What would investors ever choose arbitrary allocation of US/nonUS stocks?

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Vision
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What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Vision » Mon Aug 12, 2019 3:56 am

If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

I'm talking about people who suggest buying US and non US stocks for your portfolio.

Why wouldn't we make it way simpler, by for example, choosing VT over VTI and VXUS?

Sure we can rebalance annually, but there isn't really a rebalancing bonus for this and it just adds extra friction, so what is the advantage of this separation? Slightly higher expense ratio? I calculated and the difference is peanuts, sometimes the trading fees can be higher.

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.

kfitz1313
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by kfitz1313 » Mon Aug 12, 2019 4:22 am

You'll probably hear both the expense ratio and rebalancing arguments, as well as currency risk and that US companies are already diversified overseas from their revenues. You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.

I'm not convinced by any of those myself and do as you've said by holding VT. I think the expense ratio makes sense if you really want to save a few basis points, but ease and simplicity [are better - moderator prudent] for me personally.

sambb
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by sambb » Mon Aug 12, 2019 4:24 am

to the OP - well said

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Vision
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Vision » Mon Aug 12, 2019 4:43 am

kfitz1313 wrote:
Mon Aug 12, 2019 4:22 am
You'll probably hear both the expense ratio and rebalancing arguments, as well as currency risk and that US companies are already diversified overseas from their revenues. You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.

I'm not convinced by any of those myself and do as you've said by holding VT. I think the expense ratio makes sense if you really want to save a few basis points, but ease and simplicity [are better - moderator prudent] for me personally.
Can you give me the "rebalancing argument"? It was proven there is no real "rebalancing bonus". It's not like a lifehack, which gives you extra money for nothing.

And could you elaborate on "currency risk"? After 5 years of hearing this I still don't understand it. Could someone explain it to me like you would to a child?

Let us assume I'm from Lithuania holding VWRD world stock index in Ireland domiciled ETF...where is the "currency risk" for me there?
You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.
This does make sense, for example, China probably faking data, but...isn't that already priced in?

And ok, let us assume non-US stocks are unreliable...why hold any at all then?

Furthermore, many claim to hold about 55-60% in US stock and 45-40% in non-US. This is very close to true distribution ration, so..is it really worth holding two funds instead of one if you have close to actual ratio reflection?

[OT comment removed by moderator prudent]

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by kfitz1313 » Mon Aug 12, 2019 5:13 am

Vision wrote:
Mon Aug 12, 2019 4:43 am
Can you give me the "rebalancing argument"? It was proven there is no real "rebalancing bonus". It's not like a lifehack, which gives you extra money for nothing. As I said, I'm not someone that buys into any of this. I think the argument is that if you decide on allocating 70/30 to US/ex-US then you can buy for cheaper when you rebalance the same way you would with stocks/bonds.

And could you elaborate on "currency risk"? After 5 years of hearing this I still don't understand it. Could someone explain it to me like you would to a child? Here, people will generally point out that if you earn profits in another country, but their currency drops and you have to convert back to your home country, then the currency risk will dominate profits. So if you ex-US stocks went up 10% but the currencies went down significantly, then you'd not actually collect that gain. I see this as cutting both ways though, so it is irrelevant on the whole. Generally, I hear that most people buy their products in their home country, but as far as I can tell we are connected enough with everyone that if the US currency really did drop we would still suffer when we bought items in Target and Walmart as they are coming from all over the world.

This does make sense, for example, China probably faking data, but...isn't that already priced in? I would say yes. If we know that overseas companies are not held to the same standards then it is obviously priced in. Therefore no issue in my mind with holding them.

And ok, let us assume non-US stocks are unreliable...why hold any at all then? Many people do support only holding US stocks. I am not one of them.

Furthermore, many claim to hold about 55-60% in US stock and 45-40% in non-US. This is very close to true distribution ration, so..is it really worth holding two funds instead of one if you have close to actual ratio reflection? I would say it's only worth it on the expense ratio, which is factually cheaper, but it's not worth the few basis points to me.

[OT comment removed by moderator prudent]

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Valuethinker » Mon Aug 12, 2019 5:48 am

Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

I'm talking about people who suggest buying US and non US stocks for your portfolio.

Why wouldn't we make it way simpler, by for example, choosing VT over VTI and VXUS?

Sure we can rebalance annually, but there isn't really a rebalancing bonus for this and it just adds extra friction, so what is the advantage of this separation? Slightly higher expense ratio? I calculated and the difference is peanuts, sometimes the trading fees can be higher.

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
The stock fund will have currency risk. The bond fund AFAIK is hedged into USD?

So if we were able to separate out our currency position from our investments then we could do with with 0 currency risk. Have a currency overlay that was 100% USD and gain the full diversification benefits of holding the world market.

However in practice:

- retail investors cannot do that - they hold hedged funds or unhedged funds
- there is a cost to holding currency hedged funds
- probably Purchasing Power Parity applies in the long run - the returns (in USD) of a hedged and unhedged US global equity fund will be quite similar (but the former will lose performance due to the cost of the hedge). Note if you are within 10-15 years of retirement that "Probably" is dangerous if you have high overseas equity weightings

On the bond side if you are currency hedged then:

- the main risks you are taking on are liquidity risk (most non US govt bond markets are less liquid than UST market) & credit risk. For govt bonds you can safely ignore liquidity risk I think. Credit risk though is very real - look at the yield gap between Italian and German 10 year bonds (3.0% last time I checked) - the market thinks Italy can default.

Do you really wish to diversify from the credit risk of US Treasury bonds into the credit risk of other governments?

Empirically around 30% of portfolio seems to have given the best risk-return tradeoff (30% equities) for a US based investor.

A non-US investor should be much closer to global weightings. For example a UK investor has a domestic market of only about 10% of world developed stock market indices, and a reliance on his or her own government's credit risk. Exchange rate risk looms large.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by reln » Mon Aug 12, 2019 6:01 am

Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

I'm talking about people who suggest buying US and non US stocks for your portfolio.

Why wouldn't we make it way simpler, by for example, choosing VT over VTI and VXUS?

Sure we can rebalance annually, but there isn't really a rebalancing bonus for this and it just adds extra friction, so what is the advantage of this separation? Slightly higher expense ratio? I calculated and the difference is peanuts, sometimes the trading fees can be higher.

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
You've done a great job identifying one of the contradictions prevalent here.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by abw » Mon Aug 12, 2019 6:04 am

Vision wrote:
Mon Aug 12, 2019 3:56 am
To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
A simple reason is implementation issues. My accounts don't allow me to buy the world total stock index; I can only buy the US or developed markets (ex-US) or developing. It's up to me to approximate the world total.

Also, in my case, only US bond funds are available.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by nisiprius » Mon Aug 12, 2019 6:05 am

Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?
Your "Total World Stock and Total World Bond" is a perfectly reasonable choice, but it's not the only sane choice.

I hope I can convince you that things are not as simple as you think. What bothers me is the intensity which people seem to have about this topic.

Let me try this on you. If we assume we are not able to pick stocks or sectors, then we do not know which will do better: developed markets or undeveloped markets. What should our ratio between developed and undeveloped markets be? Quick, try to answer the question yourself, before reading on or looking anything up.

Now, your Total World Stock fund is 90% developed markets, 10% emerging markets. If we are unable to judge which is better, should we be putting 90% of our investment into developed markets? What is your personal reason for not making it a 50/50 split between developed/emerging?

Take it a step farther. If we do not know which country will do best, then what should be our allocation by country? If you put $10,000 into Total World Stock, you have put $750 into Japan and only $150 into Korea. You have put $80 into Italy and $300 into France. You have put as much Canada as you have put into all of China. Does that make sense to you? If we do not know which country will do best, then shouldn't we be equal-weighting all of the countries?

My answer is "no," and probably yours is "no," too, because by choosing an "index fund" we have chosen to follow an "index." That term was introduced by Irving Fisher in 1922 in a book called The Making of Index Numbers. He introduced the use of capitalization weighting--weighting by dollars in the market, rather than equal weighting. 1922 marks a dividing line between the use of the pragmatic Dow Jones "averages," and cap-weighted "indexes."

So, we are both committing to cap-weighting. But I hope I've shown that "I don't know which will do best" does not, all by itself, tell us what our ratio should be. "I don't know which will do best, so I will weight them equally" and "I don't know which will do best, so I will weight them by capitalization" are both plausible, and there are other plausible, sane choices, many of which have been seriously argued.

But we both like cap-weighting and we both use it within our US investments, and the likely reason why we are doing this is that there is a theorem in financial economics that says that cap-weighting is an optimum--the optimum when measured in a certain way and the optimum if you make certain assumptions.

At this point you should be saying (gleefully) "but you've proved my point, which is that I think US/international should be allocated by cap weight, which is what Total World does."

The problem is that at least on the face of it, those assumptions are closer to being realistic for a single country, e.g. the US, than they are for the world. The theorem about "the market portfolio" assumes that you have a unified market within which rational investors trade frictionlessly.

Despite phrases like "the global stock market," no such thing exists. There is no single global stock market. There is a collection of dozens of national stock markets. We can add them up on a spreadsheet but that doesn't make them a single market in real life. And there are sources of friction, one of the obvious ones being currency exchange.

The difference is there. Sensible people can disagree on how big it is and how much it matters. Maybe the differences between a collection of separate national stock markets, and a single imaginary global market trading in a universal currency, are completely negligible, or maybe they make some difference.

There is room for people who have made different judgements to be within the range of sanity, and not to be quick to call each other illogical.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Dandy » Mon Aug 12, 2019 6:35 am

If your fixed income is primarily for safety and stability of your portfolio why would you need any international bonds? The US has a variety of government guaranteed, municipal, corporate, inflation protected, FDIC options that should suffice. And they have lower costs than VG international bond fund. You might choose to add some international bond exposure but that isn't really needed.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by RadAudit » Mon Aug 12, 2019 6:40 am

nisiprius wrote:
Mon Aug 12, 2019 6:05 am
There is room for people who have made different judgements to be within the range of sanity
Thank you for the post - and that out.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by kfitz1313 » Mon Aug 12, 2019 6:46 am

Dandy wrote:
Mon Aug 12, 2019 6:35 am
If your fixed income is primarily for safety and stability of your portfolio why would you need any international bonds? The US has a variety of government guaranteed, municipal, corporate, inflation protected, FDIC options that should suffice. And they have lower costs than VG international bond fund. You might choose to add some international bond exposure but that isn't really needed.
You could hold other government bonds to the extent you assign a probability of the US government either defaulting or the currency depreciating. If I did hold fixed income, I would probably be roughly 50/50 as I travel quite a bit and usually live outside the US. Something like GOVT/BWX in 50/50 holding would make sure that any currency changes would come out a wash. I don't think the US currency has a lot of risk, but I also don't know which direction it's going in the long-run compared to the rest of the world's sovereign debt.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by lazyday » Mon Aug 12, 2019 7:39 am

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?
Because many of us do not always follow Boglehead principles. Just like Bogle himself.

No matter how smart you are, it's difficult to invest rationally.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by JoMoney » Mon Aug 12, 2019 8:05 am

For a US investor, international stocks have higher costs to manage the portfolio/fund, foreign tax withholding, domestic tax considerations, as well as exposing the investor to different risks (like sovereign/currency risk... and more). On top of that, the US stock market is pretty well diversified as it is, is denominated in U.S. dollars (a currency that may have issues, but is still the leader), is filled with multi-national companies that have plenty of exposure to foreign economic activity, and dominated by larger market-cap less volatile stocks.
I don't get the justification why other U.S. investors feel compelled to own international stocks.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by longinvest » Mon Aug 12, 2019 8:45 am

Here's a Vanguard paper about the subject:

The role of home bias in global asset allocation decisions
[...] we outline a decision framework that considers both quantitative and qualitative criteria. Based on these criteria, we conclude that, in general, U.S. investors may have some justification for marginal home bias [...]
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Vision » Mon Aug 12, 2019 8:59 am

Here, people will generally point out that if you earn profits in another country, but their currency drops and you have to convert back to your home country, then the currency risk will dominate profits. So if you ex-US stocks went up 10% but the currencies went down significantly, then you'd not actually collect that gain. I see this as cutting both ways though, so it is irrelevant on the whole.
That is the thing - wouldn't currency changes reflect in price fluctuations either way?

It is not like if EUR gets devalued against dollar the prices in stores magically remain the same, right?

Besides, I'm not sure where I will spend my pension. I might as well travel around the world and dollar should be fine in that case. And when needed I would convert USD to EUR to pay for my living costs.

So where is this risk exactly? If dollar drops in value all of sudden? But EUR might as well drop in value as well. We don't know which will happen, so how is holding EUR based fund safer than USD based fund? If EUR drops then you will be able t buy less stuff with it even if it is your home country, no?
So if we were able to separate out our currency position from our investments then we could do with with 0 currency risk. Have a currency overlay that was 100% USD and gain the full diversification benefits of holding the world market.
So how to do this? Assuming my country uses EUR and assuming I want to buy accumulating world stock index like VWRA (Ireland based). How to mitigate this risk then?
Let me try this on you. If we assume we are not able to pick stocks or sectors, then we do not know which will do better: developed markets or undeveloped markets. What should our ratio between developed and undeveloped markets be? Quick, try to answer the question yourself, before reading on or looking anything up.
My first instinctive choice is - they should be whatever they are aka "the index".
Now, your Total World Stock fund is 90% developed markets, 10% emerging markets. If we are unable to judge which is better, should we be putting 90% of our investment into developed markets? What is your personal reason for not making it a 50/50 split between developed/emerging?
No, we should hold whatever the true portion is. If developed markets are 90%, we should have 90% in them.
should we be putting 90% of our investment into developed markets?
Yes.
What is your personal reason for not making it a 50/50 split between developed/emerging?
Because then I would assume I'm smart enough to determine that emerging markets will for some reason perform better than developed markets. Why would I suddenly have the required intelligence to make that call?
Take it a step farther. If we do not know which country will do best, then what should be our allocation by country? If you put $10,000 into Total World Stock, you have put $750 into Japan and only $150 into Korea. You have put $80 into Italy and $300 into France. You have put as much Canada as you have put into all of China. Does that make sense to you? If we do not know which country will do best, then shouldn't we be equal-weighting all of the countries?
No, it should not be equal weight, because proportionally these countries are of different sizes economy wise, so we should have the % whatever the actual, real % is aka "the index".
"I don't know which will do best, so I will weight them equally" and "I don't know which will do best, so I will weight them by capitalization" are both plausible, and there are other plausible, sane choices, many of which have been seriously argued.
But if you are weighting a small country with 2 million population the same as a country with 1 billion population can that truly be a reasonable assumption? You are giving an equal exposure to both simply because they are divided geographically, but differ completely in size. You are increasing risk drastically and not really "diversifying". I don't believe that t be a plausible, sane choice. It isn't sane to weight tiny region, Ukraine stocks same as China stocks as they both differ in size dramatically.

Now, you are probably right and more knowledgeable on this subject. I don't want to argue.

But I understand that my approach is fair and logical for my particular case.

So I have decided on 80% stock weighting in VWRA accumulating Ireland index ETF. Does that make sense?

Now...what would be the bond ETF to choose? Any tips?
If your fixed income is primarily for safety and stability of your portfolio why would you need any international bonds? The US has a variety of government guaranteed, municipal, corporate, inflation protected, FDIC options that should suffice. And they have lower costs than VG international bond fund. You might choose to add some international bond exposure but that isn't really needed.
Honestly, I don't know. That is why I'm here. Should I choose US only bond index like BND? Also, are there accumulating bond indices?
JoMoney wrote:
Mon Aug 12, 2019 8:05 am
For a US investor, international stocks have higher costs to manage the portfolio/fund, foreign tax withholding, domestic tax considerations, as well as exposing the investor to different risks (like sovereign/currency risk... and more). On top of that, the US stock market is pretty well diversified as it is, is denominated in U.S. dollars (a currency that may have issues, but is still the leader), is filled with multi-national companies that have plenty of exposure to foreign economic activity, and dominated by larger market-cap less volatile stocks.
I don't get the justification why other U.S. investors feel compelled to own international stocks.
True, but I'm no US investor.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by kfitz1313 » Mon Aug 12, 2019 9:14 am

Vision wrote:
Mon Aug 12, 2019 8:59 am
Here, people will generally point out that if you earn profits in another country, but their currency drops and you have to convert back to your home country, then the currency risk will dominate profits. So if you ex-US stocks went up 10% but the currencies went down significantly, then you'd not actually collect that gain. I see this as cutting both ways though, so it is irrelevant on the whole.
That is the thing - wouldn't currency changes reflect in price fluctuations either way?

It is not like if EUR gets devalued against dollar the prices in stores magically remain the same, right? If the EUR depreciates then I can buy more stuff with USD. If it appreciates, I can buy less stuff with USD.

Besides, I'm not sure where I will spend my pension. I might as well travel around the world and dollar should be fine in that case. And when needed I would convert USD to EUR to pay for my living costs. See above. The USD will be fine as long as it is stronger than other currencies. Assuming that is making a bet that it will remain so. That can fine or not depending on how you assign risk over your life.

So where is this risk exactly? If dollar drops in value all of sudden? But EUR might as well drop in value as well. We don't know which will happen, so how is holding EUR based fund safer than USD based fund? If EUR drops then you will be able to buy less stuff with it even if it is your home country, no? I feel like we are saying almost the same thing, but maybe making different conclusions. Yes, of course there is risk that the dollar drops in value all of sudden, just not much of one. I'm not personally worried about that, but I am young and will likely live for another 50-60 years. Tell me if USD will still be the dominant currency. It might, it might not. Yes, if the EUR drops you will be able to buy less stuff, even if it is your home country, which is true for the USD too. That is the whole point. I don't know what currency will be strongest in the future and neither does anyone else, so why hold only one? I'd rather diversity the currencies I hold, particularly as a person who travels a lot and can choose to buy goods in almost any location. However, even if I were stationary, as you point out, a home country currency dropping in value still means buying less stuff because all countries import stuff and that will be affected. Holding other currencies is sort of like holding gold. You are just storing value in them. I'm not personally on planning on doing much of this in any case, so this is just more so looking at how currencies affect consumption. One personal example is that I took a job in Singapore in 2014 and the currency went down considerably over the next few years to the tune of tens of thousands of dollars worth of USD. That could have just as easily gone the other way though so that I came out thousands of dollars ahead in converting SGD to USD. I didn't know ahead of time which direction it went.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by nix4me » Mon Aug 12, 2019 10:47 am

So you instead assume that Vanguard picked the magical right mix for VT??? You sure about that?

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by vineviz » Mon Aug 12, 2019 11:33 am

Vision wrote:
Mon Aug 12, 2019 8:59 am
Now, your Total World Stock fund is 90% developed markets, 10% emerging markets. If we are unable to judge which is better, should we be putting 90% of our investment into developed markets? What is your personal reason for not making it a 50/50 split between developed/emerging?
No, we should hold whatever the true portion is. If developed markets are 90%, we should have 90% in them.
There are three assumptions in here, ranging in soundness from questionable to clearly false.

1) There is such a thing as a “true portion”;

2) If there is, that “true portion” is the market cap weight;

3) If that is true, every investor should hold the same proportion of every asset.

#1 and #2 are questionable. #3 is certainly not true.

Ergo, non-market weights aren’t necessarily “arbitrary”.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Charon » Mon Aug 12, 2019 11:56 am

Vision wrote:
Mon Aug 12, 2019 8:59 am
No, it should not be equal weight, because proportionally these countries are of different sizes economy wise, so we should have the % whatever the actual, real % is aka "the index".

...

But if you are weighting a small country with 2 million population the same as a country with 1 billion population can that truly be a reasonable assumption? You are giving an equal exposure to both simply because they are divided geographically, but differ completely in size. You are increasing risk drastically and not really "diversifying". I don't believe that t be a plausible, sane choice. It isn't sane to weight tiny region, Ukraine stocks same as China stocks as they both differ in size dramatically.
You may want to consider the inherent contradiction in your replies here. In the first reply you talk about weighting by economy size, and in the second you weight by population. If it's not sane to weight Ukraine the same as China because of the much larger population of the latter, then it's not sane to weight Canada the same as China. (Canada has a smaller population than Ukraine.) But that's what you'd do by cap weighting.

I think part of the point nisiprius was trying to make is that "the index" was chosen to weight certain factors. You could choose to weight by other factors instead, and plausibly argue for them. It's not a priori clear which indexing method is the best, and it's definitely dangerous to believe that one method is perfect, "real", and the only option, when it's not.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by ruralavalon » Mon Aug 12, 2019 12:08 pm

Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

I'm talking about people who suggest buying US and non US stocks for your portfolio.

Why wouldn't we make it way simpler, by for example, choosing VT over VTI and VXUS?

Sure we can rebalance annually, but there isn't really a rebalancing bonus for this and it just adds extra friction, so what is the advantage of this separation? Slightly higher expense ratio? I calculated and the difference is peanuts, sometimes the trading fees can be higher.

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
Historically market weight U.S. versus international stocks has not proven to be the optimum for diversification benefit. The Efficient Market Hypothesis is just a hypothesis, not a proven fact.

This won't be convincing to anyone who believes in the hypothesis. There is no clear compelling evidence for any of the opinions (including mine) on international stock allocation, so the argument is endless.

Your 2 fund portfolio, Vanguard Total World Stock Index Fund Investor Shares (VTWSX) plus Vanguard Total International Bond Index Fund Admiral Shares (VTABX), is within the range of what is reasonable in my opinion. But that's just an opinion, your 2 fund portfolio is not the only logical choice for every investor.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Vision » Mon Aug 12, 2019 12:22 pm

ruralavalon wrote:
Mon Aug 12, 2019 12:08 pm
Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

I'm talking about people who suggest buying US and non US stocks for your portfolio.

Why wouldn't we make it way simpler, by for example, choosing VT over VTI and VXUS?

Sure we can rebalance annually, but there isn't really a rebalancing bonus for this and it just adds extra friction, so what is the advantage of this separation? Slightly higher expense ratio? I calculated and the difference is peanuts, sometimes the trading fees can be higher.

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
Historically market weight U.S. versus international stocks has not proven to be the optimum for diversification benefit. The Efficient Market Hypothesis is just a hypothesis, not a proven fact.

This won't be convincing to anyone who believes in the hypothesis. There is no clear compelling evidence for any of the opinions (including mine) on international stock allocation, so the argument is endless.

Your 2 fund portfolio, Vanguard Total World Stock Index Fund Investor Shares (VTWSX) plus Vanguard Total International Bond Index Fund Admiral Shares (VTABX), is within the range of what is reasonable in my opinion. But that's just an opinion, your 2 fund portfolio is not the only logical choice for every investor.
Due to me being located in Lithuania it is best for me to choose Irish based funds for tax reasons. I found VWRA as accumulating world index fund, but haven't decided on BND portion - what would be your recommendation?

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Goal33 » Mon Aug 12, 2019 12:23 pm

I buy VT but typically end up having to split it up to take advantage of tax loss harvesting.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Tyler Aspect » Mon Aug 12, 2019 12:28 pm

I quite like the combination of VTI coupled to VT. Unfortunately not many 401k programs have access to a global stock index.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by ruralavalon » Mon Aug 12, 2019 12:34 pm

Vision wrote:
Mon Aug 12, 2019 12:22 pm
ruralavalon wrote:
Mon Aug 12, 2019 12:08 pm
Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

I'm talking about people who suggest buying US and non US stocks for your portfolio.

Why wouldn't we make it way simpler, by for example, choosing VT over VTI and VXUS?

Sure we can rebalance annually, but there isn't really a rebalancing bonus for this and it just adds extra friction, so what is the advantage of this separation? Slightly higher expense ratio? I calculated and the difference is peanuts, sometimes the trading fees can be higher.

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
Historically market weight U.S. versus international stocks has not proven to be the optimum for diversification benefit. The Efficient Market Hypothesis is just a hypothesis, not a proven fact.

This won't be convincing to anyone who believes in the hypothesis. There is no clear compelling evidence for any of the opinions (including mine) on international stock allocation, so the argument is endless.

Your 2 fund portfolio, Vanguard Total World Stock Index Fund Investor Shares (VTWSX) plus Vanguard Total International Bond Index Fund Admiral Shares (VTABX), is within the range of what is reasonable in my opinion. But that's just an opinion, your 2 fund portfolio is not the only logical choice for every investor.
Due to me being located in Lithuania it is best for me to choose Irish based funds for tax reasons. I found VWRA as accumulating world index fund, but haven't decided on BND portion - what would be your recommendation?
I don't know anything about Irish based funds. Sorry.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Vision » Mon Aug 12, 2019 12:35 pm

Tyler Aspect wrote:
Mon Aug 12, 2019 12:28 pm
I quite like the combination of VTI coupled to VT. Unfortunately not many 401k programs have access to a global stock index.
Goal33 wrote:
Mon Aug 12, 2019 12:23 pm
I buy VT but typically end up having to split it up to take advantage of tax loss harvesting.


I'm EU investor (Lithuania). Irish based fund like VWRA would be better choice for me, but I'm not sure on which bond index to choose. Any ideas?

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by LadyGeek » Mon Aug 12, 2019 4:12 pm

This thread is now in the Investing - Theory, News & General forum (general discussion).
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by columbia » Mon Aug 12, 2019 5:11 pm

Why do some folks get fired up about how others choose to invest their money? It’s rather odd.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by columbia » Mon Aug 12, 2019 5:33 pm

If you live in Canada, Vanguard will sell you a global fund which is 30% Canada.

https://www.bloomberg.com/quote/VEQT:CN

They do not appear to offer Canadians a version of VT.

I think I know why that is.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by White Coat Investor » Mon Aug 12, 2019 5:35 pm

Hard to get VT in many accounts but TSM or a 500 index fund are pretty easy to find.

Personally, I don't think a market weighting is best for me given that I'll likely mostly spend dollars in my lifetime. I think it makes sense for me to overweight domestic a bit. I think the key is to find something reasonable and stick with it. For me, that 1/3 international.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by FIREchief » Mon Aug 12, 2019 6:12 pm

OP: I understand that English may not be your first language. I believe you are asking "Why would investors choose an arbitrary allocation of US/nonUS stocks?"

I will answer with a question: What do you define as "arbitrary?" I believe the two most common choices are a) 100% US / 0% nonUS and b) global market weighting. Neither of these are "arbitrary." They're based upon certain criteria or reasoning. We can (and certainly have :P ) questioned the basis for different splits, but I don't consider them to be simply arbitrary choices. The most typical "arbitrary" choice I've seen mentioned is to invest 80% US and 20% nonUS, usually because some respected expert recommended "no more than 20% nonUS").

If I'm correct on that, then my answer would be that those who just choose some arbitrary allocation are just too lazy to think through their choice.
Last edited by FIREchief on Mon Aug 12, 2019 6:41 pm, edited 2 times in total.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by longinvest » Mon Aug 12, 2019 6:40 pm

columbia wrote:
Mon Aug 12, 2019 5:33 pm
If you live in Canada, Vanguard will sell you a global fund which is 30% Canada.

https://www.bloomberg.com/quote/VEQT:CN

They do not appear to offer Canadians a version of VT.

I think I know why that is.
VEQT is one among five Asset Allocation ETFs (ranging from 100/0 to 20/80 stocks/bonds in steps of 20) offered by Vanguard Canada. The research behind these ETFs is explained in the document "Vanguard asset allocation ETFs: A simple yet sophisticated approach to portfolio construction". It contains a text box that specifically discusses the home bias of these ETFs:
Text Box A: Home bias – Balancing theory and implementation

Financial theory suggests that investors construct their asset class exposure in line with market capitalization weights. After all, market capitalizations reflect the consensus estimate of each company’s value at any given moment. Therefore, the methodology for the asset allocation ETFs is to weight assets according to their asset weights within all asset classes with the exception of Canadian equities and bonds.
[...]
When it comes to sizing an appropriate home bias, we take into consideration factors such as investors’ home-country preferences, the potential for return variation and volatility reduction from adding more global securities, the degree of market concentration, relative implementation costs (including taxes and liquidity), the impact of currency (to be covered later) and regulatory constraints (Scott, 2017). When weighing these factors collectively, we believe a home bias of 30% for equities and 60% for fixed income represents a reasonable trade-off between the benefits of adding more global equities while still maintaining a meaningful allocation to Canadian securities. As time goes on, the evolution of investor preferences for global diversification and a trend of declining implementation costs may warrant a lower home bias.
All of my portfolio is invested into the Vanguard Balanced ETF Portfolio (VBAL) which is one of these five Asset Allocation ETFs. I'm fine with Vanguard's choice of allocating 30% of equities and 60% of fixed income to Canadian securities.

I would definitely have trouble sleeping at night if I had to hold a portfolio with a 97% weighting to foreign securities to reflect the theoretical "proper weighting" of Canadian stocks and bonds in my portfolio.
Last edited by longinvest on Mon Aug 12, 2019 6:47 pm, edited 1 time in total.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by columbia » Mon Aug 12, 2019 6:47 pm

longinvest wrote:
Mon Aug 12, 2019 6:40 pm
columbia wrote:
Mon Aug 12, 2019 5:33 pm
If you live in Canada, Vanguard will sell you a global fund which is 30% Canada.

https://www.bloomberg.com/quote/VEQT:CN

They do not appear to offer Canadians a version of VT.

I think I know why that is.
VEQT is one among five Asset Allocation ETFs (ranging from 100/0 to 20/80 stocks/bonds in steps of 20) offered by Vanguard Canada. The research behind these ETFs is explained in the document "Vanguard asset allocation ETFs: A simple yet sophisticated approach to portfolio construction". It contains a text box that specifically discusses the home bias of these ETFs:
Text Box A: Home bias – Balancing theory and implementation

Financial theory suggests that investors construct their asset class exposure in line with market capitalization weights. After all, market capitalizations reflect the consensus estimate of each company’s value at any given moment. Therefore, the methodology for the asset allocation ETFs is to weight assets according to their asset weights within all asset classes with the exception of Canadian equities and bonds.
[...]
When it comes to sizing an appropriate home bias, we take into consideration factors such as investors’ home-country preferences, the potential for return variation and volatility reduction from adding more global securities, the degree of market concentration, relative implementation costs (including taxes and liquidity), the impact of currency (to be covered later) and regulatory constraints (Scott, 2017). When weighing these factors collectively, we believe a home bias of 30% for equities and 60% for fixed income represents a reasonable trade-off between the benefits of adding more global equities while still maintaining a meaningful allocation to Canadian securities. As time goes on, the evolution of investor preferences for global diversification and a trend of declining implementation costs may warrant a lower home bias.
Disclosure: All of my portfolio is invested into the Vanguard Balanced ETF Portfolio (VBAL) which is one of these five Asset Allocation ETFs.

That’s pretty much what I thought.

You’re obviously ok with the “bias”, it seems.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by longinvest » Mon Aug 12, 2019 6:50 pm

columbia wrote:
Mon Aug 12, 2019 6:47 pm
You’re obviously ok with the “bias”, it seems.
I'm definitely fine with it. Most Canadians have a much higher home bias in their portfolios.

Let me ask you: How would you feel if you had to invest 97% of your money abroad in foreign equities and foreign fixed income?

Personally, I would have trouble sleeping at night.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by columbia » Mon Aug 12, 2019 6:53 pm

longinvest wrote:
Mon Aug 12, 2019 6:50 pm
columbia wrote:
Mon Aug 12, 2019 6:47 pm
You’re obviously ok with the “bias”, it seems.
I'm definitely fine with it. Most Canadians have a much higher home bias in their portfolios.

Let me ask you: How would you feel if you had to invest 97% of your money abroad in foreign equities and foreign fixed income?

Personally, I would have trouble sleeping at night.

I most certainly would not do that...

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by longinvest » Mon Aug 12, 2019 7:02 pm

columbia wrote:
Mon Aug 12, 2019 6:53 pm
longinvest wrote:
Mon Aug 12, 2019 6:50 pm
columbia wrote:
Mon Aug 12, 2019 6:47 pm
You’re obviously ok with the “bias”, it seems.
I'm definitely fine with it. Most Canadians have a much higher home bias in their portfolios.

Let me ask you: How would you feel if you had to invest 97% of your money abroad in foreign equities and foreign fixed income?

Personally, I would have trouble sleeping at night.

I most certainly would not do that...
We have a similar view, then. Vanguard's choice is already pushing my tolerance to its limit by allocating 58% of VBAL to foreign securities (42% foreign stocks, 16% foreign bonds).
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by columbia » Mon Aug 12, 2019 7:05 pm

Beware: Holding 10x the global cap of your home country might give some folks here an aneurism. :P

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by Ferdinand2014 » Mon Aug 12, 2019 7:05 pm

Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

I'm talking about people who suggest buying US and non US stocks for your portfolio.

Why wouldn't we make it way simpler, by for example, choosing VT over VTI and VXUS?

Sure we can rebalance annually, but there isn't really a rebalancing bonus for this and it just adds extra friction, so what is the advantage of this separation? Slightly higher expense ratio? I calculated and the difference is peanuts, sometimes the trading fees can be higher.

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
Your making a dangerous assumption that the world is a global utopia of unified markets where there is perfect all encompassing information priced into all securities. You are also not taking into account individuals tax liabilities, laws they live under, currency they spend in, personal risk tolerances, corporate governance and shareholder rights as a foreign (or domestic) investor, individuals personal views regarding investing in certain countries and companies that may or may not be desired by the individual investor, etc. Even if all securities are perfectly priced by incorporating all known information on a global scale, they cannot be priced appropriately for an individuals own circumstances outlined above. X stock priced at X dollar may be expensive to one investor in one country with their own tax laws for example, but cheap to another investor in another country. Caveat emptor.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by longinvest » Mon Aug 12, 2019 7:14 pm

columbia wrote:
Mon Aug 12, 2019 7:05 pm
Beware: Holding 10x the global cap of your home country might give some folks here an aneurism. :P
Let's not tell them about the 20x global cap of home country in fixed income. :wink:
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by rob » Mon Aug 12, 2019 7:36 pm

Vision wrote:
Mon Aug 12, 2019 4:43 am
You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.
This does make sense, for example, China probably faking data, but...isn't that already priced in?
Why do you say China? - there are LOTS of other countries in the world. How about the UK, Germany, Australia, Canada or Japan? One of the largest financial crisis in recent times was the US "faking" data.....
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by David Jay » Mon Aug 12, 2019 8:06 pm

rob wrote:
Mon Aug 12, 2019 7:36 pm
Vision wrote:
Mon Aug 12, 2019 4:43 am
You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.
This does make sense, for example, China probably faking data, but...isn't that already priced in?
Why do you say China? - there are LOTS of other countries in the world. How about the UK, Germany, Australia, Canada or Japan? One of the largest financial crisis in recent times was the US "faking" data.....
Have you ever done business in China? I have. Creative business documentation is pervasive, it is just assumed that companies maintain two sets of books.

There is no corollary in Western countries.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by thx1138 » Mon Aug 12, 2019 8:13 pm

Vision wrote:
Mon Aug 12, 2019 8:59 am
No, it should not be equal weight, because proportionally these countries are of different sizes economy wise, so we should have the % whatever the actual, real % is aka "the index".

...

But if you are weighting a small country with 2 million population the same as a country with 1 billion population can that truly be a reasonable assumption? You are giving an equal exposure to both simply because they are divided geographically, but differ completely in size. You are increasing risk drastically and not really "diversifying". I don't believe that t be a plausible, sane choice. It isn't sane to weight tiny region, Ukraine stocks same as China stocks as they both differ in size dramatically.
GDP (2017 World Bank)
China: $12.24T
USA: $19.39T

Population (2017 World Bank)
China: 1.386B
USA: 0.325B

VTWSX Allocation (Vanguard Total World Stock Index Fund, as of 6/30/2019)
China: 3.3%
USA: 54.8%

So, do you now understand why even what you perceived as the "truth" of the index is by your very statements above actually a totally wrong and arbitrary choice by the metrics you claim to be important (size of economy or size of population).

Market capitalization is a rather arbitrary choice. Of a variety of similarly arbitrary choices it is really good for certain index constructions because it results in very little trading (compared to say equal weighting which would require frequent trading as the different assets values changed). That's quite important on the scale of individual stocks or any collection of volatile assets.

As for home country vs. rest of world it really is no big deal at all to chose something different (e.g. any fixed weighting) as long as it doesn't cause endless trading to maintain the chosen ratio.

Anyway - don't fall into the trap that market capitalization weighting is some mystical "truth". It isn't. It is just an easy an efficient choice. There are other similarly arbitrary choices that are just as good.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by HomerJ » Tue Aug 13, 2019 9:35 am

Vision wrote:
Mon Aug 12, 2019 4:43 am
You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.
This does make sense, for example, China probably faking data, but...isn't that already priced in?
No it's not priced in. Certainly not to the full extent. If you don't know how much they are lying, you can't possibly price it correctly.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by MarkRoulo » Tue Aug 13, 2019 9:51 am

Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

...

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
There is also a cap-weighted world ratio of stocks to bonds. Do you also feel that it is logical to have your stock:bond mix follow world-wide cap weighting?

If not, then your answer might provide some insight into why other folks don't feel compelled to follow the US:intl cap-weighted mix.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by UpperNwGuy » Tue Aug 13, 2019 10:04 am

MarkRoulo wrote:
Tue Aug 13, 2019 9:51 am
Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

...

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
There is also a cap-weighted world ratio of stocks to bonds. Do you also feel that it is logical to have your stock:bond mix follow world-wide cap weighting?

If not, then your answer might provide some insight into why other folks don't feel compelled to follow the US:intl cap-weighted mix.
+1

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by aristotelian » Tue Aug 13, 2019 10:18 am

Do you also hold the global market cap weight of real estate, bonds, and Bitcoin?

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by kfitz1313 » Tue Aug 13, 2019 11:06 am

HomerJ wrote:
Tue Aug 13, 2019 9:35 am
Vision wrote:
Mon Aug 12, 2019 4:43 am
You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.
This does make sense, for example, China probably faking data, but...isn't that already priced in?
No it's not priced in. Certainly not to the full extent. If you don't know how much they are lying, you can't possibly price it correctly.
I don't know how much Apple is lying either. I can't imagine there being some extra level of lying that isn't priced in. Certain countries aren't magically better at lying than others. We only need to be right on average. No one priced it into Enron correctly, but we seem to price it roughly correctly for all US stocks. We only need an approximately correct idea of how much to price it in. As time goes on, that approximation gets better. That's called learning.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by HomerJ » Tue Aug 13, 2019 12:20 pm

kfitz1313 wrote:
Tue Aug 13, 2019 11:06 am
HomerJ wrote:
Tue Aug 13, 2019 9:35 am
Vision wrote:
Mon Aug 12, 2019 4:43 am
You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.
This does make sense, for example, China probably faking data, but...isn't that already priced in?
No it's not priced in. Certainly not to the full extent. If you don't know how much they are lying, you can't possibly price it correctly.
I don't know how much Apple is lying either.
False equivalency. But you are welcome to believe they are the same thing, if that makes you feel better.
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by heyyou » Tue Aug 13, 2019 1:39 pm

Having chosen what suits me, others are welcome to choose what suits them. Seems presumptuous (maybe preposterous) for me to say that since I think that I know better than most, others should do what I do. Even if they are asking to follow me, their circumstances may be different.

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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by fennewaldaj » Tue Aug 13, 2019 1:47 pm

longinvest wrote:
Mon Aug 12, 2019 6:40 pm


I would definitely have trouble sleeping at night if I had to hold a portfolio with a 97% weighting to foreign securities to reflect the theoretical "proper weighting" of Canadian stocks and bonds in my portfolio.
Those of us from the US are really quite lucky as we can have global weight and still have a lot of US assets. And our market is so big that holding only US assets is not really terrible either. Its even worse for the OP who is from Lithuania as their stock and bond markets are tiny.

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