The benefits of international diversification - NOT: Hulbert

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CULater
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The benefits of international diversification - NOT: Hulbert

Post by CULater » Tue Oct 09, 2018 1:38 pm

Here's the reason Mark Hulbert says that international diversification isn't all it's supposed to be on paper. I guess we're left with the "what if the U.S. is the next Japan?" argument.
The problem is that the correlation between domestic and international stocks is not constant. It instead shifts with the bull and bear cycle of the market itself: The correlation is lowest when the U.S. market is rising, and highest when U.S. equities are falling.

As a result, international stocks provide the least diversification precisely when investors need it most — when U.S. stocks are declining. And when U.S. stocks are rising, and investors don’t need or want any diversification, international stocks provide it in spades.
https://www.marketwatch.com/story/inter ... 2018-10-09
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Re: The benefits of international diversification - NOT: Hulbert

Post by willthrill81 » Tue Oct 09, 2018 1:50 pm

I'm not aware of long-term data which supports this idea of fluctuating diversification hinging on whether U.S. stocks are going up or down, and Hulbert didn't provide any. We certainly know that there have been periods where international equities outperformed the U.S. (e.g. 2000-2009), even though international sank just like the U.S. during the 2008-2009 debacle.

I still believe that the strongest argument in favor of international investing is indeed the threat of the U.S. potentially following in Japan's footsteps. And I'm not convinced that a market cap weighting (i.e. ~50/50) adequately addresses that risk because half of the portfolio would still be in just one country (i.e. you still have huge country risk), and an investor could still easily be hosed if the U.S. became Japan 2.0.

I do know that it's situations like this that make me glad to be a trend follower so that I can be ambivalent to this issue, among many others.
Last edited by willthrill81 on Tue Oct 09, 2018 1:51 pm, edited 1 time in total.
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Re: The benefits of international diversification - NOT: Hulbert

Post by pokebowl » Tue Oct 09, 2018 1:50 pm

While the "never internationals" group on this board have taken many sticks to the international horse, that being said this column really didn't provide much to go off of. Instead it only focused on the past performance of this year alone. Going by that baseline, what would we conclude about an investor holding international in 2017 by that years performance alone? What happens when an investor looks back at the 60s, 70, and 80s? Could that type of history repeat? Where holding international actually saves an equity investor?

I hold international because I am unsure if I will be retiring in a period similar to the late 90s through 00s where US outperformed or a period similar to the 70s through early 90s where international outperformed.
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Re: The benefits of international diversification - NOT: Hulbert

Post by JoMoney » Tue Oct 09, 2018 2:32 pm

When Diversification Fails
Sébastien Page, CFA, and Robert A. Panariello, CFA
https://www.cfapubs.org/doi/pdf/10.2469/faj.v74.n3.3
... Conditional correlations reveal that during market crises, diversification across risk assets almost completely disappears. Moreover, diversification seems to work remarkably well when investors do not need it—during market rallies. This undesirable asymmetry is pervasive across markets...

Is the Stock–Bond Correlation the Only True Source of Diversification?
When market sentiment suddenly turns negative and fear grips markets, government bonds almost always rally because of the flight-to-safety effect (Gulko 2002). In a sense, duration risk may be the only true source of diversification in multi-asset portfolios. Therefore, the expected stock–bond correlation is one of the most important inputs to the asset allocation decision... Unlike results for other correlations, this profile is highly desirable: Bonds decouple from stocks in bad times and become positively correlated with stocks in good times.
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Re: The benefits of international diversification - NOT: Hulbert

Post by nisiprius » Tue Oct 09, 2018 4:46 pm

1) The observation that diversification fails in crises is basically just another way of saying "financial crises happen." If it only affected one asset class and not others, it wouldn't be a crisis.

2) "The problem is that the correlation between domestic and international stocks is not constant." At this point, I'm almost completely convinced that people are starting to see imaginary patterns in pure noise in correlations. I suspect most of the claimed phenomena are just sampling error.

3) I continue to be in the strange position of being, seemingly, one of the few people who think that there's no evidence that international diversification has ever mattered much--never has helped much, never has hurt much.

4) I continued to be be puzzled why my point of view is so seemingly rare, and why people are so intense in asserting that it matters an awful lot.
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Re: The benefits of international diversification - NOT: Hulbert

Post by dknightd » Tue Oct 09, 2018 4:57 pm

I have not studied if international diversification helps, or hurts, or if it matters.

I keep some money in the international markets because I live in the USA. I've already got a lot of exposure to the USA economy.
I believe in the concept of a global economy. I think that means eventually the world will have a similar standard of living (at least as measured in "money"). To me that suggests parts of the World will go up, and parts will go down. Having at least some exposure to other countries makes sense to me. YMMV

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Re: The benefits of international diversification - NOT: Hulbert

Post by visualguy » Tue Oct 09, 2018 5:20 pm

nisiprius wrote:
Tue Oct 09, 2018 4:46 pm
3) I continue to be in the strange position of being, seemingly, one of the few people who think that there's no evidence that international diversification has ever mattered much--never has helped much, never has hurt much.

4) I continued to be be puzzled why my point of view is so seemingly rare, and why people are so intense in asserting that it matters an awful lot.
Never mattered? Investing in the ex-US index would have certainly hurt my returns significantly. I started investing in 1996 and had some international initially, but then luckily got out of that after a few years, and never invested in it again. Still, I've been following it and researching it since then, and I keep being surprised by how poorly it performs.

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Re: The benefits of international diversification - NOT: Hulbert

Post by Tycoon » Tue Oct 09, 2018 5:25 pm

nisiprius wrote:
Tue Oct 09, 2018 4:46 pm

3) I continue to be in the strange position of being, seemingly, one of the few people who think that there's no evidence that international diversification has ever mattered much--never has helped much, never has hurt much.
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Re: The benefits of international diversification - NOT: Hulbert

Post by Sunrise » Tue Oct 09, 2018 6:18 pm

willthrill81 wrote:
Tue Oct 09, 2018 1:50 pm
I do know that it's situations like this that make me glad to be a trend follower so that I can be ambivalent to this issue, among many others.

willthrill81,

How can I learn more about how one would become a "trend follower"? Could you suggest a website(s) or book(s) to educate myself? Thanks.

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Re: The benefits of international diversification - NOT: Hulbert

Post by randomguy » Tue Oct 09, 2018 6:27 pm

nisiprius wrote:
Tue Oct 09, 2018 4:46 pm


3) I continue to be in the strange position of being, seemingly, one of the few people who think that there's no evidence that international diversification has ever mattered much--never has helped much, never has hurt much.

The 1966 retiree got about 10% more spenable money with international. I will let you decide if getting 10% more in the worst case is meaningful or not.

And obvious the japanese investor did a lot better with international diversification😀

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Re: The benefits of international diversification - NOT: Hulbert

Post by staythecourse » Tue Oct 09, 2018 6:28 pm

nisiprius wrote:
Tue Oct 09, 2018 4:46 pm
4) I continued to be be puzzled why my point of view is so seemingly rare, and why people are so intense in asserting that it matters an awful lot.
Nisi,

Couple of points to the above point. 1. Would you be saying the same if you were 100% country specific in Japan or many of the countries that have either gone through hyperinflation in the past (Argentina, Germany, etc..), currency devaluation like the Peso, or major markets that crumbled (Egypt)? Or is your believe that America is immune to such issues? 2. If there is NO real advantage to adding International (outside of eliminating single country risk) then what is the real disadvantage of adding it? Costs are low to access that space. There is PLENTY of data to support which one does better (U.S. vs. international) comes down to which currency is stronger.

So why bet on a single country and the U.S. dollar only when you have very little disadvantage of adding it on a cost basis. As you know there is no SYSTEMATIC premium placed on being 100% country specific.

The biggest issue really comes down to looking in the mirror and using ex post data and really believing in your beliefs which just happen to coincide with what WOULD have done best the last 20 years. This is where you see behavioral errors occur in the financially literate folks.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: The benefits of international diversification - NOT: Hulbert

Post by MotoTrojan » Tue Oct 09, 2018 6:30 pm

Sunrise wrote:
Tue Oct 09, 2018 6:18 pm
willthrill81 wrote:
Tue Oct 09, 2018 1:50 pm
I do know that it's situations like this that make me glad to be a trend follower so that I can be ambivalent to this issue, among many others.

willthrill81,

How can I learn more about how one would become a "trend follower"? Could you suggest a website(s) or book(s) to educate myself? Thanks.
It’s market timing. Many use the 50 or 200 day moving average as a 100% swap from equities to bonds and vise versa. Reduces drawdown but also upside. Some periods of time it wins, others it loses. Not a great approach in a taxable account. I’ll pass regardless.

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Re: The benefits of international diversification - NOT: Hulbert

Post by galeno » Tue Oct 09, 2018 6:30 pm

I did not read the article.

Hulbert is probably talking about diversification OUTSIDE a main asset class. I.e. diversify stocks with bonds.

International equity diversification is diversification INSIDE the same asset class. Equities.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: The benefits of international diversification - NOT: Hulbert

Post by MJW » Tue Oct 09, 2018 6:48 pm

randomguy wrote:
Tue Oct 09, 2018 6:27 pm

And obvious the japanese investor did a lot better with international diversification😀
Yeah, the Japanese investor would have been better off investing in US, too. :wink:

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Re: The benefits of international diversification - NOT: Hulbert

Post by visualguy » Tue Oct 09, 2018 6:57 pm

staythecourse wrote:
Tue Oct 09, 2018 6:28 pm
The biggest issue really comes down to looking in the mirror and using ex post data and really believing in your beliefs which just happen to coincide with what WOULD have done best the last 20 years. This is where you see behavioral errors occur in the financially literate folks.
You can pick longer periods, even much longer ones, and ex-US has still been bad over those even longer periods... Also, the mirror is all we have. Anything else is just some theory which is particularly questionable when it tries to convince us that something that didn't work in the past will work in the future for no apparent reason.

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Re: The benefits of international diversification - NOT: Hulbert

Post by galeno » Tue Oct 09, 2018 7:16 pm

For me "buy the entire haystack" does not mean ONLY the USA haystack.

If you hold only an USA equity index you're slicing and dicing. If you hold only the NASDAQ index same thing.

Are they smart bets? Only you can answer that.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

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Re: The benefits of international diversification - NOT: Hulbert

Post by staythecourse » Tue Oct 09, 2018 7:57 pm

visualguy wrote:
Tue Oct 09, 2018 6:57 pm
staythecourse wrote:
Tue Oct 09, 2018 6:28 pm
The biggest issue really comes down to looking in the mirror and using ex post data and really believing in your beliefs which just happen to coincide with what WOULD have done best the last 20 years. This is where you see behavioral errors occur in the financially literate folks.
You can pick longer periods, even much longer ones, and ex-US has still been bad over those even longer periods... Also, the mirror is all we have. Anything else is just some theory which is particularly questionable when it tries to convince us that something that didn't work in the past will work in the future for no apparent reason.
Well the data shows US SCV has been the best overall part of the market. Are you 100% US SCV then? If you are then you walk the walk. If you aren't then you are just rationalizing being 100% U.S. equities or otherwise NOT being market cap even though most espouse being market cap on this board.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: The benefits of international diversification - NOT: Hulbert

Post by raven15 » Tue Oct 09, 2018 8:03 pm

Great. Diversification is dead. So we are all free to put our money into whatever will have the best returns and there will be no consequences. Yay!
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Re: The benefits of international diversification - NOT: Hulbert

Post by Random Walker » Tue Oct 09, 2018 8:20 pm

International small value is likely a significantly better diversifier than international developed. Small companies much more affected by local economies. International large and US large more likely to be highly correlated. I think ISV diversification benefit same ballpark as EM.

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"International Stocks Provide The Least Protection Just When Investors Need It Most"

Post by Taylor Larimore » Tue Oct 09, 2018 8:20 pm

[Thread merged into here, see below. --admin LadyGeek]

Bogleheads:

The most contentious topic on the Bogleheads forum may be: How much to invest in international stocks?

This MarketWatch article provides more information on the subject:

International Stocks Provide The Least Protection Just When Investors Need It Most

My own suggestion for the international stock allocation can be read here.

Best wishes
Taylor
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Re: "International Stocks Provide The Least Protection Just When Investors Need It Most"

Post by UpperNwGuy » Tue Oct 09, 2018 8:26 pm

Taylor, I am now following your recommendation. Previously I tried to maintain international at 33% of my equities, but I've allowed it to drift down to 20% over the last year. Like the article said, international has been both a poor diversifier and a poor performer. I won't let it go any lower than 20%, but I doubt I'll ever go much higher.
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Re: "International Stocks Provide The Least Protection Just When Investors Need It Most"

Post by oldzey » Tue Oct 09, 2018 8:29 pm

0% International works for me! :beer
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Re: The benefits of international diversification - NOT: Hulbert

Post by LadyGeek » Tue Oct 09, 2018 8:36 pm

I merged Taylor Larimore's thread into the on-going discussion.
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Re: "International Stocks Provide The Least Protection Just When Investors Need It Most"

Post by tony_roach » Tue Oct 09, 2018 8:41 pm

UpperNwGuy wrote:
Tue Oct 09, 2018 8:26 pm
Taylor, I am now following your recommendation. Previously I tried to maintain international at 33% of my equities, but I've allowed it to drift down to 20% over the last year. Like the article said, international has been both a poor diversifier and a poor performer. I won't let it go any lower than 20%, but I doubt I'll ever go much higher.
Add me to the 20% international camp as well...

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Re: The benefits of international diversification - NOT: Hulbert

Post by randomguy » Tue Oct 09, 2018 8:48 pm

I can't wait for the next 3-5 year period where EM or international crushes the US stocks. Those threads will be entertaining:) It is easy when an asset is soaring to say that it is all you need. Getting that article published when the sector is underperforming is a lot harder:)

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Re: The benefits of international diversification - NOT: Hulbert

Post by heyyou » Tue Oct 09, 2018 8:49 pm

There is a fine line between learning what doesn't work in investing and discerning what happened to just not work during the studied period, another type of recency bias. I'm not betting it all on one country, especially the one that has done the best.

Where is the most growth expected in the future, domestic or foreign? My portfolio returns have served me well in spite of my previous foreign exposure. Others are welcome to do what suits them, but I'm staying with my level of diversification that does include foreign stock index funds. Delayed gratification may work later, says the guy who was blindly buying shares of the S&P500 at market highs in the 1980s.

Since foreign shares have not performed well, what is that attributed to? Could the same happen to domestic shares? How did domestic stocks do from 1966 to 1982? There were no real returns for them in that period. For the employed, that was a good time to buy, in retrospect, but prices were high during that period.

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Re: The benefits of international diversification - NOT: Hulbert

Post by arcticpineapplecorp. » Tue Oct 09, 2018 9:01 pm

visualguy wrote:
Tue Oct 09, 2018 5:20 pm
nisiprius wrote:
Tue Oct 09, 2018 4:46 pm
3) I continue to be in the strange position of being, seemingly, one of the few people who think that there's no evidence that international diversification has ever mattered much--never has helped much, never has hurt much.

4) I continued to be be puzzled why my point of view is so seemingly rare, and why people are so intense in asserting that it matters an awful lot.
Never mattered? Investing in the ex-US index would have certainly hurt my returns significantly. I started investing in 1996 and had some international initially, but then luckily got out of that after a few years, and never invested in it again. Still, I've been following it and researching it since then, and I keep being surprised by how poorly it performs.
You can only speak in the past tense, not the present tense. Because we don't know what the present and or future will bring. I find it interesting that you held it a few years since 1996 and then say you were lucky to get out but international did better than the U.S. from 2003-2007 (see below, blue Total U.S. stock market, orange Total international stock market). What this shows is that people often give up in frustration at exactly the wrong time (right before the returns show up). Full Disclosure (I own 30% international in TISM).

Image

source: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

Yes the dates I used can be accused to be cherry picking, but my returns overall have been good. You're supposed to want to buy assets that haven't gone up as much as the others. That's what holding TISM has enabled over the last many years. But remember, TISM went up 27.5% in 2017 whereas TSM only went up 21.2%. So holding TISM actually helped your returns last year. One year does not matter. But this is the nature of holding diversifying assets. Otherwise why would you hold bonds in addition to stocks?

Image

source:
https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D
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Re: "International Stocks Provide The Least Protection Just When Investors Need It Most"

Post by whodidntante » Tue Oct 09, 2018 9:02 pm

oldzey wrote:
Tue Oct 09, 2018 8:29 pm
0% International works for me! :beer
You could short it and be extra right.

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Re: The benefits of international diversification - NOT: Hulbert

Post by oldzey » Tue Oct 09, 2018 9:04 pm

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

The inception date of Vanguard Total International Stock Index Fund (VGTSX) was 4/29/1996.

Per Morningstar, as of 10/9/2018, if you had invested $10,000 in both funds on 4/30/1996, you would currently have $66,668 in your Total Stock U.S. Stock Market Index Fund, which would be more than double as much as the $27,665 in your Total International Stock Index Fund.

Of course, past performance does not indicate future performance.

Image
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Re: The benefits of international diversification - NOT: Hulbert

Post by lostdog » Tue Oct 09, 2018 9:48 pm

randomguy wrote:
Tue Oct 09, 2018 8:48 pm
I can't wait for the next 3-5 year period where EM or international crushes the US stocks. Those threads will be entertaining:) It is easy when an asset is soaring to say that it is all you need. Getting that article published when the sector is underperforming is a lot harder:)
+1

Recency bias is quite apparent.

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Re: The benefits of international diversification - NOT: Hulbert

Post by willthrill81 » Tue Oct 09, 2018 9:52 pm

lostdog wrote:
Tue Oct 09, 2018 9:48 pm
randomguy wrote:
Tue Oct 09, 2018 8:48 pm
I can't wait for the next 3-5 year period where EM or international crushes the US stocks. Those threads will be entertaining:) It is easy when an asset is soaring to say that it is all you need. Getting that article published when the sector is underperforming is a lot harder:)
+1

Recency bias is quite apparent.
To which someone (not necessarily me) could reply: "How 'recent' do you consider the last 30 years to be?"
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The benefits of international diversification - NOT: Hulbert

Post by willthrill81 » Tue Oct 09, 2018 9:54 pm

MotoTrojan wrote:
Tue Oct 09, 2018 6:30 pm
Sunrise wrote:
Tue Oct 09, 2018 6:18 pm
willthrill81 wrote:
Tue Oct 09, 2018 1:50 pm
I do know that it's situations like this that make me glad to be a trend follower so that I can be ambivalent to this issue, among many others.

willthrill81,

How can I learn more about how one would become a "trend follower"? Could you suggest a website(s) or book(s) to educate myself? Thanks.
It’s market timing. Many use the 50 or 200 day moving average as a 100% swap from equities to bonds and vise versa. Reduces drawdown but also upside. Some periods of time it wins, others it loses. Not a great approach in a taxable account. I’ll pass regardless.
At the risk of derailing the thread, this is a common misconception. Trend following can be very tax efficient through the use of futures to zero one's position in stocks when called for.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The benefits of international diversification - NOT: Hulbert

Post by lostdog » Tue Oct 09, 2018 9:55 pm

willthrill81 wrote:
Tue Oct 09, 2018 9:52 pm
lostdog wrote:
Tue Oct 09, 2018 9:48 pm
randomguy wrote:
Tue Oct 09, 2018 8:48 pm
I can't wait for the next 3-5 year period where EM or international crushes the US stocks. Those threads will be entertaining:) It is easy when an asset is soaring to say that it is all you need. Getting that article published when the sector is underperforming is a lot harder:)
+1

Recency bias is quite apparent.
To which someone (not necessarily me) could reply: "How 'recent' do you consider the last 30 years to be?"
And I feel bad for the young investors just starting out seeing 0% international posts. Not good...

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Re: The benefits of international diversification - NOT: Hulbert

Post by willthrill81 » Tue Oct 09, 2018 10:03 pm

lostdog wrote:
Tue Oct 09, 2018 9:55 pm
willthrill81 wrote:
Tue Oct 09, 2018 9:52 pm
lostdog wrote:
Tue Oct 09, 2018 9:48 pm
randomguy wrote:
Tue Oct 09, 2018 8:48 pm
I can't wait for the next 3-5 year period where EM or international crushes the US stocks. Those threads will be entertaining:) It is easy when an asset is soaring to say that it is all you need. Getting that article published when the sector is underperforming is a lot harder:)
+1

Recency bias is quite apparent.
To which someone (not necessarily me) could reply: "How 'recent' do you consider the last 30 years to be?"
And I feel bad for the young investors just starting out seeing 0% international posts. Not good...
For believers in the efficient market hypothesis (not myself), the super long-term difference in risk-adjusted returns between U.S. and international equities should be zero. But we unfortunate humans don't have the super long-term to invest. Our investment horizons are measured in comparably pitiful years and decades.

This is part of the problem with the buy-and-hold strategy. Those practicing it must be prepared for periods lasting years and, yes, even decades where certain asset classes underperform, which history indicates is pretty much bound to happen at some point. The investor may never live to see those asset classes outperform the others. This is exceedingly difficult for many people, but this is the deal that is made when they decide to buy-and-hold.

There are other strategies that might overcome this problem, but they come with their own sets of problems. It is up to the individual investor to determine which set of pros and cons best fits their own risk tolerance, personality, etc. Temet nosce.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The benefits of international diversification - NOT: Hulbert

Post by Random Walker » Tue Oct 09, 2018 10:25 pm

willthrill81 wrote:
Tue Oct 09, 2018 10:03 pm

For believers in the efficient market hypothesis (not myself), the super long-term difference in risk-adjusted returns between U.S. and international equities should be zero. But we unfortunate humans don't have the super long-term to invest. Our investment horizons are measured in comparably pitiful years and decades.

This is part of the problem with the buy-and-hold strategy. Those practicing it must be prepared for periods lasting years and, yes, even decades where certain asset classes underperform, which history indicates is pretty much bound to happen at some point. The investor may never live to see those asset classes outperform the others. This is exceedingly difficult for many people, but this is the deal that is made when they decide to buy-and-hold.

There are other strategies that might overcome this problem, but they come with their own sets of problems. It is up to the individual investor to determine which set of pros and cons best fits their own risk tolerance, personality, etc. Temet nosce.
This is effectively the argument for diversifying across factors. It seems a bit anti intuitive, but the shorter the time frame, the more important it may be to diversify across factors.

Dave

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Re: The benefits of international diversification - NOT: Hulbert

Post by willthrill81 » Tue Oct 09, 2018 10:28 pm

Random Walker wrote:
Tue Oct 09, 2018 10:25 pm
willthrill81 wrote:
Tue Oct 09, 2018 10:03 pm

For believers in the efficient market hypothesis (not myself), the super long-term difference in risk-adjusted returns between U.S. and international equities should be zero. But we unfortunate humans don't have the super long-term to invest. Our investment horizons are measured in comparably pitiful years and decades.

This is part of the problem with the buy-and-hold strategy. Those practicing it must be prepared for periods lasting years and, yes, even decades where certain asset classes underperform, which history indicates is pretty much bound to happen at some point. The investor may never live to see those asset classes outperform the others. This is exceedingly difficult for many people, but this is the deal that is made when they decide to buy-and-hold.

There are other strategies that might overcome this problem, but they come with their own sets of problems. It is up to the individual investor to determine which set of pros and cons best fits their own risk tolerance, personality, etc. Temet nosce.
This is effectively the argument for diversifying across factors. It seems a bit anti intuitive, but the shorter the time frame, the more important it may be to diversify across factors.

Dave
Diversification can indeed help the portfolio. But many investors bemoan the inevitable poor performance of one or more components of that portfolio, especially if those components underperform for years on end.

It sounds trite and almost buffoonish, but if you're going to buy-and-hold, then that's what you have to do.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: The benefits of international diversification - NOT: Hulbert

Post by visualguy » Tue Oct 09, 2018 11:17 pm

staythecourse wrote:
Tue Oct 09, 2018 7:57 pm
Well the data shows US SCV has been the best overall part of the market. Are you 100% US SCV then? If you are then you walk the walk. If you aren't then you are just rationalizing being 100% U.S. equities or otherwise NOT being market cap even though most espouse being market cap on this board.
This is a false analogy. My argument wasn't limited to the relative performance to the US stock market. It was about absolute performance. Ex-US has performed poorly in absolute terms. The poor return didn't justify the huge volatility. You don't need to put up with that kind of volatility to get that meager long-term return (just buy bonds or CDs, for example). It has been a bad way to invest money. Period. Even if the US had been as bad or worse, it wouldn't have made ex-US a good investment. It would have just made both of them bad.

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Re: The benefits of international diversification - NOT: Hulbert

Post by jalbert » Tue Oct 09, 2018 11:46 pm

The benefit of int’l diversification is not because of any significant effect on the variance of shorter term returns. The benefit of int’l diversification is to reduce the variance (dispersion of outcomes) of long-term returns.

Over long periods, say 30+ years, a portfolio performance miss is an irreversible outcome. You don’t get to rewind the clock and play it over a different way.

Holding some non-US equities by US investors protects against tail risk scenarios like the dollar losing its status as the reserve currency of world trade, federal debt reaching unsustainable levels, hyperinflation or even just persistent high inflation, or the continued shrinking of US GDP as a percentage of world GDP until it falls below some invisible tipping point beyond which the US economy cannot sustain the type of growth it has had in the past.
Risk is not a guarantor of return.

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Re: The benefits of international diversification - NOT: Hulbert

Post by MJW » Tue Oct 09, 2018 11:58 pm

jalbert wrote:
Tue Oct 09, 2018 11:46 pm
Over long periods, say 30+ years, a portfolio performance miss is an irreversible outcome. You don’t get to rewind the clock and play it over a different way.
Yeah, that is precisely what makes me apprehensive about my decision to hold international stock. :)

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Re: The benefits of international diversification - NOT: Hulbert

Post by oldzey » Wed Oct 10, 2018 12:10 am

"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

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Re: The benefits of international diversification - NOT: Hulbert

Post by visualguy » Wed Oct 10, 2018 12:51 am

jalbert wrote:
Tue Oct 09, 2018 11:46 pm
The benefit of int’l diversification is not because of any significant effect on the variance of shorter term returns. The benefit of int’l diversification is to reduce the variance (dispersion of outcomes) of long-term returns.

Over long periods, say 30+ years, a portfolio performance miss is an irreversible outcome. You don’t get to rewind the clock and play it over a different way.

Holding some non-US equities by US investors protects against tail risk scenarios like the dollar losing its status as the reserve currency of world trade, federal debt reaching unsustainable levels, hyperinflation or even just persistent high inflation, or the continued shrinking of US GDP as a percentage of world GDP until it falls below some invisible tipping point beyond which the US economy cannot sustain the type of growth it has had in the past.
There are two problems with this... A) The Ex-US index is likely to crash just as badly or worse if such things happened. B) These are extremely unlikely events within our lifetime.

Basically, you're investing in something that has shown poor long-term performance in the past in order to gain protection that it isn't likely to provide against something which is extremely unlikely. Doesn't make much sense to me...

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Re: The benefits of international diversification - NOT: Hulbert

Post by jalbert » Wed Oct 10, 2018 1:17 am

There are two problems with this... A) The Ex-US index is likely to crash just as badly or worse if such things happened. B) These are extremely unlikely events within our lifetime.
Non-US equities greatly improved portfolio survivability for US retirees during the inflation of the 1970's.
Yeah, that is precisely what makes me apprehensive about my decision to hold international stock.
Currency risk and the potential for a strong US dollar for a long time is why I don't go higher than 25% non-US equities. I view that as enough to offer some protection if the US experiences persistent inflation, but not so much as to contribute to a major drift from the performance of the US econony in which we have to meet financial obligations.
Risk is not a guarantor of return.

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Re: The benefits of international diversification - NOT: Hulbert

Post by JoMoney » Wed Oct 10, 2018 2:19 am

jalbert wrote:
Wed Oct 10, 2018 1:17 am
...
Non-US equities greatly improved portfolio survivability for US retirees during the inflation of the 1970's...
I wonder which countries, and how widely available foreign stock ownership was in the 1970's. Much of the relaxation of capital controls and global market liberalization occurred in and after the 1970s.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: The benefits of international diversification - NOT: Hulbert

Post by Ari » Wed Oct 10, 2018 4:09 am

A common misconception is that you should hold non-US equities to protect you against a crash. What it's for is rather to protect you against a slow decline.

Personally, I'm at 20% US, the same as my EM allocation, but then the US is part of my international allocation. :D

US-only investors cite a host of different reasons, pretty much all of which are moot if the EMH applies to global markets. On the other hand, I've seen few arguments as to why it wouldn't apply. I think it might not! For example if significant foreign markets artificially keep valuations high. But I've seen few people argue this.

Otherwise, investing in a market with low valuations that stay low should be a lot better than investing in a market with high valuations that stay high, right? We don't need to apply "reversion to the mean" thinking to argue for a preference for low valuations. If you're a buy-and-holder, better hope those valuations never rise!
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Re: The benefits of international diversification - NOT: Hulbert

Post by steve321 » Wed Oct 10, 2018 4:14 am

nisiprius wrote:
Tue Oct 09, 2018 4:46 pm


4) I continued to be be puzzled why my point of view is so seemingly rare, and why people are so intense in asserting that it matters an awful lot.
Survival bias mate. For Americans it has not mattered much, for Germans for example it would have mattered a lot.

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Re: The benefits of international diversification - NOT: Hulbert

Post by msk » Wed Oct 10, 2018 4:15 am

We all expect a market crash in the near/medium term future and I expect that whatever causes it will not be anything we suspect today; otherwise the powers-that-be will fix it in time. Why I am scared of over-exposure to the US market: the US market cap is >50% of world market cap, but it is nowhere near 50% of the world economy. One day the reckoning will come (it did for Japan! when that market cap looked invincible. Been there, done that!) and I want to be exposed to the other markets as they rise up to take their % of world market cap to match their % of world economy. China? How? Peacefully? :confused USD reserve currency status? Even the EU is getting exasperated :annoyed I am 100% stocks by world market cap and I am willing to accept "lower, probable medium term returns to appease" my anxiety. But are bond holders also not accepting "lower, probable medium term returns to appease" their anxiety? No anxiety? Enjoy the US market ride :moneybag I was glad that I was also exposed to the US market when Japan slimmed out back in the 1980s.

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Re: The benefits of international diversification - NOT: Hulbert

Post by steve321 » Wed Oct 10, 2018 4:15 am

International Diversification Works (Eventually)

https://www.aqr.com/Insights/Research/J ... Eventually

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Re: The benefits of international diversification - NOT: Hulbert

Post by Valuethinker » Wed Oct 10, 2018 4:43 am

Ari wrote:
Wed Oct 10, 2018 4:09 am
A common misconception is that you should hold non-US equities to protect you against a crash. What it's for is rather to protect you against a slow decline.

Personally, I'm at 20% US, the same as my EM allocation, but then the US is part of my international allocation. :D

US-only investors cite a host of different reasons, pretty much all of which are moot if the EMH applies to global markets. On the other hand, I've seen few arguments as to why it wouldn't apply. I think it might not! For example if significant foreign markets artificially keep valuations high. But I've seen few people argue this.

Otherwise, investing in a market with low valuations that stay low should be a lot better than investing in a market with high valuations that stay high, right? We don't need to apply "reversion to the mean" thinking to argue for a preference for low valuations. If you're a buy-and-holder, better hope those valuations never rise!
What's your rationale for such a large EM weighting?

It's worth drilling into the EM index. You have a lot in Chinese companies - individual companies, some of whom have opaque accounting (I am given to understand). Also with large state shareholdings which again increases the temptation to manipulate share prices. I have a lot of reservations about the Chinese market as a fair arbiter of the prospects of the underlying businesses.

It's not that it's bad to own China in proportion to world market cap. But this a heavy overweighting. Off the top of my head you have as much in Tencent & Alibaba (maybe more) than in Amazon/ Apple/ Google/ Microsoft?

If I had a view on EM it would be along the lines of the DFA funds that "clean" the numbers before setting investment allocation.

Conversely you are underweight some of the world's most successful companies like Apple and Amazon who are expanding into EM.

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Re: The benefits of international diversification - NOT: Hulbert

Post by simplesimon » Wed Oct 10, 2018 5:41 am

I view international as part of the total (public) market like how a company is part of a sector or industry that is part of the total market.

Why aren't we talking about the worst performing industries over the last couple of decades and completely divesting from them?

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Re: The benefits of international diversification - NOT: Hulbert

Post by Ari » Wed Oct 10, 2018 5:44 am

Valuethinker wrote:
Wed Oct 10, 2018 4:43 am
What's your rationale for such a large EM weighting?
I find market weight to be a great thing in individual funds, since it limits transactions and thus costs. For the world portfolio, I'm not as convinced market weight is necessarily the most diversified, for a variety of definitions of the word. Does the fact that the US has a larger fraction of their companies publicly listed really mean I should invest more of my money there? I don't know that I feel that's true. Part of the reason for my large EM weight is that it's risky, with corruption, unstable institutions and undiversified economies. That is some risk that I can see EM investors getting rewarded for. It has a history of descent long-term returns and relatively low correlation with developed markets, so that's nice, too. And, of course, they represent a huge portion (majority?) of the world population.

The large weighting of China in the index is a problem, just like the large US weighting in the world index. I don't have access to an "EM ex China" fund, unfortunately, so it's harder to get rid of than the US problem. I'm keeping a lookout on the fund space to see if anything pops up, but at the moment I can't be much bothered. I've been thinking of supplementing with a Latin America or Eastern Europe fund, but I can't seem to find any cheap ones.

My basic reason for the 20% EM exposure is that it's what I settled on some time ago, and I sometimes feel I have too much and sometimes feel that I have too little. So I mostly just shrug and leave it as it is. I might change it, but there's no big hurry. Better to stay the course with a mediocre plan than to change ships in mid-stream, I figure.
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