If the US market cap was 5% instead of 52%, would the US vs International conversation change?

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JustinR
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If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by JustinR » Fri May 25, 2018 1:47 am

In the US vs International threads, there are often the same arguments repeated by the "home bias is ok if it's the US" crowd.

Mostly that the US economy is awesome, efficient, and stable, while other countries are risky, corrupt, unstable, and not as awesome. Also, in the past US has outperformed International.

Market cap and performance aren't exactly the same things, right? You can perform amazingly and still have a small market cap compared to the rest of the world.

The often repeated arguments for tilting US don't change when the market cap is different.

So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?

FireProof
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by FireProof » Fri May 25, 2018 2:47 am

There's also currency risk. Having 95% of your investments in different currencies from your own minor currency could be at least psychologically tricky.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

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

JustinR wrote:
Fri May 25, 2018 1:47 am
In the US vs International threads, there are often the same arguments repeated by the "home bias is ok if it's the US" crowd.

Mostly that the US economy is awesome, efficient, and stable, while other countries are risky, corrupt, unstable, and not as awesome. Also, in the past US has outperformed International.

Market cap and performance aren't exactly the same things, right? You can perform amazingly and still have a small market cap compared to the rest of the world.

The often repeated arguments for tilting US don't change when the market cap is different.

So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?
A problem those of us from smaller markets face every time we think about this.

Home Country bias is not unique to US investors, but it's more damaging. Particularly if you are UK based investor, and the last 10 years of underperformance.

Another way of putting that would be "the smaller your domestic stock market, the greater the gains from international diversification".
Last edited by Valuethinker on Fri May 25, 2018 3:23 am, edited 1 time in total.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Valuethinker » Fri May 25, 2018 3:22 am

FireProof wrote:
Fri May 25, 2018 2:47 am
There's also currency risk. Having 95% of your investments in different currencies from your own minor currency could be at least psychologically tricky.
1. you can hedge your currency exposure - there are even equity funds which do so

2. your labour income and your home equity are in your home currency. And for equities, what really matters is what currencies the companies themselves operate in, and their hedging policies. That's difficult to measure. But it's a good bet that if your currency is strong against say USD, profits will be lower, and vice versa. The market seems to adjust its levels to some extent for this-- stocks with high external exposure move contra to the currency (to some extent)

3. if you have an increasing level of fixed income as you near retirement, you can hold that in your home currency (bond funds which invest in domestic bonds, or hedge back into the home currency)

The big problem is that some domestic bond markets (Italy! One of the world's top 5 govt bond markets) are not risk free.

I tend to suggest unless you are a resident of one of those "risk free" countries that you try to diversify across global developed market government bonds-- but hedged back into your home currency. If such is not available, a US Treasury bond fund.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by AlohaJoe » Fri May 25, 2018 3:24 am

Probably not. It is easy to form the hypothesis: "Is home country bias smaller in countries with small global market caps" and then google to see if the hypothesis is easily proved/disproved.

Image

It isn't like being 2.4% has affected the Australia vs International conversation. Being 3.4% hasn't affected the Canada vs International conversation. Being 7.2% hasn't affected the Japan vs International conversation.

If anything the US is actually less home biased than many countries. (Though I think that is due to the extremely well-developed financial system, more than anything else.)

We can also see that home country bias is extremely high in most countries. Long-term membership in the EU seems to be about the only factor that drives it down substantially.

Image

But even that is a relative thing. Everyone is very far from "global market cap weighting". Germany is something like 5% of the global market cap for equities but Germany investors hold 66% Germany equities.[1]

There's been a clear trend towards greater global diversification. Which is visible even here on Bogleheads. 25 years ago, in 1993, it would have been the rare Boglehead who held any international at all. Now the conversation seems to have largely shifted to be about how much international you should hold. This is echoed in every country.

Image

I see little reason for the conversation to change substantially if the US were at 5% of the global market cap. However, I expect that over the next few decades, everyone -- everywhere in the world -- will shift towards global market cap. After all, we have already seen exactly this same thing play out in the US once before.

Not that long ago, in the US, "home bias" meant "home city bias" when it came to investing. People in New York were more likely to invest in New York companies than California companies. (And vice versa.) There's a fascinating recent NBER paper -- "Who Owned Citibank? Familiarity Bias and Business Network Influences on Stock Purchases, 1925-1929" -- that showed that distance from New York influenced ownership of Citibank.
Consistent with “home bias,” the Northeast (as defined by the Census) accounted for 85% of Citibank’s voting shares,
As information technology improved, as regional differences subsided, as America become more national (as opposed to federal) that kind of "home bias" has largely gone away. (But not entirely: look at the "home bias" that venture capitalists still have towards Silicon Valley vs. non-Silicon Valley companies.)

Since we've seen "home bias" go away once away, it doesn't seem a stretch to forecast that it will go away again.

That said: the US will never be 5% of the global market cap. The last time it was 5% of the global market cap was probably back in the 1820s or something. So this is so totally non-actionable I'm not really sure what lessons we can draw from this thought exercise. The US may go down to 30% (as it was in the 1980s) again but....it is hard to see it going lower than that in any of our lifetimes.

[1]: "Are Investors Home Biased? Evidence from Germany"

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by IlliniDave » Fri May 25, 2018 3:48 am

Regarding the the subject question, yes the conversation would change. And if we had a state-run economy like China we might not be having the discussion at all. Any number of hypothetical alternate realities could change things.

What I find fascinating is the persistence of this particular discussion--many on both sides seem bothered by those who hold different views on the subject. I don't know the "right" answer, so I have international exposure but less than full market cap. I'm familiar with the whole results/strategy admonition, but I'm nearing the phase of my life where strategy is rapidly taking a back seat to tactics and results are what I am left with. All I can say is I am glad I hedged (tilt towards US). Everyone should invest in the way they are most comfortable with. I'm a firm believer that within reason, precisely how you arrange your invested dollars is less important than how you behave as an investor.
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by msk » Fri May 25, 2018 3:55 am

As is often the case, it all depends...
I am resident in a country with a very, very tiny stock market. Which means that I can pay attention to ALL the stocks, on the daily news, quarterly reports, etc. This market is so tiny that it does not even appear as Frontier. Yet, because of the lack of sophistication of the local investors, it has been very easy to beat the index, enormously. So I ended up with 50% of my stock investments locally and 50% abroad (all other countries). Because my local investments have been doing so well I have, over the decades, been selling locally and reinvesting abroad to keep the split at 50:50. Never the other way around. This is despite the fact that the local market index has been virtually level over decades. But I am now getting old and have less patience with following stocks, hence I am migrating more and more to Worldwide by free market weight. Perhaps the same applies to those markets which form a small percentage of World. Possibly, Canadians feel more confident in picking individual stocks in Canada and hence weight Canada more, using individual picks rather than indexing? Never mind the added currency gyrations. Ditto for Brits, etc. I have nil knowledge of Korean/Japanese/Chinese stocks, so my investments in all the smaller markets ought to be only via indexing. As you dig into ever smaller markets I suspect that the investment climate is more similar to what Buffett enjoyed in the USA many decades ago. Successfully picking individual stocks was much easier than in the USA today. Advice to my own adult kids resident in smaller markets: assign 2x to local market weight (10% for a country with 5% global market), rest international. Logic? Weak, but it may help with assuaging anxiety following currency gyrations.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by JustinR » Fri May 25, 2018 4:02 am

AlohaJoe wrote:
Fri May 25, 2018 3:24 am
Probably not. It is easy to form the hypothesis: "Is home country bias smaller in countries with small global market caps" and then google to see if the hypothesis is easily proved/disproved.

It isn't like being 2.4% has affected the Australia vs International conversation. Being 3.4% hasn't affected the Canada vs International conversation. Being 7.2% hasn't affected the Japan vs International conversation.

If anything the US is actually less home biased than many countries. (Though I think that is due to the extremely well-developed financial system, more than anything else.)

We can also see that home country bias is extremely high in most countries. Long-term membership in the EU seems to be about the only factor that drives it down substantially.

But even that is a relative thing. Everyone is very far from "global market cap weighting". Germany is something like 5% of the global market cap for equities but Germany investors hold 66% Germany equities.[1]
Thanks for the visuals and stats. To me, this just tells me that most people are bad investors. Particularly Australians and Canadians :D

My theoretical exercise is mainly directed towards Bogleheads and the conversations that happen here. I suspect that most of the Australians and Canadians here don't have 66% of their portfolio invested in their home country. Bogleheads are less likely to invest based on home bias right?

AlohaJoe wrote:
Fri May 25, 2018 3:24 am
That said: the US will never be 5% of the global market cap. The last time it was 5% of the global market cap was probably back in the 1820s or something. So this is so totally non-actionable I'm not really sure what lessons we can draw from this thought exercise. The US may go down to 30% (as it was in the 1980s) again but....it is hard to see it going lower than that in any of our lifetimes.
This thread isn't to literally imagine a world where the US is at 5% cap. The question is extreme on purpose so that the "Bogle told me 0% international is cool" people can reevaluate if their arguments still make sense when their allocation is completely at odds with the world cap, instead of closer like it is today.

IlliniDave wrote:
Fri May 25, 2018 3:48 am
Regarding the the subject question, yes the conversation would change. And if we had a state-run economy like China we might not be having the discussion at all. Any number of hypothetical alternate realities could change things.

What I find fascinating is the persistence of this particular discussion--many on both sides seem bothered by those who hold different views on the subject. I don't know the "right" answer, so I have international exposure but less than full market cap. I'm familiar with the whole results/strategy admonition, but I'm nearing the phase of my life where strategy is rapidly taking a back seat to tactics and results are what I am left with. All I can say is I am glad I hedged (tilt towards US). Everyone should invest in the way they are most comfortable with. I'm a firm believer that within reason, precisely how you arrange your invested dollars is less important than how you behave as an investor.
Yea, the US vs International discussion gets old and I doubt anyone actually changes their minds from these threads.

But that's exactly why I'm trying to reframe the discussion.

Why is 100% US ok at 51% cap but not 5%?
Last edited by JustinR on Fri May 25, 2018 4:10 am, edited 1 time in total.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by msk » Fri May 25, 2018 4:08 am

Pension funds are also a major factor. I suspect that in most countries government pension funds are directed to invest primarily, if not entirely, in local markets, be it stocks or RE.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by AlohaJoe » Fri May 25, 2018 4:44 am

JustinR wrote:
Fri May 25, 2018 4:02 am
Why is 100% US ok at 51% cap but not 5%?
Once an economy reaches a certain size it is internally diversified "enough". They have enough variety of industries within their borders. The US, China, Japan, and maybe the UK are the only countries that are at that point.

You don't need to be 50% market cap to reach that point. But you probably do need to be bigger than 5%. Think of it like a tipping point. Below that tipping point, one should strongly skew towards global market cap. Above that tipping point, you can be strongly domestic biased -- even up to 100% if that floats your boat.

The tipping point isn't strictly related to market cap, though. But there is probably a soft relationship. Instead it is more about the diversity of the national economy (and how much of that is publicly listed). It is probably better to look at GICS sectors and see how countries do on that.

If the US were 5% of the global market cap but still had a diverse local economy -- car manufacturers, energy, industrials, consumer staples, healtcare, etc -- I think people could make a case for still investing 100% in it. This follows easily from the research by Roll (1992), Baca, Garbe, and Weiss (2000), Cavaglia, Brightman, and Akek (2000), and others (including Vanguard themselves) that
For the developed markets, we found that sector diversification produced the potential for more risk reduction benefits than did country diversification
So if a single national economy is able to have a breadth of industries & sectors, you could make the case that holding 100% in just that national economy is "okay".

I mean, I wouldn't (and don't) invest that way. But it should be pretty clear how easily someone can make the case that "Why is 100% US ok at 51% cap but not 5%".

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by ignition » Fri May 25, 2018 5:08 am

The US is much more diversified than other countries. I'm from Belgium but there is no way I would invest 100% in Belgium. It's just too small and undiversified. I would feel very uncomfortable investing 100% in Belgium. If I were a US investor with 100% US stocks I wouldn't be that worried.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Valuethinker » Fri May 25, 2018 5:25 am

AlohaJoe wrote:
Fri May 25, 2018 4:44 am
JustinR wrote:
Fri May 25, 2018 4:02 am
Why is 100% US ok at 51% cap but not 5%?
Once an economy reaches a certain size it is internally diversified "enough". They have enough variety of industries within their borders. The US, China, Japan, and maybe the UK are the only countries that are at that point.
UK most definitely not. The problem is sectoral. The UK is strong in banks, pharmaceuticals, tobacco, consumer goods, mining & metals (especially) but weak in tech & engineering stocks.

In addition you have big stock specific risk. 10 companies are c. 45% of the UK index.
You don't need to be 50% market cap to reach that point. But you probably do need to be bigger than 5%. Think of it like a tipping point. Below that tipping point, one should strongly skew towards global market cap. Above that tipping point, you can be strongly domestic biased -- even up to 100% if that floats your boat.

The tipping point isn't strictly related to market cap, though. But there is probably a soft relationship. Instead it is more about the diversity of the national economy (and how much of that is publicly listed). It is probably better to look at GICS sectors and see how countries do on that.

If the US were 5% of the global market cap but still had a diverse local economy -- car manufacturers, energy, industrials, consumer staples, healtcare, etc -- I think people could make a case for still investing 100% in it. This follows easily from the research by Roll (1992), Baca, Garbe, and Weiss (2000), Cavaglia, Brightman, and Akek (2000), and others (including Vanguard themselves) that
For the developed markets, we found that sector diversification produced the potential for more risk reduction benefits than did country diversification
So if a single national economy is able to have a breadth of industries & sectors, you could make the case that holding 100% in just that national economy is "okay".

I mean, I wouldn't (and don't) invest that way. But it should be pretty clear how easily someone can make the case that "Why is 100% US ok at 51% cap but not 5%".
As above. I doubt many countries have the capacity to diversify across sectors fully. And stock specific risk matters a lot, the "tech" play in S Korea is Samsung. Even in Japan you have few of the world's biggest technology companies.

US-only investor is underweight natural resources ex oil & gas. Also with consumer goods it really doesn't make a lot of sense to want to own P&G but not Unilever nor Nestle. Altria (Philip Morris) but not BAT nor Imperial Tobacco. To own alcoholic beverages companies but not Diageo (the world's largest). Inbev is a Belgium based co, but presumably listed on N American markets? But what about Heineken.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Lauretta » Fri May 25, 2018 5:28 am

Valuethinker wrote:
Fri May 25, 2018 3:14 am
JustinR wrote:
Fri May 25, 2018 1:47 am
In the US vs International threads, there are often the same arguments repeated by the "home bias is ok if it's the US" crowd.

Mostly that the US economy is awesome, efficient, and stable, while other countries are risky, corrupt, unstable, and not as awesome. Also, in the past US has outperformed International.

Market cap and performance aren't exactly the same things, right? You can perform amazingly and still have a small market cap compared to the rest of the world.

The often repeated arguments for tilting US don't change when the market cap is different.

So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?
A problem those of us from smaller markets face every time we think about this.

Home Country bias is not unique to US investors, but it's more damaging. Particularly if you are UK based investor, and the last 10 years of underperformance.

Another way of putting that would be "the smaller your domestic stock market, the greater the gains from international diversification".
I am not sure I understand how you define 'damaging' but your last statement about the 'greater gains from international diversification' for smaller domestic markets does not seem to be generalizable.

A Swedish investor would have had much greater gains in the last 40 years had she invested in Sweden only rather than in a globally diversified portfolio. The same is true for someone who had invested in South Africa or Australia only in 1900, as their performance to date has been greater than that of the US (or of the world).

On the the other hand, a Japanese investor would have hugely benefited from diversification and avoiding home country bias at the end of the 80s, even though the Japanese stock market was of the order of half the world market at that time.

The US outperformed over the last 10 years, but over the previous 30 yrs it had the same performance as the rest of the developed world.

What is true is that if your country's stock market makes up a small fraction of the world stock market, it's more likely that its performance will have a larger deviation from MSCI ACWI than in the case where it makes up half of the total. So if you define 'damaging' as a deviation from MSCI ACWI that's of course true. But that deviation could go either way.
Last edited by Lauretta on Fri May 25, 2018 5:49 am, edited 2 times in total.
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Valuethinker » Fri May 25, 2018 5:29 am

AlohaJoe wrote:
Fri May 25, 2018 3:24 am


There's been a clear trend towards greater global diversification. Which is visible even here on Bogleheads. 25 years ago, in 1993, it would have been the rare Boglehead who held any international at all. Now the conversation seems to have largely shifted to be about how much international you should hold. This is echoed in every country.

Image

I see little reason for the conversation to change substantially if the US were at 5% of the global market cap. However, I expect that over the next few decades, everyone -- everywhere in the world -- will shift towards global market cap. After all, we have already seen exactly this same thing play out in the US once before.

Not that long ago, in the US, "home bias" meant "home city bias" when it came to investing. People in New York were more likely to invest in New York companies than California companies. (And vice versa.) There's a fascinating recent NBER paper -- "Who Owned Citibank? Familiarity Bias and Business Network Influences on Stock Purchases, 1925-1929" -- that showed that distance from New York influenced ownership of Citibank.
Consistent with “home bias,” the Northeast (as defined by the Census) accounted for 85% of Citibank’s voting shares,
As information technology improved, as regional differences subsided, as America become more national (as opposed to federal) that kind of "home bias" has largely gone away. (But not entirely: look at the "home bias" that venture capitalists still have towards Silicon Valley vs. non-Silicon Valley companies.)

Since we've seen "home bias" go away once away, it doesn't seem a stretch to forecast that it will go away again.

That said: the US will never be 5% of the global market cap.
The last time it was 5% of the global market cap was probably back in the 1820s or something. So this is so totally non-actionable I'm not really sure what lessons we can draw from this thought exercise. The US may go down to 30% (as it was in the 1980s) again but....it is hard to see it going lower than that in any of our lifetimes.

[1]: "Are Investors Home Biased? Evidence from Germany"
Great stats. Thank you -- a well argued piece.

The situation in Canada was that, at that time (1986), Canadian pension funds were limited to 10% foreign assets (both DB schemes and RRSPs/ personal pensions). The funds used derivative strategies to get around that (at considerable cost) and eventually the government relinquished the restriction.

More recently, Canadian government-sponsored pension funds have led the way in international investing, especially into "alternative" assets (real estate, private equity, infrastructure - primarily).

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Valuethinker » Fri May 25, 2018 5:33 am

msk wrote:
Fri May 25, 2018 4:08 am
Pension funds are also a major factor. I suspect that in most countries government pension funds are directed to invest primarily, if not entirely, in local markets, be it stocks or RE.
The big Canadian public, Defined Benefit, schemes have led the way in international investing, especially into Alternative asset classes - private equity, real estate, infrastructure finance.

Ontario Teachers' and Ontario Municipal Employees (OMERS) are big in this.

Up until the early 1990s there was a limit on Canadian pension fund overseas exposure-- originally a max of 10% of total assets.

Canadian stock market is about 40% banks & financials, 40% natural resources - very undiversified. Now lacks any big tech stocks at all (had Nortel JSD Uniphase and RIM (Blackberry)).

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by randomguy » Fri May 25, 2018 6:59 am

AlohaJoe wrote:
Fri May 25, 2018 3:24 am

Since we've seen "home bias" go away once away, it doesn't seem a stretch to forecast that it will go away again.

That said: the US will never be 5% of the global market cap. The last time it was 5% of the global market cap was probably back in the 1820s or something. So this is so totally non-actionable I'm not really sure what lessons we can draw from this thought exercise. The US may go down to 30% (as it was in the 1980s) again but....it is hard to see it going lower than that in any of our lifetimes.

Lifetimes of people on this board are 50-70+ years. That is a really, really long time:) Think the Japanese investor in 1989 could imagine Japan being down around 10% of the market from the ~40% they were holding? Now I have no clue if we are at the end of the US bubble (i.e. numbers change a lot of US returns 3% and Europe/Japan/china 12% for the next decade) or part of the new norm. But peak values often look absurd in hindsight. Now say 15% of a much larger pie might still be diversifed enough. A lot comes down to where your industries are. If in 50 years the US is say 80% health care, tech, and entertainment, you might want diversification into say natural resources and manufacturing.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Snowjob » Fri May 25, 2018 7:30 am

Valuethinker wrote:
Fri May 25, 2018 3:14 am
JustinR wrote:
Fri May 25, 2018 1:47 am
In the US vs International threads, there are often the same arguments repeated by the "home bias is ok if it's the US" crowd.

Mostly that the US economy is awesome, efficient, and stable, while other countries are risky, corrupt, unstable, and not as awesome. Also, in the past US has outperformed International.

Market cap and performance aren't exactly the same things, right? You can perform amazingly and still have a small market cap compared to the rest of the world.

The often repeated arguments for tilting US don't change when the market cap is different.

So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?
A problem those of us from smaller markets face every time we think about this.

Home Country bias is not unique to US investors, but it's more damaging. Particularly if you are UK based investor, and the last 10 years of underperformance.

Another way of putting that would be "the smaller your domestic stock market, the greater the gains from international diversification".
I've never heard it or thought about it from this stand point but its simple, intuitive. Absolutely brilliant.

The US seems based on scale and diversity of industry seems to be the one outlier. Here, given the concentration of tech companies, moving to a global portfolio reduces this sector bet in a way. Every country has large banks and energy plays or some few industrial conglomerates less have a massive tech industry. So you diversify some industries but you end up re-weighting tech overall to a lower portion of the portfolio -- even if that weighting is the correct weighting globally and its only large relative to the US in a vacuum. (almost 20-25% now???)

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Dandy » Fri May 25, 2018 7:40 am

Interesting question. I think a lot depends on the country. The US has lots of advantages e.g. natural resources, diverse economy, mobile workforce, stable government, friendly neighbors, large oceans separating it from conflicts, many large warm water ports, etc. If it had those advantages I might still be heavily investing in my country.

If my country's economy was based on oil, or other resource, less stable government, surrounded by less friendly neighbors, etc maybe I'd be much more open to "foreign" investing.

Of course I think home bias is very subtle i.e. easy to rationalize over weighting what you feel you understand and are used to.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by guyesmith » Fri May 25, 2018 7:50 am

This is a great question. Thanks for asking it!

Thought I'd share this with this thread as well.

Sector Weightings of VTSAX (Total US) and VTWSX (Total World) according to Morningstar:

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

To me this shows the all-US investor has the same diversity as the all-World investor. It truly is a globalized economy we live in.

To stay on theme with this thread. If the US market cap produced these same sector weightings at 5% as it does at 52% currently then I'd find it difficult to justify investing abroad. What's the more important type of diversification - Country or Sector?

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Valuethinker » Fri May 25, 2018 7:56 am

Snowjob wrote:
Fri May 25, 2018 7:30 am
Valuethinker wrote:
Fri May 25, 2018 3:14 am
JustinR wrote:
Fri May 25, 2018 1:47 am
In the US vs International threads, there are often the same arguments repeated by the "home bias is ok if it's the US" crowd.

Mostly that the US economy is awesome, efficient, and stable, while other countries are risky, corrupt, unstable, and not as awesome. Also, in the past US has outperformed International.

Market cap and performance aren't exactly the same things, right? You can perform amazingly and still have a small market cap compared to the rest of the world.

The often repeated arguments for tilting US don't change when the market cap is different.

So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?
A problem those of us from smaller markets face every time we think about this.

Home Country bias is not unique to US investors, but it's more damaging. Particularly if you are UK based investor, and the last 10 years of underperformance.

Another way of putting that would be "the smaller your domestic stock market, the greater the gains from international diversification".
I've never heard it or thought about it from this stand point but its simple, intuitive. Absolutely brilliant.

The US seems based on scale and diversity of industry seems to be the one outlier. Here, given the concentration of tech companies, moving to a global portfolio reduces this sector bet in a way. Every country has large banks and energy plays or some few industrial conglomerates less have a massive tech industry. So you diversify some industries but you end up re-weighting tech overall to a lower portion of the portfolio -- even if that weighting is the correct weighting globally and its only large relative to the US in a vacuum. (almost 20-25% now???)
2 outliers in particular: healthcare and technology. Not coincidentally, it has been, over the last 50 years, the greatest repository of discoveries in these scientific fields-- Sputnik & Eisenhower's response did great things for America (although it started earlier - at least w WW2).

Healthcare is partly a function of the concentration of world-leading pharmaceutical companies & biomedical companies, but also the US has the greatest expenditure on private healthcare of any nation in the world, thus the associated companies (hospitals, insurers etc.).

The issue with tech is increasing returns to scale. The US has the largest tech sector, but also the most *winners*. Apple, [Amazon], Microsoft, Google, Facebook (Intel, Oracle, Cisco ...) are the world leaders in their fields and the first 5 at least seem to be in businesses that tend towards natural monopolies (having the larger scale conveys advantages to the users that make them choose the leader).

This was also true of Kodak, Polaroid, IBM, DEC etc. in their day. At some point, there may be a break due to changes in technology, regulation etc. At which point in best "nifty 50" style, the sector may prove to be overvalued.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Valuethinker » Fri May 25, 2018 7:57 am

guyesmith wrote:
Fri May 25, 2018 7:50 am
This is a great question. Thanks for asking it!

Thought I'd share this with this thread as well.

Sector Weightings of VTSAX (Total US) and VTWSX (Total World) according to Morningstar:

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

To me this shows the all-US investor has the same diversity as the all-World investor. It truly is a globalized economy we live in.

To stay on theme with this thread. If the US market cap produced these same sector weightings at 5% as it does at 52% currently then I'd find it difficult to justify investing abroad. What's the more important type of diversification - Country or Sector?
Exactly.

It's the stock specific risk.

You needed to be in Apple Amazon Google Facebook not Dell Nortel RIM/ Blackberry Nokia.

Take those out of your US portfolio and the outperformance is more modest.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Valuethinker » Fri May 25, 2018 8:53 am

Lauretta wrote:
Fri May 25, 2018 5:28 am
Valuethinker wrote:
Fri May 25, 2018 3:14 am
JustinR wrote:
Fri May 25, 2018 1:47 am
In the US vs International threads, there are often the same arguments repeated by the "home bias is ok if it's the US" crowd.

Mostly that the US economy is awesome, efficient, and stable, while other countries are risky, corrupt, unstable, and not as awesome. Also, in the past US has outperformed International.

Market cap and performance aren't exactly the same things, right? You can perform amazingly and still have a small market cap compared to the rest of the world.

The often repeated arguments for tilting US don't change when the market cap is different.

So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?
A problem those of us from smaller markets face every time we think about this.

Home Country bias is not unique to US investors, but it's more damaging. Particularly if you are UK based investor, and the last 10 years of underperformance.

Another way of putting that would be "the smaller your domestic stock market, the greater the gains from international diversification".
I am not sure I understand how you define 'damaging' but your last statement about the 'greater gains from international diversification' for smaller domestic markets does not seem to be generalizable.

A Swedish investor would have had much greater gains in the last 40 years had she invested in Sweden only rather than in a globally diversified portfolio. The same is true for someone who had invested in South Africa or Australia only in 1900, as their performance to date has been greater than that of the US (or of the world).

On the the other hand, a Japanese investor would have hugely benefited from diversification and avoiding home country bias at the end of the 80s, even though the Japanese stock market was of the order of half the world market at that time.

The US outperformed over the last 10 years, but over the previous 30 yrs it had the same performance as the rest of the developed world.

What is true is that if your country's stock market makes up a small fraction of the world stock market, it's more likely that its performance will have a larger deviation from MSCI ACWI than in the case where it makes up half of the total. So if you define 'damaging' as a deviation from MSCI ACWI that's of course true. But that deviation could go either way.
In the mean-variance return framework higher return is only achieved with higher risk (less diversification in this case) *except* that you can improve your risk-return tradeoff by greater diversification.

US stock market has a pretty high correlation with world equity markets. Smaller markets like Canada or Sweden, much less so.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by alpine_boglehead » Fri May 25, 2018 11:22 am

FireProof wrote:
Fri May 25, 2018 2:47 am
There's also currency risk. Having 95% of your investments in different currencies from your own minor currency could be at least psychologically tricky.
In my opinion, quite on the contrary. If you're in a small country with a minor currency, you have all the more reason to diversify outside of your country.
Valuethinker wrote:
Fri May 25, 2018 3:22 am

The big problem is that some domestic bond markets (Italy! One of the world's top 5 govt bond markets) are not risk free.
I wouldn't consider government bonds risk free, they are just one of the less riskier types of bonds. In Italy, the risk is more visible because they have partly given up control over their currency. But a government in control of its currency can just start the printing press and inflate away their debt (Italy had a high inflation before joining the Euro), which has the same effect on bondholders as a partial default. It's less spectacular, though.

Again, holding assets outside of your currency (which has the risk that you government inflates it to reduce real debt) diversifies that risk.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by Valuethinker » Fri May 25, 2018 12:06 pm

alpine_boglehead wrote:
Fri May 25, 2018 11:22 am

Valuethinker wrote:
Fri May 25, 2018 3:22 am

The big problem is that some domestic bond markets (Italy! One of the world's top 5 govt bond markets) are not risk free.
I wouldn't consider government bonds risk free, they are just one of the less riskier types of bonds. In Italy, the risk is more visible because they have partly given up control over their currency. But a government in control of its currency can just start the printing press and inflate away their debt (Italy had a high inflation before joining the Euro), which has the same effect on bondholders as a partial default. It's less spectacular, though.

Again, holding assets outside of your currency (which has the risk that you government inflates it to reduce real debt) diversifies that risk.
To clarify: default risk free. No credit risk.

I agree there is inflation risk in government bonds. That is not simple, and it tends to be reflected in exchange rates. So, in principle you can hedge that out, whereas an individual investor cannot hedge out default risk. And in an efficient market for Credit Default Swaps, there's no point doing it if you are an institutional investor*.

* I recognize that there may be a credit arbitrage there around the market's assumption of your counterparty risk.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by lostdog » Fri May 25, 2018 12:38 pm

If you're not global market cap weighted, you're betting, plain and simple.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

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

Valuethinker wrote:
Fri May 25, 2018 7:57 am
It's the stock specific risk.

You needed to be in Apple Amazon Google Facebook not Dell Nortel RIM/ Blackberry Nokia.
If the Total World and Total US weightings are similar, can you diversify large (single?) stock risk in the US - Apple, Google, Amazon, etc. - by adding Total International in order to approach a Total World weight?

Essentially, you'll be adding the technology sector of the rest of the world to the US holdings. Might be worth something in the unlikely event one or more of the large stocks go belly up.
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by FireProof » Fri May 25, 2018 4:52 pm

alpine_boglehead wrote:
Fri May 25, 2018 11:22 am
FireProof wrote:
Fri May 25, 2018 2:47 am
There's also currency risk. Having 95% of your investments in different currencies from your own minor currency could be at least psychologically tricky.
In my opinion, quite on the contrary. If you're in a small country with a minor currency, you have all the more reason to diversify outside of your country.
Well, if you're planning or willing to leave the country, sure, but most people stay in the same country their whole life. If you're planning to live in, say, Australia your whole life, seeing a 30% loss due to currency fluctuations might be painful. Then again, just that, "painful" - it probably shouldn't be a major consideration for long-term retirement playing.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by TomCat96 » Fri May 25, 2018 5:22 pm

JustinR wrote:
Fri May 25, 2018 1:47 am
In the US vs International threads, there are often the same arguments repeated by the "home bias is ok if it's the US" crowd.

Mostly that the US economy is awesome, efficient, and stable, while other countries are risky, corrupt, unstable, and not as awesome. Also, in the past US has outperformed International.

Market cap and performance aren't exactly the same things, right? You can perform amazingly and still have a small market cap compared to the rest of the world.

The often repeated arguments for tilting US don't change when the market cap is different.

So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?

I'm one of those that has repeatedly argued in favor of US over international. I am a US citizen, but I never advocated for US equities because of home bias. I advocated it because indeed other countries are more risky, corrupt, unstable, and less economically developed from a legal perspective. The US has simply had a much longer period of time to have developed it legal infrastructure, (the securities and exchange acts of '33 and '34, investment company act, establishment of the SEC, Fed), had a longer period to prove itself (the stability of the US market), has a dollar hegemony, has strong laws which safeguard personal property, and has had its relevant business interests protected by the most powerful military in the world.

I additionally argued that had I been living in Japan in the mid twentieth century, I would have been an majority international investor. So my investment positions with the US isn't so much tied to home bias, but based on a judgment call regarding the US market. And I do not believe that the international market is so efficient that one can simply rely on the market to price things to perfection--not when individual state actors have so much power to prop up their own companies. I cited the Bank of Japan being a top 10 shareholder in 90% of their nikkei 225 as far back as 2013. I cited other central banks purchasing significant amounts of securities globally as additional evidence.

Additionally
-I cited the differing treatments in tax regulation--namely the countries with VATs, as further complicating the efficiency of allocation because it undercut the proposition that there was any single efficient price.
-I counterargued against those that advocated the line--what do I know that the market does not--by arguing that even international stock indices were themselves a selection of companies which took into account at least a baseline amount of legal infrastructure and development in their respective home countries as a condition to their inclusion in such indices. (At the time chinese companies were being included into some international indices)

Finally I argued that the market cap of 52% was a completely arbritrary reason to invest in US stocks. Although the global allocation of capital pertaining to equity itself is roughly 50-50 US-International, it completely ignores the fact that global allocation of capital is not in fact 50-50. The vast majority of global capital is parked in, depending on how you look at it, 1) derivatives, 2) short term sovereign bonds.
I shifted the burden of the argument --what do I know that the market does not know--to those advocated in favor of international US 50-50, what do you know that the market doesn't know that you would dare not allocate most of your money in short term sovereign bonds? I further argued that if one is to be faithful to the inherent wisdom of the market's chosen allocation of 50-50 US-International for equities, they must be faithful in light of the fact that such allocation is made with equities themselves being only a very small part the total allocation of global capital.

Now to answer your question.
If any of the rationales I argued were to be undercut in the future, I would reevaluate my decision. A US market cap at 5% would very likely change the rationales upon which I based my arguments. I don't know how it affect any of my rationales in particular, but such a titanic shift would certainly cause me to take a closer look.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by galeno » Fri May 25, 2018 7:48 pm

We live in a USD dominated country whose GDP is smaller than the GMP (gross municipal product) of Oklahoma City. The credit rating for our govt bonds is junk.

We have a 40% global equity allocation combined with 55% in investment grade USA bonds.

This January we will probably go back to 60 global stocks with 40% in investment grade GLOBAL bonds. The 60% non-USD bonds would be hedged back into USD to lower the currency volatity.
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: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by venkman » Fri May 25, 2018 10:14 pm

JustinR wrote:
Fri May 25, 2018 1:47 am
So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?
I'm not anti-international, but this is the argument I would make:

In 2017, about 43% of sales for S&P 500 companies came from outside the US. If the US economy tanks (and somehow doesn't manage to take the rest of the world with it), US companies still have significant revenue streams coming in from overseas. It's not market cap that's relevant; it's global diversification of revenues.

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by randomguy » Fri May 25, 2018 10:33 pm

venkman wrote:
Fri May 25, 2018 10:14 pm
JustinR wrote:
Fri May 25, 2018 1:47 am
So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?
I'm not anti-international, but this is the argument I would make:

In 2017, about 43% of sales for S&P 500 companies came from outside the US. If the US economy tanks (and somehow doesn't manage to take the rest of the world with it), US companies still have significant revenue streams coming in from overseas. It's not market cap that's relevant; it's global diversification of revenues.
Lets go back to 1989. Japan was like 40% of the world market cap (larger then the US by a noticeable amount) with a huge chunk of the sales of coming from overseas resulting in huge trade surpluses. Would you be ok only investing in Japanese stocks if you lived there?

If we look at recent history that 40% revenue isn't enough to prevent drastic differences in returns. See 2003-2007 for the drastic US underperformance and all those European countries with big US revenues sure hasn't helped them the past 10 years..

I got to admit a 10 year international outperformance period would be really fun to see. It would add a lot of spice to these arguments:)

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

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

randomguy wrote:
Fri May 25, 2018 10:33 pm
venkman wrote:
Fri May 25, 2018 10:14 pm
JustinR wrote:
Fri May 25, 2018 1:47 am
So if, hypothetically, the US market cap was 5% and the rest of the world 95%...would the anti-international people have a different US/INTL allocation, or would it be the same?
I'm not anti-international, but this is the argument I would make:

In 2017, about 43% of sales for S&P 500 companies came from outside the US. If the US economy tanks (and somehow doesn't manage to take the rest of the world with it), US companies still have significant revenue streams coming in from overseas. It's not market cap that's relevant; it's global diversification of revenues.
Lets go back to 1989. Japan was like 40% of the world market cap (larger then the US by a noticeable amount) with a huge chunk of the sales of coming from overseas resulting in huge trade surpluses. Would you be ok only investing in Japanese stocks if you lived there?

If we look at recent history that 40% revenue isn't enough to prevent drastic differences in returns. See 2003-2007 for the drastic US underperformance and all those European countries with big US revenues sure hasn't helped them the past 10 years..

I got to admit a 10 year international outperformance period would be really fun to see. It would add a lot of spice to these arguments:)
I didn't say it was a GOOD argument. :happy

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by aj76er » Sat May 26, 2018 12:01 am

galeno wrote:
Fri May 25, 2018 7:48 pm
We live in a USD dominated country whose GDP is smaller than the GMP (gross municipal product) of Oklahoma City. The credit rating for our govt bonds is junk.

We have a 40% global equity allocation combined with 55% in investment grade USA bonds.

This January we will probably go back to 60 global stocks with 40% in investment grade GLOBAL bonds. The 60% non-USD bonds would be hedged back into USD to lower the currency volatity.
Do you plan on using the new Total World Bond fund being offered by Vanguard?
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by JoMoney » Sat May 26, 2018 1:43 am

JustinR wrote:
Fri May 25, 2018 4:02 am
...
This thread isn't to literally imagine a world where the US is at 5% cap.
...
Why is 100% US ok at 51% cap but not 5%?
I'm literally not sure what it is you're asking people to imagine, or what other factors would play into this imaginary scenario.
The question itself seems to be a strawman you created, but expect others to argue for you. :confused
Your characterization that people with a 100% U.S. stock portfolio as "anti-international", is probably not hitting the mark either, a diversified U.S. portfolio has quite a bit of international exposure, it's probably not the portfolio for anyone that is "anti-international".
At any rate, there is a Vanguard paper that discusses a model and some considerations you might look at to think about under what scenarios a "home bias" might be more or less viable. One of the points in the paper, shows many smaller markets as having larger bid-ask spreads and lower liquidity, which maybe (although not necessarily) may be a factor in your imagined conditions.
https://personal.vanguard.com/pdf/icrrhb.pdf
Image
... Although there may be many rational reasons for home bias, we present certain metrics that investors can use to help determine an appropriate allocation to foreign securities. Generally speaking, our framework suggests that U.S. investors may have some quantitative justification for a home bias, and investors in other countries might consider increasing their global diversification. We provide an example of how our framework can be used; however, it or any systematic evaluation process must also be individualized. ...
I'm guessing by some of the statements you've made, that you very strongly believe everyone should be buying stocks that are based in foreign markets. Maybe there are some questions from the alternative side you could flip to ask yourself, like at what cost would the expenses and taxes be too high for you to consider buying foreign stocks? Are there any risks that you would consider a deal-breaker to even consider buying those stocks? If the country implemented laws that were hostile to foreign investors, tightened outflows of capital, had accounting or legal practices that were broadly seen as corrupt ? At what point or level of risk would YOUR stance on "the International conversation" change?
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by alpine_boglehead » Sat May 26, 2018 2:26 am

Valuethinker wrote:
Fri May 25, 2018 12:06 pm
alpine_boglehead wrote:
Fri May 25, 2018 11:22 am

Valuethinker wrote:
Fri May 25, 2018 3:22 am

The big problem is that some domestic bond markets (Italy! One of the world's top 5 govt bond markets) are not risk free.
I wouldn't consider government bonds risk free, they are just one of the less riskier types of bonds. In Italy, the risk is more visible because they have partly given up control over their currency. But a government in control of its currency can just start the printing press and inflate away their debt (Italy had a high inflation before joining the Euro), which has the same effect on bondholders as a partial default. It's less spectacular, though.

Again, holding assets outside of your currency (which has the risk that you government inflates it to reduce real debt) diversifies that risk.
To clarify: default risk free. No credit risk.

I agree there is inflation risk in government bonds. That is not simple, and it tends to be reflected in exchange rates. So, in principle you can hedge that out, whereas an individual investor cannot hedge out default risk. And in an efficient market for Credit Default Swaps, there's no point doing it if you are an institutional investor*.

* I recognize that there may be a credit arbitrage there around the market's assumption of your counterparty risk.
Thanks very much for clarifying. Now I get the point of holding currency hedged foreign bonds. Based on the assumption that hedging gives you the interest rate of your home currency, you can get the diversification, but not the currency risk (should have been obvious :) ).

But then again, if you hedge foreign bond holdings into your home currency, you trade the foreign currency inflation risk for your home currency inflation risk, i.e. concentrate your inflation risk, right?

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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by JustinR » Sat May 26, 2018 3:07 am

JoMoney wrote:
Sat May 26, 2018 1:43 am
I'm literally not sure what it is you're asking people to imagine, or what other factors would play into this imaginary scenario.
The question itself seems to be a strawman you created, but expect others to argue for you. :confused
Your characterization that people with a 100% U.S. stock portfolio as "anti-international", is probably not hitting the mark either, a diversified U.S. portfolio has quite a bit of international exposure, it's probably not the portfolio for anyone that is "anti-international".
At any rate, there is a Vanguard paper that discusses a model and some considerations you might look at to think about under what scenarios a "home bias" might be more or less viable. One of the points in the paper, shows many smaller markets as having larger bid-ask spreads and lower liquidity, which maybe (although not necessarily) may be a factor in your imagined conditions.

I'm guessing by some of the statements you've made, that you very strongly believe everyone should be buying stocks that are based in foreign markets. Maybe there are some questions from the alternative side you could flip to ask yourself, like at what cost would the expenses and taxes be too high for you to consider buying foreign stocks? Are there any risks that you would consider a deal-breaker to even consider buying those stocks? If the country implemented laws that were hostile to foreign investors, tightened outflows of capital, had accounting or legal practices that were broadly seen as corrupt ? At what point or level of risk would YOUR stance on "the International conversation" change?
Basically I feel like that the 100% US people are arguing from a position of strength, because the US has done so well in recent history and is currently over 50% of the world cap anyway. Like, if the US was 95% cap, then obviously holding 100% US would be "ok."

The point of this is to remove that position of strength and examine if their arguments are just as valid, weaker, or maybe even nullified if the US were something like 5% cap.

I'm personally pro-world cap investing. But I want to understand the other side and perhaps get convinced that a US tilt is good. It helps to remove US's dominance from the equation.

I learned some things such as sector diversification and that the US has enough there that it may be ok even at 5% cap. Like these posts:

AlohaJoe wrote:
Fri May 25, 2018 4:44 am
Once an economy reaches a certain size it is internally diversified "enough". They have enough variety of industries within their borders. The US, China, Japan, and maybe the UK are the only countries that are at that point.

You don't need to be 50% market cap to reach that point. But you probably do need to be bigger than 5%. Think of it like a tipping point. Below that tipping point, one should strongly skew towards global market cap. Above that tipping point, you can be strongly domestic biased -- even up to 100% if that floats your boat.

The tipping point isn't strictly related to market cap, though. But there is probably a soft relationship. Instead it is more about the diversity of the national economy (and how much of that is publicly listed). It is probably better to look at GICS sectors and see how countries do on that.

If the US were 5% of the global market cap but still had a diverse local economy -- car manufacturers, energy, industrials, consumer staples, healtcare, etc -- I think people could make a case for still investing 100% in it. This follows easily from the research by Roll (1992), Baca, Garbe, and Weiss (2000), Cavaglia, Brightman, and Akek (2000), and others (including Vanguard themselves) that
For the developed markets, we found that sector diversification produced the potential for more risk reduction benefits than did country diversification
So if a single national economy is able to have a breadth of industries & sectors, you could make the case that holding 100% in just that national economy is "okay".

I mean, I wouldn't (and don't) invest that way. But it should be pretty clear how easily someone can make the case that "Why is 100% US ok at 51% cap but not 5%".
guyesmith wrote:
Fri May 25, 2018 7:50 am
This is a great question. Thanks for asking it!

Thought I'd share this with this thread as well.

Sector Weightings of VTSAX (Total US) and VTWSX (Total World) according to Morningstar:

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

To me this shows the all-US investor has the same diversity as the all-World investor. It truly is a globalized economy we live in.

To stay on theme with this thread. If the US market cap produced these same sector weightings at 5% as it does at 52% currently then I'd find it difficult to justify investing abroad. What's the more important type of diversification - Country or Sector?

Also, interesting perspectives like these, from 100% US investors. Exactly what I was looking for.
TomCat96 wrote:
Fri May 25, 2018 5:22 pm
I'm one of those that has repeatedly argued in favor of US over international. I am a US citizen, but I never advocated for US equities because of home bias. I advocated it because indeed other countries are more risky, corrupt, unstable, and less economically developed from a legal perspective. The US has simply had a much longer period of time to have developed it legal infrastructure, (the securities and exchange acts of '33 and '34, investment company act, establishment of the SEC, Fed), had a longer period to prove itself (the stability of the US market), has a dollar hegemony, has strong laws which safeguard personal property, and has had its relevant business interests protected by the most powerful military in the world.

I additionally argued that had I been living in Japan in the mid twentieth century, I would have been an majority international investor. So my investment positions with the US isn't so much tied to home bias, but based on a judgment call regarding the US market. And I do not believe that the international market is so efficient that one can simply rely on the market to price things to perfection--not when individual state actors have so much power to prop up their own companies. I cited the Bank of Japan being a top 10 shareholder in 90% of their nikkei 225 as far back as 2013. I cited other central banks purchasing significant amounts of securities globally as additional evidence.

Additionally
-I cited the differing treatments in tax regulation--namely the countries with VATs, as further complicating the efficiency of allocation because it undercut the proposition that there was any single efficient price.
-I counterargued against those that advocated the line--what do I know that the market does not--by arguing that even international stock indices were themselves a selection of companies which took into account at least a baseline amount of legal infrastructure and development in their respective home countries as a condition to their inclusion in such indices. (At the time chinese companies were being included into some international indices)

Finally I argued that the market cap of 52% was a completely arbritrary reason to invest in US stocks. Although the global allocation of capital pertaining to equity itself is roughly 50-50 US-International, it completely ignores the fact that global allocation of capital is not in fact 50-50. The vast majority of global capital is parked in, depending on how you look at it, 1) derivatives, 2) short term sovereign bonds.
I shifted the burden of the argument --what do I know that the market does not know--to those advocated in favor of international US 50-50, what do you know that the market doesn't know that you would dare not allocate most of your money in short term sovereign bonds? I further argued that if one is to be faithful to the inherent wisdom of the market's chosen allocation of 50-50 US-International for equities, they must be faithful in light of the fact that such allocation is made with equities themselves being only a very small part the total allocation of global capital.

Now to answer your question.
If any of the rationales I argued were to be undercut in the future, I would reevaluate my decision. A US market cap at 5% would very likely change the rationales upon which I based my arguments. I don't know how it affect any of my rationales in particular, but such a titanic shift would certainly cause me to take a closer look.

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galeno
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by galeno » Sat May 26, 2018 2:08 pm

We're going to use the new global bond ETF from Ireland Ishares. It's LSE:AGGU. The new world bond ETF from Vanguard is a simple combination of BND and BNDX.

As non-USA domicles we would pay a 30% withholding tax on all the interest income from that new USA Vanguard bond ETF. Using the current SEC Yields on both ETFs (1.96%) that would mean an additional portfolio cost of 0.59%. We call this the TR (tax ratio).

Our cost for owning the new USA domiciled global bond fund from Vanguard would be ER + TR or 0.08% + 0.59% = 0.67%. A VERY expensive bond ETF for us.

With LSE:AGGU our withholding tax on the interest income is ZERO. ER + TR or 0.10% + 0% = 0.10%. So we save 0.57% per year buying the same product.
aj76er wrote:
Sat May 26, 2018 12:01 am
galeno wrote:
Fri May 25, 2018 7:48 pm
We live in a USD dominated country whose GDP is smaller than the GMP (gross municipal product) of Oklahoma City. The credit rating for our govt bonds is junk.

We have a 40% global equity allocation combined with 55% in investment grade USA bonds.

This January we will probably go back to 60 global stocks with 40% in investment grade GLOBAL bonds. The 60% non-USD bonds would be hedged back into USD to lower the currency volatity.
Do you plan on using the new Total World Bond fund being offered by Vanguard?
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%.

asif408
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by asif408 » Sun May 27, 2018 6:26 am

OP,

I've been around here long enough to see that although there are plenty of smart people here, those smart people are also human, and capable of Olympic level mental gymnastics to justify their reasonings. So I don't think you will ever get any sort of capitulation from them regarding international investing. But I will suggest that after some time of international outperformance you will begin to see more positive sentiment on this board about foreign investing. And it will be interesting to see how many of the US only crowd come over to the dark side of international investing after international has a run of outperformance.

A few years ago there were a lot of posts here with people thinking about getting rid of their international positions because of its poor recent performance. Sentiment seems to be more neutral right now, but definitely not positive about foreign investing as a whole, and I find it interesting to watch sentiment change overall around here based on recent performance. You should come back in a few years and ask this question again.

MnD
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by MnD » Sun May 27, 2018 8:47 am

If that was the case I wouldn't be very worried about having 10% in US versus 5% market cap, whereas I couldn't tolerate being 75% or 100% US.
In fact being 52% US makes me nervous - if over the years US market cap and my allocation went to something like 30%, I'd be more comfortable.

halfnine
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by halfnine » Sun May 27, 2018 3:38 pm

As far as I can tell home bias comes with extreme left tails and extreme right tails. As I don't really need either of them right now I am perfectly happy to be globally diversified.

dknightd
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Re: If the US market cap was 5% instead of 52%, would the US vs International conversation change?

Post by dknightd » Sun May 27, 2018 4:07 pm

My thinking is in an increasing global market things will eventually settle down to a global economy - some will win others will loose. Likely over the long term the rich ones will loose, and poor ones will gain, of course I could be wrong.
I already have a big investment in the country I live in, that investment is in my human capitol. Many of my retirement investments are in big companies that already have global exposure. That would be true no matter what country I lived in. To me a home bias makes sense, since I spend local money, and so do most of the people I know. No matter what country I lived in I'd probably tilt to the country I lived in, but I'd always want some money in other economies.

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