Larry Swedroe: The Historical Imperative For International Diversification

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Random Walker
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Larry Swedroe: The Historical Imperative For International Diversification

Post by Random Walker » Sat Jul 06, 2019 2:37 pm

https://www.advisorperspectives.com/art ... sification

If your equities do not have significant international diversification, you might be affected by home country bias or recency bias. In a separate article I posted a day or two ago, Larry describes a game “outfoxing the box”. In that essay he plays that game with market, size, value. One could do the same mind experiment with US and Int equities.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by nisiprius » Sat Jul 06, 2019 4:44 pm

The linked article draws on this Vanguard paper. The article says:
Scott, Stockton and Donaldson concluded that a good starting point for investors is weighting by global market-capitalization.
I don't feel that that is a good summary of their conclusion. For one thing, they said "helpful," not "good." If you include the next sentence as well, the tone is much less categorical:
This paper concludes that although no one answer fits all investors, global market-capitalization weight serves as a helpful starting point in determining the appropriate allocation between domestic and international equities. In practice, many investors will consider an allocation to international equities well below global market-capitalization weight based on their sensitivity to a number of considerations, including volatility reduction, implementation costs, taxes, regulation, and their own preferences.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by visualguy » Sat Jul 06, 2019 5:01 pm

Indeed, there's a big leap from what the Vanguard paper actually says and "historical imperative".

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by larryswedroe » Sat Jul 06, 2019 5:27 pm

Really sad to see such comments
Is the word helpful not mean good? Nitpicking if I have ever seen it.
And everyone should know by now that I have no control over the titles chosen. FYI my title was historical perspective helps to avoid biases. (:-))
One other comment, what I find interesting is that the whole philosophy of Bogleheads is really based on market efficiency. And if markets are efficient than US, Developed and EM must all have same expected risk adjusted returns and yet we hear arguments favoring US bias (which makes no sense if you believe in market efficiency. The two conflict as you sacrifice avoiding or minimizing divesifiable risks which are uncompensated.
BTW, if anyone is interested in following my musings I suggest you either follow me at Twitter, or use Google alerts, or can check in the three sites I write for now, Alpha Architect, Evidence Based Investors and Advisor Perspectives
Best wishes
Larry

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by nisiprius » Sat Jul 06, 2019 5:57 pm

Suggestion withdrawn per Random Walker's explanation below.
larryswedroe wrote:
Sat Jul 06, 2019 5:27 pm
...And everyone should know by now that I have no control over the titles chosen. FYI my title was historical perspective helps to avoid biases.
Perhaps Random Walker, the original poster, would consider changing the thread title to something like "Larry Swedroe: Historical perspective helps to avoid biases re international stocks."
Last edited by nisiprius on Sat Jul 06, 2019 6:24 pm, edited 1 time in total.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by visualguy » Sat Jul 06, 2019 6:11 pm

Larry,

Even the much milder title that you would have used ("historical perspective helps to avoid biases") needs more elaboration. Historically, in the long run (decades, century, etc), international diversification (adding ex-US to a US portfolio) has been a significant drag on returns as shown in the charts below.

In your view, what has been the benefit? It certainly hasn't been returns. As the Vanguard paper points out, the correlation between US and ex-US increased over the years, so the diversification effect actually decreased. Then you have the currency and taxation issues. I think it's easy to understand why many are questioning the benefit, not to mention imperative (or even just your milder version). I have not seen a clear explanation, and certainly none that explain why the benefit hasn't manifested itself in the past for such an awfully long time, but will suddenly appear in a future time frame that's relevant to us.

Image
Last edited by visualguy on Sat Jul 06, 2019 6:17 pm, edited 1 time in total.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Random Walker » Sat Jul 06, 2019 6:14 pm

I’ve always tried to be accurate, and thus have posted titles best I can exactly as written. Didn’t want to fog anything up unless it was clearly my own comments in the ensuing thread.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by columbia » Sat Jul 06, 2019 6:20 pm

“Historical imperative” is generally associated with Karl Marx, so it’s amusing to see the phrase on an investing forum. :)

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by nisiprius » Sat Jul 06, 2019 6:20 pm

Random Walker wrote:
Sat Jul 06, 2019 6:14 pm
I’ve always tried to be accurate, and thus have posted titles best I can exactly as written. Didn’t want to fog anything up unless it was clearly my own comments in the ensuing thread.

Dave
That makes sense and I withdraw my suggestion.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Jerry476 » Sat Jul 06, 2019 7:10 pm

You can agree or disagree with Larry Swedroe. You can act on his advise or choose not to. This Boglehead appreciates his input. There is is no doubt in my mind that his purpose is to help and he should be appreciated for that. A smart person takes the input of many in order to make calculated decisions. The nitpicking just isn’t necessary. This site needs more manners and tolerance.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by willthrill81 » Sat Jul 06, 2019 7:17 pm

visualguy wrote:
Sat Jul 06, 2019 6:11 pm
Larry,

Even the much milder title that you would have used ("historical perspective helps to avoid biases") needs more elaboration. Historically, in the long run (decades, century, etc), international diversification (adding ex-US to a US portfolio) has been a significant drag on returns as shown in the charts below.

In your view, what has been the benefit? It certainly hasn't been returns. As the Vanguard paper points out, the correlation between US and ex-US increased over the years, so the diversification effect actually decreased. Then you have the currency and taxation issues. I think it's easy to understand why many are questioning the benefit, not to mention imperative (or even just your milder version). I have not seen a clear explanation, and certainly none that explain why the benefit hasn't manifested itself in the past for such an awfully long time, but will suddenly appear in a future time frame that's relevant to us.

Image
According to the die-hard adherents to strict market efficiency, the U.S. has just been lucky for a long time.

Or, one might take this as evidence that markets are not as efficient as many believe them to be.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by klaus14 » Sat Jul 06, 2019 7:20 pm

willthrill81 wrote:
Sat Jul 06, 2019 7:17 pm

According to the die-hard adherents to strict market efficiency, the U.S. has just been lucky for a long time.

Or, one might take this as evidence that markets are not as efficient as many believe them to be.
US definitely deserved to outperform due to better governance. i would say "US investors" got lucky.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by SimpleGift » Sat Jul 06, 2019 7:27 pm

visualguy wrote:
Sat Jul 06, 2019 6:11 pm
I have not seen a clear explanation, and certainly none that explain why the benefit hasn't manifested itself in the past for such an awfully long time, but will suddenly appear in a future time frame that's relevant to us.
The U.S. stock market had a remarkable run in the 20th century, especially relative to countries whose economies were devastated by land wars on their own soils. But expecting the 21st century to be like the 20th is quite shortsighted in my view.

Making projections about the future is certainly perilous, but totally ignoring future forecasts also does not serve investors well, since their stock returns will coming from profits earned in the decades ahead. Everything we know today about future demographic trends, economic growth rates and expanding global stock markets suggests that it's unlikely the U.S. will still be the predominate world economy by mid-century (chart below).
  • Image
    NOTE: Values are inflation-adjusted, in USD, at 2010 purchasing power parity — and in billions.
    Source: Latest OECD forecasts.
I'm not suggesting that young investors today will not achieve their financial goals with an all-U.S. equity portfolio in the decades ahead. Chances are they will do OK. But there's also a good chance that the investing world of the future may turn out to be very much different from the past — which is what portfolio diversification is all about.
Last edited by SimpleGift on Sat Jul 06, 2019 7:32 pm, edited 1 time in total.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by columbia » Sat Jul 06, 2019 7:30 pm

visualguy wrote:
Sat Jul 06, 2019 6:11 pm
Larry,

Even the much milder title that you would have used ("historical perspective helps to avoid biases") needs more elaboration. Historically, in the long run (decades, century, etc), international diversification (adding ex-US to a US portfolio) has been a significant drag on returns as shown in the charts below.

In your view, what has been the benefit? It certainly hasn't been returns. As the Vanguard paper points out, the correlation between US and ex-US increased over the years, so the diversification effect actually decreased. Then you have the currency and taxation issues. I think it's easy to understand why many are questioning the benefit, not to mention imperative (or even just your milder version). I have not seen a clear explanation, and certainly none that explain why the benefit hasn't manifested itself in the past for such an awfully long time, but will suddenly appear in a future time frame that's relevant to us.

Image
What is the source for this re:performance of stocks vs. bonds?

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by whodidntante » Sat Jul 06, 2019 7:31 pm

Love these threads.

Image

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by willthrill81 » Sat Jul 06, 2019 7:33 pm

SimpleGift wrote:
Sat Jul 06, 2019 7:27 pm
visualguy wrote:
Sat Jul 06, 2019 6:11 pm
I have not seen a clear explanation, and certainly none that explain why the benefit hasn't manifested itself in the past for such an awfully long time, but will suddenly appear in a future time frame that's relevant to us.
The U.S. stock market had a remarkable run in the 20th century, especially relative to countries whose economies were devastated by land wars on their own soils. But expecting the 21st century to be like the 20th is quite shortsighted in my view.

Making projections about the future is certainly perilous, but totally ignoring future forecasts also does not serve investors well, since their stock returns will coming from profits earned in the decades ahead. Everything we know today about future demographic trends, economic growth rates and expanding global stock markets suggests that it's unlikely the U.S. will still be the predominate world economy by mid-century (chart below).
  • Image
    NOTE: Values are inflation-adjusted, in USD, at 2010 purchasing power parity — and in billions.
    Source: Latest OECD forecasts.
I'm not suggesting that young investors today will not achieve their financial goals with an all-U.S. equity portfolio in the decades ahead. Chances are they will do OK. But there's also the chance that the investing world of the future may turn out to be very much different from the past — which is what portfolio diversification is all about.
I'm extremely skeptical of economic projections 30 years into the future. Economists aren't very good at predicting what will happen next quarter, and I don't believe that the addition of multiple decades will improve their accuracy.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by nisiprius » Sat Jul 06, 2019 7:34 pm

columbia wrote:
Sat Jul 06, 2019 7:30 pm
What is the source for this re:performance of stocks vs. bonds?
Looks like the Credit Suisse Global Returns Yearbook. Available online at no cost but unfortunately they cut the amount of data in it way back a few years ago. Looks like the 2019 yearbook. You can download it here: Summary 2019 Global Investment Returns Yearbook
Yep, it's from figure 24, p. 36 and figure 25, p. 37.

The reports are produced by Elroy Dimson, Paul Marsh, and Mike Staunton, the group that produced a volume circa 2000 called Triumph of the Optimists: 101 Years of Global Investment Returns. Never been updated as far as I know. Amazing that they are selling a book that's almost twenty years out of date for $132.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by SimpleGift » Sat Jul 06, 2019 7:39 pm

willthrill81 wrote:
Sat Jul 06, 2019 7:33 pm
I'm extremely skeptical of economic projections 30 years into the future. Economists aren't very good at predicting what will happen next quarter, and I don't believe that the addition of multiple decades will improve their accuracy.
The point of the post is not that the economic forecasts are accurate, but that the future is very unlikely to resemble the past. Since there are many possible futures, the best investing approach is to diversify as broadly as possible. An all-U.S. investor is betting on just one possible future.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by willthrill81 » Sat Jul 06, 2019 7:44 pm

SimpleGift wrote:
Sat Jul 06, 2019 7:39 pm
willthrill81 wrote:
Sat Jul 06, 2019 7:33 pm
I'm extremely skeptical of economic projections 30 years into the future. Economists aren't very good at predicting what will happen next quarter, and I don't believe that the addition of multiple decades will improve their accuracy.
The point of the post is not that the economic forecasts are accurate, but that the future is very unlikely to resemble the past. Since there are many possible futures, the best investing approach is to diversify as broadly as possible. An all-U.S. investor is betting on just one possible future.
It might be nitpicking, but do you believe that an all-U.S. portfolio will only at least match ex-U.S. in "just one possible future?" I can think of many different scenarios where that would occur. I'm not going to put a percentage likelihood on the U.S. outperforming ex-U.S. over the next 30 years, but I don't think that it's remote.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by visualguy » Sat Jul 06, 2019 7:50 pm

willthrill81 wrote:
Sat Jul 06, 2019 7:33 pm
I'm extremely skeptical of economic projections 30 years into the future. Economists aren't very good at predicting what will happen next quarter, and I don't believe that the addition of multiple decades will improve their accuracy.
True, but I think that even if this GDP prediction turns out to be correct, it doesn't follow that ex-US index investment will be helpful because of the nature of the Chinese and Indian economies and stock markets. They've grown tremendously in the past as well without this translating to a corresponding benefit to index investors in their stock markets.

You have to believe not so much in this GDP prediction necessarily, but more in a radical change in the nature of the economy and stock markets in those countries, and expect all that to happen within the fairly short time frame of very few decades when it could benefit you.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by SimpleGift » Sat Jul 06, 2019 8:02 pm

willthrill81 wrote:
Sat Jul 06, 2019 7:44 pm
It might be nitpicking, but do you believe that an all-U.S. portfolio will only at least match ex-U.S. in "just one possible future?"
It's possible, but the point is we don't know. In the face of ignorance about the future, the most prudent course for a passive index investor is to spread one's bets as broadly as possible — not to be making substantial bets on particular outcomes.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by 9-5 Suited » Sat Jul 06, 2019 8:09 pm

Two of the most timeless bits of wisdom from John Bogle (both often cited on these forums) are "the past is not prologue" and "don't look for the needle, buy the haystack."

It seems that the arguments presented against international equity often violate one or both of these precepts. Citing past returns (as above in this thread) is assuming that past outcomes predict future ones. And tilting heavily to the US with the expectation of better performance is an attempt to actively avoid buying the haystack. Why does the value of cap weighted indexing end at the shores of the US?

Larry's perspective here is very helpful as usual. Of course there's nothing terrible about having only 20-30% international and it most likely won't matter much with correlations being what they are. But any less than that starts to look really uncomfortable with an unknowable future.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Dottie57 » Sat Jul 06, 2019 8:13 pm

Jerry476 wrote:
Sat Jul 06, 2019 7:10 pm
You can agree or disagree with Larry Swedroe. You can act on his advise or choose not to. This Boglehead appreciates his input. There is is no doubt in my mind that his purpose is to help and he should be appreciated for that. A smart person takes the input of many in order to make calculated decisions. The nitpicking just isn’t necessary. This site needs more manners and tolerance.
+1

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by lostdog » Sat Jul 06, 2019 8:14 pm

SimpleGift wrote:
Sat Jul 06, 2019 8:02 pm
willthrill81 wrote:
Sat Jul 06, 2019 7:44 pm
It might be nitpicking, but do you believe that an all-U.S. portfolio will only at least match ex-U.S. in "just one possible future?"
It's possible, but the point is we don't know. In the face of ignorance about the future, the most prudent course for a passive index investor is to spread one's bets as broadly as possible — not to be making substantial bets on particular outcomes.
+1

It's nice to have a forum like this for novice investors to see both sides of the argument.

Vanguard recommends 40% international. I believe they will soon change that to world market cap.

https://investor.vanguard.com/investing ... -investing
Last edited by lostdog on Sat Jul 06, 2019 8:56 pm, edited 2 times in total.
I don't invest looking in the rear view mirror and I know absolutely nothing about the future.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Whakamole » Sat Jul 06, 2019 8:18 pm

And of course, Vanguard itself uses close to world market cap in their Target Retirement and LifeStrategy funds.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Seasonal » Sat Jul 06, 2019 8:18 pm

larryswedroe wrote:
Sat Jul 06, 2019 5:27 pm
One other comment, what I find interesting is that the whole philosophy of Bogleheads is really based on market efficiency. And if markets are efficient than US, Developed and EM must all have same expected risk adjusted returns and yet we hear arguments favoring US bias (which makes no sense if you believe in market efficiency. The two conflict as you sacrifice avoiding or minimizing divesifiable risks which are uncompensated.
That is a key point that cannot be stressed enough - to the extent markets are efficient everything has the same risk-adjusted return. The US may have vastly superior prospects than EM and have a much better legal system and investor rights. The market takes this into account when determining prices. Better countries or companies are not necessarily better investments.

If an investment has worse prospects and higher risk, the market will reduce the price of that investment until it achieves an equilibrium in which everything has the same risk adjusted return, at least to the extent markets are efficient and also taking into account how the investment fits into the entire portfolio.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by SevenBridgesRoad » Sat Jul 06, 2019 8:19 pm

Glad to see after Moderators banned Larry Swedrow's columns (see recent thread) that we are still having Larry's columns here. Yes! Freedom of ideas wins.
Retired 2018 | Every day I choose how I spend my energy | One Vanguard TDF except for bunch of individual stocks...still recovering from my Fidelity AUM days years ago | Now sleeping well at night

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by SimpleGift » Sat Jul 06, 2019 8:22 pm

visualguy wrote:
Sat Jul 06, 2019 7:50 pm
You have to believe not so much in this GDP prediction necessarily, but more in a radical change in the nature of the economy and stock markets in those countries, and expect all that to happen within the fairly short time frame of very few decades when it could benefit you.
Yes, but again the point is not that the stock markets in China and India will outperform, just because their economies are growing rapidly or becoming dominant. The problem of stock dilution in rapidly growing economies is well known, where new growth is mostly being financed by new share issuance — and not benefiting existing shareholders.

The real question is what companies will best benefit from the future growth of the emerging economies? What we're seeing today is that domestic companies in emerging markets are doing well, as are many European companies who are capitalizing on their colonial roots and legacies. U.S. companies so far have not exhibited a huge advantage in this space.

But who know what the future holds? So owning a small portion of all global companies makes the most sense in my view.
Last edited by SimpleGift on Sat Jul 06, 2019 8:30 pm, edited 2 times in total.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Random Walker » Sat Jul 06, 2019 8:25 pm

SevenBridgesRoad wrote:
Sat Jul 06, 2019 8:19 pm
Glad to see after Moderators banned Larry Swedrow's columns (see recent thread) that we are still having Larry's columns here. Yes! Freedom of ideas wins.
Article was posted prior to my receiving the request to refrain from posting his essays.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Grt2bOutdoors » Sat Jul 06, 2019 8:27 pm

Seasonal wrote:
Sat Jul 06, 2019 8:18 pm
larryswedroe wrote:
Sat Jul 06, 2019 5:27 pm
One other comment, what I find interesting is that the whole philosophy of Bogleheads is really based on market efficiency. And if markets are efficient than US, Developed and EM must all have same expected risk adjusted returns and yet we hear arguments favoring US bias (which makes no sense if you believe in market efficiency. The two conflict as you sacrifice avoiding or minimizing divesifiable risks which are uncompensated.
That is a key point that cannot be stressed enough - to the extent markets are efficient everything has the same risk-adjusted return. The US may have vastly superior prospects than EM and have a much better legal system and investor rights. The market takes this into account when determining prices. Better countries or companies are not necessarily better investments.

If an investment has worse prospects and higher risk, the market will reduce the price of that investment until it achieves an equilibrium in which everything has the same risk adjusted return, at least to the extent markets are efficient and also taking into account how the investment fits into the entire portfolio.
+1 One more reason to hold a globally diversified portfolio, own the entire haystack.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by SevenBridgesRoad » Sat Jul 06, 2019 8:28 pm

Random Walker wrote:
Sat Jul 06, 2019 8:25 pm
SevenBridgesRoad wrote:
Sat Jul 06, 2019 8:19 pm
Glad to see after Moderators banned Larry Swedrow's columns (see recent thread) that we are still having Larry's columns here. Yes! Freedom of ideas wins.
Article was posted prior to my receiving the request to refrain from posting his essays.

Dave
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by 9-5 Suited » Sat Jul 06, 2019 8:46 pm

SevenBridgesRoad wrote:
Sat Jul 06, 2019 8:28 pm
Random Walker wrote:
Sat Jul 06, 2019 8:25 pm
SevenBridgesRoad wrote:
Sat Jul 06, 2019 8:19 pm
Glad to see after Moderators banned Larry Swedrow's columns (see recent thread) that we are still having Larry's columns here. Yes! Freedom of ideas wins.
Article was posted prior to my receiving the request to refrain from posting his essays.

Dave
Oh.
Unfortunate. Not sure why such a request would be made. Larry Swedroe has contributed over 15,000 posts on the forum, so it's not like he's on the lookout for a little cheap publicity. The guy has put in a lot of sweat equity over the years as a key member of the forum who helps generate interesting discussion.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by JustinR » Sat Jul 06, 2019 8:48 pm

"International has been such a drag in the past though."
  • "Chances are the future will be different from the past. That's why we should diversify."

"I don't think that's true. Forecasters can't see 30 years into the future much less 3 months."
  • "Right, but my point is it's a good idea to diversify because the future probably won't be like the past."

"But even if international does well in the future, US will probably be good too?"
  • "It's possible, but we don't know. That's why we diversify."

"But — ugggh — US has just been so great though. China and India hasn't had a huge effect so far."
  • "Yea but We don't know what the future holds. So it's a good idea to diversify."

lmao

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Grt2bOutdoors » Sat Jul 06, 2019 8:58 pm

JustinR wrote:
Sat Jul 06, 2019 8:48 pm
"International has been such a drag in the past though."
  • "Chances are the future will be different from the past. That's why we should diversify."

"I don't think that's true. Forecasters can't see 30 years into the future much less 3 months."
  • "Right, but my point is it's a good idea to diversify because the future probably won't be like the past."

"But even if international does well in the future, US will probably be good too?"
  • "It's possible, but we don't know. That's why we diversify."

"But — ugggh — US has just been so great though. China and India hasn't had a huge effect so far."
  • "Yea but We don't know what the future holds. So it's a good idea to diversify."

lmao
I suppose if instead of using the term "intenational" we used the word "technology" instead. What would be the outcome of a similar discussion if say we were having this exact conversation say 50 years ago when we were still using "punchcards" and "whole buildings to house mainframes which did not even have the level of computing power that the unit I'm currently typing on has". When the segments of the economy were more heavily dependent on manufacturing/natural resources/chemicals. Can you just imagine it? I know I can.

What I like about these threads is the ability for them to make you think if you dare do so, instead of following verbatim what a select few [OT comment removed - moderator oldcomputerguy] espouse. Innovation exists in many areas, and investing is no different.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by arcticpineapplecorp. » Sat Jul 06, 2019 9:03 pm

well,I for one am glad to see the link to the Vanguard Paper because now I understand why Vanguard has increased their international holdings to 40% (up from 30%) in their target date and lifestrategy funds.

I had referenced a similar paper from Vanguard from years past where they showed volatility decreased when holding non U.S. assets between 20%-40% of your portfolio. So naturally, I (as did Vanguard) chose to hold 30% international (because it was the sweet spot).

Now I see they are showing 40% as the "sweet spot" for reducing volatility.

I may have to reconsider moving from 30% to 40% or just going with vtwax (total world stock index) since it's only 0.10% (and currently I'm paying around 0.06% for my 70/30 U.S./int mix).

thanks for the article Random Walker and Larry. Good food for thought.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Vulcan » Sat Jul 06, 2019 9:04 pm

willthrill81 wrote:
Sat Jul 06, 2019 7:44 pm
SimpleGift wrote:
Sat Jul 06, 2019 7:39 pm
willthrill81 wrote:
Sat Jul 06, 2019 7:33 pm
I'm extremely skeptical of economic projections 30 years into the future. Economists aren't very good at predicting what will happen next quarter, and I don't believe that the addition of multiple decades will improve their accuracy.
The point of the post is not that the economic forecasts are accurate, but that the future is very unlikely to resemble the past. Since there are many possible futures, the best investing approach is to diversify as broadly as possible. An all-U.S. investor is betting on just one possible future.
It might be nitpicking, but do you believe that an all-U.S. portfolio will only at least match ex-U.S. in "just one possible future?" I can think of many different scenarios where that would occur. I'm not going to put a percentage likelihood on the U.S. outperforming ex-U.S. over the next 30 years, but I don't think that it's remote.
For US to continue to consistently outperform, it would have to grow significantly beyond its current global market share of approximately 55 percent, which is already a historic high.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by 9-5 Suited » Sat Jul 06, 2019 9:06 pm

Grt2bOutdoors wrote:
Sat Jul 06, 2019 8:58 pm
I suppose if instead of using the term "intenational" we used the word "technology"
I completely agree with your point and made a similar one above, but to be fair to the other side it's a slightly flawed analogy that can be reasonably nitpicked with the same arguments we've seen in the thread. Going 100% tech stocks would be much riskier than 100% US stocks for a few reasons, including just basic global market representation percentage as well as correlations. But like I said, agree with the principle of what you're saying.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Beehave » Sat Jul 06, 2019 9:09 pm

Random Walker wrote:
Sat Jul 06, 2019 2:37 pm
https://www.advisorperspectives.com/art ... sification

If your equities do not have significant international diversification, you might be affected by home country bias or recency bias. In a separate article I posted a day or two ago, Larry describes a game “outfoxing the box”. In that essay he plays that game with market, size, value. One could do the same mind experiment with US and Int equities.

Dave
Dave,
Thanks. Not only have I found links such as the ones you provide informative, I have found that using these links sometimes points me to other interesting sources of information and opinion as well. More specifically, I do not have formal training in finance or economics, so when I link to something interesting it leads to questions about concepts and terminology I need to research and do a deeper dive which is why I particularly enjoy and profit intellectually from posts like yours.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Mel Lindauer » Sat Jul 06, 2019 9:26 pm

Random Walker wrote:
Sat Jul 06, 2019 8:25 pm
SevenBridgesRoad wrote:
Sat Jul 06, 2019 8:19 pm
Glad to see after Moderators banned Larry Swedrow's columns (see recent thread) that we are still having Larry's columns here. Yes! Freedom of ideas wins.
Article was posted prior to my receiving the request to refrain from posting his essays.

Dave
Larry has always been, and is still welcome to post here and engage in exchanges of ideas with forum members.

It's the two-way exchanges with Larry here on.this forum that benefits our forum members.
Best Regards - Mel | | Semper Fi

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by McGilicutty » Sat Jul 06, 2019 9:38 pm

Grt2bOutdoors wrote:
Sat Jul 06, 2019 8:58 pm
What I like about these threads is the ability for them to make you think if you dare do so, instead of following verbatim what a select few [OT comment removed - moderator oldcomputerguy] espouse. Innovation exists in many areas, and investing is no different.
[OT - Removed] VXUS is up 5% since inception while the S&P 500 is up 127% during that time frame. 5% over 7 years is
"innovation?"

[OT - Removed]

(Edits by moderator oldcomputerguy)

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Sandtrap » Sat Jul 06, 2019 9:46 pm

SimpleGift wrote:
Sat Jul 06, 2019 7:39 pm
willthrill81 wrote:
Sat Jul 06, 2019 7:33 pm
I'm extremely skeptical of economic projections 30 years into the future. Economists aren't very good at predicting what will happen next quarter, and I don't believe that the addition of multiple decades will improve their accuracy.
The point of the post is not that the economic forecasts are accurate, but that the future is very unlikely to resemble the past. Since there are many possible futures, the best investing approach is to diversify as broadly as possible. An all-U.S. investor is betting on just one possible future.
+1
Very astute point.
j
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by willthrill81 » Sat Jul 06, 2019 9:51 pm

It's interesting to see that those crowing about the wisdom of owning global equities have been the ones left holding one of the worst performing asset classes for U.S. investors for the last 30 years. Since 1990, even short-term Treasuries and gold have both posted higher annualized returns than ex-U.S. stock and with lower volatility to boot.

This may change in the future, but international diversification hasn't helped U.S. investors for a long time now.

Believe it or not, I'm not saying one that one should not own ex-U.S. stock. For most of this year, emerging markets was my biggest holding. But those planning on holding ex-U.S. over the long-term had better not pin their hopes on the next decade looking a lot better than the last 30 years.
Last edited by willthrill81 on Sat Jul 06, 2019 9:52 pm, edited 1 time in total.
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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Whakamole » Sat Jul 06, 2019 9:52 pm

McGilicutty wrote:
Sat Jul 06, 2019 9:38 pm
Grt2bOutdoors wrote:
Sat Jul 06, 2019 8:58 pm
What I like about these threads is the ability for them to make you think if you dare do so, instead of following verbatim what a select few [OT comment removed - moderator oldcomputerguy] espouse. Innovation exists in many areas, and investing is no different.
[OT comment removed - moderator oldcomputerguy] VXUS is up 5% since inception while the S&P 500 is up 127% during that time frame. 5% over 7 years is
"innovation?"

[OT comment removed - moderator oldcomputerguy]
So logically we should invest in what will increase the most over the next 7 years.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by visualguy » Sat Jul 06, 2019 10:08 pm

SimpleGift wrote:
Sat Jul 06, 2019 8:22 pm
The real question is what companies will best benefit from the future growth of the emerging economies? What we're seeing today is that domestic companies in emerging markets are doing well, as are many European companies who are capitalizing on their colonial roots and legacies. U.S. companies so far have not exhibited a huge advantage in this space.

But who know what the future holds? So owning a small portion of all global companies makes the most sense in my view.
US companies have capitalized tremendously on China and others, both as a market and as a manufacturing center. Not sure what you're referring to regarding Europe - I haven't seen that. It's just another area among many where they lag the US with results which are evident in their stock markets.

Owning a small portion won't make a significant difference, so it's hard to argue for or against it.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Mountain Doc » Sat Jul 06, 2019 10:09 pm

McGilicutty wrote:
Sat Jul 06, 2019 9:38 pm
You might want to tone down the arrogance a little. You might learn something.
Ditto.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by lostdog » Sat Jul 06, 2019 10:12 pm

willthrill81 wrote:
Sat Jul 06, 2019 9:51 pm
It's interesting to see that those crowing about the wisdom of owning global equities have been the ones left holding one of the worst performing asset classes for U.S. investors for the last 30 years. Since 1990, even short-term Treasuries and gold have both posted higher annualized returns than ex-U.S. stock and with lower volatility to boot.

This may change in the future, but international diversification hasn't helped U.S. investors for a long time now.

Believe it or not, I'm not saying one that one should not own ex-U.S. stock. For most of this year, emerging markets was my biggest holding. But those planning on holding ex-U.S. over the long-term had better not pin their hopes on the next decade looking a lot better than the last 30 years.
Are you making a prediction?
I don't invest looking in the rear view mirror and I know absolutely nothing about the future.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by willthrill81 » Sat Jul 06, 2019 10:14 pm

lostdog wrote:
Sat Jul 06, 2019 10:12 pm
willthrill81 wrote:
Sat Jul 06, 2019 9:51 pm
It's interesting to see that those crowing about the wisdom of owning global equities have been the ones left holding one of the worst performing asset classes for U.S. investors for the last 30 years. Since 1990, even short-term Treasuries and gold have both posted higher annualized returns than ex-U.S. stock and with lower volatility to boot.

This may change in the future, but international diversification hasn't helped U.S. investors for a long time now.

Believe it or not, I'm not saying one that one should not own ex-U.S. stock. For most of this year, emerging markets was my biggest holding. But those planning on holding ex-U.S. over the long-term had better not pin their hopes on the next decade looking a lot better than the last 30 years.
Are you making a prediction?
No. What I am saying is that the last 30 years have not been good for ex-U.S., and the next decade may not look any better. I seem to get the vibe from some that they're expecting international to surge forward due to mean reversion or something.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by lostdog » Sat Jul 06, 2019 10:16 pm

willthrill81 wrote:
Sat Jul 06, 2019 10:14 pm
lostdog wrote:
Sat Jul 06, 2019 10:12 pm
willthrill81 wrote:
Sat Jul 06, 2019 9:51 pm
It's interesting to see that those crowing about the wisdom of owning global equities have been the ones left holding one of the worst performing asset classes for U.S. investors for the last 30 years. Since 1990, even short-term Treasuries and gold have both posted higher annualized returns than ex-U.S. stock and with lower volatility to boot.

This may change in the future, but international diversification hasn't helped U.S. investors for a long time now.

Believe it or not, I'm not saying one that one should not own ex-U.S. stock. For most of this year, emerging markets was my biggest holding. But those planning on holding ex-U.S. over the long-term had better not pin their hopes on the next decade looking a lot better than the last 30 years.
Are you making a prediction?
No. What I am saying is that the last 30 years have not been good for ex-U.S., and the next decade may not look any better. I seem to get the vibe from some that they're expecting international to surge forward due to mean reversion or something.
Gotcha. Makes sense what you're saying.
I don't invest looking in the rear view mirror and I know absolutely nothing about the future.

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Grt2bOutdoors » Sat Jul 06, 2019 10:21 pm

willthrill81 wrote:
Sat Jul 06, 2019 10:14 pm
lostdog wrote:
Sat Jul 06, 2019 10:12 pm
willthrill81 wrote:
Sat Jul 06, 2019 9:51 pm
It's interesting to see that those crowing about the wisdom of owning global equities have been the ones left holding one of the worst performing asset classes for U.S. investors for the last 30 years. Since 1990, even short-term Treasuries and gold have both posted higher annualized returns than ex-U.S. stock and with lower volatility to boot.

This may change in the future, but international diversification hasn't helped U.S. investors for a long time now.

Believe it or not, I'm not saying one that one should not own ex-U.S. stock. For most of this year, emerging markets was my biggest holding. But those planning on holding ex-U.S. over the long-term had better not pin their hopes on the next decade looking a lot better than the last 30 years.
Are you making a prediction?
No. What I am saying is that the last 30 years have not been good for ex-U.S., and the next decade may not look any better. I seem to get the vibe from some that they're expecting international to surge forward due to mean reversion or something.
There are some asset classes and in particular some segments within those certain asset classes that do absolutely nothing in terms of returns. Okay, so a portfolio that is truly diversified will usually underperform the best performing class simply because you are holding less of it. The world is truly global and to expect that international is going to shrink over the next 30 years creates a bigger dilemma - if your trading partners shrink how do you propose to continue the upward movement in earnings and market values?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Alchemist » Sat Jul 06, 2019 10:25 pm

SimpleGift wrote:
Sat Jul 06, 2019 8:02 pm
willthrill81 wrote:
Sat Jul 06, 2019 7:44 pm
It might be nitpicking, but do you believe that an all-U.S. portfolio will only at least match ex-U.S. in "just one possible future?"
It's possible, but the point is we don't know. In the face of ignorance about the future, the most prudent course for a passive index investor is to spread one's bets as broadly as possible — not to be making substantial bets on particular outcomes.

There is part of the future that we do know now, it is baked in for decades to come. Demographics. India does indeed have a promising demographic profile, as does the United States. China, Europe, Japan, and South Korea however are facing terminal demographic declines. Not something that can be turned around prior to the middle of this century. Below is a chart that I believe you originally posted in another thread some time ago.


Image


https://www.economist.com/news/finance- ... -vanishing

China's demographic situation is particularly dire.

Since 2000, China’s total fertility rate has been lower than that of Japan. The average in 2010-2016 was 1.18 in China and 1.42 in Japan. This means China's ageing crisis will be more severe than Japan’s, and its economic outlook bleaker....

....If China can stabilise its total fertility rate at 1.2, the total population will fall to around 1.07 billion by 2050 and 480 million by 2100. This decline will be accompanied by an ageing population structure. The proportion of the population aged 65 and over will rise from 10 per cent in 2015 to 32.6 per cent by 2050. In comparison, the proportion of those 65 and over in the US will rise from 14.6 per cent in 2015 to 23.2 per cent in 2050. In India, the proportion aged over 65 will increase from 5.6 per cent to 14.2 per cent by 2050.....


....The size of China’s labour force is rapidly declining, while its elderly population numbers are increasing dramatically. In 2015, China had 6.9 workers aged 20-64 supporting one senior citizen aged 65 or above (most women retire in their 50s) and there is already a social security shortfall. The ratio will continue to decline, to 3.6 workers in 2030 and 1.7 in 2050. No social security net, no family security and a pensions crisis will evolve into a humanitarian catastrophe.
Source: https://www.scmp.com/comment/insight-op ... risis-will


Keep in mind that the U.S. population is expected to increase to 400 million by 2100. Additionally, the Chinese working age population peaked....five years ago! The average Chinese is already two years older (38 vs 40) than the average American. China is becoming old far faster than it is becoming rich. The U.S. working age population continues to grow, albeit at a slow pace and thanks largely to immigration. Europe, Japan, Tawian, and South Korea all face declining populations and already shrinking working age populations. Even if automation helps in production, you still need customers to buy things. Those countries are not going to get any better demographically (and likely economically) than they are now. China still has some room to grow as the rural areas develop. The room for expansion, however, is limited by the heavy costs of an upside down population pyramid as its population ages even more rapidly than Japan's.

India, South East Asia, and Africa all have healthy demographic trends. Though there are a great deal of other risks associated with investing there. I think in the long run they will do pretty well as they develop with India eventually over taking the U.S. in GDP. However, Emerging Markets offer a great deal more risk for equity investors than developed ones like the U.S. I for one find it a bit too risky for my money but think it is reasonable for others to invest there if they so chose with a part of their portfolio. With Europe and developed Asia looking at long term demographic decline, I just do not see much reason to invest in developed international funds as a U.S. investor.

Again, demographics are already determined through the middle of the century. You cannot reverse decline in less than a multi-decade period. After all, it takes 18 years to make an unskilled worker and 22 for one with a degree.
Last edited by Alchemist on Sat Jul 06, 2019 10:29 pm, edited 3 times in total.

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