Why does Vanguard reccomend 60:40 US:International ratio?

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Daendrew
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Why does Vanguard reccomend 60:40 US:International ratio?

Post by Daendrew » Sun Sep 30, 2018 7:40 pm

Why does Vanguard reccomend 60% US and 40% International in it's target funds and advisor services? What is the research behind that?

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by livesoft » Sun Sep 30, 2018 7:42 pm

The research is in the External Links to the bogleheads.org/wiki page on the subject:
https://www.bogleheads.org/wiki/Domestic/International
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JoMoney
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by JoMoney » Sun Sep 30, 2018 7:52 pm

Probably because that's close to "market weights" for the global market of investable stocks.

The cynical reasoning might be that Vanguard is a dominant player in holding U.S. stocks, and they're hoping to expand their presence more globally, looking at the incentives, such as Vanguard's performance compensation plan to employees, it is geared around how much they can lower prices for investors, it's much harder to do that from where they currently stand on U.S. stocks, but there's lots of room to grow market share and lower costs on international.
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by rkhusky » Sun Sep 30, 2018 9:07 pm

livesoft wrote:
Sun Sep 30, 2018 7:42 pm
The research is in the External Links to the bogleheads.org/wiki page on the subject:
https://www.bogleheads.org/wiki/Domestic/International
The 2nd, 3rd and 4th external links are throwing an error.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by columbia » Sun Sep 30, 2018 9:37 pm

As I recall, they point to 30% being the “optimal” allocation...yet exceed it. I’ve not seen a rational explanation for the increase in the Life Strategy and Target Date funds, given that.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by Ron Scott » Sun Sep 30, 2018 9:41 pm

JoMoney wrote:
Sun Sep 30, 2018 7:52 pm
Probably because that's close to "market weights" for the global market of investable stocks.

The cynical reasoning might be that Vanguard is a dominant player in holding U.S. stocks, and they're hoping to expand their presence more globally, looking at the incentives, such as Vanguard's performance compensation plan to employees, it is geared around how much they can lower prices for investors, it's much harder to do that from where they currently stand on U.S. stocks, but there's lots of room to grow market share and lower costs on international.
Excellent observation, thanks.

I wonder if this will prove to be a case of sub-optimal intervention, where the motivation to improve one key measure (fees) misses the big-picture and reduces their members’ returns after taxes and fees.
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by nedsaid » Sun Sep 30, 2018 9:52 pm

I don't know, maybe it is because 60/40 is a good round number. As JoMoney pointed out, 60% US and 40% International is fairly close to the market weight of the World Stock Market. Maybe somebody at Vanguard read an article in an industry magazine. I haven't looked at the efficient frontiers in a while but it seemed you got most all of the diversification benefit at 20% International and 30% seemed to be the sweet spot. Moving from 30% to 40% gets you very, very little diversification benefit.
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Sun Sep 30, 2018 10:26 pm

Daendrew wrote:
Sun Sep 30, 2018 7:40 pm
Why does Vanguard reccomend 60% US and 40% International in it's target funds and advisor services? What is the research behind that?
Here is a white paper describing the results of Vanguard’s research on this. See figure 3 where it shows that 30-40% non-US stocks minimized variance in their sample.

https://investor.vanguard.com/investing ... -investing

I think the difference in variance between 30% and 40% non-US stocks in their data is not statistically significant. Vanguard’s overall recommendation in some articles is 20-40% of equities in non-US stocks, but in others they say at least 40% stocks (which their own data does not support, i.e. going higher than 40%).
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by assyadh » Sun Sep 30, 2018 11:12 pm

The ratio should be 54.9/45.1, following VT's portfolio allocation.

Anything else is a bet

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by visualguy » Mon Oct 01, 2018 1:14 am

assyadh wrote:
Sun Sep 30, 2018 11:12 pm
The ratio should be 54.9/45.1, following VT's portfolio allocation.

Anything else is a bet
It's a bet regardless of the ratio you choose (including market weighting).

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by HEDGEFUNDIE » Mon Oct 01, 2018 1:30 am

For the past 30 years the combo with the highest Sharpe ratio has been 100% US.

The combo with the lowest stdDev (I.e. maximum diversification benefit) has been 77% US / 23% ex-US

https://www.portfoliovisualizer.com/eff ... tockMarket

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by international001 » Mon Oct 01, 2018 6:01 am

IF you look at historical data, it doesn't seem to be a real reason to invest in International.
You could be worried about black swans events (what if US goes to hell). The 40% international is in the limit when historical performance doesn't degrade much. So I would think 40% is a 'cover-all' strategy

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by Daitokuji » Mon Oct 01, 2018 11:09 am

Vanguard has predicted that international will outperform domestic in the next decade.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by 2pedals » Mon Oct 01, 2018 11:35 am

Daitokuji wrote:
Mon Oct 01, 2018 11:09 am
Vanguard has predicted that international will outperform domestic in the next decade.
I don't think there was ever a prediction from Vanguard. Only a recommendation to diversify and to spread out risks.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Mon Oct 01, 2018 2:24 pm

For the past 30 years the combo with the highest Sharpe ratio has been 100% US.
And in the prior 30 years non-US equities obliterated US equities.

What will happen in the next 30 years?
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by pascalwager » Mon Oct 01, 2018 3:07 pm

Also, Vanguard has stated that they believe in being invested in the actual world stock market percentages, which is currently about 55/45. So, maybe they'll put their beliefs into action in the future with respect to their TR and LS funds, etc.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Mon Oct 01, 2018 5:23 pm

pascalwager wrote:
Mon Oct 01, 2018 3:07 pm
Also, Vanguard has stated that they believe in being invested in the actual world stock market percentages, which is currently about 55/45. So, maybe they'll put their beliefs into action in the future with respect to their TR and LS funds, etc.
Not consistently so. They also state that 20-40% of equities in non-US equities is recommended. Other places they state that almost all of the benefit is achieved at 25% of equities in non-US equities, so at least 25% is recommended.

My own position is that the very small variation in reduction in variance in the 25-40% range for weighting non-US equities in the Vanguard data is not likely to have any statistical significance, so pick the point in the range with the least currency risk (25% non-US). This is also consistent with some other studies.

But I understand that this is a personal decision with no one right answer.
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by tmcc » Mon Oct 01, 2018 6:35 pm

International and emerging are total dogs so far this year.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by fortyofforty » Mon Oct 01, 2018 7:56 pm

tmcc wrote:
Mon Oct 01, 2018 6:35 pm
International and emerging are total dogs so far this year.
That's true. Is it enough to scare you off? Is it enough to entice you in?
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by gks » Mon Oct 01, 2018 9:07 pm

I don't post often, and the US/International stock allocation is so vigorously debated that I feel like the kid in the corner who doesn't understand what is going on.
Talbert wrote:
Mon Oct 01, 2018 2:24 pm
For the past 30 years the combo with the highest Sharpe ratio has been 100% US.
And in the prior 30 years non-US equities obliterated US equities.

What will happen in the next 30 years?

Talbert,

How could anyone have invested in International 60 years ago? Please let me know. For me, the inception of Vanguard Total International Stock Index-VTIAX, is an indication of how things have gone over the last 22 ½ years, 04-27-96 to 09-30-18. Compare to Vanguard Total Stock Market Index-VTSAX.

Per Morning star as of 09-30-18:

VTSAX $69,009.69
VTIAX $28,805.05

Or maybe compare to Vanguard 500 Index Fund, VFIAX to whatever International fund existed on 08-31-76 to date. I'm not that literate about international funds prior to VTIAX. No cherry picking of dates, simply 08-31-76 to date.

I don't know what is going to happen in the next 30 years, but my time line is less than 30 years.

Yes, past performance is not a guarantee of future performance, but from what I have seen, there is a correlation between past and future performance.

Talbert, I don't want to pick on you, because there are so many other international fans, but I just want to point out that for the past 22 1/2 years, international has seriously underperformed the US. Maybe it is time to start investing in international now, but I just don't have the time to make that bet.

Greg

A believer in Mr. Bogle regarding international investing

edit to correct spelling

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by JBTX » Mon Oct 01, 2018 9:12 pm

I'd say it is market weight, dialed back a bit for added risks of international investing.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Mon Oct 01, 2018 9:56 pm

How could anyone have invested in International 60 years ago? Please let me know
The Templeton Growth Fund started in the 1950’s. But this misses the point which is that a single 30-year backtest unfortunately is too biased to be used as a predictor of future returns, as different 30-year periods have had a different result with respect to US and non-US returns.
Risk is not a guarantor of return.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by vineviz » Mon Oct 01, 2018 10:16 pm

gks wrote:
Mon Oct 01, 2018 9:07 pm
How could anyone have invested in International 60 years ago? Please let me know.
Seriously? The MSCI World index has been calculated since 1969, and there are at least five mutual funds still in existence that date back at least that far. There are nearly 100 international mutual funds that are older than Vanguard Total Stock Market Index.

It was absolutely possible to invest in international stocks during the 1970s, 1980s, & 2000s: all decades when US stocks dramatically under-performed international stocks.

Image
gks wrote:
Mon Oct 01, 2018 9:07 pm
Or maybe compare to Vanguard 500 Index Fund, VFIAX to whatever International fund existed on 08-31-76 to date. I'm not that literate about international funds prior to VTIAX. No cherry picking of dates, simply 08-31-76 to date.
If you'd invested $100,000 in Vanguard 500 at the beginning of September 1976 you'd now have $8,617,415.

If you'd divided that $100,0000 equally among the seven international mutual funds that existed then and still do today you'd have $12,911,399.
gks wrote:
Mon Oct 01, 2018 9:07 pm
Talbert, I don't want to pick on you, because there are so many other international fans, but I just want to point out that for the past 22 1/2 years, international has seriously underperformed the US. Maybe it is time to start investing in international now, but I just don't have the time to make that bet.
The benefits of diversification aren't something you have to wait for. The point of investing in a diversified portfolio that includes international stocks is that you never know what group of stocks is going to do better tomorrow. Or the next day. Or the day after that.

You don't know, so you buy the basket.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by tadamsmar » Tue Oct 02, 2018 11:25 am

Does Vanguard ever really answer the question?

They obviously want diversification. The stuff on the lowest variance mix is not convincing because you have to take return into account, you can't just minimize variance.

Contrast with the TSP L Funds:

https://www.tsp.gov/PDF/formspubs/FundsL.pdf

They use an efficient frontier calculation.

The only thing that they don't fully specify about the L Funds is how they arrive at the mean, variance, and covariance inputs to the calculation. It's clear they don't just use historical data, they have some additional analysis for current and futures conditions.

I would think that the L Fund approach would be the industry standard approach. But I cannot find any place where Vanguard clearly states that they use that approach.

But, in Figure 3 here:

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

I am not sure they clearly define the Y axis units. Is it really just relative variance (as opposed to risk-adjusted return?).

PS: Note that the L Fund efficient frontier is oddly flat because they can use the G Fund as the risk-free rate that is not available to the general public.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by iamlucky13 » Tue Oct 02, 2018 11:58 am

Many of Vanguard's white papers are worth reading in order to better understand common recommendations like this. Here's one:
https://personal.vanguard.com/pdf/icriecr.pdf

It's from 2012, but I don't expect the picture changes radically if it were to be updated. They see most of the benefit to volatility from between 20% and 40% international allocation.

As I understand it, international allocations in that range also usually (not always) slightly outperform US-only allocations over long enough frames. Paul Merriman frequently publishes data arguing this claim, and the Bogleheads Wiki Domestic/International article also seems to support it.

Maybe I'm missing something, but it seems like a win-win, up to a point.

However, you also have to be prepared for decade plus long periods of international underperformance.

As always, the past performance does not guarantee future returns disclaimer applies.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by gks » Wed Oct 03, 2018 4:17 am

vineviz,

As I stated, I'm not an international investor, and don't have that inclination. I was wondering if there were in fact mutual funds that were available for small investors prior to Vanguard Total International. Obviously, there must have been.

Your graphs are interesting, but the dates are cherry picked. As I indicated in my post, from 04-27-96 to 09-30-18, international has seriously underperformed. My starting date was the inception of Vanguard Total International. The ending date was information available when I posted.

I found a T. Rowe Price International Stock Fund PRITX that goes back to 05-09-80, and it is pretty much the same thing vs Vanguard 500 VFIAX, $268,458 to $722,566 as of 10-02-18 per Morningstar. 1980 was before I started investing.

No, I don't know the future, but I don't have the time or inclination to bet against the U.S.

Greg

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by HEDGEFUNDIE » Wed Oct 03, 2018 6:06 am

gks wrote:
Wed Oct 03, 2018 4:17 am
vineviz,

As I stated, I'm not an international investor, and don't have that inclination. I was wondering if there were in fact mutual funds that were available for small investors prior to Vanguard Total International. Obviously, there must have been.

Your graphs are interesting, but the dates are cherry picked. As I indicated in my post, from 04-27-96 to 09-30-18, international has seriously underperformed. My starting date was the inception of Vanguard Total International. The ending date was information available when I posted.

I found a T. Rowe Price International Stock Fund PRITX that goes back to 05-09-80, and it is pretty much the same thing vs Vanguard 500 VFIAX, $268,458 to $722,566 as of 10-02-18 per Morningstar. 1980 was before I started investing.

No, I don't know the future, but I don't have the time or inclination to bet against the U.S.

Greg
Greg, do you invest in bonds? If you do, are you “betting against stocks”?

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by 3funder » Wed Oct 03, 2018 9:56 am

I'm 50/50. I used to be 60/40, and I still would be if US stocks weren't currently so expensive, but alas, they are. Both AA and future contributions are 50/50, and if I ever allocate even more to international stocks, it would never be to the tune of more than an additional 10%. 40/60 - 60/40 US/International is reasonable, in my opinion; anything else feels like too much of a tilt.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by 3funder » Wed Oct 03, 2018 9:58 am

tmcc wrote:
Mon Oct 01, 2018 6:35 pm
International and emerging are total dogs so far this year.
Indeed; it makes me want to invest more money in them.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by Ice-9 » Wed Oct 03, 2018 10:22 am

Because they knew I'd been doing it the last decade and a half and wanted to be just like me. :sharebeer

Ha!

Well, I'm sure Vanguard's reasons are more well defined, but for me:
* Started with 50/50 being a rough approximation of market weight
* factored in that international funds have disadvantage of being slightly higher expense ratio
* factored in that international has other disadvantages, such as limited public companies available for outsider investment in some other countries
* concluded that 60/40 sounded reasonable

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by abuss368 » Wed Oct 03, 2018 11:49 am

They had a document and graph with a very detailed explanation. I believe it was located under the research section of their website.
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by gks » Wed Oct 03, 2018 6:01 pm

HEDGFUNDIE,

I don't think I ever stated that I was betting against stocks. I am betting that the the U.S. market will continue to outperform Ex-US in my somewhat limited time frame. For whatever it is worth, I am not a fan of international bonds. As an aside, my wife's Roth IRA is 2% of our portfolio invested with Vanguard Moderate Growth, VSMGX, as a small hedge that I may be wrong. If things go south, we all will have larger problems than what percentage our international holdings may be.

Greg

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by gks » Wed Oct 03, 2018 6:45 pm

jalbert wrote:
Mon Oct 01, 2018 9:56 pm
How could anyone have invested in International 60 years ago? Please let me know
The Templeton Growth Fund started in the 1950’s. But this misses the point which is that a single 30-year backtest unfortunately is too biased to be used as a predictor of future returns, as different 30-year periods have had a different result with respect to US and non-US returns.
jalbert wrote:
Mon Oct 01, 2018 9:56 pm
How could anyone have invested in International 60 years ago? Please let me know
The Templeton Growth Fund started in the 1950’s. But this misses the point which is that a single 30-year backtest unfortunately is too biased to be used as a predictor of future returns, as different 30-year periods have had a different result with respect to US and non-US returns.
jalbert,

My apologies, I missed your post. Thanks for the information.

I went to Morningstar and compared TEPLX to Fidelity Magellan, FMAGX, from 02-05-63 to present, as that is when Magellan was initiateed. The results:

TEPLX $6,957,101
FMAGX $37,484,917

OK, maybe not a fair comparison, since Peter Lynch was at the helm during the early years.

08-31-76 to present, initiation of Vanguard 500 VFIAX

TEPLX $921,766
VFIAX $879,399
FMAGX $3,933,455

Doggone that Peter Lynch.

Greg

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by gks » Wed Oct 03, 2018 7:12 pm

jalbert,

I agree with your assessment about US/International securities over the past 60 years, but looking at the Morningstar graphs, 1996, the year of "Irrational Exuberance", was the divergence of performance between US-ExUS. I don't know when Ex-US will recover, but for now, I am comfortable with US.

Greg

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by lostdog » Wed Oct 03, 2018 7:13 pm

assyadh wrote:
Sun Sep 30, 2018 11:12 pm
The ratio should be 54.9/45.1, following VT's portfolio allocation.

Anything else is a bet
+1. You nailed it.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Wed Oct 03, 2018 7:29 pm

Data as far back as 1/1/1970 is available on Morningstar to compare the non-US stock fund Templeton Growth Fund to the S&P500. Note that the index return was not readily available to investors due to much higher investment costs than today during much of the period. The Templeton fund had a load and ER, the index did not. Nonetheless:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

At 24% of equities in non-US equities I'm hardly betting on US underperformance. Rather, it is to diversify the risk of serious US equity underperformance.

Any backtest that excludes the period from roughly 1967-1982 is missing the period where US equities most struggled against non-US equities.

But I don't care about backtests for this because I'm not trying to predict which will win. I'm making my best guess at what might have the lowest risk of failing to deliver the returns needed to meet my future obligations.
Last edited by jalbert on Thu Oct 04, 2018 12:31 am, edited 1 time in total.
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by HEDGEFUNDIE » Wed Oct 03, 2018 7:53 pm

gks wrote:
Wed Oct 03, 2018 6:01 pm
HEDGFUNDIE,

I don't think I ever stated that I was betting against stocks. I am betting that the the U.S. market will continue to outperform Ex-US in my somewhat limited time frame. For whatever it is worth, I am not a fan of international bonds. As an aside, my wife's Roth IRA is 2% of our portfolio invested with Vanguard Moderate Growth, VSMGX, as a small hedge that I may be wrong. If things go south, we all will have larger problems than what percentage our international holdings may be.

Greg
You seem to believe that investing or not investing in international stocks is a “bet” on future performance.

My point is that you probably don’t think of your bond allocation in the same way. You probably think of your bond allocation as an insurance policy against poor stock performance, because stocks and bonds don’t move together in the same magnitude. And therefore a portfolio without bonds is more risky than a portfolio with bonds.

I don’t invest in international because I think it will do better than US stocks in the future. I have no idea which one will do better. What I do know is that international stocks (especially small caps and emerging markets) do not move together with US stocks in the same magnitude. And so, just as with bonds, a portfolio without international stocks is more risky than a portfolio with international stocks.

I can show you plenty of backtests to confirm what I am saying. But that’s the gist of it.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by abuss368 » Wed Oct 03, 2018 8:17 pm

HEDGEFUNDIE wrote:
Wed Oct 03, 2018 7:53 pm

You seem to believe that investing or not investing in international stocks is a “bet” on future performance.

My point is that you probably don’t think of your bond allocation in the same way. You probably think of your bond allocation as an insurance policy against poor stock performance, because stocks and bonds don’t move together in the same magnitude. And therefore a portfolio without bonds is more risky than a portfolio with bonds.

I don’t invest in international because I think it will do better than US stocks in the future. I have no idea which one will do better. What I do know is that international stocks (especially small caps and emerging markets) do not move together with US stocks in the same magnitude. And so, just as with bonds, a portfolio without international stocks is more risky than a portfolio with international stocks.

I can show you plenty of backtests to confirm what I am saying. But that’s the gist of it.
Nice post and interesting. By chance, do you work in the financial services industry?
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by HEDGEFUNDIE » Wed Oct 03, 2018 8:28 pm

abuss368 wrote:
Wed Oct 03, 2018 8:17 pm
HEDGEFUNDIE wrote:
Wed Oct 03, 2018 7:53 pm

You seem to believe that investing or not investing in international stocks is a “bet” on future performance.

My point is that you probably don’t think of your bond allocation in the same way. You probably think of your bond allocation as an insurance policy against poor stock performance, because stocks and bonds don’t move together in the same magnitude. And therefore a portfolio without bonds is more risky than a portfolio with bonds.

I don’t invest in international because I think it will do better than US stocks in the future. I have no idea which one will do better. What I do know is that international stocks (especially small caps and emerging markets) do not move together with US stocks in the same magnitude. And so, just as with bonds, a portfolio without international stocks is more risky than a portfolio with international stocks.

I can show you plenty of backtests to confirm what I am saying. But that’s the gist of it.
Nice post and interesting. By chance, do you work in the financial services industry?
Thanks abuss. My first job out of college was at a hedge fund on Wall Street; I started working in September of 2008, a week before the collapse of Lehman Brothers.

My experience in the epicenter of the financial crisis shaped the way I think about risk, financial and otherwise.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by abuss368 » Wed Oct 03, 2018 8:30 pm

HEDGEFUNDIE wrote:
Wed Oct 03, 2018 8:28 pm
abuss368 wrote:
Wed Oct 03, 2018 8:17 pm
HEDGEFUNDIE wrote:
Wed Oct 03, 2018 7:53 pm

You seem to believe that investing or not investing in international stocks is a “bet” on future performance.

My point is that you probably don’t think of your bond allocation in the same way. You probably think of your bond allocation as an insurance policy against poor stock performance, because stocks and bonds don’t move together in the same magnitude. And therefore a portfolio without bonds is more risky than a portfolio with bonds.

I don’t invest in international because I think it will do better than US stocks in the future. I have no idea which one will do better. What I do know is that international stocks (especially small caps and emerging markets) do not move together with US stocks in the same magnitude. And so, just as with bonds, a portfolio without international stocks is more risky than a portfolio with international stocks.

I can show you plenty of backtests to confirm what I am saying. But that’s the gist of it.
Nice post and interesting. By chance, do you work in the financial services industry?
Thanks abuss. My first job out of college was at a hedge fund on Wall Street; I started working in September of 2008, a week before the collapse of Lehman Brothers.

My experience in the epicenter of the financial crisis shaped the way I think about risk, financial and otherwise.
Interesting. I can not imagine starting your career during such a financially traumatic period of time. Do you continue to work on Wall Street today?
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by HEDGEFUNDIE » Wed Oct 03, 2018 8:34 pm

abuss368 wrote:
Wed Oct 03, 2018 8:30 pm
HEDGEFUNDIE wrote:
Wed Oct 03, 2018 8:28 pm
abuss368 wrote:
Wed Oct 03, 2018 8:17 pm
HEDGEFUNDIE wrote:
Wed Oct 03, 2018 7:53 pm

You seem to believe that investing or not investing in international stocks is a “bet” on future performance.

My point is that you probably don’t think of your bond allocation in the same way. You probably think of your bond allocation as an insurance policy against poor stock performance, because stocks and bonds don’t move together in the same magnitude. And therefore a portfolio without bonds is more risky than a portfolio with bonds.

I don’t invest in international because I think it will do better than US stocks in the future. I have no idea which one will do better. What I do know is that international stocks (especially small caps and emerging markets) do not move together with US stocks in the same magnitude. And so, just as with bonds, a portfolio without international stocks is more risky than a portfolio with international stocks.

I can show you plenty of backtests to confirm what I am saying. But that’s the gist of it.
Nice post and interesting. By chance, do you work in the financial services industry?
Thanks abuss. My first job out of college was at a hedge fund on Wall Street; I started working in September of 2008, a week before the collapse of Lehman Brothers.

My experience in the epicenter of the financial crisis shaped the way I think about risk, financial and otherwise.
Interesting. I can not imagine starting your career during such a financially traumatic period of time. Do you continue to work on Wall Street today?
I was laid off with a sizable portion of my colleagues in 2010. That’s when I decided to leave financial services, and so I basically lost the first two years of my career.

In the grand scheme of things and in retrospect, not a huge deal. But it certainly was scary at the time.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Thu Oct 04, 2018 3:18 pm

gks wrote:
Wed Oct 03, 2018 7:12 pm
jalbert,

I agree with your assessment about US/International securities over the past 60 years, but looking at the Morningstar graphs, 1996, the year of "Irrational Exuberance", was the divergence of performance between US-ExUS. I don't know when Ex-US will recover, but for now, I am comfortable with US.

Greg
I would consider the secular inflection point to be the start of the unwinding of the equity and real estate bubbles in Japan about 1990.

It is not hard to construct plausible narratives for this to go either way moving forward.
Risk is not a guarantor of return.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Sat Oct 06, 2018 3:55 pm

Examples that imply the long-term risk of a US-only portfolio:

https://www.bloomberg.com/news/articles ... u-s-dollar
Risk is not a guarantor of return.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by KJVanguard » Sat Oct 06, 2018 4:33 pm

Shall I be brutally honest and say that they pulled that magic number out of their butt, and there is nothing really magical about it?

Long ago in college, finance text books showed lovely graphs of how 70/30 was optimal. Saint John Bogle, as we all know, has often said that 0% international is just fine because large US multi-nationals derive so much of their income from overseas that you already effectively have international exposure by owning the US market.

60/40 is just a reasonable number that they picked as they had to pick something. Nothing magical about it. I own slightly more international than US as I feel foreign valuations (especially in emerging markets) are better than prices in the US.

On another note, I own no foreign bonds at all even though Vanguard tells me that I should own lots. Perhaps I would if Vanguard offered a short-term international bond fund. I don't care to take on the interest rate risk of intermediate bonds (no matter where they are in the world).

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Sat Oct 06, 2018 10:59 pm

KJVanguard wrote:
Sat Oct 06, 2018 4:33 pm
Shall I be brutally honest and say that they pulled that magic number out of their butt, and there is nothing really magical about it?
I don’t think that is correct. A white paper describing Vanguard’s methodology was referenced above a few times:

posting.php?mode=quote&f=10&t=260193&p= ... #pr4143416
Risk is not a guarantor of return.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by watchnerd » Sun Oct 07, 2018 7:01 am

KJVanguard wrote:
Sat Oct 06, 2018 4:33 pm

Long ago in college, finance text books showed lovely graphs of how 70/30 was optimal. Saint John Bogle, as we all know, has often said that 0% international is just fine because large US multi-nationals derive so much of their income from overseas that you already effectively have international exposure by owning the US market.
I've never understood this argument, because the logic seems completely skewed:

1. Most large multi-national corporations derive significant chunks of their revenue from overseas (relative to their domicile); the fact that US-based firms do so is not unique
2. Owning the whole market means not having to predict whatever random country a multi-national corporation happens to be domiciled and not having to choose between BMW, GM, and Toyota. Own them all.
3. There are segments of the world economy where the dominant players are not American-domiciled: mining, ship-building, etc. Why do we want to leave those out?
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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jclear » Sun Oct 07, 2018 3:08 pm

jalbert wrote:
Sat Oct 06, 2018 10:59 pm
KJVanguard wrote:
Sat Oct 06, 2018 4:33 pm
Shall I be brutally honest and say that they pulled that magic number out of their butt, and there is nothing really magical about it?
I don’t think that is correct. A white paper describing Vanguard’s methodology was referenced above a few times:

posting.php?mode=quote&f=10&t=260193&p= ... #pr4143416
And if you restricted yourself to a three-fund portfolio where the third fund were required to be AGG(?), there'd be at least a simplistic argument in that article. Otherwise, there's none.
Last edited by jclear on Sun Oct 07, 2018 11:12 pm, edited 2 times in total.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by jalbert » Sun Oct 07, 2018 6:01 pm

The argument is based on finding the minimum variance equity portfolio if you hold total market index funds for US and non-US equities. The real problem with Vanguard’s work that it is not based on a random sample of independent trials, which would actually be very difficult if not impossible to achieve.
Risk is not a guarantor of return.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by Cop51 » Mon Oct 08, 2018 3:47 am

I’m satisfied with my 20% international. It’s enough skin in the game to feel the impact either way but not make or break my portfolio.

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Re: Why does Vanguard reccomend 60:40 US:International ratio?

Post by Valuethinker » Mon Oct 08, 2018 4:09 am

tmcc wrote:
Mon Oct 01, 2018 6:35 pm
International and emerging are total dogs so far this year.
How much of that is currency? And how much actual returns in local currency?

https://www.ftse.com/products/downloads ... 180531.pdf up to May

found this performance data in USD terms

p 9 gives you the FX returns which are negative relative to USD *except* for JPY.

If you look at the sector charts you see it's the tech sector which is blazing in the USA relative to other markets (tech in other markets and relative to other sectors).

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