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 » Fri May 25, 2018 5:38 am

Created a M* comparison of sorts to help with the conversation. Seems to me one of the questions within this question is diversification of industry sectors.

This link is to VTSAX and I set VTWSX as the benchmark. As you will see, the sector weighting’s are quite similar.

http://portfolios.morningstar.com/fund/ ... ture=en-US

Thoughts?

Link didn’t work... just add the fund as the benchmark.

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

Post by columbia » Fri May 25, 2018 6:39 am

Comparison of:

Total world
iShares global 100
50/50 mix of SP500 and developed markets

https://www.portfoliovisualizer.com/bac ... tion4_3=50


The mix has beaten the other two since 2011 and with lower volatility. Random noise or something else?

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

Post by guyesmith » Fri May 25, 2018 6:58 am

Sector Weightings of VTSAX and VTWSX:

VTSAX VTWSX
Basic Materials 3.19 5.88
Consumer Cyclical 12.35 12.27
Financial Services 16.72 18.42
Real Estate 3.56 3.73
Communication 2.81 3.39
Energy 5.96 6.36
Industrials 11.10 11.35
Technology 21.07 16.91
Consumer Defensive 6.77 8.02
Healthcare 13.55 10.66
Utilities 2.93 3.00

What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment. Other countries can't say that. Seems to give the same diversity without the currency/political risk etc.

Sorry it's hard to read. I couldn't figure out how to import a picture or spreadsheet.

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

Post by Snowjob » Fri May 25, 2018 7:06 am

rudeboy wrote:
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.
Debt issues are worse in most of those other countries -- perhaps in large part as an offset to cheaper health care. Corruption is everywhere but on balance worse outside the US especially if you extend to third world countries and I really have a hard time thinking natural disasters is unique to the united states.

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

Post by aburntoutcase » Fri May 25, 2018 10:48 am

Lauretta wrote:
Fri May 25, 2018 3:14 am
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/
Risk of confiscation of assets is probably lowest in the US across the world. By diversifying into international stocks, especially emerging markets you are only increasing it, not reducing it.

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

Post by guyesmith » Fri May 25, 2018 11:53 am

aburntoutcase wrote:
Fri May 25, 2018 10:48 am
Lauretta wrote:
Fri May 25, 2018 3:14 am
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/
Risk of confiscation of assets is probably lowest in the US across the world. By diversifying into international stocks, especially emerging markets you are only increasing it, not reducing it.
+1 If confiscation happened in the US you better have a fully stocked doomsday prepper pantry - ‘cause der ain’t nobody carrying cash worth any value.

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

Post by aburntoutcase » Fri May 25, 2018 12:39 pm

guyesmith wrote:
Fri May 25, 2018 11:53 am
+1 If confiscation happened in the US you better have a fully stocked doomsday prepper pantry - ‘cause der ain’t nobody carrying cash worth any value.
Funny!

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

Post by Fclevz » Fri May 25, 2018 12:50 pm

guyesmith wrote:
Fri May 25, 2018 11:53 am
+1 If confiscation happened in the US you better have a fully stocked doomsday prepper pantry - ‘cause der ain’t nobody carrying cash worth any value.
Confiscation doesn't mean jack-booted thugs will come to your door and take your stuff. The gentleman's way to confiscate is taxes. In 1932 the top marginal tax rate was increased to 63% during the Great Depression and steadily increased, reaching 94% (on all income over $200,000) in 1945. Also, in World War II, tax law revisions increased the numbers of those paying some income taxes from 7% of the U.S. population (1940) to 64% by 1944, vastly broadening the tax base and increasing the total intake.

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

Post by guyesmith » Fri May 25, 2018 12:53 pm

Fclevz wrote:
Fri May 25, 2018 12:50 pm
guyesmith wrote:
Fri May 25, 2018 11:53 am
+1 If confiscation happened in the US you better have a fully stocked doomsday prepper pantry - ‘cause der ain’t nobody carrying cash worth any value.
Confiscation doesn't mean jack-booted thugs will come to your door and take your stuff. The gentleman's way to confiscate is taxes. In 1932 the top marginal tax rate was increased to 63% during the Great Depression and steadily increased, reaching 94% (on all income over $200,000) in 1945. Also, in World War II, tax law revisions increased the numbers of those paying some income taxes from 7% of the U.S. population (1940) to 64% by 1944, vastly broadening the tax base and increasing the total intake.

:shock:

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

Post by Artsdoctor » Fri May 25, 2018 3:05 pm

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/
The article is an overview of Dr. Bernstein"s characterization of deep risk. You're not really going to get protection from confiscation by investing in Vanguard's Total International Stock Fund. He's describing hard assets that are held overseas, such as the flat in Paris you always wanted to have. Confiscation by stable governments, as described above, are usually referring to taxation.

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

Post by pascalwager » Fri May 25, 2018 11:24 pm

azanon wrote:
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.
I ran the two fund M* graphs back to the date of inception for VG Total World Stock (just under 10 years), and TWS had the slightly higher return. So, maybe their luck ran out at ten years. (GE has been around since 1995.)

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

Post by pascalwager » Sat May 26, 2018 1:09 am

guyesmith wrote:
Fri May 25, 2018 6:58 am
Sector Weightings of VTSAX and VTWSX:

VTSAX VTWSX
Basic Materials 3.19 5.88
Consumer Cyclical 12.35 12.27
Financial Services 16.72 18.42
Real Estate 3.56 3.73
Communication 2.81 3.39
Energy 5.96 6.36
Industrials 11.10 11.35
Technology 21.07 16.91
Consumer Defensive 6.77 8.02
Healthcare 13.55 10.66
Utilities 2.93 3.00

What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment. Other countries can't say that. Seems to give the same diversity without the currency/political risk etc.

Sorry it's hard to read. I couldn't figure out how to import a picture or spreadsheet.
But the industrial sector of the world market is more diversified than that of the US market.

s8r
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by s8r » Sat May 26, 2018 1:33 am

Excluding possible additional cost, investing in a Total World index is the most rationally justifiable strategy for a passive equity investor. It is the scientific approach.

Even if in the end your returns turn out to be dissappointing, at least you can perfectly logically justify your choice of strategy. Likewise, if you choose a concentrated approach and in the end it turns out to be a poor strategy, you will have to endure painfully logical critique why your decision was foolish.

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

Post by david1082b » Sat May 26, 2018 1:40 am

azanon wrote:
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.
VT has slightly outperformed VHGEX going back to the start of VT, almost nothing in it really: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

It's possible you're using PortfolioVisualizer, which would only start from the beginning of 2009 for its comparison, missing out the fact that VHGEX had a worse drawdown in 2008. https://www.portfoliovisualizer.com/bac ... ion2_2=100

Index is not always better than active, but outperformance is only known in hindsight. It doesn't happen in the present tense. It's easy to outperform indexing with a time machine, but we don't have them yet.

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

Post by selters » Sat May 26, 2018 3:53 am

guyesmith wrote:
Tue May 22, 2018 3:35 pm
Many investors I know in their 50s and 60s have been US-only. It has worked out great for them.
Many McDonalds, Microsoft, Exxon Mobil, Nike, Disney, Berkshire, Amazon employees have been company stock only. It has worked out from fine to great for them, too. Not so well for Enron, Lehman Brothers and Kodak employees.

I'm exaggerating to make a point. But if you go 100% US stocks, you're concentrating your investments in 52% of the global stock market, and you're making a bet that the US stock market is even greater than what's priced into the market.

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

Post by guyesmith » Sat May 26, 2018 6:45 am

pascalwager wrote:
Sat May 26, 2018 1:09 am
guyesmith wrote:
Fri May 25, 2018 6:58 am
Sector Weightings of VTSAX and VTWSX:

VTSAX VTWSX
Basic Materials 3.19 5.88
Consumer Cyclical 12.35 12.27
Financial Services 16.72 18.42
Real Estate 3.56 3.73
Communication 2.81 3.39
Energy 5.96 6.36
Industrials 11.10 11.35
Technology 21.07 16.91
Consumer Defensive 6.77 8.02
Healthcare 13.55 10.66
Utilities 2.93 3.00

What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment. Other countries can't say that. Seems to give the same diversity without the currency/political risk etc.

Sorry it's hard to read. I couldn't figure out how to import a picture or spreadsheet.
But the industrial sector of the world market is more diversified than that of the US market.
Do you know where I can see that data? I’m not seeing it on Morningstar.

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

Post by UpperNwGuy » Sat May 26, 2018 7:27 am

aburntoutcase wrote:
Wed May 23, 2018 9:10 am
guyesmith wrote:
Wed May 23, 2018 8:51 am
Yes. That's the essence of my 'sure fire win' theory. The investor will ALWAYS be investing in the best companies in the best countries. Currently that's roughly 55% North America and 45% World ex-US, with 11% or so being in emerging markets.
Well Messrs. French and Fama tell us that there is something called the Value factor, so according to that to get better returns you must deviate from market cap weighting and pick the cheaper less popular/riskier stocks.
And many of us choose not to take that extra risk by tilting toward value stocks. We prefer to own the whole market, whether it be the US market or the world market. The only issue for us is the US/international split.

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

Post by azanon » Sat May 26, 2018 10:50 am

david1082b wrote:
Sat May 26, 2018 1:40 am
azanon wrote:
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.
VT has slightly outperformed VHGEX going back to the start of VT, almost nothing in it really: http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

It's possible you're using PortfolioVisualizer, which would only start from the beginning of 2009 for its comparison, missing out the fact that VHGEX had a worse drawdown in 2008. https://www.portfoliovisualizer.com/bac ... ion2_2=100

Index is not always better than active, but outperformance is only known in hindsight. It doesn't happen in the present tense. It's easy to outperform indexing with a time machine, but we don't have them yet.
Ahh ok thanks, and yeah that's what I did. I used portfoliovisualizer, and didn't realize that the bit where VT outperformed was getting cut off.

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

Post by guyesmith » Sat May 26, 2018 2:20 pm

UpperNwGuy wrote:
Sat May 26, 2018 7:27 am
aburntoutcase wrote:
Wed May 23, 2018 9:10 am
guyesmith wrote:
Wed May 23, 2018 8:51 am
Yes. That's the essence of my 'sure fire win' theory. The investor will ALWAYS be investing in the best companies in the best countries. Currently that's roughly 55% North America and 45% World ex-US, with 11% or so being in emerging markets.
Well Messrs. French and Fama tell us that there is something called the Value factor, so according to that to get better returns you must deviate from market cap weighting and pick the cheaper less popular/riskier stocks.
And many of us choose not to take that extra risk by tilting toward value stocks. We prefer to own the whole market, whether it be the US market or the world market. The only issue for us is the US/international split.
+1

The more I study and discuss the more I find myself at this level of simplicity too.

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

Post by jalbert » Sat May 26, 2018 3:53 pm

What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment.
Yes, this is why US investors do not need to take the currency risk of being at global market cap.
Risk is not a guarantor of return.

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

Post by jalbert » Sat May 26, 2018 4:30 pm

Lauretta wrote:
Fri May 25, 2018 3:14 am
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/
The article posits that global equities protect you against prolonged deflation. I suspect that this is tenuous protection, as deflation in the US might well lead to the USD soaring (opposite of inflation where a currency deteriorates). Post-1980’s Japan initially saw the yen soar during the equity and real estate crash there, but then the yen fell during the long, slow entrenched deflation there. Global equity diversification certainly would have helped Japanese equity investors during its lost decade(s).

But if the US had serious prolonged deflation, I’m not sure I’d want to depend on global equity diversification given the US trade imbalance. If the dollar didn’t soar cancelling out the benefit of global equity diversification, then it seems like prices of goods produced globally would also have to fall to continue to be sold to US consumers, which might also hit equities hard in countries with a trade surplus with the US. I think it is hard to know what would work best, but I would expect treasuries to be the most reliable asset class to protect against prolonged deflation in the US.

I think Wade Pfau did some research on sustainable withdrawal rates for retirees with int’l diversification and found that global diversification improved the probability of success measured for the inflationary period in the US in the 1970’s but lowered the probability of success measured for the Great Depression, which was, of course, deflationary in the US.

While I’m not trying to advocate for a 94% top tax rate, $200,000 in 1940 is about $3.6M in inflation-adjusted terms today, so that was the threshold for that bracket. And I think over 90% of workers in the US paid zero income taxes in 1940.
Risk is not a guarantor of return.

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

Post by galeno » Sat May 26, 2018 5:02 pm

"And many of us choose not to take that extra risk by tilting toward value stocks. We prefer to own the whole market, whether it be the US market or the world market. The only issue for us is the US/international split."

Investing in VT (FTSE all world all cap equity index) automatically solves that issue. It's "self-cleansing".
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 = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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

Post by UpperNwGuy » Sun May 27, 2018 6:04 am

galeno wrote:
Sat May 26, 2018 5:02 pm
"And many of us choose not to take that extra risk by tilting toward value stocks. We prefer to own the whole market, whether it be the US market or the world market. The only issue for us is the US/international split."

Investing in VT (FTSE all world all cap equity index) automatically solves that issue. It's "self-cleansing".
Yes, that is certainly a legitimate way of deciding upon one's US/international split. I have no idea what "self-cleansing" means. If I decide to invest in Total World, it will be VTWSX, not VT.

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

Post by CyberBob » Sun May 27, 2018 10:13 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 :-).
PlateVoltage wrote:
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
PlateVoltage's suggestion to only consider the opinion of your fellow countrymen (who have your same inflation rates, tax laws, currency, etc.), rather than people in other countries who may differ considerably is pretty darn interesting. I was curious what it may look like regarding bonds. So using the same treasury sources as PlateVoltage, I came up with:

Citibank U.S. Broad Investment Grade Bond Index (USBIG): $18,890,430
Foreign owned: $5,565,277 treasury, $993,281 agency, $3,936,952 corporate ($10,495,510 total)
US owned foreign: $2,832,616

8,394,920/2,832,616 = 75/25

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

Post by galeno » Sun May 27, 2018 10:58 am

"Yes, that is certainly a legitimate way of deciding upon one's US/international split. I have no idea what "self-cleansing" means. If I decide to invest in Total World, it will be VTWSX, not VT."

I have no idea what "self-cleansing" means either. I take it to mean that "no rebalancing necessary" between TSM and TISM.
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 = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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

Post by pascalwager » Sun May 27, 2018 11:28 am

guyesmith wrote:
Sat May 26, 2018 6:45 am
pascalwager wrote:
Sat May 26, 2018 1:09 am
guyesmith wrote:
Fri May 25, 2018 6:58 am
Sector Weightings of VTSAX and VTWSX:

VTSAX VTWSX
Basic Materials 3.19 5.88
Consumer Cyclical 12.35 12.27
Financial Services 16.72 18.42
Real Estate 3.56 3.73
Communication 2.81 3.39
Energy 5.96 6.36
Industrials 11.10 11.35
Technology 21.07 16.91
Consumer Defensive 6.77 8.02
Healthcare 13.55 10.66
Utilities 2.93 3.00

What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment. Other countries can't say that. Seems to give the same diversity without the currency/political risk etc.

Sorry it's hard to read. I couldn't figure out how to import a picture or spreadsheet.
But the industrial sector of the world market is more diversified than that of the US market.
Do you know where I can see that data? I’m not seeing it on Morningstar.
M* provides sector percentages, but does not identify the sector components. I don't have data, but is it not common knowledge that heavy industry has moved offshore in recent decades to reduce labor costs? Examples include ship-building (India), steel manufacturer, and heavy castings like roadway man-hole and vault covers (India).

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

Post by rob65 » Sun May 27, 2018 12:02 pm

buylowbuyhigh wrote:
Thu May 24, 2018 1:55 am


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?


Not sure if this got answered later, but yes.

If a fund owns y% of an index, then it owns y% of each company in the index, at least in an idealized market.

Consider an index with three companies: A, B, and C. A has a market cap of $50,000, B has a market cap of $30,000, and C has a market cap of $20,000 for a total market cap of $100,000 for the index. Suppose a fund has $10,000 in assets, so 10% of the total index. It will match the market cap weights and own $5000 of A, $3000 of B, and $2000 of C. That means that it owns 10% of A, 10% of B, and 10% of C. In fact, it will own 10% of the shares of A, 10% of the shares of B, and 10% of the shares of C. Replace 10% with y% and include as many companies as you want and the math works the same.

I'm not an expert, but I would guess that real life is probably a bit messier (free float changes, inflows/outflows in the fund, liquidity issues with lightly traded stocks, etc). Still, I think the basic underlying concept holds.

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

Post by Actin » Sun May 27, 2018 12:55 pm

Simplicity is a beautiful thing, but there comes a point where you deconstruct something down to such a simplistic level that you destroy what made is so special.There seems to be some kind of contest among modern investors to see who can do the absolute least amount of work with their investments.

Compare what you get with total world vs the three fund. You're nearly identical in your top holdings, except now you've given up the ability to control the ratios of them. This is the same reason I don't like target funds. You lose the ability to tilt more towards your better performers and slow down on the ones that are dragging you. I contribute significantly more each month to VTSAX than I do to VTIAX and VBTLX.

Yes, this is a form of market timing, and I know it's considered sacrilegious to even imply market timing, but it's not a terrible thing to adjust your contribution ratios based on reality. I agree with Mr. Bogle that the US is the primary market for investing in and I don't see that changing anytime soon.

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

Post by pascalwager » Sun May 27, 2018 3:12 pm

Actin wrote:
Sun May 27, 2018 12:55 pm
Simplicity is a beautiful thing, but there comes a point where you deconstruct something down to such a simplistic level that you destroy what made is so special.There seems to be some kind of contest among modern investors to see who can do the absolute least amount of work with their investments.

Compare what you get with total world vs the three fund. You're nearly identical in your top holdings, except now you've given up the ability to control the ratios of them. This is the same reason I don't like target funds. You lose the ability to tilt more towards your better performers and slow down on the ones that are dragging you. I contribute significantly more each month to VTSAX than I do to VTIAX and VBTLX.

Yes, this is a form of market timing, and I know it's considered sacrilegious to even imply market timing, but it's not a terrible thing to adjust your contribution ratios based on reality. I agree with Mr. Bogle that the US is the primary market for investing in and I don't see that changing anytime soon.
The total world stock fund is not a deconstruction, it's the basic, original construction. Modern passive investors understand that portfolio work should be minimized to reduce self-induced under-performance, and simplicity is a big part of this minimization.

I would like to hear more about your understanding of "reality" and how it connects the past or present to the future.

Personally, I like Gene Fama's idea that non-domestic allocation is a matter of personal taste. While I use the world index approach, I do have doubts about the country proportions. Is there really a world market, or just individual country markets? If there isn't a world market, then how does this effect portfolio allocation decisions?

I've been tempted to tilt toward domestic, but I never act on it. I really wouldn't feel comfortable with a domestic tilt because I don't have the necessary convictions.

So, my taste is to use the world index approach until I develop some convictions about the future, which isn't likely in my case. You do have these convictions, so your tilt toward domestic makes perfect sense.

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

Post by columbia » Sun May 27, 2018 3:23 pm

Age is a factor, correct?

It would seem odd to advise a 70 year old, US-only equities investor to switch to a global cap weight.

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

Post by lostdog » Sun May 27, 2018 6:12 pm

If you tilt to anything besides world market cap, you're betting.

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

Post by guyesmith » Sun May 27, 2018 7:26 pm

pascalwager wrote:
Sun May 27, 2018 11:28 am
guyesmith wrote:
Sat May 26, 2018 6:45 am
pascalwager wrote:
Sat May 26, 2018 1:09 am
guyesmith wrote:
Fri May 25, 2018 6:58 am
Sector Weightings of VTSAX and VTWSX:

VTSAX VTWSX
Basic Materials 3.19 5.88
Consumer Cyclical 12.35 12.27
Financial Services 16.72 18.42
Real Estate 3.56 3.73
Communication 2.81 3.39
Energy 5.96 6.36
Industrials 11.10 11.35
Technology 21.07 16.91
Consumer Defensive 6.77 8.02
Healthcare 13.55 10.66
Utilities 2.93 3.00

What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment. Other countries can't say that. Seems to give the same diversity without the currency/political risk etc.

Sorry it's hard to read. I couldn't figure out how to import a picture or spreadsheet.
But the industrial sector of the world market is more diversified than that of the US market.
Do you know where I can see that data? I’m not seeing it on Morningstar.
M* provides sector percentages, but does not identify the sector components. I don't have data, but is it not common knowledge that heavy industry has moved offshore in recent decades to reduce labor costs? Examples include ship-building (India), steel manufacturer, and heavy castings like roadway man-hole and vault covers (India).
I see what you’re saying, that even though the industrial levels for example are at the same percentage it doesn’t mean that it’s the same industries with in the segment. Mining for example would look different in North America than it does in South America or Africa. However, I would also argue that your example of industry moving offshore is irrelevant to the investor because those are still American companies generating revenue.

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

Post by pascalwager » Sun May 27, 2018 10:54 pm

guyesmith wrote:
Sun May 27, 2018 7:26 pm
pascalwager wrote:
Sun May 27, 2018 11:28 am
guyesmith wrote:
Sat May 26, 2018 6:45 am
pascalwager wrote:
Sat May 26, 2018 1:09 am
guyesmith wrote:
Fri May 25, 2018 6:58 am
Sector Weightings of VTSAX and VTWSX:

VTSAX VTWSX
Basic Materials 3.19 5.88
Consumer Cyclical 12.35 12.27
Financial Services 16.72 18.42
Real Estate 3.56 3.73
Communication 2.81 3.39
Energy 5.96 6.36
Industrials 11.10 11.35
Technology 21.07 16.91
Consumer Defensive 6.77 8.02
Healthcare 13.55 10.66
Utilities 2.93 3.00

What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment. Other countries can't say that. Seems to give the same diversity without the currency/political risk etc.

Sorry it's hard to read. I couldn't figure out how to import a picture or spreadsheet.
But the industrial sector of the world market is more diversified than that of the US market.
Do you know where I can see that data? I’m not seeing it on Morningstar.
M* provides sector percentages, but does not identify the sector components. I don't have data, but is it not common knowledge that heavy industry has moved offshore in recent decades to reduce labor costs? Examples include ship-building (India), steel manufacturer, and heavy castings like roadway man-hole and vault covers (India).
I see what you’re saying, that even though the industrial levels for example are at the same percentage it doesn’t mean that it’s the same industries with in the segment. Mining for example would look different in North America than it does in South America or Africa. However, I would also argue that your example of industry moving offshore is irrelevant to the investor because those are still American companies generating revenue.
We may do some specialty steel manufacturing and ship building, but the large scale manufacturing is overseas. And large scale casting products are all overseas.

If you own the world stock market, you own every company in every industry–-if the fund(s) follows a very broad index. Investing in the world market provides every company and every type of company in every sector. Investing in a single country cannot be assured to accomplish such complete diversity. Why would you want to include only companies located in a single country? Well, some people may have a reason to do that, but I don't.

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

Post by pascalwager » Sun May 27, 2018 11:00 pm

jalbert wrote:
Sat May 26, 2018 3:53 pm
What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment.
Yes, this is why US investors do not need to take the currency risk of being at global market cap.
Currency risk applies to the short-term investor, but for the long-term investor, currency changes balance out.

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

Post by aburntoutcase » Mon May 28, 2018 1:04 pm

s8r wrote:
Sat May 26, 2018 1:33 am
Excluding possible additional cost, investing in a Total World index is the most rationally justifiable strategy for a passive equity investor. It is the scientific approach.

Even if in the end your returns turn out to be dissappointing, at least you can perfectly logically justify your choice of strategy. Likewise, if you choose a concentrated approach and in the end it turns out to be a poor strategy, you will have to endure painfully logical critique why your decision was foolish.
So let us say Venezuela and Cuba want to IPO a bunch of State-Owned Enterprises. It is logical to want to sell some of your current equity investments and redeploy into buying them in order to ensure maximum diversification? That is what a World Stock Index fund would do. If all countries had similar economic growth potential, similar shareholder protections and rule of law, sure diversify away because equity risk premium should be similar. However the world outside of US has a variety of economic and shareholder friendly regimes. Risk doesn't always equal return otherwise there would be no risk premium. It is an empirical fact that high volatility equities and bonds have lower returns than less volatile counterparts, kind of the opposite of what CAPM dogma would say.

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

Post by Pinkllama » Mon May 28, 2018 2:21 pm

A total world index wouldn’t buy IPO’s in Venezuela and Cuba as they aren’t part of the index. At least not in Vanguard’s version of it.

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

Post by drk » Mon May 28, 2018 2:38 pm

aburntoutcase wrote:
Mon May 28, 2018 1:04 pm
So let us say Venezuela and Cuba want to IPO a bunch of State-Owned Enterprises. It is logical to want to sell some of your current equity investments and redeploy into buying them in order to ensure maximum diversification? That is what a World Stock Index fund would do. If all countries had similar economic growth potential, similar shareholder protections and rule of law, sure diversify away because equity risk premium should be similar. However the world outside of US has a variety of economic and shareholder friendly regimes. Risk doesn't always equal return otherwise there would be no risk premium. It is an empirical fact that high volatility equities and bonds have lower returns than less volatile counterparts, kind of the opposite of what CAPM dogma would say.
People come up with such weird hypotheticals when discussing the ex-US investing landscape. It's not a mystery what would happen to Vanguard Total World if Venezuela or Cuba decided "to IPO a bunch of State-Owned Enterprises." The answer is nothing. We know this because FTSE publishes their rules for inclusion in any given index, and neither country meets those rules. If they did, they would be included, but then we get into abstract counterfactual territory (would we still be talking about the same Venezuela or Cuba at that point?). Plus, neither country is even close to inclusion in the index, which we know because FTSE doesn't even consider either a frontier market. (The FTSE Global All Cap Index excludes frontier markets, in case that's not clear.)

For what it's worth, it is completely fine for you to avoid investing according to global market cap, to avoid emerging markets, or even to invest solely in the US. It's not helping anyone to spread FUD that might dissuade others from otherwise safe asset allocations of their own.

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

Post by aburntoutcase » Mon May 28, 2018 9:34 pm

drk wrote:
Mon May 28, 2018 2:38 pm
People come up with such weird hypotheticals when discussing the ex-US investing landscape. It's not a mystery what would happen to Vanguard Total World if Venezuela or Cuba decided "to IPO a bunch of State-Owned Enterprises." The answer is nothing. We know this because FTSE publishes their rules for inclusion in any given index, and neither country meets those rules. If they did, they would be included, but then we get into abstract counterfactual territory (would we still be talking about the same Venezuela or Cuba at that point?). Plus, neither country is even close to inclusion in the index, which we know because FTSE doesn't even consider either a frontier market. (The FTSE Global All Cap Index excludes frontier markets, in case that's not clear.)

For what it's worth, it is completely fine for you to avoid investing according to global market cap, to avoid emerging markets, or even to invest solely in the US. It's not helping anyone to spread FUD that might dissuade others from otherwise safe asset allocations of their own.
Well if people are such fans of global market cap investing, which not include every single tradeable market from emerging markets to frontier markets and beyond? You can replace Venezuela and Cuba with China and Russia in this example if you want. What you are calling FUD is actually what happens. A lot of market cap in emerging and frontier markets is inefficient state owned enterprises. I absolutely have shunned investing ex-US for the most part for my investing career (past ~20 years) and thank god I did so. As someone blessed to have the opportunity to invest in the worlds most dynamic developed market with the most sophisticated financial system and best shareholder protections why would I want to go overseas just because I feel nervous about US exposure? The US stock market is unique in the world. No other national stock market offers such deep diversification by industry and number of stocks.

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

Post by jacoavlu » Mon May 28, 2018 11:46 pm

I wish VT (8099 holdings) was as diversified as VTI + VXUS (9956 holdings).

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

Post by pascalwager » Tue May 29, 2018 1:21 am

jacoavlu wrote:
Mon May 28, 2018 11:46 pm
I wish VT (8099 holdings) was as diversified as VTI + VXUS (9956 holdings).
If you read the VT prospectus, there's some hope for a broader index in the future with more companies. But this is one reason why I own the two separate US and non-US funds. The other reason is lower cost (I own the mutual funds, not the ETFs.)

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

Post by sassy_penguin » Tue May 29, 2018 1:25 am

VTWSX (Total World Stock): 8099 stocks
VTSAX (Total Stock Market): 3629 stocks
VTIAX (Total Int'l Stock): 6327 stocks

Why doesn't the top one total the number of holdings of the other two? I personally only get into investing beyond a little bit in my 401k in the last year. I do a split of 75% VTSAX to 25% VTIAX.

I am open to the idea of just moving wholly to VTWSX, but it actually seems it may limit the broadness of my investment somehow due to the above discrepancy.

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

Post by pascalwager » Tue May 29, 2018 1:29 am

aburntoutcase wrote:
Mon May 28, 2018 9:34 pm
drk wrote:
Mon May 28, 2018 2:38 pm
People come up with such weird hypotheticals when discussing the ex-US investing landscape. It's not a mystery what would happen to Vanguard Total World if Venezuela or Cuba decided "to IPO a bunch of State-Owned Enterprises." The answer is nothing. We know this because FTSE publishes their rules for inclusion in any given index, and neither country meets those rules. If they did, they would be included, but then we get into abstract counterfactual territory (would we still be talking about the same Venezuela or Cuba at that point?). Plus, neither country is even close to inclusion in the index, which we know because FTSE doesn't even consider either a frontier market. (The FTSE Global All Cap Index excludes frontier markets, in case that's not clear.)

For what it's worth, it is completely fine for you to avoid investing according to global market cap, to avoid emerging markets, or even to invest solely in the US. It's not helping anyone to spread FUD that might dissuade others from otherwise safe asset allocations of their own.
Well if people are such fans of global market cap investing, which not include every single tradeable market from emerging markets to frontier markets and beyond? You can replace Venezuela and Cuba with China and Russia in this example if you want. What you are calling FUD is actually what happens. A lot of market cap in emerging and frontier markets is inefficient state owned enterprises. I absolutely have shunned investing ex-US for the most part for my investing career (past ~20 years) and thank god I did so. As someone blessed to have the opportunity to invest in the worlds most dynamic developed market with the most sophisticated financial system and best shareholder protections why would I want to go overseas just because I feel nervous about US exposure? The US stock market is unique in the world. No other national stock market offers such deep diversification by industry and number of stocks.
True, but when you own all of the national stock markets, not just the US national stock market, then you have even deeper "diversification by industry and number of stocks".

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

Post by pascalwager » Tue May 29, 2018 1:37 am

sassy_penguin wrote:
Tue May 29, 2018 1:25 am
VTWSX (Total World Stock): 8099 stocks
VTSAX (Total Stock Market): 3629 stocks
VTIAX (Total Int'l Stock): 6327 stocks

Why doesn't the top one total the number of holdings of the other two? I personally only get into investing beyond a little bit in my 401k in the last year. I do a split of 75% VTSAX to 25% VTIAX.

I am open to the idea of just moving wholly to VTWSX, but it actually seems it may limit the broadness of my investment somehow due to the above discrepancy.
An index which includes all of the qualifying world companies doesn't exist right now, but VG is open to changing indexes for TWS in the future.

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

Post by Always passive » Tue May 29, 2018 1:52 am

jacoavlu wrote:
Mon May 28, 2018 11:46 pm
I wish VT (8099 holdings) was as diversified as VTI + VXUS (9956 holdings).
The way I understand it, the purpose of diversification is to reduce volatility, that is the Markovitz (MPT) "free lunch" The question is how many stocks do you need to capture the totality of the "free lunch"?
Now, do you think that adding another 1900 companies to the 8099 already in VT will make such a difference?
There are several studies that show that after about 30 stocks in an index, the standard deviation is about the same as you add stocks to it. Maybe in a global index you need a bit more, but 8099 is not enough?

see the graph in https://www.investopedia.com/articles/s ... cation.asp

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

Post by pascalwager » Tue May 29, 2018 2:09 am

Always passive wrote:
Tue May 29, 2018 1:52 am
jacoavlu wrote:
Mon May 28, 2018 11:46 pm
I wish VT (8099 holdings) was as diversified as VTI + VXUS (9956 holdings).
The way I understand it, the purpose of diversification is to reduce volatility, that is the Markovitz (MPT) "free lunch" The question is how many stocks do you need to capture the totality of the "free lunch"?
Now, do you think that adding another 1900 companies to the 8099 already in VT will make such a difference?
There are several studies that show that after about 30 stocks in an index, the standard deviation is about the same as you add stocks to it. Maybe in a global index you need a bit more, but 8099 is not enough?

see the graph in https://www.investopedia.com/articles/s ... cation.asp
TWS is subject to sampling error, but the two separate funds don't employ sampling since they are complete.

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

Post by pascalwager » Tue May 29, 2018 2:52 am

guyesmith wrote:
Sun May 27, 2018 7:26 pm
pascalwager wrote:
Sun May 27, 2018 11:28 am
guyesmith wrote:
Sat May 26, 2018 6:45 am
pascalwager wrote:
Sat May 26, 2018 1:09 am
guyesmith wrote:
Fri May 25, 2018 6:58 am
Sector Weightings of VTSAX and VTWSX:

VTSAX VTWSX
Basic Materials 3.19 5.88
Consumer Cyclical 12.35 12.27
Financial Services 16.72 18.42
Real Estate 3.56 3.73
Communication 2.81 3.39
Energy 5.96 6.36
Industrials 11.10 11.35
Technology 21.07 16.91
Consumer Defensive 6.77 8.02
Healthcare 13.55 10.66
Utilities 2.93 3.00

What is amazingly eye-opening to me about this is how incredibly diverse the US economy is. To be all-US would give you essentially the same sector weightings as a global market cap weight investment. Other countries can't say that. Seems to give the same diversity without the currency/political risk etc.

Sorry it's hard to read. I couldn't figure out how to import a picture or spreadsheet.
But the industrial sector of the world market is more diversified than that of the US market.
Do you know where I can see that data? I’m not seeing it on Morningstar.
M* provides sector percentages, but does not identify the sector components. I don't have data, but is it not common knowledge that heavy industry has moved offshore in recent decades to reduce labor costs? Examples include ship-building (India), steel manufacturer, and heavy castings like roadway man-hole and vault covers (India).
I see what you’re saying, that even though the industrial levels for example are at the same percentage it doesn’t mean that it’s the same industries with in the segment. Mining for example would look different in North America than it does in South America or Africa. However, I would also argue that your example of industry moving offshore is irrelevant to the investor because those are still American companies generating revenue.
The US companies didn't move offshore, but the activity (ship-building, etc.) moved to other countries.

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

Post by pokebowl » Tue May 29, 2018 4:34 am

sassy_penguin wrote:
Tue May 29, 2018 1:25 am
VTWSX (Total World Stock): 8099 stocks
VTSAX (Total Stock Market): 3629 stocks
VTIAX (Total Int'l Stock): 6327 stocks

Why doesn't the top one total the number of holdings of the other two? I personally only get into investing beyond a little bit in my 401k in the last year. I do a split of 75% VTSAX to 25% VTIAX.

I am open to the idea of just moving wholly to VTWSX, but it actually seems it may limit the broadness of my investment somehow due to the above discrepancy.
VTWSX follows the FTSE Global All Cap, which as of 30 April 2018, follows approximately 8,000 stocks that cover both Developed and Emerging global markets. VTIAX and VTSAX follow two additional different indexes. Just as VTIAX also doesnt give you everything, than say if you invested in each market individually. Still it comes down to time, cost and sampling.

On that note VTWSX is evolving, with its basket of holdings growing annually. 12 months ago, the fund held only ~7k equities. If the above (but shrinking) gap causes a concern, you can temporarily split VTIAX and VTSAX based on FTSE weights, which currently resides around 51.55% (52%) US to 48.45% (48%) World.
There is nothing more expensive than something offered for free.

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

Post by aburntoutcase » Tue May 29, 2018 7:37 am

pascalwager wrote:
Tue May 29, 2018 1:29 am
True, but when you own all of the national stock markets, not just the US national stock market, then you have even deeper "diversification by industry and number of stocks".
If all the other stock markets were similar to US in risk and return profile sure, but they are not and then there is the introduction of currency risk.

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

Post by jacoavlu » Tue May 29, 2018 9:15 am

I like the simplicity of VT, but for me that simplicity does not outweigh the benefit of increased diversification and lower cost compared to VTI + VXUS. The primary difference being VTI covers about twice as many US equities as VT (~3600 vs ~1800).

With divididend allocation and capital additions, I rebalance toward US vs Intl market cap.

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

Post by bgf » Tue May 29, 2018 9:18 am

guyesmith wrote:
Tue May 22, 2018 3:35 pm
Many investors I know in their 50s and 60s have been US-only. It has worked out great for them.
Many investors I know in their 50s and 60s have been MSFT/BRK.B only. It has worked out great (really REALLY great) for them.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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