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

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

Post by guyesmith » Tue May 22, 2018 2:15 pm

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

I've heard Burton Malkiel say that if you invest in anything other than the market cap weighted you're making a bet. Others explain indexing as being 'self-cleansing.' That got me thinking.

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. If they ride the Total World long-term, though, they're going to consistently be invested in the winners and grow with their market weight (whether U.S., Canada, Australia, China, etc.). If the U.S. market increases to 60% or 70% they ride the wave up (while if they maintained a 60% it's missing out). If the U.S. declines to 40% there is cleansing and winning because you're riding on the backs of the rest of the world's growth.

In this scenario within our global economy is this not a sure fire win for retirement savings? Or at least the closest thing to a guarantee?

Of course, if the U.S. is overweighted in a portfolio then the investor would do better when the U.S. does better (vica-versa). Perhaps I'm only stating the obvious here and it's just an ah-ha moment.

I'm sure there are a thousand ways to look at this, and that's why I've posted this in the theory, news and general section.

Not looking for personal advice, just tossing out an idea to see what everyone thinks.

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

Post by alex_686 » Tue May 22, 2018 2:21 pm

guyesmith wrote:
Tue May 22, 2018 2:15 pm
Theory: The Total World Index a Sure Fire Win [VT/VTWSX]
There is a fair amount of evidence that a marketed weighted portfolio should be the most efficient portfolio and I tend to believe it. Or if not fully believe it, it is the starting point for building a portfolio.

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

Post by nisiprius » 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.)
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by galeno » Tue May 22, 2018 2:53 pm

I agree with "buy the world's haystack". However, for USA domiciles, holding only USA domiciled equities is CHEAPER.

The ERs are cheaper. There are HIDDEN dividend withholding taxes on non-USA domiciled equities. That dividend withholding tax is about 7.5% on developed non-USA equities and 11.2% for EM equities.

For non-USA domiciles like us, non-USA domiciled equities are cheaper than USA domiciled equities. For us, USA domiciled equities have a 30% dividend withholding tax.
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 rudeboy » Tue May 22, 2018 3:02 pm

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.)
A hypothetical total world index did win. You're confusing 'a winner' with 'the biggest winner' (which, of course, the US wasn't).

The total world index's 5.2% sure looks good from 1900-1999 compared to Belguim's ~2%.

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

Post by guyesmith » Tue May 22, 2018 3:04 pm

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.)
nisiprius: I've heard JL Collins say self-cleansing in interviews. I'm not sure I've heard it any place else. Here is a quote from his website and a link.
Those will fall away and be replaced by other newer and more vital firms. Some will succeed in a spectacular fashion growing 200, 300, 1000, 10000% or more. There is no upside limit. As some stars fade, new ones are always on the rise. This is what makes the index, and by extension VTSAX, self-cleansing. - JL Collins
That paragraph is about 1/3 of the way down the page. http://jlcollinsnh.com/2013/06/14/stock ... out-money/

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

Post by guyesmith » Tue May 22, 2018 3:12 pm

nisiprius wrote:
Tue May 22, 2018 2:48 pm
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.

Thanks for this resource.

I see your point that the US-only outperforms. If you lived in the US and invested over that 117 year span you would 'win.' However, I think the pie charts makes my point too. The luck of that bet was for the US-only investor. The UK-only investor fell from 25% to 6.1%. The France-only investor fell from 11.5% to 3.3%. The Japan-only investor was not accounted in the data for in 1900 but grew to 8.6%. In 1900 no one knew who would win. No one knows what the next 117 years will hold. That's why I'm proposing it's a sure fire win to buy 'em all.

Edit: Pie chart on page 7 of the linked document.

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

Post by alpine_boglehead » Tue May 22, 2018 3:24 pm

galeno wrote:
Tue May 22, 2018 2:53 pm
For non-USA domiciles like us, non-USA domiciled equities are cheaper than USA domiciled equities. For us, USA domiciled equities have a 30% dividend withholding tax.
Not if your country has a treaty with the US to only withhold 15% of dividends. And in some countries, that 15% can be (if the equities are held directly) fully creditable for local taxes, so US equity is more tax-efficient than others (e.g. Germany).

I find it really funny that according to the Credit Suisses Yearbook, Austria (tiny nation in central Europe, never mind) made up roughly 5% of global market cap in 1899. Now it's 0.06% (according to the FTSE All-World Index). Home-country bias wouldn't have paid off for me had I lived back then :)

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

Post by guyesmith » Tue May 22, 2018 3:31 pm

alpine_boglehead wrote:
Tue May 22, 2018 3:24 pm
I find it really funny that according to the Credit Suisses Yearbook, Austria (tiny nation in central Europe, never mind) made up roughly 5% of global market cap in 1899. Now it's 0.06% (according to the FTSE All-World Index). Home-country bias wouldn't have paid off for me had I lived back then :)
:| A good antidote for home-bias is too look at this sort of data. Even the US has fluctuated quite a bit in the last 117 years.

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

Post by guyesmith » 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.

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

Post by david1082b » Tue May 22, 2018 3:48 pm

guyesmith wrote:
Tue May 22, 2018 2:15 pm
Theory: The Total World Index a Sure Fire Win [VT/VTWSX]
If they ride the Total World long-term, though, they're going to consistently be invested in the winners and grow with their market weight (whether U.S., Canada, Australia, China, etc.). If the U.S. market increases to 60% or 70% they ride the wave up (while if they maintained a 60% it's missing out). If the U.S. declines to 40% there is cleansing and winning because you're riding on the backs of the rest of the world's growth.
You might be confusing returns with market cap size. Imagine China or India selling loads more assets on the stock market, their market cap % could increase a lot, but the returns for shareholders would not have gone up. The market cap can grow faster than the returns for shareholders. Recently Chinese A shares listed on Shanghai were added to Vanguard funds, so China's market cap weighting went up but the returns did not. Imagine if Beijing closes Chinese markets to outsiders, USA's market cap % would go up, but no one made any gains on USA stocks or any other nations left in total workd stock.

In this scenario within our global economy is this not a sure fire win for retirement savings? Or at least the closest thing to a guarantee?
Fixed annuities and Treasuries would be closer to a guarantee, same for CDs. I don't see why see why global stock markets have to give gains perpetually for every generation in retirement. Without a government guarantee, stock markets will simply return what they return per share.

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

Post by dharrythomas » Tue May 22, 2018 3:56 pm

guyesmith wrote:
Tue May 22, 2018 3:31 pm
alpine_boglehead wrote:
Tue May 22, 2018 3:24 pm
I find it really funny that according to the Credit Suisses Yearbook, Austria (tiny nation in central Europe, never mind) made up roughly 5% of global market cap in 1899. Now it's 0.06% (according to the FTSE All-World Index). Home-country bias wouldn't have paid off for me had I lived back then :)
:| A good antidote for home-bias is too look at this sort of data. Even the US has fluctuated quite a bit in the last 117 years.
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.

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

Post by fennewaldaj » Tue May 22, 2018 4:51 pm

nisiprius wrote:
Tue May 22, 2018 2:48 pm

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?
I think a better way to describe total world would be a surefire way to achieve acceptable results (barring the collapse of capitalism/economic growth). Obviously some countries in it will do much better than others we just don't know which ones they are before the fact. By definition total world can't win since some countries have to do better than average. The US along with a few others did the best in the 1900-2017 time frame that may or may not be the case going forward. I suppose some would argue that holding US only is also a surefire way to achieve acceptable results since our stock market is so large it is unlikely to deviate to greatly from the world mean.

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

Post by david1082b » Tue May 22, 2018 4:55 pm

guyesmith wrote:
Tue May 22, 2018 3:12 pm
nisiprius wrote:
Tue May 22, 2018 2:48 pm
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.

Thanks for this resource.

I see your point that the US-only outperforms. If you lived in the US and invested over that 117 year span you would 'win.' However, I think the pie charts makes my point too. The luck of that bet was for the US-only investor. The UK-only investor fell from 25% to 6.1%. The France-only investor fell from 11.5% to 3.3%. The Japan-only investor was not accounted in the data for in 1900 but grew to 8.6%. In 1900 no one knew who would win. No one knows what the next 117 years will hold. That's why I'm proposing it's a sure fire win to buy 'em all.

Edit: Pie chart on page 7 of the linked document.
From 1900 to now Britain's returns were about the world average, but its market cap weighting in the world fell from 25% to 6%. What happened? This was more to do with the rest of the world putting more of its assets on exchanges and having more population growth than Britain. Losing market cap % wasn't a negative for British shareholders. More market cap growth didn't give global investors more return necessarily. Japan's returns since 1900 were poor because of war destruction and hyperinflation, it lost 99% from 1945 to 1950 essentially. Growth in relative global market cap % for Japan from 1900 to now didn't result in better returns than for Britain.

I still prefer global market investing in any case, but I often see people linking market cap with returns and felt like talking about it. Months ago I remember someone being cynical about USA's chances of outperforming the rest of the world in future - they used market cap % as a reason, since USA can't grow bigger in global market cap % forever can it? It would eventually be 100% of the world! Yet a nation can outperform while its market cap weighting stays the same in the world or even goes down, due to things like emerging markets listing more stuff on exchanges and having more population growth.

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

Post by Fudgie » Tue May 22, 2018 5:57 pm

:oops:
Last edited by Fudgie on Fri Jun 08, 2018 6:13 pm, edited 1 time in total.

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

Post by galeno » Tue May 22, 2018 6:02 pm

Another thing that has some older USA domiciles worried is that the MSCI and FTSE Global Indices are going to begin adding mainland Chinese stocks and bonds to their indices.

Chinese A stocks will make up about 1% to 2% of the world equity indices and about 6% of the Barklay's Global Bond Index will be composed of mainland Chinese bonds.
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 rudeboy » Tue May 22, 2018 6:03 pm

david1082b wrote:
Tue May 22, 2018 4:55 pm
guyesmith wrote:
Tue May 22, 2018 3:12 pm
nisiprius wrote:
Tue May 22, 2018 2:48 pm
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.

Thanks for this resource.

I see your point that the US-only outperforms. If you lived in the US and invested over that 117 year span you would 'win.' However, I think the pie charts makes my point too. The luck of that bet was for the US-only investor. The UK-only investor fell from 25% to 6.1%. The France-only investor fell from 11.5% to 3.3%. The Japan-only investor was not accounted in the data for in 1900 but grew to 8.6%. In 1900 no one knew who would win. No one knows what the next 117 years will hold. That's why I'm proposing it's a sure fire win to buy 'em all.

Edit: Pie chart on page 7 of the linked document.
From 1900 to now Britain's returns were about the world average, but its market cap weighting in the world fell from 25% to 6%. What happened? This was more to do with the rest of the world putting more of its assets on exchanges and having more population growth than Britain. Losing market cap % wasn't a negative for British shareholders. More market cap growth didn't give global investors more return necessarily. Japan's returns since 1900 were poor because of war destruction and hyperinflation, it lost 99% from 1945 to 1950 essentially. Growth in relative global market cap % for Japan from 1900 to now didn't result in better returns than for Britain.

I still prefer global market investing in any case, but I often see people linking market cap with returns and felt like talking about it. Months ago I remember someone being cynical about USA's chances of outperforming the rest of the world in future - they used market cap % as a reason, since USA can't grow bigger in global market cap % forever can it? It would eventually be 100% of the world! Yet a nation can outperform while its market cap weighting stays the same in the world or even goes down, due to things like emerging markets listing more stuff on exchanges and having more population growth.
That's a good point. Also, I'm a little hazy on this, but I believe the correlation between GDP growth and equity returns is not infallible either. Basically, there is no good reason to assume one country will do better than another.

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

Post by nisiprius » Tue May 22, 2018 6:09 pm

guyesmith wrote:
Tue May 22, 2018 3:12 pm
...I see your point that the US-only outperforms...
I think my real point is that "In theory, there is no difference between theory and practice, but, in practice, there is."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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

Post by grok87 » Tue May 22, 2018 6:29 pm

fennewaldaj wrote:
Tue May 22, 2018 4:51 pm
nisiprius wrote:
Tue May 22, 2018 2:48 pm

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?
I think a better way to describe total world would be a surefire way to achieve acceptable results (barring the collapse of capitalism/economic growth). Obviously some countries in it will do much better than others we just don't know which ones they are before the fact. By definition total world can't win since some countries have to do better than average. The US along with a few others did the best in the 1900-2017 time frame that may or may not be the case going forward. I suppose some would argue that holding US only is also a surefire way to achieve acceptable results since our stock market is so large it is unlikely to deviate to greatly from the world mean.
agree.
or perhaps similarly the Total world stock index might have the best risk adjusted returns?
Keep calm and Boglehead on. KCBO.

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

Post by jalbert » Tue May 22, 2018 6:46 pm

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.)
In 1900, The US equity was not close to half of world market cap like it is today. It would have been as much of a single country bet as investing in a smaller country today, and it would not be obvious which to pick. I don’t have the data, but I expect US equities in 1900 were dominated by banks and railroads— definitely an undiversified sector and country bet.

In that sense, the world cap protected against the risk of guessing wrong, and returned a solid return. If a Eurozone index fund had existed in 1900 it would have been the slam dunk choice, and it would have underperformed a hypothetical world index.
Last edited by jalbert on Wed May 23, 2018 12:21 am, edited 1 time in total.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by grok87 » Tue May 22, 2018 7:09 pm

jalbert wrote:
Tue May 22, 2018 6:46 pm
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.)
In 1900, The US equity was not close to half of world market cap like it is today. It would have been as much of a single country bet as investing in a smaller country today, and it would not be obvious which to pick. I don’t have the data, but I expect US equities in 1900 were dominated by banks and railroads— definitely an undiversified sector and country bet.

In that sense, the world cap protected against the risk of guessing wrong, and returned a solid return. If a Eurozone index fund had existed in 1900 it would have been the slam dunk choice, and it would have underperformed the world index.
agree.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by Jack56 » Tue May 22, 2018 7:42 pm

Buying the global portfolio is the least risky way of investing. There is no accepted economic theory that i am aware of that buying some part of the global portfolio is less risky than buying the global portfolio. People say that if you had invested in X or Y you would have done better than the global portfolio, That is true. But because someone happened to buy the winning lottery ticket does not prove that buying lottery tickets is a good idea. We don't know what the future brings so the intelligent investor should diversify his investments as much as is possible.

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

Post by petulant » Tue May 22, 2018 8:38 pm

Jack56 wrote:
Tue May 22, 2018 7:42 pm
Buying the global portfolio is the least risky way of investing. There is no accepted economic theory that i am aware of that buying some part of the global portfolio is less risky than buying the global portfolio. People say that if you had invested in X or Y you would have done better than the global portfolio, That is true. But because someone happened to buy the winning lottery ticket does not prove that buying lottery tickets is a good idea. We don't know what the future brings so the intelligent investor should diversify his investments as much as is possible.
I think the accepted theory for home country bias is exposure to home country currency values. Appreciation of home country currency will reduce the value of foreign holdings, even if the world portfolio has the same return as the home portfolio absent currency changes. Now, how much to put on this theory can be the subject of debate, but I think it’s an important subject.

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

Post by TimeRunner » Tue May 22, 2018 8:40 pm

Holding Total World is the logical end-point of Bogleheads' equities strategy. Vanguard's expense ratio has been dropping, so the argument that you're better off with several funds to build the equivalent and manually rebalancing between them is also becoming less significant, at least in TIRA and Roth accounts where TLH isn't a consideration.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by bikechuck » Tue May 22, 2018 8:49 pm

How do continuously fluctuating exchange rates impact investments in non U.S. equities for U.S. citizens. It has always seemed to me that they add an element of risk which is why I have limited my investment in non U.S. equities to 20% of my total equities. Am I mistaken in my thinking?

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

Post by Marketgarden » Tue May 22, 2018 8:50 pm

Interesting thread! It sounds like VTWSX is gaining traction. It seems the country holding is based on performance, so if the US continues to lead in growth, will the index not compensate and hold a larger US portion?

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

Post by aburntoutcase » Tue May 22, 2018 9:05 pm

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.
I must confess that I am a 100% US equity and bond portfolio fan. As an immigrant it is not nativism or lack of exposure to the world. I simply believe that the American system (political, economic) is more dynamic and responsive and that a sustained economic doldrums of the kind we see in Japan would not be allowed to develop here. I have traveled in Europe and while they have many fine companies, their most dynamic markets are in US and Emerging markets not in Europe itself. While I love the charm of many European cities, I am very bearish on the economic growth and future of Europe itself and see no reason to diversify my bet by actively seeking investments in a society whose economic future I do not believe in with confidence. I am much more bullish on Asia (ex-Japan) but Emerging Market exposure is too levered to a China bet where State-Owned-Enterprises that are run inefficiently are very dominant in the index.

So I see 100% US equity portfolio as fine. I am lucky to be investing in the only country in the world where you can have a home country bias yet have a very diversified portfolio in terms of industries as well as well as individual stock holdings. Why would I dilute that stroke of fortune by investing overseas? On the bond side I see no reason to diversify at all. At least in terms of equities there is a case to be made, bond case is very weak in my opinion. Much of the benefit of developed foreign equity exposure comes from periods when the US dollar is depreciating against European currencies. If you were to only look at local currency returns, the period where developed foreign equity exposure has been beneficial would be seen differently.

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

Post by asset_chaos » 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.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by asset_chaos » Tue May 22, 2018 11:37 pm

Marketgarden wrote:
Tue May 22, 2018 8:50 pm
Interesting thread! It sounds like VTWSX is gaining traction. It seems the country holding is based on performance, so if the US continues to lead in growth, will the index not compensate and hold a larger US portion?
I think it's more companies than countries they're domiciled in. To give an outsized and completely speculative example, several big-ish US companies moved their official domicile outside the US; if Apple were to do the same thing---became legally domiciled in Canada or Bermuda, say---the changes to total stock and total international index funds would be large as they swapped Apple between them. But total world wouldn't need to change a whit. Total world obliterates the distinction of slicing and dicing the stock market into foreign and domestic, regardless of your viewpoint of domestic.
Regards, | | Guy

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

Post by WanderingDoc » Wed May 23, 2018 12:10 am

Using the TSP, investing in USA vs. International is the SAME PRICE. :D
I have just rebalanced into 50%/50%.
There is quite a bit of blind patriotism concerning investing in the U.S. market heavily. The U.S. is more than likely going to be steamrolled by 2050.

galeno wrote:
Tue May 22, 2018 2:53 pm
I agree with "buy the world's haystack". However, for USA domiciles, holding only USA domiciled equities is CHEAPER.

The ERs are cheaper. There are HIDDEN dividend withholding taxes on non-USA domiciled equities. That dividend withholding tax is about 7.5% on developed non-USA equities and 11.2% for EM equities.

For non-USA domiciles like us, non-USA domiciled equities are cheaper than USA domiciled equities. For us, USA domiciled equities have a 30% dividend withholding tax.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by jalbert » Wed May 23, 2018 12:24 am

Marketgarden wrote:
Tue May 22, 2018 8:50 pm
Interesting thread! It sounds like VTWSX is gaining traction. It seems the country holding is based on performance, so if the US continues to lead in growth, will the index not compensate and hold a larger US portion?
Yes. The total world index is a float-adjusted market cap weight index. If US equities over-perform (or underperform) the weighting of US equities in the index will increase (or decrease).
Risk is not a guarantor of return.

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

Post by buylowbuyhigh » Wed May 23, 2018 1:11 am

jalbert wrote:
Wed May 23, 2018 12:24 am
Marketgarden wrote:
Tue May 22, 2018 8:50 pm
Interesting thread! It sounds like VTWSX is gaining traction. It seems the country holding is based on performance, so if the US continues to lead in growth, will the index not compensate and hold a larger US portion?
Yes. The total world index is a float-adjusted market cap weight index. If US equities over-perform (or underperform) the weighting of US equities in the index will increase (or decrease).
According to Vanguard and FTSE, Total World Stock fund has net total assets of $16.4B and the index it tracks, FTSE Global All Cap has net market cap of $51,878.8$. So Vanguard TWS owns 0.0316% of the index according to these numbers. Is it correct to say that TWS owns 0.0316% of the free-floated shares of every company included in this index?

I've been thinking about this and it sounds more intuitive than market cap weighting, not equal weight but equal share in each company. Then if there would be no money inflows or outflows in the fund it would not have to do anything, just keep holding x% of every company. Of course there's still adding and removing stocks when the index updates and participating in stock buybacks and new issues.

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

Post by ignition » Wed May 23, 2018 2:46 am

alpine_boglehead wrote:
Tue May 22, 2018 3:24 pm
galeno wrote:
Tue May 22, 2018 2:53 pm
For non-USA domiciles like us, non-USA domiciled equities are cheaper than USA domiciled equities. For us, USA domiciled equities have a 30% dividend withholding tax.
Not if your country has a treaty with the US to only withhold 15% of dividends. And in some countries, that 15% can be (if the equities are held directly) fully creditable for local taxes, so US equity is more tax-efficient than others (e.g. Germany).

I find it really funny that according to the Credit Suisses Yearbook, Austria (tiny nation in central Europe, never mind) made up roughly 5% of global market cap in 1899. Now it's 0.06% (according to the FTSE All-World Index). Home-country bias wouldn't have paid off for me had I lived back then :)
Wasn't it called Austria-Hungary back then and one of the biggest nations in Europe?

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

Post by PrettyCoolWorkshop » 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.
Be greedy and fearful. All the time.

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

Post by aburntoutcase » Wed May 23, 2018 8:46 am

WanderingDoc wrote:
Wed May 23, 2018 12:10 am
Using the TSP, investing in USA vs. International is the SAME PRICE. :D
I have just rebalanced into 50%/50%.
There is quite a bit of blind patriotism concerning investing in the U.S. market heavily. The U.S. is more than likely going to be steamrolled by 2050.
Maybe so, but I find it hard to think of a scenario of the world in which the US economy gets "steamrolled" by 2050 and Europe and Japan are hitting out the lights. For most of my investing lifetime over past two decades adding European and Japanese stocks to a US portfolio has hurt returns.

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

Post by guyesmith » Wed May 23, 2018 8:47 am

These are some great responses! Thanks for adding to the conversation!

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

Post by guyesmith » Wed May 23, 2018 8:51 am

jalbert wrote:
Wed May 23, 2018 12:24 am
Marketgarden wrote:
Tue May 22, 2018 8:50 pm
Interesting thread! It sounds like VTWSX is gaining traction. It seems the country holding is based on performance, so if the US continues to lead in growth, will the index not compensate and hold a larger US portion?
Yes. The total world index is a float-adjusted market cap weight index. If US equities over-perform (or underperform) the weighting of US equities in the index will increase (or decrease).
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.

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

Post by lostdog » Wed May 23, 2018 9:02 am

guyesmith wrote:
Wed May 23, 2018 8:51 am
jalbert wrote:
Wed May 23, 2018 12:24 am
Marketgarden wrote:
Tue May 22, 2018 8:50 pm
Interesting thread! It sounds like VTWSX is gaining traction. It seems the country holding is based on performance, so if the US continues to lead in growth, will the index not compensate and hold a larger US portion?
Yes. The total world index is a float-adjusted market cap weight index. If US equities over-perform (or underperform) the weighting of US equities in the index will increase (or decrease).
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.
+1. You nailed it guyesmith. Pretty much what JCollins said with VTSAX for U.S. you can say for VTWSX for the world. I know he loves VTWSX but what is holding him back is cost. .19 expense ratio is still low.

You're going to get detailed responses that will challenege your explanation and might sway you from this. In the end it won't matter much anyway compared to your more broad explanation.
Last edited by lostdog on Wed May 23, 2018 9:15 am, edited 3 times in total.

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

Post by aburntoutcase » 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.

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

Post by lostdog » Wed May 23, 2018 9:17 am

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.

That was my thought for awhile too. I decided to make the move for the long term.

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

Post by drk » Wed May 23, 2018 9:39 am

buylowbuyhigh wrote:
Wed May 23, 2018 1:11 am
According to Vanguard and FTSE, Total World Stock fund has net total assets of $16.4B and the index it tracks, FTSE Global All Cap has net market cap of $51,878.8$. So Vanguard TWS owns 0.0316% of the index according to these numbers. Is it correct to say that TWS owns 0.0316% of the free-floated shares of every company included in this index?
No, the fund uses sampling rather than full-index replication.
Vanguard Total World: Portfolio & Management wrote: The fund invests in a broadly diversified sampling of stocks in the index that approximates the index’s key risk factors and characteristics.

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

Post by 3funder » Wed May 23, 2018 9:46 am

I'm approximately 60/40 US/International. I'm quite happy with it. That said, I doubt I'll ever increase my US exposure beyond this.

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

Post by HomerJ » Wed May 23, 2018 10:08 am

fennewaldaj wrote:
Tue May 22, 2018 4:51 pm
I suppose some would argue that holding US only is also a surefire way to achieve acceptable results since our stock market is so large it is unlikely to deviate to greatly from the world mean.
This is my argument. Everything is so connected these days that investing 100% U.S. is still pretty likely to give an acceptable result.

I think people who do that are not trying to "make a bet" that U.S. will out-perform. I think it's just easier.
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Re: Theory: Total World Index a Sure Fire Win [VT/VTWSX]

Post by HomerJ » Wed May 23, 2018 10:13 am

jalbert wrote:
Tue May 22, 2018 6:46 pm
In that sense, the world cap protected against the risk of guessing wrong, and returned a solid return. If a Eurozone index fund had existed in 1900 it would have been the slam dunk choice, and it would have underperformed a hypothetical world index.
This is a very good point. In 1900, Europe was a pretty good bet. But it would have not turned out well.
The J stands for Jay

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

Post by buylowbuyhigh » Wed May 23, 2018 11:25 am

drk wrote:
Wed May 23, 2018 9:39 am
buylowbuyhigh wrote:
Wed May 23, 2018 1:11 am
According to Vanguard and FTSE, Total World Stock fund has net total assets of $16.4B and the index it tracks, FTSE Global All Cap has net market cap of $51,878.8$. So Vanguard TWS owns 0.0316% of the index according to these numbers. Is it correct to say that TWS owns 0.0316% of the free-floated shares of every company included in this index?
No, the fund uses sampling rather than full-index replication.
Vanguard Total World: Portfolio & Management wrote: The fund invests in a broadly diversified sampling of stocks in the index that approximates the index’s key risk factors and characteristics.
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.

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

Post by JoeRetire » Wed May 23, 2018 11:28 am

guyesmith wrote:
Tue May 22, 2018 2:15 pm
In this scenario within our global economy is this not a sure fire win for retirement savings?
Maybe you could define what you mean by "sure fire win" in this context.
Would a savings account yielding a guaranteed 1% be a "sure fire win"?

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

Post by guyesmith » Wed May 23, 2018 11:33 am

Country diversification (% of common stock) as of 04/30/2018
Total World Stock Idx Inv

United States 51.7%
Japan 8.5%
United Kingdom 6.0%
China 3.2%
France 3.2%
Canada 3.0%
Germany 3.0%
Switzerland 2.4%
Australia 2.2%
Korea 1.9%
Taiwan 1.5%
Hong Kong 1.2%
India 1.2%
Netherlands 1.1%
Italy 1.0%
Spain 1.0%
Brazil 0.9%
Sweden 0.9%
South Africa 0.8%
Denmark 0.6%
Singapore 0.5%
Belgium 0.4%
Finland 0.4%
Malaysia 0.4%
Mexico 0.4%
Russia 0.4%
Thailand 0.4%
Norway 0.3%
Chile 0.1%
Indonesia 0.2%
Israel 0.2%
Austria 0.1%
Colombia 0.1%
Greece 0.0%
Ireland 0.1%
New Zealand 0.1%
Philippines 0.1%
Poland 0.1%
Portugal 0.1%
Qatar 0.1%
Turkey 0.1%
United Arab Emirates 0.1%
Czech Republic 0.0%
Egypt 0.0%
Hungary 0.0%
Luxembourg 0.0%
Other 0.0%
Pakistan 0.0%
Peru 0.0%
Argentina —

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

Post by guyesmith » Wed May 23, 2018 11:51 am

JoeRetire wrote:
Wed May 23, 2018 11:28 am
guyesmith wrote:
Tue May 22, 2018 2:15 pm
In this scenario within our global economy is this not a sure fire win for retirement savings?
Maybe you could define what you mean by "sure fire win" in this context.
Would a savings account yielding a guaranteed 1% be a "sure fire win"?
Tongue in cheek? How about I save in the low-risk security of the waterproof/fireproof gun safe I have hidden in my United States basement? At retirement $3,000,000 divided into neat stacks of $100 bills would look pretty nice beside my Thompson-Center Venture 30-06 :D

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.

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

Post by guyesmith » Wed May 23, 2018 11:59 am

lostdog wrote:
Wed May 23, 2018 9:02 am
guyesmith wrote:
Wed May 23, 2018 8:51 am
jalbert wrote:
Wed May 23, 2018 12:24 am
Marketgarden wrote:
Tue May 22, 2018 8:50 pm
Interesting thread! It sounds like VTWSX is gaining traction. It seems the country holding is based on performance, so if the US continues to lead in growth, will the index not compensate and hold a larger US portion?
Yes. The total world index is a float-adjusted market cap weight index. If US equities over-perform (or underperform) the weighting of US equities in the index will increase (or decrease).
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.
+1. You nailed it guyesmith. Pretty much what JCollins said with VTSAX for U.S. you can say for VTWSX for the world. I know he loves VTWSX but what is holding him back is cost. .19 expense ratio is still low.

You're going to get detailed responses that will challenege your explanation and might sway you from this. In the end it won't matter much anyway compared to your more broad explanation.
Thanks. Yes, Collins does say that in his book and on his blog. It's interesting to see how much VTWSX/VT has gotten recommendations even with it's high ER. In fact, Malkiel and Ellis recommend it in their book Elements of Investing way back when the ER was at .50 and it had a .25 purchasing fee. That's insane! Now, even in the one month I've been watching it the ER has dropped from .21 to .19 and the Net Assets has risen from 16.1B to 16.4B. Momentum? Hhhmm..

Many schools of thought, yes. Bogle-Buffet-(Collins): 100% US, Malkiel-Ellis: 50/50 US/INT, Vanguard 60/40 US/INT

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

Post by JoeRetire » 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.

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