"You're More Internationally Diversified Than You (Probably) Realize"

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Taylor Larimore
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"You're More Internationally Diversified Than You (Probably) Realize"

Post by Taylor Larimore »

Bogleheads:

Morningstar is featuring an article titled: You're More Internationally Diversified Than You (Probably) Realize

You're More International Diversified Than You (Probably) Realize

This sentence caught my eye: Shareholders of major U.S. stock market index funds have about 40% foreign exposure, as measured by corporate revenues.

Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?

I will appreciate your thoughts.

Thank you and best wishes.
Taylor
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by welsie »

The same is true when holding foreign stock with respect to the U.S.

I drive a Honda, my phone is Samsung, my cellular service is from AT&T (whose LTE infrastructure is Alcatel-Lucent and Ericsson), my TVs are a Samsung and a TCL, I use Dove soap (Unilever), my 11 month old baby eats Gerber foods (Nestle), the gas in my car may have been extracted by BP, I will throw a Stouffer's lasagne in the oven from time to time (Nestle), a lot of things I buy on Amazon are from resellers who bought them from Alibaba...

My goal is to agnostically capture global economic growth at low cost, picking U.S. firms doesn't accomplish that goal, it would mean I am trying to pick winners and losers. Not saying it is not good enough, but I prefer knowing I literally have all of my bases covered.
Last edited by welsie on Fri Feb 22, 2019 7:15 pm, edited 1 time in total.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by petulant »

“Morningstar” wrote:The question arises: How do the sources of a revenue stream affect a stock's returns? For example, if a company based in the U.S. generates 50% of its sales at home and the other 50% in Europe, will its stock move in tandem with the stock of a European company that shares its industry and revenue mix? Or, will the location of their domiciles send those two stocks scurrying in different directions?
You got me. Morningstar has yet to study that subject, and because the global data are only now becoming available, neither have many academic researchers. (No doubt some have, but my admittedly brief Internet search yielded no results. If you know of such a study, please let drop me a line.) This field has not been well-explored.
Based on this quote, it is not the case that the Total U.S. Stock Market Index Fund holds the equivalent of 40% in international stocks. The article does not show that the home/international revenue split is matched to home/international stock performance.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by RadAudit »

IIRC, the weightings of the sector diversification of the total US equity market are different from the weightings of the total international equity market. I believe this might contribute long term to a difference in the performance between the US equity market and the international equity market based on the performance of the various sectors. I don't know by how much and over what time frame. However, it might be a reason to lean toward more international weighting in an individual portfolio, if one wanted a portfolio closer to a world market.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by pdavi21 »

US is 24% of Global GDP. As long as we're ignoring market cap weights, why not go 24% US/76% INTL?
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by ResearchMed »

Not to belabor the obvious, but... the returns of the international and domestic index funds have not been quite equivalent, over very short periods, or longer time intervals...

There are many years when I'd be happy holding both funds, rather than holding only the "wrong" one.

RM
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by welsie »

pdavi21 wrote: Fri Feb 22, 2019 7:28 pm US is 24% of Global GDP. As long as we're ignoring market cap weights, why not go 24% US/76% INTL?
Not all of GDP flows through publicly traded companies. In many developing countries there aren't even developed banking systems, and those that exist only touch a small portion of the population.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by permport »

Just hold the global market weight and sit back and relax. :beer
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by MotoTrojan »

Tax and regulations aren’t determined based on who your customers are.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by moneywise3 »

It covers Geo political risk, currency risk etc. A currency movement could affect an European company selling in US exactly opposite of how it affects a US corp selling in Europe.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by pokebowl »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Bogleheads:

Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?

I will appreciate your thoughts.

Thank you and best wishes.
Taylor
As a Total international Stock Market Index Fund ALREADY holds the equivalent of 30+% in U.S. stocks, Why bother holding a separate U.S fund?
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Ferdinand2014 »

I wouldn't bother:

I spend in U.S. dollars and live in the U.S.
The world currency is in U.S. dollars.
The U.S. equity market is the most liquid, largest, broadest and investable in the world.
The stabilty of governance, shareholder protections and accounting standard is one of the most robust by developed country standards (according to MSCI).
The natural capitalist forces and corporate governance of the S&P 500 corporations that have international investment footprints will intrinsically determine investment decisions based on currency, regulation and opportunites in foreign markets that will create shareholder value for the U.S. investor.
International markets have been becoming more correlated as globalization and interconnectedness grows.

Even if the S&P500 (or total stock market fund) underperforms vs international going forward, I still feel comfortable with my simple portfolio of short term treasuries and an S&P 500 low cost index fund. It works for me. Clearly there are rational arguments to the contrary (which I completely respect).
Last edited by Ferdinand2014 on Fri Feb 22, 2019 9:09 pm, edited 1 time in total.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Carlos Danger »

Honestly I'm getting pretty close to ditching international.

Long term treasuries are far less correlated with the U.S. stock market, and oh by the way perform admirably vs. international equities. Looking at portfolio visualizer, VUSTX has outperformed VTRIX and underperformed VWIGX by a mere .08% since 1987 given uniform monthly investments.

Little bit better for international growth over the past 20 years only. 7% vs. 5.6% for VUSTX. But VWIGX over that period has a corrolation of .87 with the U.S. stock market, vs. -.29 for VUSTX. At .87 corrolation with U.S. equities, what is the point of forgoing what have been better returns for U.S. equities? AND what look to continue to be better going forward based on demographics: while the U.S. will be experiencing a little lower GROWTH in its "working age" population over the coming 30 years vs. the past 3 decades, the EU powerhouses like Germany and France, as well as China and Korea, will ALL be joining Japan and experiencing significant declines over the next 30 years. BTW Population growth is even more predictive of real equity returns than real GDP is.

I don't want a bunch of the crap that is in emerging markets with unstable governments and/or governments that heavily control/influence corporations. I don't want the demographic disasters of Europe, Japan, and South Korea on the developed side. I don't feel like picking and choosing individual country ETFs and rotating in and out of them (Brazil, Mexico, and the Phillipines and looking like good times to buy if that's you're thing and you trust some rando on the internet). Our monthly retirement savings are split 50/50 between DW's 403(b) and our Vanguard accounts, strongly considering moving to a 3 fund portfolio of 50% S&P 500 Index, 40% TLT, and 10% VIOO. I'd consider a 2 fund portfolio of Total U.S. Stock and TLT, but the 403(b) only offers an S&P 500 index fund. Rather do VIOO (S&P 600 Small Cap) than extended market.

More and more I'm starting to agree with the late Mr. Bogle's view on Domestic vs. International. Haven't made the switch yet, but I may this year.

International hasn't given much in the way of true diversification, and has been a dog w/r/t returns. Why settle for it when the picture looking out 3 decades, enough to cover our entire working/savings phase, looks WORSE and I can get international exposure through the sales/revenue of U.S.-based corporations? Plus I can always change my mind later if suddenly something drastic happens and the future does not look so bleak for the aforementioned nations?

Just my .02
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by nedsaid »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Bogleheads:

Morningstar is featuring an article titled: You're More Internationally Diversified Than You (Probably) Realize

You're More International Diversified Than You (Probably) Realize

This sentence caught my eye: Shareholders of major U.S. stock market index funds have about 40% foreign exposure, as measured by corporate revenues.

Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?

I will appreciate your thoughts.

Thank you and best wishes.
Taylor
Taylor, I was curious and did a bit of Googling around.
Japanese companies generated 58.3% of their sales abroad last fiscal year, the highest-ever ratio reflecting a growing focus on foreign markets amid sluggish growth at home.

The ratio rose 1.4 percentage points on the year, the Japan External Trade Organization said Tuesday. By region, the Americas provided the biggest chunk, or 25.9%, of overall sales -- up 2.4 points from a year earlier. Asia-Oceania made up 18.4%, and Europe 8.9%.
https://asia.nikkei.com/Economy/Japan-I ... iscal-2015

A Japanese John Bogle would say if you were invested in an index of Japanese stocks that you wouldn't need to invest outside of Japan as 58.3% of revenues are outside of Japan. Of course, we all know how the Japanese stock market has done in dollar terms since the late 1980's, not well. I think home country bias is a big problem. It would be wise for investors to have International diversification. Many of the world's best companies exist outside of Japan. Many of the world's best companies exist outside of the United States.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by oldzey »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?
I don't bother - works for me! :beer
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by EnjoyTheJourney »

US-based firms tend to have their center of gravity for sales in the US, whether they participate in overseas markets or not. This is generally true for MNCs for many other nations as well^. Thus, if you'd like to diversity risk at the country level then owning stocks of firms based in many nations is a good way to do that.

The US is unlikely to have the kind of bad run that Japan has, for multiple reasons, at least in the near to medium term. But, there's no guarantee that the economic standing of the US in the world will remain as strong as it is has been. If the US economy starts to lag that of many other nations then it would be helpful to (already!) have a generous helping of stocks issued by non-US firms in your portfolio.

^ Clearly this is not a universal pattern given that Nestle and many other firms have the majority of their sales outside their home nation. But, the importance of the home nation even to very large MNCs is a well known pattern that's been observable for decades.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by yogesh »

Same argument of diversification at each step:
TotalWorld > TotalUS > S&P500 > S&P100 > SingleStock
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by CFM300 »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?
Because I want to invest in...

Toyota, Samsung, Anheuser-Busch Inbev, Honda, LG, Unilever, GSK, Alibaba, Royal Dutch Shell, Nestle, HSBC, Hyundai, Vodafone, Tencent, Siemens, TSMC, China Mobile, etc.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by randomguy »

CFM300 wrote: Sat Feb 23, 2019 12:30 am
Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?
Because I want to invest in...

Toyota, Samsung, Anheuser-Busch Inbev, Honda, LG, Unilever, GSK, Alibaba, Royal Dutch Shell, Nestle, HSBC, Hyundai, Vodafone, Tencent, Siemens, TSMC, China Mobile, etc.
It will be amusing to read the threads the next time we have a 5-10 year period where international crushes the US. Granted maybe this time is different and the US will always outperform:)
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by andrew99999 »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm This sentence caught my eye: Shareholders of major U.S. stock market index funds have about 40% foreign exposure, as measured by corporate revenues.

Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?
I thought by now this argument had been put to bed (a thousand times over).

Why invest in multiple companies instead of 1?
Why invest in multiple sectors instead of 1?
Why invest in multiple countries instead of 1?
These are all the same question. If you can answer the first, then you can answer the last.

Or more pertinent to what you are actually implying (but not actually saying for some reason)
Why invest in market cap of your home country?
Why invest in market cap of all countries?
Again, they are the same question. If you can answer the first, then you can answer the last.


Diversification of currency is not the same as diversification of companies.
If you really wanted to maintain currency risk separate to concentration risk, you can easily change to a 4 fund portfolio to solve the problem
• Fixed income
• Home country equities
• International equities
• International equities (home currency hedged)
Then you could maintain home country in it's cap weighted proportion relative to the world, and adjust your currency risk & diversification through the proportion of international hedged vs unhedged, all the while maintaining company diversification by cap weighting.

Unfortunately that breaks the golden rule of finding only upsides to the 3 fund portfolio.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by bluquark »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Why bother holding a separate international fund?
This question is leading and presupposes its answer. Why are you asking it instead of a different question, such as "how much home bias is justified?" At a time when international investing is comparably easy, accessible and cheap, why treat US-only as some kind of default option that for some reason demands a high standard of evidence to move away from?

I have seen you are very big on absolutely maximal simplicity, to the point of going from 3 to 2 funds, and I respect that. But now that we have Vanguard Total World Admiral Shares, this seems to be the final straw that broke the camel's back of the formerly valid "simplicity and low fees argument" for home bias. So the tables are turned in 2019 and it's the home bias camp that ought to need to defend their position with the higher standard of evidence.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Teriyaki »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Why bother holding a separate international fund?
As a European investor I've always found the prevalent American disdain for international stocks interesting.

While it is true that U.S. companies already have a lot of foreign exposure, it is also conversely true that foreign companies have a lot of U.S. exposure. This does indeed lead to more correlation between U.S. markets and international markets, but that in itself is not a reason to shun international stocks. If anything, in a global world the country a company's stock is listed in should matter less than before because they are diversified across many markets.

As far as currency risk is considered, it may well be a good reason to have some home country bias, but saying that you shouldn't hold any international stocks because of currency risk is very extreme. After all, would you suggest that I, as a European investor, should only hold European stocks and forgo the U.S. market entirely? Of course not.

With these points off the table I feel that the prevalent disdain for international stocks must be either a case of American exceptionalism or blindly extrapolating past performance into the future. Let me be clear: If the percentage of U.S. stocks in your portfolio is higher than the share of U.S. from the total world stock market cap, you are effectively betting against the companies listed in the rest of the world. If I were a betting man, with U.S. valuations as high as they are, I would rather like to be on the other side of that bet.

However, I've never liked betting so I'll just continue holding the entire world by market cap.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by bck63 »

One thought: The article says Japan is very close to the US in this regard, with 59% of the Nikkei 400's revenues arriving from inside Japan (and 41 from outside). But the Nikkei has done terribly. It is still well below its 1990 high.

Given that, might it still be wise to diversify internationally? Are the percentages referenced necessarily an indicator of how a single country's market will perform?

I don't know the answer to my own question. Just putting it out there.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Ben Mathew »

ResearchMed wrote: Fri Feb 22, 2019 7:34 pm Not to belabor the obvious, but... the returns of the international and domestic index funds have not been quite equivalent, over very short periods, or longer time intervals...

There are many years when I'd be happy holding both funds, rather than holding only the "wrong" one.

RM
+1

And the business (as opposed to financial) counterpart to this would be that US firms operating in say China face different problems than Chinese firms operating in China--particularly when it comes to regulatory risk. And US firms in China could be concentrated in different sectors than the Chinese firms. So US firms operating in China are not a substitute for Chinese firms operating in China.

Diversification alone is a strong argument for including international. The lower valuations make it even more compelling. The only reason not to invest internationally, I think, is if it turns out that accounting standards are poor, earnings are overstated, and we are not really understanding what we are investing in. That, I believe, is Buffett's thinking, and it does concern me. I'd like to see more evidence though. In the meantime, I'm still fully invested internationally.

Avoiding international because it has lagged US stock performance might not be a good idea. To the extent that the difference is driven by valuation changes, international stocks may have higher expected return than US stocks precisely because of poorer past performance (slower price growth).
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Jags4186 »

Taylor,

Why own the US Total Stock Market and International Total Market when you can own the Total World Market in one fund? Or are you betting on the US to outperform the rest of the world? Are you making the case for less diversification?
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by drk »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?
People suggesting that people forego ex-US companies are advocating:

1. Timing the market
2. Abandoning the course
3. Ignoring a workable plan

Large US companies *currently* derive a lot of their revenues from outside of the US. They are not “international stocks” by any means. If tomorrow Japan, India, and China decided to severely restrict the business activities of the largest US companies, where would those revenues go? Certainly not to other US companies.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by willthrill81 »

Jags4186 wrote: Sat Feb 23, 2019 11:06 amOr are you betting on the US to outperform the rest of the world?
To the extent that the efficient market hypothesis is correct*, then 50% of the world's market cap (i.e. the U.S.) should have a long-term, risk-adjusted return equal to the other 50% (i.e. the rest of the world).

If the risk-adjusted returns will be equal then, you'd rather invest in just the U.S. markets due to lower costs and to avoid currency risk.

*I personally believe that markets are 'mostly' efficient most of the time.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Teriyaki »

willthrill81 wrote: Sat Feb 23, 2019 12:08 pm
Jags4186 wrote: Sat Feb 23, 2019 11:06 amOr are you betting on the US to outperform the rest of the world?
To the extent that the efficient market hypothesis is correct*, then 50% of the world's market cap (i.e. the U.S.) should have a long-term, risk-adjusted return equal to the other 50% (i.e. the rest of the world).

If the risk-adjusted returns will be equal then, you'd rather invest in just the U.S. markets due to lower costs and to avoid currency risk.

*I personally believe that markets are 'mostly' efficient most of the time.
With this logic you could just buy a single U.S. stock (or a basket of, say, 10 stocks) because with the EMH every investment in the stock universe should be just as good. However, in reality it's better to diversify within the U.S. and equivalently it is also better to diversify globally and buy international stocks too.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by willthrill81 »

Teriyaki wrote: Sat Feb 23, 2019 12:55 pm
willthrill81 wrote: Sat Feb 23, 2019 12:08 pm
Jags4186 wrote: Sat Feb 23, 2019 11:06 amOr are you betting on the US to outperform the rest of the world?
To the extent that the efficient market hypothesis is correct*, then 50% of the world's market cap (i.e. the U.S.) should have a long-term, risk-adjusted return equal to the other 50% (i.e. the rest of the world).

If the risk-adjusted returns will be equal then, you'd rather invest in just the U.S. markets due to lower costs and to avoid currency risk.

*I personally believe that markets are 'mostly' efficient most of the time.
With this logic you could just buy a single U.S. stock (or a basket of, say, 10 stocks) because with the EMH every investment in the stock universe should be just as good. However, in reality it's better to diversify within the U.S. and equivalently it is also better to diversify globally and buy international stocks too.
A single stock is an extreme instance of under-diversification. But if you're holding 50% of the global market cap (including thousands of companies), then statistically speaking, if the EMH were accurate, we should not expect the risk-adjusted returns of that 50% to significantly vary from the other 50%.

The only diversification argument that really holds up in the U.S. vs. international debate is country risk. But even then, if you have a global market cap weighting in your holdings, 50% of your stock is still in just one country, meaning that you're still greatly exposed to single country risk.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Vulcan »

Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?
I thought about all the advocates of US only investing when I saw this headline recently.
I'm afraid the increasingly global future may hold a few surprises for them.

Coca-Cola shares plunge — on track for worst day in a decade — after weak earnings outlook
The global beverage giant has been battling currency headwinds, which it said hurt its fourth-quarter earnings by 10 percent.
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Teriyaki »

willthrill81 wrote: Sat Feb 23, 2019 12:59 pm A single stock is an extreme instance of under-diversification. But if you're holding 50% of the global market cap (including thousands of companies), then statistically speaking, if the EMH were accurate, we should not expect the risk-adjusted returns of that 50% to significantly vary from the other 50%.

The only diversification argument that really holds up in the U.S. vs. international debate is country risk. But even then, if you have a global market cap weighting in your holdings, 50% of your stock is still in just one country, meaning that you're still greatly exposed to single country risk.
I agree completely with your insights but not with your conclusion. The risk of investing only in the U.S. is country risk. It could have a large impact on returns and can be easily and cheaply diversified away so investors should definitely do so (by buying international).
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Vulcan »

Carlos Danger wrote: Fri Feb 22, 2019 9:06 pm International hasn't given much in the way of true diversification, and has been a dog w/r/t returns. Why settle for it when the picture looking out 3 decades, enough to cover our entire working/savings phase, looks WORSE and I can get international exposure through the sales/revenue of U.S.-based corporations?
Do you expect US to represent increasingly larger share of the global cap over the next 30 years?
If you torture the data long enough, it will confess to anything. ~Ronald Coase
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by willthrill81 »

Teriyaki wrote: Sat Feb 23, 2019 1:06 pm
willthrill81 wrote: Sat Feb 23, 2019 12:59 pm A single stock is an extreme instance of under-diversification. But if you're holding 50% of the global market cap (including thousands of companies), then statistically speaking, if the EMH were accurate, we should not expect the risk-adjusted returns of that 50% to significantly vary from the other 50%.

The only diversification argument that really holds up in the U.S. vs. international debate is country risk. But even then, if you have a global market cap weighting in your holdings, 50% of your stock is still in just one country, meaning that you're still greatly exposed to single country risk.
I agree completely with your insights but not with your conclusion. The risk of investing only in the U.S. is country risk. It could have a large impact on returns and can be easily and cheaply diversified away so investors should definitely do so (by buying international).
How "cheaply" it is to diversify country risk is a subjective judgment, but it cannot be "diversified away," merely diversified. But again, if you hold a global market cap weighting for equities, you still have a lot of single country risk because 50% is in just one country.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by bikechuck »

I am not sure if Vanguard's Total International Equity Fund is hedged in an attempt to make fluctuations in the U.S. dollar neutral. If it is not hedged I believe that if the U.S. dollar were to weaken against the Euro and other major currencies the value of the Total International Equity Fund would rise.

If the above is true then holding some portion of a portfolio in International would offer a bit of protection should the value of the U.S. dollar drop which could happen if our politicians lose their minds and decide to spend significantly more money than the U.S. takes in.

Based in part on this and also based on wanting to hold some great companies that have HQs outside the U.S. I have been following Taylor's previous advice of holding 20% of my equities in International funds.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by drk »

bikechuck wrote: Sat Feb 23, 2019 1:14 pm I am not sure if Vanguard's Total International Equity Fund is hedged in an attempt to make fluctuations in the U.S. dollar neutral. If it is not hedged I believe that if the U.S. dollar were to weaken against the Euro and other major currencies the value of the Total International Equity Fund would rise.
This is exactly why 2017 was such a good year for VTIAX, VEMAX, etc. The returns for domestic investors in those funds’ holdings was poor, but a weak dollar provided huge returns to US investors.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by lostdog »

oldzey wrote: Fri Feb 22, 2019 10:56 pm
Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Question: If a Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks, Why bother holding a separate international fund?
I don't bother - works for me! :beer
I bother - works for me :sharebeer
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by lostdog »

Teriyaki wrote: Sat Feb 23, 2019 10:00 am
Taylor Larimore wrote: Fri Feb 22, 2019 7:06 pm Why bother holding a separate international fund?
As a European investor I've always found the prevalent American disdain for international stocks interesting.

While it is true that U.S. companies already have a lot of foreign exposure, it is also conversely true that foreign companies have a lot of U.S. exposure. This does indeed lead to more correlation between U.S. markets and international markets, but that in itself is not a reason to shun international stocks. If anything, in a global world the country a company's stock is listed in should matter less than before because they are diversified across many markets.

As far as currency risk is considered, it may well be a good reason to have some home country bias, but saying that you shouldn't hold any international stocks because of currency risk is very extreme. After all, would you suggest that I, as a European investor, should only hold European stocks and forgo the U.S. market entirely? Of course not.

With these points off the table I feel that the prevalent disdain for international stocks must be either a case of American exceptionalism or blindly extrapolating past performance into the future. Let me be clear: If the percentage of U.S. stocks in your portfolio is higher than the share of U.S. from the total world stock market cap, you are effectively betting against the companies listed in the rest of the world. If I were a betting man, with U.S. valuations as high as they are, I would rather like to be on the other side of that bet.

However, I've never liked betting so I'll just continue holding the entire world by market cap.
+1

Most of the time it's mainly American exceptionalism, ideology and older investors stuck in the past.
Last edited by lostdog on Sat Feb 23, 2019 2:17 pm, edited 1 time in total.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

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I removed an off-topic post. Please stay focused on the investing aspects.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Teriyaki »

willthrill81 wrote: Sat Feb 23, 2019 1:10 pm
Teriyaki wrote: Sat Feb 23, 2019 1:06 pm
willthrill81 wrote: Sat Feb 23, 2019 12:59 pm A single stock is an extreme instance of under-diversification. But if you're holding 50% of the global market cap (including thousands of companies), then statistically speaking, if the EMH were accurate, we should not expect the risk-adjusted returns of that 50% to significantly vary from the other 50%.

The only diversification argument that really holds up in the U.S. vs. international debate is country risk. But even then, if you have a global market cap weighting in your holdings, 50% of your stock is still in just one country, meaning that you're still greatly exposed to single country risk.
I agree completely with your insights but not with your conclusion. The risk of investing only in the U.S. is country risk. It could have a large impact on returns and can be easily and cheaply diversified away so investors should definitely do so (by buying international).
How "cheaply" it is to diversify country risk is a subjective judgment, but it cannot be "diversified away," merely diversified. But again, if you hold a global market cap weighting for equities, you still have a lot of single country risk because 50% is in just one country.
True, but 50% is much less than 100%. Truth be told, a part of me would like to underweight the U.S. but I won't since I'm firmly committed to holding the global market portfolio come hell or high water, lest I start making all kinds of weird gambles.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by willthrill81 »

Teriyaki wrote: Sat Feb 23, 2019 2:11 pm
willthrill81 wrote: Sat Feb 23, 2019 1:10 pm
Teriyaki wrote: Sat Feb 23, 2019 1:06 pm
willthrill81 wrote: Sat Feb 23, 2019 12:59 pm A single stock is an extreme instance of under-diversification. But if you're holding 50% of the global market cap (including thousands of companies), then statistically speaking, if the EMH were accurate, we should not expect the risk-adjusted returns of that 50% to significantly vary from the other 50%.

The only diversification argument that really holds up in the U.S. vs. international debate is country risk. But even then, if you have a global market cap weighting in your holdings, 50% of your stock is still in just one country, meaning that you're still greatly exposed to single country risk.
I agree completely with your insights but not with your conclusion. The risk of investing only in the U.S. is country risk. It could have a large impact on returns and can be easily and cheaply diversified away so investors should definitely do so (by buying international).
How "cheaply" it is to diversify country risk is a subjective judgment, but it cannot be "diversified away," merely diversified. But again, if you hold a global market cap weighting for equities, you still have a lot of single country risk because 50% is in just one country.
True, but 50% is much less than 100%. Truth be told, a part of me would like to underweight the U.S. but I won't since I'm firmly committed to holding the global market portfolio come hell or high water, lest I start making all kinds of weird gambles.
The question then becomes whether a 50% allocation to non-U.S. equities would be adequate to 'save your portfolio' if the U.S. did a repeat of Japan. I'm not convinced that it would.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by 3funder »

ResearchMed wrote: Fri Feb 22, 2019 7:34 pm Not to belabor the obvious, but... the returns of the international and domestic index funds have not been quite equivalent, over very short periods, or longer time intervals...

There are many years when I'd be happy holding both funds, rather than holding only the "wrong" one.

RM
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by willthrill81 »

ResearchMed wrote: Fri Feb 22, 2019 7:34 pm Not to belabor the obvious, but... the returns of the international and domestic index funds have not been quite equivalent, over very short periods, or longer time intervals...
Indeed. This calls into question then whether the EMH is really functioning at this level. If it was true, then long-term risk-adjusted returns should be very similar for U.S. and non-U.S. equities. Perhaps the EMH functions well within countries but not so well across them? I'm not sure.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by pasadena »

Because I want to invest into foreign companies, not just foreign interest of US companies.

I don't think the sentence "Total U.S. Stock Market Index Fund ALREADY holds the equivalent of 40% in international stocks" is correct. 40% of foreign exposure for US companies is not equivalent of 40% in international stocks.

Now if I do own VTIAX, how much US exposure do, say, Samsung or Nestle have? Should I reduce my US holdings to account for that?
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Teriyaki »

willthrill81 wrote: Sat Feb 23, 2019 2:16 pm The question then becomes whether a 50% allocation to non-U.S. equities would be adequate to 'save your portfolio' if the U.S. did a repeat of Japan. I'm not convinced that it would.
Well, investors who held the global market portfolio have fared much better than those who held only Japanese stocks. If the U.S. did a "repeat of Japan" I would be similarly glad to be holding the global market. There is no certainty in investing in stocks but the global market portfolio is the best you can do diversification wise.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by willthrill81 »

Teriyaki wrote: Sat Feb 23, 2019 2:36 pm
willthrill81 wrote: Sat Feb 23, 2019 2:16 pm The question then becomes whether a 50% allocation to non-U.S. equities would be adequate to 'save your portfolio' if the U.S. did a repeat of Japan. I'm not convinced that it would.
Well, investors who held the global market portfolio have fared much better than those who held only Japanese stocks. If the U.S. did a "repeat of Japan" I would be similarly glad to be holding the global market. There is no certainty in investing in stocks but the global market portfolio is the best you can do diversification wise.
Whether that's true depends on what you are trying to diversify. Again, if you're trying to diversify country risk, a global market cap weighting is definitely not the best you can do.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Teriyaki »

willthrill81 wrote: Sat Feb 23, 2019 2:38 pm
Teriyaki wrote: Sat Feb 23, 2019 2:36 pm
willthrill81 wrote: Sat Feb 23, 2019 2:16 pm The question then becomes whether a 50% allocation to non-U.S. equities would be adequate to 'save your portfolio' if the U.S. did a repeat of Japan. I'm not convinced that it would.
Well, investors who held the global market portfolio have fared much better than those who held only Japanese stocks. If the U.S. did a "repeat of Japan" I would be similarly glad to be holding the global market. There is no certainty in investing in stocks but the global market portfolio is the best you can do diversification wise.
Whether that's true depends on what you are trying to diversify. Again, if you're trying to diversify country risk, a global market cap weighting is definitely not the best you can do.
You're right, that was not the best wording on my part! All in all, I feel we mostly agree on the general points and I'm growing curious as to what your asset allocation is. If you hold mostly U.S. stocks (as I inferred from your first post in this thread) aren't you worried about country risk?
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by willthrill81 »

Teriyaki wrote: Sat Feb 23, 2019 2:47 pm
willthrill81 wrote: Sat Feb 23, 2019 2:38 pm
Teriyaki wrote: Sat Feb 23, 2019 2:36 pm
willthrill81 wrote: Sat Feb 23, 2019 2:16 pm The question then becomes whether a 50% allocation to non-U.S. equities would be adequate to 'save your portfolio' if the U.S. did a repeat of Japan. I'm not convinced that it would.
Well, investors who held the global market portfolio have fared much better than those who held only Japanese stocks. If the U.S. did a "repeat of Japan" I would be similarly glad to be holding the global market. There is no certainty in investing in stocks but the global market portfolio is the best you can do diversification wise.
Whether that's true depends on what you are trying to diversify. Again, if you're trying to diversify country risk, a global market cap weighting is definitely not the best you can do.
You're right, that was not the best wording on my part! All in all, I feel we mostly agree on the general points and I'm growing curious as to what your asset allocation is. If you hold mostly U.S. stocks (as I inferred from your first post in this thread) aren't you worried about country risk?
The U.S./international issue is one of the reasons that I switched to trend following*; the consequences for getting one's U.S./international split are too high, IMHO. Over the last 20 years, international equities only had a real return of 1.81%. It would be difficult for many of us to reach our goals with that kind of return. Conversely, investing only in the U.S. carries a lot of country risk. And the U.S. could significantly underperform international over the next 20 years. So investors may be caught between a rock and a hard place in determining an appropriate split.

*My strategy is in this thread.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by Teriyaki »

willthrill81 wrote: Sat Feb 23, 2019 3:00 pm The U.S./international issue is one of the reasons that I switched to trend following*; the consequences for getting one's U.S./international split are too high, IMHO. Over the last 20 years, international equities only had a real return of 1.81%. It would be difficult for many of us to reach our goals with that kind of return. Conversely, investing only in the U.S. carries a lot of country risk. And the U.S. could significantly underperform international over the next 20 years. So investors may be caught between a rock and a hard place in determining an appropriate split.

*My strategy is in this thread.
Ah, I see. Trend following is not my cup of tea, but your strategy seems interesting!

As for the quote I bolded, I'm worried that you might be predicting too much based on previous returns. From a valuation standpoint international feels very nice now. It is hard for me to imagine a future where U.S. equities consistently return significantly more than international ones. I guess it could happen if technological progress ushers in an age where competition is more of a winner-takes-it-all sort and the winners happen to be U.S. companies.

By the way, since you seem to be a reader of Philosophical Economics, I'm sure you've read his excellent post on the effects of current high valuations on future returns?
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by willthrill81 »

Teriyaki wrote: Sat Feb 23, 2019 3:18 pmBy the way, since you seem to be a reader of Philosophical Economics, I'm sure you've read his excellent post on the effects of current high valuations on future returns?
Indeed I did. But as PE has pointed out as well, valuations are not reliably mean reverting. High valuations have not precluded good returns, nor have low returns been consistently followed by good returns. Many were using valuation based arguments to predict 3-4% returns for the U.S. back in 2011. My strategy allows me to be completely ambivalent to such issues, which is reassuring in a way that's hard to describe.
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Re: "You're More Internationally Diversified Than You (Probably) Realize"

Post by pascalwager »

Considering the last paragraph in the M* article: Foreign Customs. The author seems to suspect that foreign stock market returns have a built-in "customs handicap" that isn't considered in economics theory. (He once posted his personal portfolio and I recall that it was devoid of any foreign positions.)
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