged (and none of Vanguard's international equity holdings are hedged), so currency changes can play a bigger factor than most realize.
Very important point that you made with great clarity. Some people will say that it is good to have "currency diversification" in a portfolio but that is a completely separate argument.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by oldzey » Wed May 23, 2018 5:59 pm

The inception date of Vanguard Total Stock U.S. Stock Market Index Fund (VTSMX) was 4/27/1992.

The inception date of Vanguard Total World Stock Index Fund (VTWSX) was 6/26/2008.

Per Morningstar, as of 5/22/2018, if you had invested $10,000 in both funds on 6/27/2008, you would currently have $26,284 in your Total Stock U.S. Stock Market Index Fund, and $18,713 in your Total World Stock Index Fund.

Both funds would have "won" (i.e. they did not lose money), but VTSMX would have won by $7,571.

Of course, past performance does not indicate future performance.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by GAAP » Wed May 23, 2018 6:02 pm

PrettyCoolWorkshop wrote:
Wed May 23, 2018 6:53 am
The only reason I am averse to putting money in Vanguard's Total World Index is that the expense ratio is .18%, which is a bit higher than other Vanguard offerings. I feel like I'm making a mountain out of a molehill though.
According to Vanguard, if you buy the ETF,
Expense ratio as of 02/23/2018 0.10%
Would that change your view?

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by GAAP » Wed May 23, 2018 6:05 pm

I continue to be amazed at how many people feel they should choose the top-performing economy as an indicator of future performance -- when they would also argue vehemently against choosing the top performing stock or asset class as an indicator of future performance.

Somebody please explain how this is any different.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by PlateVoltage » Wed May 23, 2018 6:18 pm

There isn't a single efficient frontier for the entire world. Investors seek to optimize real, after-tax returns in their home currency. Since each country has its own inflation rate, its own tax laws, and its own currency, each country also has its own efficient frontier. Perhaps instead of adopting the US/international ratio of the global market, we should adopt the ratio of our fellow countrymen. By my calculations, US investors have adopted a 68/32 US/international ratio. I'm currently 2:1, so that's pretty close :-).

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by galeno » Wed May 23, 2018 6:21 pm

With equities I don't want currency hedging. I want our equities to be volatile. For a Boglehead equities are for growth.Trying to "smooth" things with currency hedging just adds an extra cost that's not worth the benefit.

With bonds a Boglehead wants safety (ballast) first and yield second. Preferably in the dominant local currency. That means unhedged.

What do I mean by dominant? E.g. we used to live in Costa Rica which uses the CRC. The gross municipal product (GMP) of the Oklahoma City metropolitan area is slightly larger than the GDP of Costa Rica. Thus, the dominant local currency is the USD.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by galeno » Wed May 23, 2018 6:28 pm

The USA composes over 51% market cap of the world equity indices. Japan is in second place with 9%. UK is in third place with 6%.
GAAP wrote:
Wed May 23, 2018 6:05 pm
I continue to be amazed at how many people feel they should choose the top-performing economy as an indicator of future performance -- when they would also argue vehemently against choosing the top performing stock or asset class as an indicator of future performance.

Somebody please explain how this is any different.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Artsdoctor » Wed May 23, 2018 7:10 pm

galeno wrote:
Wed May 23, 2018 6:21 pm
With equities I don't want currency hedging. I want our equities to be volatile. For a Boglehead equities are for growth.Trying to "smooth" things with currency hedging just adds an extra cost that's not worth the benefit.

With bonds a Boglehead wants safety (ballast) first and yield second. Preferably in the dominant local currency. That means unhedged.

What do I mean by dominant? E.g. we used to live in Costa Rica which uses the CRC. The gross municipal product (GMP) of the Oklahoma City metropolitan area is slightly larger than the GDP of Costa Rica. Thus, the dominant local currency is the USD.
I don't think that hedging currency necessarily creates a value judgment: hedged isn't necessarily better than non-hedged. It's just that not hedging will create a separate factor in your total returns (currency factors). Again, if everything is chugging along in the Eurozone and those European markets are reflecting large gains with superior growth, you may not be capturing those returns in your non-hedged fund if the dollar is increasing as well (so in fact, the non-hedged fund is damping down the European returns). This is one reason Vanguard chose to hedge their international bond funds--because they wanted to take away currency risk as much as possible in order to create the safety that you described. They looked at hedging equity funds but felt that equity funds could absorb the idiosyncrasies of currency risk better than bond funds.

My only point really is this. If you want the whole world in your portfolio (say, 25% US equity, 25% international equity, 25% US bonds, 25% international bonds), you're going to have to understand the role currency plays in that scenario; you won't just be getting global market returns. This is one of several reasons many investors prefer a home bias.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by galeno » Wed May 23, 2018 8:00 pm

For a Boglehead who counts in USD hedging an ex-USA bond ETF is a PLUS. Hedging non-USD back to USD in a non-USD bond ETF reduces the volatility. Drastically.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by drk » Wed May 23, 2018 8:53 pm

buylowbuyhigh wrote:
Wed May 23, 2018 11:25 am
The index fat sheets states that the index includes approximately 8000 stocks, and TWS has 8099 holdings. I know they state using sampling, but how much can this deviate from full replication? I also meant that as a "definition" holding x% of every company would be more straightforward than weighting by market cap and if one can reason that they are the same thing.
I'll let the fund's management speak for itself:
Vanguard Total World: Portfolio & Management wrote: Index sampling risk: The chance that the securities selected for the fund, in the aggregate, will not provide investment performance matching that of the index. Index sampling risk for the fund should be low.
The extent to which it can deviate from a full-replication approach depends on the fund's managers. If they're good, they'll match or even beat the index. If not, they may lag the index by more than the fund's ER.

In terms of process, I think I better understand your question now, and it seems like they do not follow the approach you've described:
Vanguard Total World: Portfolio & Management wrote: The group uses proprietary software to implement trading decisions that accommodate cash flow and maintain close correlation with the index’s key characteristics. Vanguard’s refined indexing process, combined with low management fees and efficient trading, has provided tight tracking, net of expenses.
Your approach may make sense, but it's possible that it wouldn't scale well when the fund grows to ten-times its current size, leaving the fund vulnerable to front-runners and others looking for arbitrage opportunities.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by aj76er » Wed May 23, 2018 11:21 pm

spdoublebass wrote:
Wed May 23, 2018 2:04 pm
A Few Comments and thoughts...

I'm glad this isn't turning into another debate on if we need international or not. I totally understand that one could be just fine with US only, and that a domestic only portfolio might end up with a better end result for some than a Global portfolio. To each their own.

I am a big fan of this fund. I want to once again point out Siamond's paper:
https://finpage.blog/2017/03/25/investi ... ld-part-3/

This describes the merit in investing 25% in your home country and 75% at the world market weight. So yes, there is overlap, or a domestic tilt. An example for the US investor would be 25% VTI/VTSMX and 75% VT/VTWSX.
Which would put you at 36.5% International overall, pretty close to what Vanguard recommends.
+1 for Saimond's paper.
It influenced me to allocate equities as 67% World + 33% U.S. (implemented using VTI + VXUS)
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by buylowbuyhigh » Thu May 24, 2018 1:55 am

drk wrote:
Wed May 23, 2018 8:53 pm
buylowbuyhigh wrote:
Wed May 23, 2018 11:25 am
The index fat sheets states that the index includes approximately 8000 stocks, and TWS has 8099 holdings. I know they state using sampling, but how much can this deviate from full replication? I also meant that as a "definition" holding x% of every company would be more straightforward than weighting by market cap and if one can reason that they are the same thing.
I'll let the fund's management speak for itself:
Vanguard Total World: Portfolio & Management wrote: Index sampling risk: The chance that the securities selected for the fund, in the aggregate, will not provide investment performance matching that of the index. Index sampling risk for the fund should be low.
The extent to which it can deviate from a full-replication approach depends on the fund's managers. If they're good, they'll match or even beat the index. If not, they may lag the index by more than the fund's ER.

In terms of process, I think I better understand your question now, and it seems like they do not follow the approach you've described:
Vanguard Total World: Portfolio & Management wrote: The group uses proprietary software to implement trading decisions that accommodate cash flow and maintain close correlation with the index’s key characteristics. Vanguard’s refined indexing process, combined with low management fees and efficient trading, has provided tight tracking, net of expenses.
Your approach may make sense, but it's possible that it wouldn't scale well when the fund grows to ten-times its current size, leaving the fund vulnerable to front-runners and others looking for arbitrage opportunities.
Thanks, that clarifies the practice a bit. But then given the reality of running an index fund (managing cash flows and countering arbitrages) means that it's not strictly speaking market cap weighted either?

I guess I should talk about the index itself, not any real life index fund. What I'm looking for is how to explain index investing in easiest terms: Is it correct to say that an investor owning x% of an index fund, that tracks some market cap weighted index (assume full replication) and has asset size of y% of the size of the index, owns x%*y% of every company (freely floating part) in the index?

Then investing in a single total world stock index fund, following for example FTSE Global All Cap or MSCI ACWI IMI, you could just say that you own an equal share of the public part of every company in the world, no matter the domicile or size. Would the 98-99% coverage of the index and sampling in the fund make any real difference in the outcome between this simplification and reality? Maybe in the future you actually can have 100.00% coverage and replication.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by ying_yang » Thu May 24, 2018 1:59 am

There are 190 or so countries in the world. What happens when your home country isn’t the one of the big ones?

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by minimalistmarc » Thu May 24, 2018 3:31 am

Jags4186 wrote:
Wed May 23, 2018 1:35 pm
I can’t pretend to argue with efficient market hypothesis but my personal feelings are that which means I am not 100% total world market weight. I don’t want to be invested in Russia even if it’s 1% or less. I don’t want to be invested in Africa. I don’t want to be invested in South America. I don’t care if that ends up lowering my return. I just don’t trust those places with my money. I do believe small cap will outperform large cap, value will outperform growth, and my portfolio reflects that. Am I making a bet? Sure. But we’re all making a bet that stocks are the best place to be as well so I don’t see it as much different.

I’m sure companies in the mutual funds and ETFs I own make money in these places. Perhaps in a few of my international funds there actually are companies located in these places. I choose not to worry about it :-). Call me a hypocrite...but the decision to own the fund is because of the style of the fund, not because of the market cap weight.
Nobody trusts those places with their money, but that distrust is probably fully priced in already by the efficient market.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Jags4186 » Thu May 24, 2018 6:39 am

minimalistmarc wrote:
Thu May 24, 2018 3:31 am
Jags4186 wrote:
Wed May 23, 2018 1:35 pm
I can’t pretend to argue with efficient market hypothesis but my personal feelings are that which means I am not 100% total world market weight. I don’t want to be invested in Russia even if it’s 1% or less. I don’t want to be invested in Africa. I don’t want to be invested in South America. I don’t care if that ends up lowering my return. I just don’t trust those places with my money. I do believe small cap will outperform large cap, value will outperform growth, and my portfolio reflects that. Am I making a bet? Sure. But we’re all making a bet that stocks are the best place to be as well so I don’t see it as much different.

I’m sure companies in the mutual funds and ETFs I own make money in these places. Perhaps in a few of my international funds there actually are companies located in these places. I choose not to worry about it :-). Call me a hypocrite...but the decision to own the fund is because of the style of the fund, not because of the market cap weight.
Nobody trusts those places with their money, but that distrust is probably fully priced in already by the efficient market.
Yes--but we all make active bets with our money even if we buy index funds. Do you own a truly complete market cap weighted portfolio? Does your portfolio contain the correct percentage of bonds, gold, commodities? The bond market is larger than the equity market by about 25%. Do you hold a 55/45 Bond/Stock allocation throughout your entire investment horizon? Or do you tilt towards equities and gradually reduce your equity risk as you get older?

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by azanon » Thu May 24, 2018 8:02 am

guyesmith wrote:
Tue May 22, 2018 2:15 pm
Theory: The Total World Index a Sure Fire Win [VT/VTWSX]

Not looking for personal advice, just tossing out an idea to see what everyone thinks.
Personally, I think it's a great idea. One could decide how much stock they want in their portfolio, buy VT, and then never need to look at it again. VT should automatically adjust based on country market capitalization so one wouldn't have to keep up with how things are changing as the years and decades go by.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by azanon » Thu May 24, 2018 9:03 am

I was just taking a look at Vanguard's active alternative to VT, the Global Equity Fund, and it is just outright trouncing VT, or any two index fund mix (if you wanted to go back further than VT) over very long periods despite the extra 30bp or so cost. It's occasions like that that also cause me to question the strict Index is always better than active. Wouldn't their luck eventually run out? I checked to see if they were taking more risk (measured by SD), and it's just a barely higher standard deviation than the index.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Crisium » Thu May 24, 2018 9:12 am

PlateVoltage wrote:
Wed May 23, 2018 6:18 pm
There isn't a single efficient frontier for the entire world. Investors seek to optimize real, after-tax returns in their home currency. Since each country has its own inflation rate, its own tax laws, and its own currency, each country also has its own efficient frontier. Perhaps instead of adopting the US/international ratio of the global market, we should adopt the ratio of our fellow countrymen. By my calculations, US investors have adopted a 68/32 US/international ratio. I'm currently 2:1, so that's pretty close :-).
Another 2:1er! :sharebeer

I found 2:1 the perfect spot where half the time I think I have too few Int, and half the time too much.

Curious, how did you calculate that US investors average about 2:1?

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by GAAP » Thu May 24, 2018 9:17 am

galeno wrote:
Wed May 23, 2018 6:28 pm
The USA composes over 51% market cap of the world equity indices. Japan is in second place with 9%. UK is in third place with 6%.
And therefore, the USA economy will always be in that position? Where was Japan a few decades ago?

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by lostdog » Thu May 24, 2018 9:21 am

Here is a good article from the Humble Dollar in regards to a global portfolio.

http://www.humbledollar.com/money-guide ... portfolio/
Hear the clock ticking? That’s your life flying by while you listen to market pundits and watch stock prices fluctuate. -Humble Dollar

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Lauretta » Thu May 24, 2018 10:45 am

nisiprius wrote:
Tue May 22, 2018 2:48 pm
This is a sort of a trick question and I do not want to hide the fact that it's a trick question... but I am going to be tricky enough not to state what I think the explanation is.

According to the Credit Suisse Global Returns Yearbook, from 1900 through 2017 (i.e. over a century):

The total real return on a total world stock portfolio, including both US and ex-US stock markets, would have been 5.2%/year.
The total real return on a US-only stock portfolio would have been 6.5%/year.

If the Bogleheads forum had existed in 1900, why couldn't you have written exactly the same thing that you wrote above?

Why wouldn't the total world index have looked like a "sure fire win" in 1900?

If it was a sure fire win, why didn't it win?

At this point, I hope that I have convinced you that it just cannot be as simple as "cap-weighted is always going to be a sure fire win because of 'self-cleansing.'"

(I haven't heard that "self-cleansing" phrase before... please see if you can remember who used it.)
This seems to me as absurd as any argument againt diversification and in favour of concentration on the basis of the fact that, in retrospect, we find that concentrating on a geographical area (or on a sector - or on a stock) is better than diversifying across the whole market. Of course we now know in retrospect that investing in the US has had better results than divesifying in the whole world. Actually investing in South Africa or Australia since 1900 would have worked even better. The point is that no-one knew in advance that South Africa would have yielded 7.2%/year real return, so diversifying across the world (rather than concentrating all in South Africa, or in the US) was the safer bet, just like investing in the S&P500 10 yrs ago was safer than going all in in tech stocks or in a single stock like Amazon, even though we now know in retrospect that the latter performed much better the the whole US market.
Diversification works whether you want it or not, so of course if you diversify you won't be all concentrated in the winning market (or sector or stock), but that's not the point.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by azanon » Thu May 24, 2018 11:11 am

Lauretta wrote:
Thu May 24, 2018 10:45 am
nisiprius wrote:
Tue May 22, 2018 2:48 pm
This is a sort of a trick question and I do not want to hide the fact that it's a trick question... but I am going to be tricky enough not to state what I think the explanation is.

According to the Credit Suisse Global Returns Yearbook, from 1900 through 2017 (i.e. over a century):

The total real return on a total world stock portfolio, including both US and ex-US stock markets, would have been 5.2%/year.
The total real return on a US-only stock portfolio would have been 6.5%/year.

If the Bogleheads forum had existed in 1900, why couldn't you have written exactly the same thing that you wrote above?

Why wouldn't the total world index have looked like a "sure fire win" in 1900?

If it was a sure fire win, why didn't it win?

At this point, I hope that I have convinced you that it just cannot be as simple as "cap-weighted is always going to be a sure fire win because of 'self-cleansing.'"

(I haven't heard that "self-cleansing" phrase before... please see if you can remember who used it.)
This seems to me as absurd as any argument againt diversification and in favour of concentration on the basis of the fact that, in retrospect, we find that concentrating on a geographical area (or on a sector - or on a stock) is better than diversifying across the whole market. Of course we now know in retrospect that investing in the US has had better results than divesifying in the whole world. Actually investing in South Africa or Australia since 1900 would have worked even better. The point is that no-one knew in advance that South Africa would have yielded 7.2%/year real return, so diversifying across the world (rather than concentrating all in South Africa, or in the US) was the safer bet, just like investing in the S&P500 10 yrs ago was safer than going all in in tech stocks or in a single stock like Amazon, even though we now know in retrospect that the latter performed much better the the whole US market.
Diversification works whether you want it or not, so of course if you diversify you won't be all concentrated in the winning market (or sector or stock), but that's not the point.
Right, it's a sure-fire win for risk-adjusted returns, for stocks. Now if you want to try to hit the proverbial ball out of the park, with also a chance to have the portion of your body you sit on handed to you, then invest in just one country. Because both of those outcomes have happened in the past, again depending on which single country one invested in.

I don't know which country(ies) will do well, which is why I personally invest in all of them (save frontier countries). It's not cost prohibitive to do that now compared to, say, a few decades ago.

I was never great in history, but thinking way back to grade school, I do remember one theme that just happened over and over. That is, seemingly unstoppable, or super powerful nations that ended up falling or fading in due time. But this time it's different, right? Maybe it is, and I hope so since I live here, but I'm hedging my bets anyway.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by digit8 » Thu May 24, 2018 11:43 am

FWIW, I think on this thread and the subject in general, there is a lot of combining/conflating the idea of best returns, and good enough returns. There is a not-zero chance that a 100% US Equity portfolio will prove to not perform as well as a total world one over the next 30 years, and a not-zero chance that someone who reliably plunks down a piece of every paycheck for life into a 100% US Equity portfolio will find herself 30 years later getting such poor returns that it tanks the idea of a comfortable retirement......but the odds of the former are very different from the odds of the latter.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Lauretta » Thu May 24, 2018 11:57 am

azanon wrote:
Thu May 24, 2018 11:11 am

I don't know which country(ies) will do well, which is why I personally invest in all of them (save frontier countries). It's not cost prohibitive to do that now compared to, say, a few decades ago.
+1
I was never great in history, but thinking way back to grade school, I do remember one theme that just happened over and over. That is, seemingly unstoppable, or super powerful nations that ended up falling or fading in due time. But this time it's different, right? Maybe it is, and I hope so since I live here, but I'm hedging my bets anyway.
Yes I remember that many years ago I read a novel by Joseph Conrad whose introduction started with a reflection on the British Empire (which at the time was quite powerful) and then evoked the fate of the Ancient Roman Empire. I still remember that as it made quite a strong impression on me.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by jalbert » Thu May 24, 2018 12:03 pm

The extent to which it can deviate from a full-replication approach depends on the fund's managers. If they're good, they'll match or even beat the index. If not, they may lag the index by more than the fund's ER.
Indexers have been using sampling methods and optimizers to manage index funds for decades. It is a tried and true method. Most index funds start out being managed by sampling. An index fund has to be very large to use full replication— otherwise transaction costs become prohibitive from comparatively lower share volume in each transaction.
Index fund investor since 1987.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Lauretta » Thu May 24, 2018 12:04 pm

digit8 wrote:
Thu May 24, 2018 11:43 am
FWIW, I think on this thread and the subject in general, there is a lot of combining/conflating the idea of best returns, and good enough returns. There is a not-zero chance that a 100% US Equity portfolio will prove to not perform as well as a total world one over the next 30 years, and a not-zero chance that someone who reliably plunks down a piece of every paycheck for life into a 100% US Equity portfolio will find herself 30 years later getting such poor returns that it tanks the idea of a comfortable retirement......but the odds of the former are very different from the odds of the latter.
Yes, according to firms like StarCapital which base their predictions on CAPE, the chance of the first event are pretty high.
https://www.starcapital.de/en/research/ ... valuation/
Concerning the second event the odds are probably low, but then again I wonder what Japanese investors thought of the same situation in the late 80s... Only (half) joking :P Anyway if you invest throughout 30 yrs and the market declines in the mean time, you'll buy stocks cheaper. The risk is more for someone investing a big lump sum now.
Last edited by Lauretta on Thu May 24, 2018 12:08 pm, edited 1 time in total.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by jalbert » Thu May 24, 2018 12:07 pm

Nobody trusts those places with their money, but that distrust is probably fully priced in already by the efficient market.
I am skeptical that opacity risk can be priced efficiently. The efficient market hypothesis does not posit that a lack of information is priced in efficiently. It says that all publicly known information is priced in.
Index fund investor since 1987.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by rudeboy » Thu May 24, 2018 12:08 pm

digit8 wrote:
Thu May 24, 2018 11:43 am
FWIW, I think on this thread and the subject in general, there is a lot of combining/conflating the idea of best returns, and good enough returns. There is a not-zero chance that a 100% US Equity portfolio will prove to not perform as well as a total world one over the next 30 years, and a not-zero chance that someone who reliably plunks down a piece of every paycheck for life into a 100% US Equity portfolio will find herself 30 years later getting such poor returns that it tanks the idea of a comfortable retirement......but the odds of the former are very different from the odds of the latter.
Sure, but as Bill Bernstein frequently reminds us, the objective of indexing is not to get rich, but to avoid dying poor.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by galeno » Thu May 24, 2018 12:52 pm

"Sure, but as Bill Bernstein frequently reminds us, the objective of indexing is not to get rich, but to avoid dying poor."

Exactly.

USA domicled equities still compose 51% of the world equity indices. But in the future China and it's allies will mosty likely overtake the USA and its allies as the biggest parts of the world equity indices.

Soon, mainland Chinese bonds will become part of the Barklay Global Bond Index. Starting at about t 6% they will be the FOURTH highest currency after the USD (44%), EUR (25%) and JPY (17%). They are predicted to grow rapidly to 30% of the index. The GBP is 5% of the index.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by aburntoutcase » Thu May 24, 2018 1:11 pm

galeno wrote:
Thu May 24, 2018 12:52 pm
USA domicled equities still compose 51% of the world equity indices. But in the future China and it's allies will mosty likely overtake the USA and its allies as the biggest parts of the world equity indices.
You are confusing growth in representation in market cap with investor returns, those are not the same at all. Investors in Chinese stocks have enjoyed very poor returns even as the publicly traded market cap in China has increased. Conversely, despite the decline of the British Empire, British stock investors have realized very good equity returns. Even though US's share of world GDP has declined significantly since 1980, US equity investors have enjoyed some of the strongest equity investor returns globally.

Sometimes people can look a gift horse in the mouth. As US investors we are uniquely blessed to be in a massive economy that is very diversified by industry, has one of the most sophisticated financial markets and a highly responsive political democracy. Yet people are so nervous about single country exposure that they want to diversify into places like Europe, Japan, Emerging Markets, even though fundamentals and demographics for the first two are terrible.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by cykj » Thu May 24, 2018 1:23 pm

[/quote]

In 1900, as the lead of the Austria-Hungarian Empire, they ran Central Europe. Being on the wrong side of two world wars in one century is good for neither the size of your territory nor the size of your economy.
[/quote]

Hey, worked out for Germany!

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by galeno » Thu May 24, 2018 3:01 pm

I'm not confused at all. I'm totally aware of the good returns for the UK stock market during the British Empire's decline.

Just because it occurred that way when the UK smoothly handed its empire status to the USA doesn't mean it will work out that way again.

For a USA-domicile, the main reason to defend the home bias is COST. When a USA person adds non-USA stocks and bonds to the portfolio he will face higher ERs and hidden taxes on interest and dividend income.

For a non-USA domicile w/o a USA tax treaty owning USA domiciled equities is more expensive vs non-USA domiciled equities. For us the USA charges the highest tax on dividend income. 30% if we use a USA stock market. 15% if we use the LSE.

The withholding tax on dividend income from non-USA domicled stocks is about 7.5%. For EM stocks it's about 11.2%
aburntoutcase wrote:
Thu May 24, 2018 1:11 pm
galeno wrote:
Thu May 24, 2018 12:52 pm
USA domicled equities still compose 51% of the world equity indices. But in the future China and it's allies will mosty likely overtake the USA and its allies as the biggest parts of the world equity indices.
You are confusing growth in representation in market cap with investor returns, those are not the same at all. Investors in Chinese stocks have enjoyed very poor returns even as the publicly traded market cap in China has increased. Conversely, despite the decline of the British Empire, British stock investors have realized very good equity returns. Even though US's share of world GDP has declined significantly since 1980, US equity investors have enjoyed some of the strongest equity investor returns globally.

Sometimes people can look a gift horse in the mouth. As US investors we are uniquely blessed to be in a massive economy that is very diversified by industry, has one of the most sophisticated financial markets and a highly responsive political democracy. Yet people are so nervous about single country exposure that they want to diversify into places like Europe, Japan, Emerging Markets, even though fundamentals and demographics for the first two are terrible.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by PlateVoltage » Thu May 24, 2018 6:59 pm

Crisium wrote:
Thu May 24, 2018 9:12 am
Curious, how did you calculate that US investors average about 2:1?
I'm using year-end numbers for 2017.

US market cap was $27.4 trillion:
http://www.crsp.com/fact-sheet-archive

Foreign investors owned $8 trillion of that:
http://ticdata.treasury.gov/Publish/slt2d.txt

So that means US investors owned $19.4 trillion of US stocks. US investors also owned $9 trillion of foreign stock:
http://ticdata.treasury.gov/Publish/slt2f.txt

19.4/9 = 68/32

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Artsdoctor » Thu May 24, 2018 7:55 pm

If anyone is interested in data looking at Vanguard's take on international diversification (and percentages), starting here might be helpful:

https://personal.vanguard.com/pdf/ISGGEB.pdf

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Alchemist » Thu May 24, 2018 11:05 pm

I would say that the biggest flaw in the OP's theory is that investing across the world vs investing just in the U.S. is a frictionless difference. Adding international is not equivalent to simply adding more companies to a broader index like the shift from the S&P 500 to TSM. You are adding new currencies, and the risk inherent with that, as well as the different sets of legal/political rules and risks that each country brings as baggage to an international portfolio.

Adding European or Japanese stocks to U.S. stocks you add currency risk, but probably not much if any political risk. Adding South America, China, India, and other emerging markets drastically increases the exposure to black swans caused by war, violent political changes, and government confiscation of assets.

I am not saying that these alone are iron clad arguments against international diversification, rather, I am saying that it is not as simple as just adding more companies to a domestic index. There is a lot more you are getting than just Samsung, Toyota, and Mercedes....you are also getting the Chinese Communist party, possible coup's, and regional wars.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by rudeboy » Thu May 24, 2018 11:12 pm

Alchemist wrote:
Thu May 24, 2018 11:05 pm
I would say that the biggest flaw in the OP's theory is that investing across the world vs investing just in the U.S. is a frictionless difference. Adding international is not equivalent to simply adding more companies to a broader index like the shift from the S&P 500 to TSM. You are adding new currencies, and the risk inherent with that, as well as the different sets of legal/political rules and risks that each country brings as baggage to an international portfolio.

Adding European or Japanese stocks to U.S. stocks you add currency risk, but probably not much if any political risk. Adding South America, China, India, and other emerging markets drastically increases the exposure to black swans caused by war, violent political changes, and government confiscation of assets.

I am not saying that these alone are iron clad arguments against international diversification, rather, I am saying that it is not as simple as just adding more companies to a domestic index. There is a lot more you are getting than just Samsung, Toyota, and Mercedes....you are also getting the Chinese Communist party, possible coup's, and regional wars.
The counterpoint to this is that when investing in good ole US equities you aren't just getting FAANG, but ballooning debt issues & healthcare costs, drastic wealth inequality, natural disasters, and apparent political corruption. There is no free lunch.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Lauretta » Fri May 25, 2018 3:14 am

Alchemist wrote:
Thu May 24, 2018 11:05 pm

Adding European or Japanese stocks to U.S. stocks you add currency risk, but probably not much if any political risk. Adding South America, China, India, and other emerging markets drastically increases the exposure to black swans caused by war, violent political changes, and government confiscation of assets.
Well some people have argued instead that you can mitigate deep risk (such as that of confiscation) precisely by international diversification...
http://awealthofcommonsense.com/2017/02 ... ent-trump/
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by grok87 » Fri May 25, 2018 3:56 am

Lauretta wrote:
Fri May 25, 2018 3:14 am
Alchemist wrote:
Thu May 24, 2018 11:05 pm

Adding European or Japanese stocks to U.S. stocks you add currency risk, but probably not much if any political risk. Adding South America, China, India, and other emerging markets drastically increases the exposure to black swans caused by war, violent political changes, and government confiscation of assets.
Well some people have argued instead that you can mitigate deep risk (such as that of confiscation) precisely by international diversification...
http://awealthofcommonsense.com/2017/02 ... ent-trump/
nice link.
the article references William Bernstein's "Deep Risk"
https://www.amazon.com/gp/product/09887 ... 95264f3dab

paging Bill Bernstein!
Keep calm and Boglehead on. KCBO.

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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by guyesmith » Fri May 25, 2018 5:26 am

Lauretta wrote:
Fri May 25, 2018 3:14 am
Alchemist wrote:
Thu May 24, 2018 11:05 pm

Adding European or Japanese stocks to U.S. stocks you add currency risk, but probably not much if any political risk. Adding South America, China, India, and other emerging markets drastically increases the exposure to black swans caused by war, violent political changes, and government confiscation of assets.
Well some people have argued instead that you can mitigate deep risk (such as that of confiscation) precisely by international diversification...
http://awealthofcommonsense.com/2017/02 ... ent-trump/
Great article!

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