Is Index Investing Just Betting on The U.S Economy?

[alex123711]

Since most past results seem to focus mostly on the U.S market/ index, which has been the best performing market over the long term, and most strategies seem to advocate continuing to hold majority U.S indexes, is this just betting on the U.S economy on continuing to be the best performing? As we know past results do not indicate future performance, what happens if the U.S market reverts to the mean and becomes an average or below average performer in the future, as some people such as Jim Rogers predict?

It was mentioned in another thread but if you had been an index investor but had your funds in another country such as Russia, U.K, India, Japan, France etc. Your results would not have been anywhere near as successful and in some cases unsusccessul. So does index investing only apply to the U.S and or top performing country is what I'm asking, and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

[bluquark]

Vanguard advocates holding world market cap weight. They offer the VTWAX fund if you want to hold a world market weight index in one fund.

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees. And *only* in Japan starting in 1990 would it have been an actively unsuccessful strategy (and of course not if you had diversified on the entire world), while still not failing quite as hard as Japanese active funds did.

Finally, note that indexing is not a bet on economic growth but on profit and debt returns. Corporations still produce profit even when the economy is not growing, and recent research has shown that the rate of return on capital is systematically above the rate of economic growth. That's why it's not necessary to have an economic miracle like we saw in the US in the 20th century for indexing to continue to do OK.

[alex123711]

Thanks for your reply,

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees.

Is merely beating most active funds considered to be successful? I think the returns would be more important, you could return 0% and outperform most active funds (theoretically) depending on the market and time frame, but most would not be happy with that return?

[bluquark]

Thanks for your reply,

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees.

Is merely beating most active funds considered to be successful? I think the returns would be more important, you could return 0% and outperform most active funds (theoretically) depending on the market and time frame, but most would not be happy with that return?

Indeed. In the postwar period, this has only happened in Japan, due to extended deflation. You are implicitly talking about catastrophic scenarios like hyperinflation, deflation, war, and wealth confiscation. That is a pretty complete list of things that has historically caused indexing strategies to fail in the long term, for any given country that research has examined. If you are merely worried about some gradual decline or stagnancy or series of recessions, that should not be enough to drop index real returns to zero.

[patrick]

Thanks for your reply,

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees.

Is merely beating most active funds considered to be successful? I think the returns would be more important, you could return 0% and outperform most active funds (theoretically) depending on the market and time frame, but most would not be happy with that return?

The active investors who got less than 0% would be even less happy.

[Sandtrap]

Since most past results seem to focus mostly on the U.S market/ index, which has been the best performing market over the long term, and most strategies seem to advocate continuing to hold majority U.S indexes, is this just betting on the U.S economy on continuing to be the best performing? As we know past results do not indicate future performance, what happens if the U.S market reverts to the mean and becomes an average or below average performer in the future, as some people such as Jim Rogers predict?

It was mentioned in another thread but if you had been an index investor but had your funds in another country such as Russia, U.K, India, Japan, France etc. Your results would not have been anywhere near as successful and in some cases unsusccessul. So does index investing only apply to the U.S and or top performing country is what I'm asking, and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

U.S. Market based index funds, IE: Vanguard Total Stock. already have an international component because the largest corporations are global. And, this is increasing. Look at the gradual increase in international allocation in Vanguard's various Target Date Funds.
Point is, even a basic Bogle 2 fund portfolio (Total Stock, Total Bond) is globally invested. Move to a 3 fund with Total International is the proportion to your taste.

[billthecat]

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees. And *only* in Japan starting in 1990 would it have been an actively unsuccessful strategy (and of course not if you had diversified on the entire world), while still not failing quite as hard as Japanese active funds did.

Why can’t Japan fix itself?

[garlandwhizzer]

billthecat wrote:

Why can’t Japan fix itself?

Very good question. The simple answer which may or may not be the entire story is that Japan's bubble in real estate and stocks reached levels in the late 1980s that have not been reached by any other bubble in centuries. The Nikkei Stock Index went from 2000 in 1970 to 40,000 in 1990, 20 times higher in 20 years. PE 1 and PE 10 reached levels never before seen and never seen since. It was like the Dutch Tulip Bubble of the 1600s, driven by a great deal of debt-driven speculation based on momentum alone in the absence of fundamental under pinnings. Similar massive gains in Japanese real estate occurred. At one time the real estate in Tokyo alone was valued higher than all the real estate in the state of California combined. When the bubble popped incredible amounts of wealth were destroyed. Japanese banks with overwhelming levels of non-performing loans after the bubble burst chose not to foreclose on borrowers and ruin them and not to declare bankruptcy but rather to keep the non-performing loans on the books. Subsequently they became zombie banks unable to lend money even for worthy enterprises. In the mid 1990s this dire situation drove the Japanese government to try belatedly to stimulate the economy with deficit spending. Governmental debt which was only 70% of GDP when the bubble burst steadily grew to its current level of 253% of GDP. When you owe two and a half times as much money as the entire economy produces in a year following incredible levels of wealth destruction, your economy doesn't grow. Japanese GDP growth has averaged close to zero annually since 1990 and the Nikkei is lower now than it was 29 years ago.

Finally all DMs in the world have the demographic challenges of an aging population but Japan's is by far the worst with an ever decreasing labor force which is exacerbated by cultural resistance to immigration of foreigners. Japan provides a cautionary tale about how incredibly excessive levels of valuation and debt can play out as well as severe demographic issues. What is most amazing is that in spite of all this, throughout this long period of decline since 1990 the Japanese have managed to maintain a very high standard of living and run a very organized society. Experts have been calling for its collapse for decades and at least on the surface it hasn't happened yet. One suspects that at some point it will.

Garland Whizzer

[oldzey]

It was mentioned in another thread but if you had been an index investor but had your funds in another country such as Russia, U.K, India, Japan, France etc. Your results would not have been anywhere near as successful and in some cases unsusccessul. So does index investing only apply to the U.S and or top performing country is what I'm asking...

No.

...and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

Nobody can predict the future. If you solely invest in U.S. markets, you are assuming (speculating) that the U.S. markets will do better than ex-U.S. markets. This may or may not work out well - only time will tell.

[bluquark]

billthecat wrote:

Why can’t Japan fix itself?

Subsequently they became zombie banks unable to lend money even for worthy enterprises. In the mid 1990s this dire situation drove the Japanese government to try belatedly to stimulate the economy with deficit spending. Governmental debt which was only 70% of GDP when the bubble burst steadily grew to its current level of 253% of GDP. When you owe two and a half times as much money as the entire economy produces in a year following incredible levels of wealth destruction, your economy doesn't grow. Japanese GDP growth has averaged close to zero annually since 1990 and the Nikkei is lower now than it was 29 years ago.

I’ve heard an alternate story that Japan was held back by deficit hawks from stimulating the economy *enough*. This argument goes that if they had gone full-on Keynesian, they could’ve actually kickstarted the economy and the debt-to-GDP ratio might not even be worse than it is today because of the GDP growth. This arguments looks stronger lately in light of the fact that the US stimulated its economy harder after its 2008 housing bubble and bounced back much faster (while European countries favored austerity and didn’t).

[abracadabra11]

Since most past results seem to focus mostly on the U.S market/ index, which has been the best performing market over the long term, and most strategies seem to advocate continuing to hold majority U.S indexes, is this just betting on the U.S economy on continuing to be the best performing? As we know past results do not indicate future performance, what happens if the U.S market reverts to the mean and becomes an average or below average performer in the future, as some people such as Jim Rogers predict?

It was mentioned in another thread but if you had been an index investor but had your funds in another country such as Russia, U.K, India, Japan, France etc. Your results would not have been anywhere near as successful and in some cases unsusccessul. So does index investing only apply to the U.S and or top performing country is what I'm asking, and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

I just want to question one of the assumptions in your post (highlighted in your text above). The assumption that the US stock market has been the best performing over the long-term appears to be false according to this: https://www.ofwealth.com/wp-content/upl ... tswiss.jpg. Sweden has apparently outperformed all other markets since 1964 and Austrlia and South Africa outperformed all other markets when you expand the time period until 1900. Data is current as of 2013 according to the Credit Suisse chart.

[Park]

billthecat wrote:

Why can’t Japan fix itself?

Subsequently they became zombie banks unable to lend money even for worthy enterprises. In the mid 1990s this dire situation drove the Japanese government to try belatedly to stimulate the economy with deficit spending. Governmental debt which was only 70% of GDP when the bubble burst steadily grew to its current level of 253% of GDP. When you owe two and a half times as much money as the entire economy produces in a year following incredible levels of wealth destruction, your economy doesn't grow. Japanese GDP growth has averaged close to zero annually since 1990 and the Nikkei is lower now than it was 29 years ago.

I’ve heard an alternate story that Japan was held back by deficit hawks from stimulating the economy *enough*. This argument goes that if they had gone full-on Keynesian, they could’ve actually kickstarted the economy and the debt-to-GDP ratio might not even be worse than it is today because of the GDP growth. This arguments looks stronger lately in light of the fact that the US stimulated its economy harder after its 2008 housing bubble and bounced back much faster (while European countries favored austerity and didn’t).

Japan is an excellent example of how devastating a bubble can be. Before making the following statement, my opinion is that when it comes to stocks, a market cap weighting index strategy should be the default option for the vast majority of individual investors. Think long and hard before deviating from that strategy.

However, a global market cap weighting index strategy would have meant that nearly 45% of your stock allocation would have been in Japan at the peak of the bubble. At that time, the PE10 of the Japanese stock market was around 94.

That's what has made me think long and hard about market cap indexing.

[bluquark]

I'm too young to know if I would've recognized the 1989 Japan or 1999 dotcom as a bubble at the time. The thing is that there were believable positive (and even true in some sense) narratives about what was going on: Japan rising, the Internet poised to restructure the economy.

I do know that I did not fully recognize the housing bubble in 2007. I heard a lot of bubble talk but it sounded like the usual bunch of permabears who probably have some kind of point but like, they always do and the market mostly goes up anyway. And even though the bubble was in one country, the impact hit worldwide so it's not like avoiding world market cap would've helped.

[Ferdinand2014]

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees. And *only* in Japan starting in 1990 would it have been an actively unsuccessful strategy (and of course not if you had diversified on the entire world), while still not failing quite as hard as Japanese active funds did.

Why can’t Japan fix itself?

demographics. low birth rate. no immigration. aging population.

[DB2]

billthecat wrote:

Why can’t Japan fix itself?

Very good question. The simple answer which may or may not be the entire story is that Japan's bubble in real estate and stocks reached levels in the late 1980s that have not been reached by any other bubble in centuries. The Nikkei Stock Index went from 2000 in 1970 to 40,000 in 1990, 20 times higher in 20 years. PE 1 and PE 10 reached levels never before seen and never seen since. It was like the Dutch Tulip Bubble of the 1600s, driven by a great deal of debt-driven speculation based on momentum alone in the absence of fundamental under pinnings. Similar massive gains in Japanese real estate occurred. At one time the real estate in Tokyo alone was valued higher than all the real estate in the state of California combined. When the bubble popped incredible amounts of wealth were destroyed. Japanese banks with overwhelming levels of non-performing loans after the bubble burst chose not to foreclose on borrowers and ruin them and not to declare bankruptcy but rather to keep the non-performing loans on the books. Subsequently they became zombie banks unable to lend money even for worthy enterprises. In the mid 1990s this dire situation drove the Japanese government to try belatedly to stimulate the economy with deficit spending. Governmental debt which was only 70% of GDP when the bubble burst steadily grew to its current level of 253% of GDP. When you owe two and a half times as much money as the entire economy produces in a year following incredible levels of wealth destruction, your economy doesn't grow. Japanese GDP growth has averaged close to zero annually since 1990 and the Nikkei is lower now than it was 29 years ago.

Finally all DMs in the world have the demographic challenges of an aging population but Japan's is by far the worst with an ever decreasing labor force which is exacerbated by cultural resistance to immigration of foreigners. Japan provides a cautionary tale about how incredibly excessive levels of valuation and debt can play out as well as severe demographic issues. What is most amazing is that in spite of all this, throughout this long period of decline since 1990 the Japanese have managed to maintain a very high standard of living and run a very organized society. Experts have been calling for its collapse for decades and at least on the surface it hasn't happened yet. One suspects that at some point it will.

Garland Whizzer

Great summary. I recall back in the 80s how Japan was supposedly going to overtake the U.S. and become the world's #1 economy; it was considered by many as a certainty. Still shaking my head at that Nikkei Stock index lost.

[DB2]

I'm too young to know if I would've recognized the 1989 Japan or 1999 dotcom as a bubble at the time. The thing is that there were believable positive (and even true in some sense) narratives about what was going on: Japan rising, the Internet poised to restructure the economy.

I do know that I did not fully recognize the housing bubble in 2007. I heard a lot of bubble talk but it sounded like the usual bunch of permabears who probably have some kind of point but like, they always do and the market mostly goes up anyway. And even though the bubble was in one country, the impact hit worldwide so it's not like avoiding world market cap would've helped.

I'm soon to be 47 and just wish I was more educated and in-tune with these kind of matters back then (which has only happened over the last year for me as I was in my own personal economic knowledge bubble lol). I would have identified a lot of those things and would have certainly NOT bought my current home in 2004 as I did (although I have been very happy here). Live and learn...the sooner the better.

[DB2]

Japan is an excellent example of how devastating a bubble can be. Before making the following statement, my opinion is that when it comes to stocks, a market cap weighting index strategy should be the default option for the vast majority of individual investors. Think long and hard before deviating from that strategy.

However, a global market cap weighting index strategy would have meant that nearly 45% of your stock allocation would have been in Japan at the peak of the bubble. At that time, the PE10 of the Japanese stock market was around 94.

That's what has made me think long and hard about market cap indexing.

I was just thinking the same thing!

[garlandwhizzer]

bluquark wrote:

I’ve heard an alternate story that Japan was held back by deficit hawks from stimulating the economy *enough*. This argument goes that if they had gone full-on Keynesian, they could’ve actually kickstarted the economy and the debt-to-GDP ratio might not even be worse than it is today because of the GDP growth. This arguments looks stronger lately in light of the fact that the US stimulated its economy harder after its 2008 housing bubble and bounced back much faster (while European countries favored austerity and didn’t).

This is true early along after the collapse in 1990. For years the government took no serious steps to stem the tide. By the time they began to take extraordinary measures to stimulate the economy which as about 4 years later, many argue that it was too late to help ignite the economy. We don't know for sure if massive early intervention would have worked but it might have helped. Early aggressive monetary stimulus by the FED likely helped US in the Great Recession, preventing us from going into another Great Depression which at the time looked like a real possibility. We aren't entirely out of the woods yet. Now 10 years after the recovery, the US has not returned to economic growth levels that we routinely enjoyed for decades prior to 2000. Bonds are still hovering at extremely low interest rates. It required massive levels of new debt (1 trillion deficit in 2018) to spur us into modest growth levels that in past decades we achieved easily without any significant deficit at all.

The other point is that the Japanese bubble was much, much bigger than any bubble in the US ever. The Nikkei went from 90 in 1950 to 37,000 in 1990, a 41,100% gain over 40 years. No wonder many thought that Japan was going to overtake the US as the major world economic power. The Japanese owned most of this stock and they rode the happy train and got very rich for 4 decades until rather quickly the bubble burst. It turned into a nightmare from which they haven't fully recovered yet. The major risk they face now is deflation and they're pulling out all the monetary policy tools to try to beat it without much in the way of results so far. Japan would be very vulnerable should a trade war happen.

Garland Whizzer

[fennewaldaj]

billthecat wrote:

Why can’t Japan fix itself?

When you owe two and a half times as much money as the entire economy produces in a year following incredible levels of wealth destruction, your economy doesn't grow. Japanese GDP growth has averaged close to zero annually since 1990 and the Nikkei is lower now than it was 29 years ago.

Finally all DMs in the world have the demographic challenges of an aging population but Japan's is by far the worst with an ever decreasing labor force which is exacerbated by cultural resistance to immigration of foreigners. Japan provides a cautionary tale about how incredibly excessive levels of valuation and debt can play out as well as severe demographic issues. What is most amazing is that in spite of all this, throughout this long period of decline since 1990 the Japanese have managed to maintain a very high standard of living and run a very organized society. Experts have been calling for its collapse for decades and at least on the surface it hasn't happened yet. One suspects that at some point it will.

Garland Whizzer

japan's GDP per capita growth doesn't look awful. It looks like it was about 0.75% from 1991 to 2017 (US GDP per capita growth was about 1.6% over same period). Certainly not what we have become accustomed to but a pretty long way from zero (and actually very high compared to pre industrial revolution history). Seems not terrible given the combinations of demographic issues and the bubble issues.

https://fred.stlouisfed.org/series/NYGDPPCAPKDJPN

[Vulcan]

Japan is an excellent example of how devastating a bubble can be. Before making the following statement, my opinion is that when it comes to stocks, a market cap weighting index strategy should be the default option for the vast majority of individual investors. Think long and hard before deviating from that strategy.

However, a global market cap weighting index strategy would have meant that nearly 45% of your stock allocation would have been in Japan at the peak of the bubble. At that time, the PE10 of the Japanese stock market was around 94.

That's what has made me think long and hard about market cap indexing.

Beats having 100% of your stock allocation in Japan.

[MossySF]

No we aren't betting just on the U.S. Economy.

We're also betting on the fact that in capitalism, money flows to the capital owners ( see Thomas Piketty's Capital in the Twenty-First Century ) .

So it doesn't matter if there's no growth or even negative growth ... it only matters that your proportion of the pie is growing faster than your peers.

[fennewaldaj]

That's what has made me think long and hard about market cap indexing.

If one is specifically worried about avoiding bubbles there are passive and semi passive funds that can be purchased. The RAFI fundamental indexes would do a great job of avoiding bubbles.

https://www.schwabfunds.com/public/csim ... ymbol=FNDF

https://www.schwabfunds.com/public/csim ... ymbol=FNDE

https://www.schwabfunds.com/public/csim ... ymbol=FNDC

Another option is a series I recently discovered by Eaton Vance. Essentially they put countries in size tiers and equal weight within them (and then the security selection in each country is largely passive).

https://funds.eatonvance.com/parametric ... -eiemx.php

https://funds.eatonvance.com/Parametric ... -EIISX.php

[Hyperborea]

Japan is an excellent example of how devastating a bubble can be. Before making the following statement, my opinion is that when it comes to stocks, a market cap weighting index strategy should be the default option for the vast majority of individual investors. Think long and hard before deviating from that strategy.

However, a global market cap weighting index strategy would have meant that nearly 45% of your stock allocation would have been in Japan at the peak of the bubble. At that time, the PE10 of the Japanese stock market was around 94.

That's what has made me think long and hard about market cap indexing.

Beats having 100% of your stock allocation in Japan.

Isn't 100% home market bias the Boglehead way?

[Valuethinker]

I'm too young to know if I would've recognized the 1989 Japan or 1999 dotcom as a bubble at the time. The thing is that there were believable positive (and even true in some sense) narratives about what was going on: Japan rising, the Internet poised to restructure the economy.

I do know that I did not fully recognize the housing bubble in 2007. I heard a lot of bubble talk but it sounded like the usual bunch of permabears who probably have some kind of point but like, they always do and the market mostly goes up anyway. And even though the bubble was in one country, the impact hit worldwide so it's not like avoiding world market cap would've helped.

I'm soon to be 47 and just wish I was more educated and in-tune with these kind of matters back then (which has only happened over the last year for me as I was in my own personal economic knowledge bubble lol). I would have identified a lot of those things and would have certainly NOT bought my current home in 2004 as I did (although I have been very happy here). Live and learn...the sooner the better.

1. homes are for living in. If you have been happy there, you have won the game of housing

2. prices are about timing. I am not sure if US homes, peaking in December 2006, dropping and now recovering in most markets, are still below 2004 values?

So in other words what you are regretting is imperfect timing - you could have bought in 2009 maybe, rather than 2004.

On the other hand, you could have sat there in 2009 thinking "they will go lower, all is chaos" and not bought a house then. You might have waited until prices were on the rebound in 2011-12 (I forget when Calculated Risk blog called the turn; he called the top almost perfectly, and he called the bottom almost perfectly).

You never get the timing exactly right on housing. The cycles are not that predictable. We all *know* now that the US market was clearly overvalued in 2006 and that a bear market was coming. But, at the time, this was not so obvious - there had been naysayers for years, the US econoy was strong, etc. And the real slump did not start for another 12-18 months.

Knowledge of economics and study of markets does not make you a better market timer. The professionals don't beat the index funds. That's why most of us here recommend a stock/ bond mix, with regular rebalancing. Forcing me to buy when stock markets fall, and to sell when stock markets rise. You cannot really do that with your own home..

In your shoes I would be relaxed that I bought in 2004. As long as my house is a good place to live, I am avoiding paying rent and enjoying living there.

[Valuethinker]

Japan is an excellent example of how devastating a bubble can be. Before making the following statement, my opinion is that when it comes to stocks, a market cap weighting index strategy should be the default option for the vast majority of individual investors. Think long and hard before deviating from that strategy.

However, a global market cap weighting index strategy would have meant that nearly 45% of your stock allocation would have been in Japan at the peak of the bubble. At that time, the PE10 of the Japanese stock market was around 94.

That's what has made me think long and hard about market cap indexing.

Beats having 100% of your stock allocation in Japan.

Isn't 100% home market bias the Boglehead way?

Opinions vary, hugely.

Suffice it to say for a BHer whose customary residence is outside the USA & its dependencies, that home country bias is a bad thing, and could be a seriously bad thing. The Canadian index is roughly 40% financials (the Big 5 banks + a couple of insurers) and 40% natural resource stocks (chiefly oil & gas). Australia is similar. A home country bias towards those indices is very undiversified.

For a BHer who is resident in the USA the risk is smaller:

- the US is c 55% of the world index
- the US stock index is overweight technology and healthcare, and notably underweight in basic materials, but is generally broadly diversified. An investor who does not own the famous FAANGs tech stocks is not owning the world's largest companies

Empirically the minimum volatility portfolio has been 20-30% foreign stocks, but their presence has also lowered returns. It's also true (see Nisiprius's graphs) that over the long run it does not seem to have made much difference. Periods of outperformance (of the US market) are followed by underperformance.

All quotations from various authorities re foreign investing should be taken with a grain of salt. They seem just strange to those of us who live in other home markets.

[Valuethinker]

The other point is that the Japanese bubble was much, much bigger than any bubble in the US ever. The Nikkei went from 90 in 1950 to 37,000 in 1990, a 41,100% gain over 40 years. No wonder many thought that Japan was going to overtake the US as the major world economic power. The Japanese owned most of this stock and they rode the happy train and got very rich for 4 decades until rather quickly the bubble burst. It turned into a nightmare from which they haven't fully recovered yet. The major risk they face now is deflation and they're pulling out all the monetary policy tools to try to beat it without much in the way of results so far. Japan would be very vulnerable should a trade war happen.

Garland Whizzer

All good points.

The interesting one though is that since 1990:

- Japanese real GDP per capita has grown, even though nominal GDP has stagnated - price deflation does have its advantages

- the experiment with radical monetary policy is interesting, but the problem I suspect is that the Bank of Japan has too good inflation-fighting credentials. Expectations of inflation don't move up, because the assumption is the BofJ will crush any significant new inflation

What we are learning is that, actually, Japan has done amazingly well despite apparent stagnation. This is not Italy (GDP is the same, roughly, as it was when they entered the Eurozone in 2000, I believe).

It's been fashionable to sneer at Japan but in fact they do have successes in the last 30 years to point to, and we have not proved to be any better at dealing with economic stagnation (I realize the US looks a lot better than UK + Europe in this regard).

[Sinsji]

Interesting topic. Sometimes I forget why index investing is such a great idea again, besides the diversification and low cost...

In general an important assumption is the continued growth of productivity (without borrowing too much), right?
Current companies tend to be more productive, than for example their peers 20 years ago. Despite inflation, debts, bubbles, quantitaive easing, dictators, wars, famine, tax laws and trade conflicts...

Different chickens in the basket with a bit more eggs?

[SovereignInvestor]

Implicitly you are betting on the US economy since earnings drive stock valuation and earnings track GDP in long run. But nearly half of US earnings in SPX are from rest of world so it's a bit of global bet too.

As for Japan, yes 1990 investors did poorly, but they deserved to....Forward PE was around 60. If the S&P had that high of a PE in 1999 it would have been at around 4000, so even now US investors would have losses since 1999.

Worse it was known in 1990 that working age population would decline after 1990s in Japan based on birth death stats so the coming deflation and lack of growth could have been foresaw.

In the US, the working age population is projected to grow around 0.5% annually for next few decades, and forward PE is min teens. Just want to put context in Japan mention because that was combination of most extreme over valuation couples with poorest prospective fundamentals in the 20th century perhaps.

[garlandwhizzer]

fennewaldaj wrote:

japan's GDP per capita growth doesn't look awful. It looks like it was about 0.75% from 1991 to 2017 (US GDP per capita growth was about 1.6% over same period). Certainly not what we have become accustomed to but a pretty long way from zero (and actually very high compared to pre industrial revolution history). Seems not terrible given the combinations of demographic issues and the bubble issues.

I agree that Japan has done extremely well relative to their challenges, far better than many who've been calling for their doom for a long time. The comparison selected above, GDP per capita, however, distorts total GDP growth over the period between the US and Japan. Japan's population grew from 105 million in 1970 to 128 million in 2017, a gain of only 23 million or 22%. The US population grew from 205 million in 1970 to 329 million in 2017, a gain of 124 million or 60%. So with more than double the GDP growth rate per capita to start out with and over 5 times the population growth over the 47 year period, the difference in total GDP between the US and Japan becomes very significant. There are overwhelming challenges in growing GDP long term following the greatest stock collapse of the century and with very little population growth for the next 47 years. It is amazing how well they have done in spite of it.

Garland Whizzer

[nedsaid]

billthecat wrote:

Why can’t Japan fix itself?

Very good question. The simple answer which may or may not be the entire story is that Japan's bubble in real estate and stocks reached levels in the late 1980s that have not been reached by any other bubble in centuries. The Nikkei Stock Index went from 2000 in 1970 to 40,000 in 1990, 20 times higher in 20 years. PE 1 and PE 10 reached levels never before seen and never seen since. It was like the Dutch Tulip Bubble of the 1600s, driven by a great deal of debt-driven speculation based on momentum alone in the absence of fundamental under pinnings. Similar massive gains in Japanese real estate occurred. At one time the real estate in Tokyo alone was valued higher than all the real estate in the state of California combined. When the bubble popped incredible amounts of wealth were destroyed. Japanese banks with overwhelming levels of non-performing loans after the bubble burst chose not to foreclose on borrowers and ruin them and not to declare bankruptcy but rather to keep the non-performing loans on the books. Subsequently they became zombie banks unable to lend money even for worthy enterprises. In the mid 1990s this dire situation drove the Japanese government to try belatedly to stimulate the economy with deficit spending. Governmental debt which was only 70% of GDP when the bubble burst steadily grew to its current level of 253% of GDP. When you owe two and a half times as much money as the entire economy produces in a year following incredible levels of wealth destruction, your economy doesn't grow. Japanese GDP growth has averaged close to zero annually since 1990 and the Nikkei is lower now than it was 29 years ago.

Finally all DMs in the world have the demographic challenges of an aging population but Japan's is by far the worst with an ever decreasing labor force which is exacerbated by cultural resistance to immigration of foreigners. Japan provides a cautionary tale about how incredibly excessive levels of valuation and debt can play out as well as severe demographic issues. What is most amazing is that in spite of all this, throughout this long period of decline since 1990 the Japanese have managed to maintain a very high standard of living and run a very organized society. Experts have been calling for its collapse for decades and at least on the surface it hasn't happened yet. One suspects that at some point it will.

Garland Whizzer

This is an excellent analysis of what happened in Japan: a massive asset bubble, massive wealth destruction when the bubble burst, high levels of government debt compared to GDP, and poor demographics.

I have written about this before, not sure whether gov't debt to GDP ratio has anything to do with the ability of the economy to grow or not. A lot of economists, including Larry Swedroe, think so. I think not. Japan has maintained a strong currency through all of this because Japan is just so darned productive and also has enjoyed massive trade surpluses. My understanding is that the Japanese Central Bank has bought a lot of the Government Debt which effectively retires it, that is if they keep buying new debt as the old debt matures. If Japan had trade deficits rather than surpluses, my best guess is that all that debt would fuel inflation.

My other concern is that debt service gets to be too high a percentage of a government's budget. Three ways to get out of it are for your Central Bank to buy up some of the debt, or to inflate your way out of the debt, or to grow your way out of it through economic growth. The United States took on a lot of debt to fight WWII and we both inflated our way and grew our way out of the problem. Interest rates were also held artificially low below inflation. The favorable demographics from the Baby Boom helped a lot here. I heard a couple of stories that the War Bonds over time lost about 1/2 of their purchasing power.

If you believe in current accounts, then foreign account + government account + private sector account must equal zero. Thus if Japan has large foreign surpluses and high savings rate, that would offset the high gov't deficits. My understanding is that Japan's savings rate has fallen. So there is an equilibrium at work. The problem of too much government debt is inflation, that is if your debts are in your own currency. Again, Japan benefits from high productivity and trade surpluses.

But still, I am not in the camp that deficits don't matter. You run the risk of fueling inflation and debasing the currency. As they say, inflation is the hidden tax.

I think the bigger story with Japan is poor demographics. Hard to grow productivity faster than the shrinking of the workforce. Having kids is a big part of fueling economic growth. I regard Japan's high debt to GDP ratio as a symptom of falling birthrates. A rising population and household formation drive an awful lot of economic activity. There is thought that Japanese work so hard that they are too tired to, well, you know, form families.

[lostdog]

Japan is an excellent example of how devastating a bubble can be. Before making the following statement, my opinion is that when it comes to stocks, a market cap weighting index strategy should be the default option for the vast majority of individual investors. Think long and hard before deviating from that strategy.

However, a global market cap weighting index strategy would have meant that nearly 45% of your stock allocation would have been in Japan at the peak of the bubble. At that time, the PE10 of the Japanese stock market was around 94.

That's what has made me think long and hard about market cap indexing.

Beats having 100% of your stock allocation in Japan.

Isn't 100% home market bias the Boglehead way?

Mostly, yes. As times goes on it will be less.

[fennewaldaj]

fennewaldaj wrote:

japan's GDP per capita growth doesn't look awful. It looks like it was about 0.75% from 1991 to 2017 (US GDP per capita growth was about 1.6% over same period). Certainly not what we have become accustomed to but a pretty long way from zero (and actually very high compared to pre industrial revolution history). Seems not terrible given the combinations of demographic issues and the bubble issues.

I agree that Japan has done extremely well relative to their challenges, far better than many who've been calling for their doom for a long time. The comparison selected above, GDP per capita, however, distorts total GDP growth over the period between the US and Japan. Japan's population grew from 105 million in 1970 to 128 million in 2017, a gain of only 23 million or 22%. The US population grew from 205 million in 1970 to 329 million in 2017, a gain of 124 million or 60%. So with more than double the GDP growth rate per capita to start out with and over 5 times the population growth over the 47 year period, the difference in total GDP between the US and Japan becomes very significant. There are overwhelming challenges in growing GDP long term following the greatest stock collapse of the century and with very little population growth for the next 47 years. It is amazing how well they have done in spite of it.

Garland Whizzer

Yeah I suppose total GDP growth makes the most sense to look at for stock market growth. GDP per capita growth (plus GINI) gives you some idea of what its like to live there for an average person.

[Valuethinker]

I think the bigger story with Japan is poor demographics. Hard to grow productivity faster than the shrinking of the workforce. Having kids is a big part of fueling economic growth. I regard Japan's high debt to GDP ratio as a symptom of falling birthrates. A rising population and household formation drive an awful lot of economic activity. There is thought that Japanese work so hard that they are too tired to, well, you know, form families.

However Japan had a much higher birth rate in the 1950s when, if anything, they worked even harder.

There's a few issues here:

- Japanese homes are small (and generally tidy) and that makes it harder to have the space for kids - in-law parents also often live with the family - as with Italy & Spain, the wife is often charged with caring for elderly parents & in-laws, as well as children

- Japanese women take a disproportionate share of burden of child rearing, partly because their husbands are at work for such long hours, holiday allowances of 2 weeks a year are often not taken, etc.

- Japanese women face enormous discrimination in the workplace, I think workplace childcare arrangements are rare or unknown, having a child is going to kill your career - you are expected to stay at home

The consistent story of very low birth rate countries (Italy, Spain, Japan + Germany) is that having children is a significant economic cost in terms of lost income and time, and it falls disproportionately on women. Thus, career minded women choose not to have children.

The other story is low immigration - immigrants in the first generation tend to have more kids than the natives - because their standard of living is higher than it would have been if they had not immigrated from their home country (albeit below that of native born people in the country, on average). That effect fades rapidly and seldom lasts beyond the second generation (native born, then) if at all.

The exceptions are:

- Scandinavia in particular, where the burden of domestic work & child rearing is shared much more evenly. Danish men take time off work to attend their child's first week at school. Norwegian men take the baby in the pram to the pub. Working long hours is relatively rare.

- France which has some of those attributes and extensive government subsidies to daycare etc. - they really do subsidise having children in France

- Generally countries where there are more religious people have higher birthrates. Thinking Utah in America & Christian evangelicals, generally, some moslem communities in Europe, ultra orthodox Jewish in Israel.

Early marriage is a strong predictor of higher fertility rates and very religious people tend to marry younger.

[asif408]

Since most past results seem to focus mostly on the U.S market/ index, which has been the best performing market over the long term, and most strategies seem to advocate continuing to hold majority U.S indexes, is this just betting on the U.S economy on continuing to be the best performing?
As we know past results do not indicate future performance, what happens if the U.S market reverts to the mean and becomes an average or below average performer in the future, as some people such as Jim Rogers predict?

Yes, but don't say it to loudly, or you'll be accused of blasphemy by the US only crowd. If it mean reverts, we'll probably have a decent number of current US only folks converting to a more global portfolio.

It was mentioned in another thread but if you had been an index investor but had your funds in another country such as Russia, U.K, India, Japan, France etc. Your results would not have been anywhere near as successful and in some cases unsusccessul. So does index investing only apply to the U.S and or top performing country is what I'm asking, and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

It doesn't only apply to the US. Take a look at a previous post I made showing other countries that have done better than the US: viewtopic.php?f=10&t=256423&p=4068457&h ... n#p4068457. 9 countries had better returns than the US from 2000-2016. From 1970-1990, the US stock market was one of the worst performing stock markets worldwide, and during that time frame several countries, including Japan and Hong Kong, had nearly twice the return of the US stock market (around 19% vs 10% for the US). You can find the exact numbers in Ibbotson and Brinson's Global Investing book written in the early 1990s.

Own stocks in a variety of countries and you never have to worry about being the worst, just like owning stocks in different sectors, different sizes, and different growth/value characteristics. Of course, you give up the opportunity to be the best, but unlike many other areas of life, being average in investing is a good thing. Interestingly, few here will disagree with that statement when it comes to owning a total US market fund vs. individual US companies, but they don't when it comes to owning funds in one country (e.g., US) vs. owning funds in many countries, or a total world fund that owns them in market capitalization. Odd reasoning, in my view.

[gmaynardkrebs]

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees. And *only* in Japan starting in 1990 would it have been an actively unsuccessful strategy (and of course not if you had diversified on the entire world), while still not failing quite as hard as Japanese active funds did.

Why can’t Japan fix itself?

Japan is an extraordinarily well-run, pleasant place to live, with well-run companies. The stocks were simply way over-valued. The deflation/low inflation has been quite modest, hardly the catastrophe that it is sometimes portrayed. I really have to wonder why people think that declining prices are such a bad thing. There is only one data point for the widespread belief that deflation is an catastrophe for ordinary people's lives, and that is the Great Depression. Admittedly, that is a traumatic data point, but it's hard to generalize about deflation from such an extreme example. In fact, Japanese citizens have done well under deflationary scenarios, as has Germany. They don't want to "fix" themselves because the public at large does not see deflation or a tepid stock market as a problem, and for very good reasons IMHO.

[iamlucky13]

The original question is not about index investing in general, as indicated in the title, but about US vs. international investing.

I don't think very many members of Bogleheads actually oppose international diversification.

However, many members do believe that the US market alone is diversified enough due both to its significance to the global economy, and the number of US domiciled companies that derive a significant portion of their income from international operations. Some of them seem to come across as opposing international diversification, but I think their real intent to only to promote the value of US equities.

There seems to be a general split of opinions about whether international will outperform or underperform US in the future. Those who prefer US-only presumably expect underperformance, or at least higher risk.

Personally, I'm among those who prefers to be internationally diversified and who is inclined to think international will revert to the mean, or rather, that the 95% of the world's population that live in countries representing ~50% of the global market cap will gradually narrow the gap.

[MotoTrojan]

Thanks for your reply,

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees.

Is merely beating most active funds considered to be successful? I think the returns would be more important, you could return 0% and outperform most active funds (theoretically) depending on the market and time frame, but most would not be happy with that return?

I think many people would have been beyond ecstatic to have a 0% return in 2008. If the market is down 15% and a hedge fund is only down 5%, that’s a huge win still.

[alex123711]

Thanks for your reply,

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees.

Is merely beating most active funds considered to be successful? I think the returns would be more important, you could return 0% and outperform most active funds (theoretically) depending on the market and time frame, but most would not be happy with that return?

I think many people would have been beyond ecstatic to have a 0% return in 2008. If the market is down 15% and a hedge fund is only down 5%, that’s a huge win still.

We're talking long term, not 1 year returns

[MotoTrojan]

Thanks for your reply,

Indexing definitely has historically been a succesful strategy in the entire world. For any one country, an index fund outperforms most active funds after fees.

Is merely beating most active funds considered to be successful? I think the returns would be more important, you could return 0% and outperform most active funds (theoretically) depending on the market and time frame, but most would not be happy with that return?

I think many people would have been beyond ecstatic to have a 0% return in 2008. If the market is down 15% and a hedge fund is only down 5%, that’s a huge win still.

We're talking long term, not 1 year returns

Same point applies.

[willthrill81]

...and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

Nobody can predict the future. If you solely invest in U.S. markets, you are assuming (speculating) that the U.S. markets will do better than ex-U.S. markets. This may or may not work out well - only time will tell.

Not necessarily. One might believe that returns from the U.S. and the rest of the world will be very similar. And if that's occurs, it would be preferential to invest in only the U.S. in order to avoid currency risk and to reduce costs.

[DB2]

...and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

Nobody can predict the future. If you solely invest in U.S. markets, you are assuming (speculating) that the U.S. markets will do better than ex-U.S. markets. This may or may not work out well - only time will tell.

Not necessarily. One might believe that returns from the U.S. and the rest of the world will be very similar. And if that's occurs, it would be preferential to invest in only the U.S. in order to avoid currency risk and to reduce costs.

I will say in recent times, when the U.S. market tanks international seems to goes along with it.

[willthrill81]

...and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

Nobody can predict the future. If you solely invest in U.S. markets, you are assuming (speculating) that the U.S. markets will do better than ex-U.S. markets. This may or may not work out well - only time will tell.

Not necessarily. One might believe that returns from the U.S. and the rest of the world will be very similar. And if that's occurs, it would be preferential to invest in only the U.S. in order to avoid currency risk and to reduce costs.

I will say in recent times, when the U.S. market tanks international seems to goes along with it.

That was certainly the case during the financial crisis a decade ago. Despite the underlying problem originating in the U.S., international stock fell even more than U.S. stock.

[DB2]

...and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

Nobody can predict the future. If you solely invest in U.S. markets, you are assuming (speculating) that the U.S. markets will do better than ex-U.S. markets. This may or may not work out well - only time will tell.

Not necessarily. One might believe that returns from the U.S. and the rest of the world will be very similar. And if that's occurs, it would be preferential to invest in only the U.S. in order to avoid currency risk and to reduce costs.

I will say in recent times, when the U.S. market tanks international seems to goes along with it.

That was certainly the case during the financial crisis a decade ago. Despite the underlying problem originating in the U.S., international stock fell even more than U.S. stock.

Even this past December as well.

[StandingRock]

Since most past results seem to focus mostly on the U.S market/ index, which has been the best performing market over the long term, and most strategies seem to advocate continuing to hold majority U.S indexes, is this just betting on the U.S economy on continuing to be the best performing? As we know past results do not indicate future performance, what happens if the U.S market reverts to the mean and becomes an average or below average performer in the future, as some people such as Jim Rogers predict?

It was mentioned in another thread but if you had been an index investor but had your funds in another country such as Russia, U.K, India, Japan, France etc. Your results would not have been anywhere near as successful and in some cases unsusccessul. So does index investing only apply to the U.S and or top performing country is what I'm asking, and is continuing to invest in U.S markets predicting that market will continue to be the U.S?

There are investing strategies that follow any kind of index or market segment, not just based around countries.

Also, it's cheaper than managed investing so there's that.

[elderwise]

But just curious is there any sane Logic behind why a Foreign NON US based economy would (stock market) crash when US stocks decline?

For example, in 2008 a purely US crash - was well reverberated across the gulf (UAE, Qatar, Kuwait) all strong OIL exporting countries?

Does this have to do with them pegging their local currency to the US dollar?

Economics are never easy to understand...

[willthrill81]

But just curious is there any sane Logic behind why a Foreign NON US based economy would (stock market) crash when US stocks decline?

For example, in 2008 a purely US crash - was well reverberated across the gulf (UAE, Qatar, Kuwait) all strong OIL exporting countries?

Does this have to do with them pegging their local currency to the US dollar?

Economics are never easy to understand...

I believe that the answer is very simple: major world economies, where most of the world's market capitalization is located, are deeply intertwined, and the U.S. is the lynchpin to the whole enchilada.

[Valuethinker]

But just curious is there any sane Logic behind why a Foreign NON US based economy would (stock market) crash when US stocks decline?

For example, in 2008 a purely US crash - was well reverberated across the gulf (UAE, Qatar, Kuwait) all strong OIL exporting countries?

Does this have to do with them pegging their local currency to the US dollar?

Economics are never easy to understand...

2000 to 2003 the US bear market was significantly worse than other countries. The US had more overvalued tech stocks. Yet many of those same stocks are the reason the US had outperformed other markets since 2009.

2008 09 was a financial crash. It started in the US housing finance system but other countries such as Iceland Ireland Spain were badly hit as well.

The key common factor though was losses by financial services companies. RBS had a big US operation. Citi was in as bad shape as any financial institution. effectively bust.

These companies were global. The crisis was not limited to New York or London only.

Thus the market reaction was rational. A failure of Lehman Brothers had global implications for all markets and all financial institutions.

The causes were local but the consequences were global. An extreme risk aversion resulted. Hence the flight to safety in all markets.

Once the recession kicked in that was bad for all business conditions.

The price of oil and other commodities plunged. In 2009 the price of oil briefly touched 40 USD a barrel having been nearly 150 the summer before.