Vanguard says international will beat US stocks in next decade

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jstatton
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Vanguard says international will beat US stocks in next decade

Post by jstatton »

https://www.cnbc.com/2018/11/27/interna ... guard.html

Should one overweight their portfolio toward international?
typical.investor
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Re: Vanguard says international will beat US stocks in next decade

Post by typical.investor »

I would go to market weight at the most.

Expected returns might be higher, but it doesn’t mean it’s a certainty or is exact about the timing.
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Re: Vanguard expects international to beat US stocks in next decade

Post by livesoft »

I'm laughing about the reporting of the news. Vanguard did not say at all that international will beat US stocks. I already knew they would never say that. Instead, the word used was "expect" and variations of it. In the linked article "expect" occurs 12 time -- the same number of times that "will" occurs.

No guarantees. To answer your question: No, one should not overweight international equities, but one shouldn't underweight them either.
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JoMoney
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Re: Vanguard says international will beat US stocks in next decade

Post by JoMoney »

They've been saying that for quite awhile now. Maybe it will, maybe it wont...
Set your allocation based on your risk tolerance and stay the course.
If you're a market timer, and you're looking to others to tell you when you should, I think you have a bad strategy.

Back in 2010, Vanguard announced it was increasing international exposure from 20% to 30% in their Target Date funds. They claimed it wasn't about "expected returns"... but I wonder how that's worked out so far.
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Re: Vanguard expects international to beat US stocks in next decade

Post by vineviz »

livesoft wrote: Sun Dec 23, 2018 12:08 pm I'm laughing about the reporting of the news. Vanguard did not say at all that international will beat US stocks. I already knew they would never say that. Instead, the word used was "expect" and variations of it. In the linked article "expect" occurs 12 time -- the same number of times that "will" occurs.

No guarantees. To answer your question: No, one should not overweight international equities, but one shouldn't underweight them either.
Agreed. The last sentences in Vanguard's outlook white paper are predictably sensible:
Ultimately, our global market outlook suggests a somewhat more challenging environment ahead, yet one in which investors with an appropriate level of discipline, diversification, and patience are likely to be rewarded over the long term. Adhering to investment principles such as long-term focus, disciplined asset allocation, and periodic portfolio rebalancing will be more crucial than ever before.
From what I can tell, Vanguard is most worried about clients who have allowed the recently strong performance of US equitiwa to move their asset allocations out of whack. I've never seen Vanguard recommend overweighting international equities (which would require international to be more than 45% of total equities), but this board is FULL of people who are dramatically underweighting international equities with allocations of 25% or less.
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Re: Vanguard says international will beat US stocks in next decade

Post by Valuethinker »

jstatton wrote: Sun Dec 23, 2018 12:02 pm https://www.cnbc.com/2018/11/27/interna ... guard.html

Should one overweight their portfolio toward international?
Many would argue here (including John Bogle) that it's always been a better bet to back US stocks over "international" stocks.

(international because "our Snark is your Boojum" - -the US is an international market to some of us ;-)).

I happen to disagree but the historical evidence (for 1900 to 2016, and depending on sample period more recent periods as well) has been that the US has outperformed (except for Australia & South Africa). That might continue.

I would not start changing my target asset allocation on the basis of recent out or underperformance.
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Re: Vanguard says international will beat US stocks in next decade

Post by Valuethinker »

typical.investor wrote: Sun Dec 23, 2018 12:07 pm I would go to market weight at the most.

Expected returns might be higher, but it doesn’t mean it’s a certainty or is exact about the timing.
I don't think there's any case to go above market weight in non-US stocks for an American investor. I suspect the risk-return tradeoff could be quite adverse (depending upon whether or not you hedge currency, in particular).

If one worked in the tech industry or the US healthcare industry, one might argue for a tilt away from US stocks. However the stock specific risk is so high in that (it matters which company you work for, so much) that that's not likely to reduce your risk by that much - even if you work for Apple Google Facebook Amazon or one of the big health insurers. And you'd pick up a lot of general market risk.
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Re: Vanguard says international will beat US stocks in next decade

Post by Badger1754 »

The problem with analysis like this is that it doesn't quite define what on earth is an "international stock". I think - and this is my opinion only - that Vanguard is saying that with the current state of global affairs, the GDPs of countries other than the US are better placed to experience an economic upswing because they have fallen further... and international stocks are seen as a proxy for participating in the GDPs of other countries.

The problem with that is...
  1. Many "international" companies (Nestle, BP, Alibaba, just to name a few) are listed on US stock exchanges or have US ADRs and therefore are included in US indices like the S&P 500, which makes them part and parcel of portfolios containing "US stocks".
  2. Many "US" companies (GE, Microsoft, ExxonMobil) have extensive operations outside of the US. In some cases, US might represent a minority of their revenues, which makes them more exposed to "non-US" GDP than US GDP.
  3. The legal domicile of a company that might determine whether it is a "US" stock or an "international" stock is pretty much meaningless these days. Tax inversions, reverse mergers, etc. all paint a fairly slippery picture of whether a company is de facto vs. de jure US or international.
Bottom line - if the article is saying that the non-US GDP, after an extended period of chaos and low growth, is better positioned to rebound than US GDP, which has had a 10-year bull run, that's entirely possible. However, abstracting that to say that "international stocks" may outperform "US stocks" in the future doesn't necessary follow, because the intertwining of global trade ensures that both "US stocks" and "international stocks" have pretty hefty exposure to each others' markets.
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Re: Vanguard says international will beat US stocks in next decade

Post by HEDGEFUNDIE »

Badger1754 wrote: Sun Dec 23, 2018 12:37 pm The problem with analysis like this is that it doesn't quite define what on earth is an "international stock". I think - and this is my opinion only - that Vanguard is saying that with the current state of global affairs, the GDPs of countries other than the US are better placed to experience an economic upswing because they have fallen further... and international stocks are seen as a proxy for participating in the GDPs of other countries.

The problem with that is...
  1. Many "international" companies (Nestle, BP, Alibaba, just to name a few) are listed on US stock exchanges or have US ADRs and therefore are included in US indices like the S&P 500, which makes them part and parcel of portfolios containing "US stocks".
  2. Many "US" companies (GE, Microsoft, ExxonMobil) have extensive operations outside of the US. In some cases, US might represent a minority of their revenues, which makes them more exposed to "non-US" GDP than US GDP.
  3. The legal domicile of a company that might determine whether it is a "US" stock or an "international" stock is pretty much meaningless these days. Tax inversions, reverse mergers, etc. all paint a fairly slippery picture of whether a company is de facto vs. de jure US or international.
Bottom line - if the article is saying that the non-US GDP, after an extended period of chaos and low growth, is better positioned to rebound than US GDP, which has had a 10-year bull run, that's entirely possible. However, abstracting that to say that "international stocks" may outperform "US stocks" in the future doesn't necessary follow, because the intertwining of global trade ensures that both "US stocks" and "international stocks" have pretty hefty exposure to each others' markets.
You are straight up wrong on points #1 and #3 and #2 does not mean what you think it means.
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Re: Vanguard says international will beat US stocks in next decade

Post by staythecourse »

Here is your answer: It may or may not. If we knew international was going to outperform why would we hold ANY U.S. equities? The point of diversification is so you don't hold all your eggs in the same basket in case you are wrong.

That is the same reasoning why one should not hold all U.S. equities as there is no guarantees one HAS to do better.

"Diversification means never being happy as you hold too many of the losers and not enough of the winners". Quote from Mr. Gibson from "Asset Allocation".

Good luck.
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Re: Vanguard says international will beat US stocks in next decade

Post by vineviz »

HEDGEFUNDIE wrote: Sun Dec 23, 2018 12:44 pm
Badger1754 wrote: Sun Dec 23, 2018 12:37 pm The problem with analysis like this is that it doesn't quite define what on earth is an "international stock". I think - and this is my opinion only - that Vanguard is saying that with the current state of global affairs, the GDPs of countries other than the US are better placed to experience an economic upswing because they have fallen further... and international stocks are seen as a proxy for participating in the GDPs of other countries.

The problem with that is...
  1. Many "international" companies (Nestle, BP, Alibaba, just to name a few) are listed on US stock exchanges or have US ADRs and therefore are included in US indices like the S&P 500, which makes them part and parcel of portfolios containing "US stocks".
  2. Many "US" companies (GE, Microsoft, ExxonMobil) have extensive operations outside of the US. In some cases, US might represent a minority of their revenues, which makes them more exposed to "non-US" GDP than US GDP.
  3. The legal domicile of a company that might determine whether it is a "US" stock or an "international" stock is pretty much meaningless these days. Tax inversions, reverse mergers, etc. all paint a fairly slippery picture of whether a company is de facto vs. de jure US or international.
Bottom line - if the article is saying that the non-US GDP, after an extended period of chaos and low growth, is better positioned to rebound than US GDP, which has had a 10-year bull run, that's entirely possible. However, abstracting that to say that "international stocks" may outperform "US stocks" in the future doesn't necessary follow, because the intertwining of global trade ensures that both "US stocks" and "international stocks" have pretty hefty exposure to each others' markets.
You are straight up wrong on points #1 and #3 and #2 does not mean what you think it means.
Also, the implication that Vanguard, which manages two of the three largest international mutual funds, doesn't really know what qualifies as an ""international stock" might be charming if it weren't so absurd.
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Re: Vanguard says international will beat US stocks in next decade

Post by JoMoney »

Vanguard's "international" index funds follow an index, so it's not up to Vanguard to decide whether the stock is "international", it's up to the index provider, and different indexes go about that in different ways. The S&P U.S. indices have stocks that the FTSE indices consider "international"
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Re: Vanguard says international will beat US stocks in next decade

Post by Vulcan »

jstatton wrote: Sun Dec 23, 2018 12:02 pm https://www.cnbc.com/2018/11/27/interna ... guard.html

Should one overweight their portfolio toward international?
One should invest in VTWSX (Total Wold Stock Index) unless they are feeling lucky.
In less than a month that fund will have Admiral shares with 10bp ER.

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Re: Vanguard says international will beat US stocks in next decade

Post by willthrill81 »

I haven't read the Vanguard paper, but I strongly suspect that their prediction is based on valuations. It's true that international equities have lower valuations than U.S. equities, which leads to higher expected returns. But the key to remember with valuations is that
(1) they are not reliably mean reverting,
(2) high valuations do not mean that returns will be low, and
(3) low valuations do not mean that returns will be high.

The kind of valuation based tactical asset allocation suggested by the OP has had, to the best of my knowledge, inferior performance compared to a fixed AA.
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Re: Vanguard says international will beat US stocks in next decade

Post by JohnDindex »

Nestle is not in the sp 500.

I’m 50/50 so I’m slightly overweight international.....maybe the market will fix it for me.

Rick Ferri did a podcast with someone from standard and poors, it was quite interesting and they did discuss the issue of what is a “domestic” company.
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Re: Vanguard says international will beat US stocks in next decade

Post by Badger1754 »

HEDGEFUNDIE wrote: Sun Dec 23, 2018 12:44 pm You are straight up wrong on points #1 and #3 and #2 does not mean what you think it means.
vineviz wrote: Sun Dec 23, 2018 12:51 pm Also, the implication that Vanguard, which manages two of the three largest international mutual funds, doesn't really know what qualifies as an ""international stock" might be charming if it weren't so absurd.
No, I don't think I am. Vanguard doesn't "manage" an international mutual fund. Vanguard manages a fund that tracks an international index. Vanguard doesn't have any input into what goes into that index and therefore it's opinions over what qualifies as an "international stock" doesn't apply... as all it does is track an index.

If I were to take the Vanguard International Stock ETF (VXUS), for example, that tracks the FTSE All Cap Ex-US Index. The top constituents of that index include companies like Novartis, Roche, Taiwan Semiconductor, Samsung, HSBC, Toyota, which are domiciled outside of the US, but sure as heck have extensive operations in the US, revenues from US customers, and therefore exposure to US GDP. Roche, for example, generates ~50% of its revenues from the US despite being a "Swiss" company. Similar dynamics are probably at play for the others as well.

Finally, while we can have a reasoned debate based on facts, your respective tones ("straight up wrong", "doesnt not mean what you think it means", "charming if it weren't so absurd") are condescending.
Last edited by Badger1754 on Sun Dec 23, 2018 1:05 pm, edited 2 times in total.
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Re: Vanguard says international will beat US stocks in next decade

Post by UpperNwGuy »

Vulcan wrote: Sun Dec 23, 2018 12:55 pm
jstatton wrote: Sun Dec 23, 2018 12:02 pm https://www.cnbc.com/2018/11/27/interna ... guard.html

Should one overweight their portfolio toward international?
One should invest in VTWSX (Total Wold Stock Index) unless they are feeling lucky.
In less than a month that fund will have Admiral shares with 10bp ER.

Three Fund portfolio is so 2015
I will be interested to see whether the new Admiral Shares will cause a large inflow of investment dollars into Total World Stock Index. The absence of Admiral Shares has usually been one of the standard excuses for not investing in it.
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Re: Vanguard says international will beat US stocks in next decade

Post by willthrill81 »

Badger1754 wrote: Sun Dec 23, 2018 1:03 pm
HEDGEFUNDIE wrote: Sun Dec 23, 2018 12:44 pm You are straight up wrong on points #1 and #3 and #2 does not mean what you think it means.
vineviz wrote: Sun Dec 23, 2018 12:51 pm Also, the implication that Vanguard, which manages two of the three largest international mutual funds, doesn't really know what qualifies as an ""international stock" might be charming if it weren't so absurd.
No, I don't think I am. Vanguard doesn't "manage" an international mutual fund. Vanguard manages a fund that tracks an international index. Vanguard doesn't have any input into what goes into that index and therefore it's opinions over what qualifies as an "international stock" doesn't apply... as all it does is track an index.

If I were to take the Vanguard International Stock ETF (VXUS), for example, that tracks the FTSE All Cap Ex-US Index. The top constituents of that index include companies like Novartis, Roche, Taiwan Semiconductor, Samsung, HSBC, Toyota, which are domiciled outside of the US, but sure as heck have extensive operations in the US, revenues from US customers, and therefore exposure to US GDP. Roche, for example, generates ~50% of its revenues from the US despite being a "Swiss" company. Similar dynamics are probably at play for the others as well.
From an investor's standpoint, having operations in a country is very different from being domiciled within that country.
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Re: Vanguard says international will beat US stocks in next decade

Post by Badger1754 »

willthrill81 wrote: Sun Dec 23, 2018 1:05 pm From an investor's standpoint, having operations in a country is very different from being domiciled within that country.
Exactly, as an investor, I care about the underlying economic activity generated by the company (which determines its performance and value), not where it is legally domiciled (which -- among other factors -- determines its inclusion in a given index).
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Re: Vanguard expects international to beat US stocks in next decade

Post by nisiprius »

vineviz wrote: Sun Dec 23, 2018 12:20 pm...this board is FULL of people who are dramatically underweighting international equities with allocations of 25% or less...
Like me.

But since the subject of the thread is Vanguard's recommendations, it may be appropriate to review Vanguard's recommendations.

Considerations for investing in non-U.S. equities
Christopher B. Philips wrote:This paper weighs the short- and long-term impacts on a portfolio of currency fluctuations, correlations, cost, and expected risks and returns, and concludes that:
  • Non-U.S. equities should be considered for inclusion in a domestic portfolio.
  • Although there is no right answer for all investors, empirical and practical considerations suggest a reasonable starting allocation to non-U.S. stocks of 20%, with an upper limit based on global market capitalization.
  • The exact allocation to non-U.S. equities will depend on the investor’s view regarding the short- and long-term trade-offs.
This accords with your comment that Vanguard has never, as far as you or I know, recommended overweighting international stocks. It says they should be "considered for inclusion," and I think the vast majority of Bogleheads have not only considered them but chosen to include them (e.g. Taylor Larimore's suggestion in his book The Bogleheads' Guide to the Three-Fund Portfolio.)

People with 20%-of-equity-in-international are, in fact, following Vanguard's recommendations.
Last edited by nisiprius on Sun Dec 23, 2018 1:34 pm, edited 3 times in total.
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Re: Vanguard says international will beat US stocks in next decade

Post by willthrill81 »

Badger1754 wrote: Sun Dec 23, 2018 1:06 pm
willthrill81 wrote: Sun Dec 23, 2018 1:05 pm From an investor's standpoint, having operations in a country is very different from being domiciled within that country.
Exactly, as an investor, I care about the underlying economic activity generated by the company (which determines its performance and value), not where it is legally domiciled (which -- among other factors -- determines its inclusion in a given index).
How is that relevant to you if you do not own shares of the company?
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Re: Vanguard says international will beat US stocks in next decade

Post by Badger1754 »

JohnDindex wrote: Sun Dec 23, 2018 1:03 pm Nestle is not in the sp 500.
Ah, sorry, I didn't say the S&P 500. I said US indices like the S&P 500. In this case, I was thinking of Alibaba which is in the NYSE Composite.
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Re: Vanguard says international will beat US stocks in next decade

Post by HEDGEFUNDIE »

Badger1754 wrote: Sun Dec 23, 2018 1:03 pm
HEDGEFUNDIE wrote: Sun Dec 23, 2018 12:44 pm You are straight up wrong on points #1 and #3 and #2 does not mean what you think it means.
vineviz wrote: Sun Dec 23, 2018 12:51 pm Also, the implication that Vanguard, which manages two of the three largest international mutual funds, doesn't really know what qualifies as an ""international stock" might be charming if it weren't so absurd.
No, I don't think I am. Vanguard doesn't "manage" an international mutual fund. Vanguard manages a fund that tracks an international index. Vanguard doesn't have any input into what goes into that index and therefore it's opinions over what qualifies as an "international stock" doesn't apply... as all it does is track an index.

If I were to take the Vanguard International Stock ETF (VXUS), for example, that tracks the FTSE All Cap Ex-US Index. The top constituents of that index include companies like Novartis, Roche, Taiwan Semiconductor, Samsung, HSBC, Toyota, which are domiciled outside of the US, but sure as heck have extensive operations in the US, revenues from US customers, and therefore exposure to US GDP. Roche, for example, generates ~50% of its revenues from the US despite being a "Swiss" company. Similar dynamics are probably at play for the others as well.

Finally, while we can have a reasoned debate based on facts, your respective tones ("straight up wrong", "doesnt not mean what you think it means", "charming if it weren't so absurd") are condescending.
If you want to have a reasoned debate based on facts, get your facts straight before making your claims. Saying things like “US-traded stocks are in the US indexes” are simply wrong and could have been confirmed with a simple Google search.

No one is denying that multinational companies exist and have operations around the world. What you are neglecting to acknowledge is that country of origin still matters even for the most international of companies. Just look at how Huawei is being treated in the US, or Google/Facebook in China, or GM in Korea & Japan, etc. etc.

Just because a multinational is present in a country does not mean that it is winning in that country or that it is getting its fair share of that country’s GDP. Only investing in US companies because they have international revenue is not at all the same as investing in international companies.
Last edited by HEDGEFUNDIE on Sun Dec 23, 2018 2:03 pm, edited 2 times in total.
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Re: Vanguard says international will beat US stocks in next decade

Post by Badger1754 »

willthrill81 wrote: Sun Dec 23, 2018 1:09 pm
Badger1754 wrote: Sun Dec 23, 2018 1:06 pm
willthrill81 wrote: Sun Dec 23, 2018 1:05 pm From an investor's standpoint, having operations in a country is very different from being domiciled within that country.
Exactly, as an investor, I care about the underlying economic activity generated by the company (which determines its performance and value), not where it is legally domiciled (which -- among other factors -- determines its inclusion in a given index).
How is that relevant to you if you do not own shares of the company?
But I do. In my index holdings, I have Microsoft and ExxonMobil, which despite being "US" stocks have extensive operations outside of the US and therefore have valuations affected by non-US economic conditions.
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Re: Vanguard says international will beat US stocks in next decade

Post by Badger1754 »

HEDGEFUNDIE wrote: Sun Dec 23, 2018 1:17 pm If you want to have a reasoned debate based on facts, get your facts straight before making your claims. Saying things like “US-traded stocks are in the US indexes” are simply wrong and could have been confirmed with a simple Google search.
I really don't believe you are correct. Accenture (Swiss), Medtronic (Irish), and others are US-traded stock but with foreign domiciles that are included in US indices, like the CRSP US Total Market which VTI (which I own) tracks.
HEDGEFUNDIE wrote: Sun Dec 23, 2018 1:17 pm No one is denying that multinational companies exist and have operations around the world. What you are neglecting to acknowledge is that country of origin still matters even for the most international of companies. Just look at how Huawei is being treated in the US, or Google/Facebook in China, or GM in Korea, etc. etc. Just because a multinational is present in a country does not mean that it is winning in that country or that it is getting a “fair share” of that country’s GDP. Only investing in US companies because they have international revenue is not at all the some as investing in international companies.
That's a fair point. But I also think is that "country of origin" or "statutory headquarters" is becoming less meaningful especially where large multinationals have globally diversified revenue footprints. For example, does anyone really believe that Arcelor Mittal's "country of origin" is Luxembourg? Or if two large multinationals have undergone a merger that shifts their headquarters (an example in the distant past would be Royal Dutch Shell, more recent ones might include Anheuser-Busch-Inbev or South African Breweries-Miller or Roche-Genentech), how do you regard their "country of origin"?
Last edited by Badger1754 on Sun Dec 23, 2018 1:31 pm, edited 2 times in total.
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Re: Vanguard says international will beat US stocks in next decade

Post by nisiprius »

Part 1: Introduction, Appendix: Methodology
Brief notes: 1) In these Monte Carlo simulations, the return for a given month is varied by randomly choosing the actual historical return or the actual historic return for an adjacent month. 2) They show the final value from $100 monthly contributions made over the whole time period. 4) Green and red crosses mark actual historical values. 5) Green and red bars show the 10% percentile, median, and 90% percentile of the range of outcomes. 5) The actual data source is PortfolioVisualizer.com, Backtest Portfolio, Monthly Returns; this is used as calculation input; and no PV content or numeric values are directly reproduced.
The crosses and centerpoints are what they are. They are subject to all the issues and problems of comparing two portfolios over one specific period in time. They have exactly the same endpoint issues of all such comparisons. These charts do not help decide which portfolio is better than another, or how much better. Their purpose to compare the size of difference between portfolios to the general variability of the portfolio. They are based on Monte Carlo simulations of random walks around the historical data. The value of this approach has been questioned; see discussion

These are two 60/40 portfolios. They represent the lower and upper range of Vanguard's recommendations in Considerations for investing in non-U.S. equities

Baseline portfolio (green), 20% of stocks are international
VTSMX Vanguard Total Stock Mkt Idx Inv 48.00%
VGTSX Vanguard Total Intl Stock Index Inv 12.00%
VBMFX Vanguard Total Bond Market Index Inv 40.00%

Comparison portfolio (red), 50% of stocks are international
Ticker Name Allocation
VTSMX Vanguard Total Stock Mkt Idx Inv 30.00%
VGTSX Vanguard Total Intl Stock Index Inv 30.00%
VBMFX Vanguard Total Bond Market Index Inv 40.00%

Image

The stated range of years includes the "lost decade" of 2000-2009, over which US stocks had zero return while international stocks had not only a positive return but a small positive real return. Note that the VGTSX does include a meaningful allocation to emerging markets.

If you believe my Monte Carlo simulations then--as is so often the case--the difference in the two portfolios, either way, is small compared to the "simulated" range of possible scatter. Note, too, that the inclusion of international failed to reduce standard deviation, which is one aspect of risk.
Last edited by nisiprius on Sun Dec 23, 2018 1:35 pm, edited 3 times in total.
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Re: Vanguard says international will beat US stocks in next decade

Post by Vulcan »

Why I should own Ford and GM, but not Toyota and Honda?
Chase and BofA, but not UBS and HSBC?
Pfizer and Merck, but not Bayer and Novartis?
Boeing and GE, but not Siemens and Airbus?
Exxon and Chevron, but not Shell and BP?

Unless they know something others don't, and with Total World Stock Index fund available at a negligible price difference to a portfolio composed of a combination of US/Intl indices, most people really ought to think long and hard if they know something others don't that would justify betting against the markets by manually fiddling with US/Intl weights.
Last edited by Vulcan on Sun Dec 23, 2018 1:44 pm, edited 1 time in total.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Vanguard says international will beat US stocks in next decade

Post by nisiprius »

Vulcan wrote: Sun Dec 23, 2018 1:30 pm Why I should own Ford and GM, but not Toyota and Honda?
Chase and BofA, but not UBS and HSBC?
Pfizer and Merck, but not Bayer and Novartis?
Boeing and GE, but not Siemens and Airbus?
Exxon and Chevron, but not Shell and BP?

Unless they know something others don't, and with Total World Stock Index fund available at a negligible price difference to a portfolio composed of a combination of US/Intl indices, most people really ought to thing long and hard if they know something others don't that would justify betting against the markets by manually fiddling with US/Intl weights.
You should explicitly state how you personally handle currency risk in your assessment of weighting. The textbook rationale for cap-weighting assumes frictionless trading in a single unified market without currency risk. If we assume that from a financial and business standpoint, Pfizer, Inc. and Bayer AG are perfect clones except for currency, then to a German investor, Pfizer is riskier than Bayer, while to a US investor, Bayer is riskier than Pfizer. The risk is bidirectional, but it is an extra source of variation.

Since "low volatility" is all the rage, we could phrase this by saying that for a US investor, Pfizer is lower volatility, but for a German investor Bayer is lower volatility.

There is no reason to expect US investors to be compensated for taking risk in Bayer that other investors do not need to take, so it seems that it should have lower risk-adjusted return.

In other words, there is no reason to own Pfizer but not Bayer, but there might be a reason for a US investor to tilt toward Pfizer and a German investor to tilt toward Bayer.
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Re: Vanguard says international will beat US stocks in next decade

Post by HEDGEFUNDIE »

Badger1754 wrote: Sun Dec 23, 2018 1:26 pm
HEDGEFUNDIE wrote: Sun Dec 23, 2018 1:17 pm If you want to have a reasoned debate based on facts, get your facts straight before making your claims. Saying things like “US-traded stocks are in the US indexes” are simply wrong and could have been confirmed with a simple Google search.
I really don't believe you are correct. Accenture (Swiss), Medtronic (Irish), and others are US-traded stock but with foreign domiciles that are included in US indices, like the CRSP US Total Market which VTI (which I own) tracks.
Here is the claim you originally made:
Many "international" companies (Nestle, BP, Alibaba, just to name a few) are listed on US stock exchanges or have US ADRs and therefore are included in US indices like the S&P 500, which makes them part and parcel of portfolios containing "US stocks".
This claim is simply false. The S&P 500 has none of those stocks you named. You later said they are a part of the NYSE composite index, but that index does not claim to be a “US index” and none of the standard US index funds we use around here track the NYSE composite.

The fact that VTI contains those foreign-domiciled and US-traded companies says to me that the index builders are quite sophisticated in their inclusion rules. Let me ask you this, when Accenture goes to bid on a systems implementation project for a Chinese state-owned enterprise, do you think the Chinese decision-makers are considering them to be an Irish company or a US company?
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Re: Vanguard says international will beat US stocks in next decade

Post by HEDGEFUNDIE »

nisiprius wrote: Sun Dec 23, 2018 1:41 pm
Vulcan wrote: Sun Dec 23, 2018 1:30 pm Why I should own Ford and GM, but not Toyota and Honda?
Chase and BofA, but not UBS and HSBC?
Pfizer and Merck, but not Bayer and Novartis?
Boeing and GE, but not Siemens and Airbus?
Exxon and Chevron, but not Shell and BP?

Unless they know something others don't, and with Total World Stock Index fund available at a negligible price difference to a portfolio composed of a combination of US/Intl indices, most people really ought to thing long and hard if they know something others don't that would justify betting against the markets by manually fiddling with US/Intl weights.
You should explicitly state how you personally handle currency risk in your assessment of weighting.
Two words: currency hedging.
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Re: Vanguard says international will beat US stocks in next decade

Post by Badger1754 »

HEDGEFUNDIE wrote: Sun Dec 23, 2018 1:47 pm The fact that VTI contains those foreign-domiciled and US-traded companies says to me that the index builders are quite sophisticated in their inclusion rules. Let me ask you this, when Accenture goes to bid on a systems implementation project for a Chinese state-owned enterprise, do you think the Chinese decision-makers are considering them to be an Irish company or a US company?
Accenture dealing with the inner IT workings of Chinese government entities are a pretty clear cut answer. You seem quite volatile. So here's a less volatile question: if AB Inbev submits an RFP to cater the holiday parties at offices of the Mayor of Sao Paulo, the Prime Minister of Belgium, the Premier of Gauteng, and the Governor of Missouri... how might those respective offices consider the "national origin" of the vendor? :sharebeer
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Re: Vanguard says international will beat US stocks in next decade

Post by Vulcan »

nisiprius wrote: Sun Dec 23, 2018 1:41 pm
Vulcan wrote: Sun Dec 23, 2018 1:30 pm Why I should own Ford and GM, but not Toyota and Honda?
Chase and BofA, but not UBS and HSBC?
Pfizer and Merck, but not Bayer and Novartis?
Boeing and GE, but not Siemens and Airbus?
Exxon and Chevron, but not Shell and BP?

Unless they know something others don't, and with Total World Stock Index fund available at a negligible price difference to a portfolio composed of a combination of US/Intl indices, most people really ought to think long and hard if they know something others don't that would justify betting against the markets by manually fiddling with US/Intl weights.
You should explicitly state how you personally handle currency risk in your assessment of weighting.
Nisi, I am truly honored whenever my input merits a response from the one man Boglehead institution that you are :sharebeer

As is often the case with celebrity interactions, I remember our previous conversation on this topic, and you may not - but, believe it or not, you and I have already discussed this a bit a few month ago:)
viewtopic.php?t=256423&start=300#p4071748

I think the conclusion was that I do not find the classical definition of currency risk very useful to me personally, and what some see as extra currency risk, I see as free currency hedge in case USD goes the way my home country's currency did in the 90ies (see cool picture of approx. $300 USD at the link above)
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Vanguard says international will beat US stocks in next decade

Post by Vulcan »

HEDGEFUNDIE wrote: Sun Dec 23, 2018 1:49 pm
nisiprius wrote: Sun Dec 23, 2018 1:41 pm
Vulcan wrote: Sun Dec 23, 2018 1:30 pm Why I should own Ford and GM, but not Toyota and Honda?
Chase and BofA, but not UBS and HSBC?
Pfizer and Merck, but not Bayer and Novartis?
Boeing and GE, but not Siemens and Airbus?
Exxon and Chevron, but not Shell and BP?

Unless they know something others don't, and with Total World Stock Index fund available at a negligible price difference to a portfolio composed of a combination of US/Intl indices, most people really ought to think long and hard if they know something others don't that would justify betting against the markets by manually fiddling with US/Intl weights.
You should explicitly state how you personally handle currency risk in your assessment of weighting.
Two words: currency hedging.
Beat me to it! :D
:sharebeer
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: Vanguard says international will beat US stocks in next decade

Post by ThePrince »

Vulcan wrote: Sun Dec 23, 2018 12:55 pm
jstatton wrote: Sun Dec 23, 2018 12:02 pm https://www.cnbc.com/2018/11/27/interna ... guard.html

Should one overweight their portfolio toward international?
One should invest in VTWSX (Total Wold Stock Index) unless they are feeling lucky.
In less than a month that fund will have Admiral shares with 10bp ER.

Three Fund portfolio is so 2015
+1
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Re: Vanguard says international will beat US stocks in next decade

Post by Elysium »

willthrill81 wrote: Sun Dec 23, 2018 1:00 pm I haven't read the Vanguard paper, but I strongly suspect that their prediction is based on valuations. It's true that international equities have lower valuations than U.S. equities, which leads to higher expected returns. But the key to remember with valuations is that
(1) they are not reliably mean reverting,
(2) high valuations do not mean that returns will be low, and
(3) low valuations do not mean that returns will be high.

The kind of valuation based tactical asset allocation suggested by the OP has had, to the best of my knowledge, inferior performance compared to a fixed AA.
This.

I read the Vanguard paper sometime back, it is all about relative valuations and mean reversion. Nothing new here, as many others like GMO for instance has been doing their 7 year asset forecasts for years. They have been right mostly for a while, that may be just a co-incidence as these valuation based analysis and reversion to mean does not happen exactly when you think it will happen. It may happen next year, some other point in time, or may be never. You cannot rely on that to make successful tactical asset allocations. People get lucky sometimes and then confuse that with skill. Problem with that is you run out of luck sometimes and that will hurt you very badly. Better stick to an allocation that is reasonable for the unique situations for each of us.
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Re: Vanguard says international will beat US stocks in next decade

Post by staycalm »

Vanguard's Total Stock Market Fund and International tock Market Fund both track indexes. Since these indexes do not overlap, discussions about what is and what is not international are irrelevant. Holding both at market cap weights provides great diversity which I am told is my friend :D
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Re: Vanguard says international will beat US stocks in next decade

Post by Austintatious »

Recommendation for international stocks and bonds currently on the Vanguard website:

https://investor.vanguard.com/investing ... -investing
How much should you invest?

To get the full diversification benefits, we recommend that you consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.

For most people, investing internationally through mutual funds or ETFs is a better option.

Not only will you get the benefits of diversification, investing through funds also tends to be cheaper and easier, since you won't have to worry about the costs and timing considerations associated with trading on international exchanges or through American depositary receipts.
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Re: Vanguard says international will beat US stocks in next decade

Post by samsdad »

I've been trying to figure out how Vanguard (or anyone else) figures out the valuations of securities in countries where the local government actively manipulates their market in differing amounts year to year? Do they have some sort of proprietary corruption algorithm? Do they have phone calls with the local political committee chairs?
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Re: Vanguard says international will beat US stocks in next decade

Post by HEDGEFUNDIE »

samsdad wrote: Sun Dec 23, 2018 3:31 pm I've been trying to figure out how Vanguard (or anyone else) figures out the valuations of securities in countries where the local government actively manipulates their market in differing amounts year to year? Do they have some sort of proprietary corruption algorithm? Do they have phone calls with the local political committee chairs?
You mean like in the US where the Fed chairman sneezes and the markets freefall?
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Re: Vanguard says international will beat US stocks in next decade

Post by vineviz »

Badger1754 wrote: Sun Dec 23, 2018 1:03 pm No, I don't think I am. Vanguard doesn't "manage" an international mutual fund. Vanguard manages a fund that tracks an international index. Vanguard doesn't have any input into what goes into that index and therefore it's opinions over what qualifies as an "international stock" doesn't apply... as all it does is track an index.
If your goal is to make this line of argument seem less absurd, you're heading in wrong direction.

Never mind that saying that "all it does is track an index" is like saying "all Google does is run a website".

Never mind the fact that the portfolio managers and equity traders who manage Vanguard's index funds are buying and selling stocks in nearly fifty different stock markets every day, and are doing this at Vanguard's trading desks on three different continents.

Never mind the fact that Vanguard is probably the top holder in EVERY major publicly traded company in the world (more than BlackRock, Fidelity, T. Rowe Price, and Dimensional Fund Advisors combined).

No, it would be enough to point out the Vanguard actually DOES run seven actively-managed international equity funds, with over $57 billion in assets. Yeah, I think they know what an international stock is.
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Re: Vanguard says international will beat US stocks in next decade

Post by drk »

samsdad wrote: Sun Dec 23, 2018 3:31 pm I've been trying to figure out how Vanguard (or anyone else) figures out the valuations of securities in countries where the local government actively manipulates their market in differing amounts year to year?
One could look at the hubbub over the last couple of years with Wells Fargo (asset level frozen by the Fed), Amazon (bidding war among major cities for a new large outpost), or Air Lease Corp and Invesco (both large, undisclosed holdings of the Commerce Secretary) and conclude that a US-only portfolio does not inoculate yourself against government involvement, shady or otherwise.
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Re: Vanguard says international will beat US stocks in next decade

Post by lostdog »

Vulcan wrote: Sun Dec 23, 2018 1:30 pm Why I should own Ford and GM, but not Toyota and Honda?
Chase and BofA, but not UBS and HSBC?
Pfizer and Merck, but not Bayer and Novartis?
Boeing and GE, but not Siemens and Airbus?
Exxon and Chevron, but not Shell and BP?

Unless they know something others don't, and with Total World Stock Index fund available at a negligible price difference to a portfolio composed of a combination of US/Intl indices, most people really ought to think long and hard if they know something others don't that would justify betting against the markets by manually fiddling with US/Intl weights.

“May I say that I have not thoroughly enjoyed serving with humans? I find their illogic and foolish emotions a constant irritant.” - Star Trek, season 3, episode 7 (“Day of the Dove,” 1968)

Total world market cap weight is the only logical soultion. It takes human emotions out of the equation.

Live long and prosper.
Brokerage: VTI+VXUS || Retirement: VTWAX || Short-Term: Cash+BSV || 33x Expenses
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Re: Vanguard says international will beat US stocks in next decade

Post by Austintatious »

drk wrote: Sun Dec 23, 2018 4:07 pm
samsdad wrote: Sun Dec 23, 2018 3:31 pm I've been trying to figure out how Vanguard (or anyone else) figures out the valuations of securities in countries where the local government actively manipulates their market in differing amounts year to year?
One could look at the hubbub over the last couple of years with Wells Fargo (asset level frozen by the Fed), Amazon (bidding war among major cities for a new large outpost), or Air Lease Corp and Invesco (both large, undisclosed holdings of the Commerce Secretary) and conclude that a US-only portfolio does not inoculate yourself against government involvement, shady or otherwise.
drk, the legitimate instances you cite barely scratch the surface of the corruption that exists in the relationship between the U. S. government and big business. Dollar for dollar, no other country comes close to matching the level of corruption that occurs right here at home. Look no further than the level of corruption and criminality that caused the 2008 crash, crimes that were openly perpetrated by big business on a massive scale, crimes that were facilitated and condoned by the U.S. government, before, during and since that financial crisis. Anyone genuinely believing that kind of corruption isn't going on right here, right now, is ignoring the quite obvious. And all that has real implications for this discussion about allocation to international securities -to wit, excluding international stocks solely or primarily for fear of corruption is likely not a well thought out policy.
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Re: Vanguard says international will beat US stocks in next decade

Post by willthrill81 »

Badger1754 wrote: Sun Dec 23, 2018 1:17 pm
willthrill81 wrote: Sun Dec 23, 2018 1:09 pm
Badger1754 wrote: Sun Dec 23, 2018 1:06 pm
willthrill81 wrote: Sun Dec 23, 2018 1:05 pm From an investor's standpoint, having operations in a country is very different from being domiciled within that country.
Exactly, as an investor, I care about the underlying economic activity generated by the company (which determines its performance and value), not where it is legally domiciled (which -- among other factors -- determines its inclusion in a given index).
How is that relevant to you if you do not own shares of the company?
But I do. In my index holdings, I have Microsoft and ExxonMobil, which despite being "US" stocks have extensive operations outside of the US and therefore have valuations affected by non-US economic conditions.
But you don't own Samsung, Royal Dutch Shell, Toyota, Volkswagen, BP, etc. I'm not saying that you should, but let's not confuse a company doing business in a country as being equivalent to ownership of that company. They are entirely distinct.
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Re: Vanguard says international will beat US stocks in next decade

Post by oldzey »

Time will tell... :beer
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Re: Vanguard says international will beat US stocks in next decade

Post by Jim180 »

For about the past 5 years I've heard so-called "experts" say International will outperform the U.S. Maybe if we give it another 5 years it may eventually happen. Everyone is eventually right sometime. Meanwhile I will stick to U.S. equity investments.
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Re: Vanguard says international will beat US stocks in next decade

Post by willthrill81 »

oldzey wrote: Sun Dec 23, 2018 5:11 pm Time will tell... :beer
Indeed. To the extent that one believes in the EMH, the risk-adjusted returns of U.S. and international should be similar over the long-term, which is what should really be the focus for stock investors. If that is the case, then you're paying a higher expense ratio, losing some return due to taxes, and taking on currency risk, in order to increase your holdings from about 3,639 (VTSAX) to 8,110 (VTWSX) and to reduce your single country risk. Maybe it will be worth it, and maybe it won't. I don't know, and neither does anyone else. At the very best, we can only give a probabilistic answer.
“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: Vanguard says international will beat US stocks in next decade

Post by nisiprius »

HEDGEFUNDIE wrote: Sun Dec 23, 2018 1:49 pm
nisiprius wrote: Sun Dec 23, 2018 1:41 pm
Vulcan wrote: Sun Dec 23, 2018 1:30 pm Why I should own Ford and GM, but not Toyota and Honda?
Chase and BofA, but not UBS and HSBC?
Pfizer and Merck, but not Bayer and Novartis?
Boeing and GE, but not Siemens and Airbus?
Exxon and Chevron, but not Shell and BP?

Unless they know something others don't, and with Total World Stock Index fund available at a negligible price difference to a portfolio composed of a combination of US/Intl indices, most people really ought to thing long and hard if they know something others don't that would justify betting against the markets by manually fiddling with US/Intl weights.
You should explicitly state how you personally handle currency risk in your assessment of weighting.
Two words: currency hedging.
Vanguard's international funds aren't currency hedged.

So how? What specific funds do you suggest as a currency-hedged substitute for the Vanguard Total International Stock Index Fund, what would you estimate is the cost of currency hedging, and the drag on return as a result?

If currency hedging isn't cost-free, then the international end of the efficient frontier curve will be dragged downward, and the tangent point will shift toward US stocks.

It can't be a free lunch. Either investments you make that require currency conversion have extra volatility, or you must pay a third party to assume that risk for you, in which case you no longer have extra volatility but you do have lower return. Either way, assets denominated in a foreign currency are not as good as assets denominated in one's home currency.
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Re: Vanguard says international will beat US stocks in next decade

Post by HEDGEFUNDIE »

nisiprius wrote: Sun Dec 23, 2018 5:45 pm
HEDGEFUNDIE wrote: Sun Dec 23, 2018 1:49 pm
nisiprius wrote: Sun Dec 23, 2018 1:41 pm
Vulcan wrote: Sun Dec 23, 2018 1:30 pm Why I should own Ford and GM, but not Toyota and Honda?
Chase and BofA, but not UBS and HSBC?
Pfizer and Merck, but not Bayer and Novartis?
Boeing and GE, but not Siemens and Airbus?
Exxon and Chevron, but not Shell and BP?

Unless they know something others don't, and with Total World Stock Index fund available at a negligible price difference to a portfolio composed of a combination of US/Intl indices, most people really ought to thing long and hard if they know something others don't that would justify betting against the markets by manually fiddling with US/Intl weights.
You should explicitly state how you personally handle currency risk in your assessment of weighting.
Two words: currency hedging.
Vanguard's international funds aren't currency hedged.

So how? What specific funds do you suggest as a currency-hedged substitute for the Vanguard Total International Stock Index Fund, what would you estimate is the cost of currency hedging, and the drag on return as a result?

If currency hedging isn't cost-free, then the international end of the efficient frontier curve will be dragged downward, and the tangent point will shift toward US stocks.

It can't be a free lunch. Either investments you make that require currency conversion have extra volatility, or you must pay a third party to assume that risk for you, in which case you no longer have extra volatility but you do have lower return. Either way, assets denominated in a foreign currency are not as good as assets denominated in one's home currency.
Three examples:

EFA vs HEFA
https://www.portfoliovisualizer.com/fun ... F22%2F2018

DWM vs DDWM
https://www.portfoliovisualizer.com/fun ... F22%2F2018

DLS vs DDLS
https://www.portfoliovisualizer.com/fun ... F22%2F2018

The only Vanguard hedged stock fund I am aware of is Global Minimum Volatility. I attribute a decent amount of its low volatility to currency hedging.

I mean, theoretically I’m with you Nisi. But theory doesn’t put food on the table or $ in my account.
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Re: Vanguard says international will beat US stocks in next decade

Post by jhawktx »

Don't forget the expense ratios are higher for International vs Domestic.
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