Will ex-US ever revert to good performance? Or is it just a high-risk, low-reward investment?

[HawkeyePierce]

I find it more than a little ironic that many own ex-U.S. stock to, among other reasons, guard against the possibility that a single nation's stocks go nowhere for a decade or longer, as Japan's has done, but for U.S. investors, ex-U.S. stock has done precisely that for the last 13+ years. They experience the risk that they were specifically trying to guard against because they were trying to guard against it. Yes, that's argued to be the price of diversification, but it's still very ironic IMHO.

Global investors guarded against the possibility of putting all their eggs in a single basket that falters. They did not experience the risk they were trying to guard against.

The ex-U.S. 'basket' has certainly 'faltered' since 2007, with a real return of basically zero but with a lot of volatility.

Think of it how you think of insurance. All of the money I've spent on insurance (home insurance, disability insurance, my umbrella policy) has so far had a return on investment of exactly zero. Insurance money that has no return on investment is akin to our faltering ex-U.S. basket.

Imagine two people:

Person A spends thousands of dollars each year on insurance.
Person B does without insurance and instead invests the thousands in the market

One way of looking at it, just looking at historical performance, makes Person B the winner. And the thing is, probably Person B will continue to be the winner, as insurance money typically does not pay off.

Just because Person B's increased risk (by not having insurance) pays off does not mean that was the smart thing to do. Just because the all-eggs-in-one-basket strategy has paid off also does not mean that was the smart thing to do.

(Seems like we have people with two different mindsets in this thread: the "performance mindset" and the "insurance mindset" and perhaps this is the essential reason we're coming to different conclusions.)

Very well said.

I myself am firmly in the "insurance" camp of this debate. This is also why I eschew developed market large caps as they're highly correlated with the S&P500. I invest my international allocation in ex-US small caps and emerging markets to get more bang for my diversification buck.

[wackerdr]

I find it more than a little ironic that many own ex-U.S. stock to, among other reasons, guard against the possibility that a single nation's stocks go nowhere for a decade or longer, as Japan's has done, but for U.S. investors, ex-U.S. stock has done precisely that for the last 13+ years. They experience the risk that they were specifically trying to guard against because they were trying to guard against it. Yes, that's argued to be the price of diversification, but it's still very ironic IMHO.

Global investors guarded against the possibility of putting all their eggs in a single basket that falters. They did not experience the risk they were trying to guard against.

The ex-U.S. 'basket' has certainly 'faltered' since 2007, with a real return of basically zero but with a lot of volatility.

Think of it how you think of insurance. All of the money I've spent on insurance (home insurance, disability insurance, my umbrella policy) has so far had a return on investment of exactly zero. Insurance money that has no return on investment is akin to our faltering ex-U.S. basket.

Imagine two people:

Person A spends thousands of dollars each year on insurance.
Person B does without insurance and instead invests the thousands in the market

One way of looking at it, just looking at historical performance, makes Person B the winner. And the thing is, probably Person B will continue to be the winner, as insurance money typically does not pay off.

Just because Person B's increased risk (by not having insurance) pays off does not mean that was the smart thing to do. Just because the all-eggs-in-one-basket strategy has paid off also does not mean that was the smart thing to do.

(Seems like we have people with two different mindsets in this thread: the "performance mindset" and the "insurance mindset" and perhaps this is the essential reason we're coming to different conclusions.)

I really like this analogy. So the question is , will international provide the right level of insurance or diversification. Since majority of the suggested allocations are around 20% for international, it will not amplify overall the returns even if international substantially outperforms US.

If 80% in US based balanced portfolio is going to tank for prolonged period of time, I don’t see how much difference a 20 % allocation of international is going to buffer that.Economy is far too global. For that money / insurance, a more conservative US based allocation is my preference. Or a less correlated asset and less volatile asset class including cash or gold.But everyone is different. This coming from someone invested directly in India market for past 20 years. Overall it has been ok for a 20 year holding, but the currency depreciation has taken a significant bite, so has performance in the past 3-4 years in India. I am still invested there about 15% of total assets and 7% of stock portfolio.

[Northern Flicker]

The short answer for most cases is no. But even if big multi national's could continue growing while their domestic economies shrank; when you buy a German index fund you are not just buying VW. You are also buying the hundreds of domestic-only firms who will struggle to grow individually and find it nearly impossible to grown as a group.

85% of equity market cap in Germany is in large and midcap companies. The MSCI Germany index (large/mid) contains stock of 62 companies. The cap-weighted position of the largest, SAP, is over 4x larger than the combined position of the two VW share classes.

[Robot Monster]

...one should ask whether ex-U.S. stock is the best 'insurance' for the risk of poor stock returns that U.S. investors face.

Karsten (of German birth) found that since 1970, ex-U.S. didn't provide much diversification when U.S. investors really needed it (i.e. when U.S. returns were poor).

I'm not thinking not in terms of insuring against things like we've seen in the past, but instead something it has never experienced before--a U.S. specific black swan event, perhaps you could call it. So, yeah, the historical record by the very nature of this beast isn't going to tell us much.

The U.S. basket, historically speaking, has been okay. Sure, it's taken hits, but it's always come back. There's no guarantee what we've seen in the past will continue, that the U.S. egg basket couldn't be hit far harder than we've ever seen it be. For this reason, seems like you're taking some risk off the table by putting eggs in more than one country basket.

** "

Of course, people can still argue whether taking this risk is worth it or not. Perhaps it is for some, not so much for others. We're all taking risk by investing in the market in the first place, after all.

***

For people who don't like the performance of the Total International Stock Market, it's an interesting idea to perhaps just allocate to the better performing foreign countries i.e. Switzerland, Australia, and Canada. If only iShares had better expense ratios for their country specific funds, or if Franklin Templeton had higher Total Net Assets for theirs.

[Robot Monster]

If 80% in US based balanced portfolio is going to tank for prolonged period of time, I don’t see how much difference a 20 % allocation of international is going to buffer that.

The heavy exposure to the U.S. even in global portfolios leads the Economist article entitled "Should investors diversify away from America?" to come to this surprising conclusion:

A good investment rule, then, might be to allocate a third of an equity portfolio to American stocks, a third to an index of stocks listed in other rich countries and a third to emerging-market shares. Such a portfolio would better reflect the make-up of global gdp. It would cap exposure to any one bloc. And it would anticipate a secular shift.
https://www.economist.com/finance-and-e ... om-america

[Schlabba]

I find it more than a little ironic that many own ex-U.S. stock to, among other reasons, guard against the possibility that a single nation's stocks go nowhere for a decade or longer, as Japan's has done, but for U.S. investors, ex-U.S. stock has done precisely that for the last 13+ years. They experience the risk that they were specifically trying to guard against because they were trying to guard against it. Yes, that's argued to be the price of diversification, but it's still very ironic IMHO.

Global investors guarded against the possibility of putting all their eggs in a single basket that falters. They did not experience the risk they were trying to guard against.

The ex-U.S. 'basket' has certainly 'faltered' since 2007, with a real return of basically zero but with a lot of volatility.

Think of it how you think of insurance. All of the money I've spent on insurance (home insurance, disability insurance, my umbrella policy) has so far had a return on investment of exactly zero. Insurance money that has no return on investment is akin to our faltering ex-U.S. basket.

Imagine two people:

Person A spends thousands of dollars each year on insurance.
Person B does without insurance and instead invests the thousands in the market

One way of looking at it, just looking at historical performance, makes Person B the winner. And the thing is, probably Person B will continue to be the winner, as insurance money typically does not pay off.

Just because Person B's increased risk (by not having insurance) pays off does not mean that was the smart thing to do. Just because the all-eggs-in-one-basket strategy has paid off also does not mean that was the smart thing to do.

(Seems like we have people with two different mindsets in this thread: the "performance mindset" and the "insurance mindset" and perhaps this is the essential reason we're coming to different conclusions.)

I don't really agree looking at international as an insurance. That in itself would mean you are counting on US only and expect much less from international, but you are only holding it for the diversification benefit.

I see international and the US as equal. The long term results of investing in an European index is very profitable. MSCI Europe had a 7.77 annualized return since 1987*. 7.77% is a satisfactory investment result.

But the past is the past, nobody knows what the next 50 years will bring. I actually think that the US won't be outperforming in the short term*. In the long term... Nobody knows nothing.

Look at China 50 years ago. 90% of the population lived in poverty. I wouldn't have invested in it with a ten-foot pole. Today the predictions are that it will be the biggest economy of the world this decade.
Sweden in the last century had a period where it was doing relatively poorly*. Then they started privatization and improving their system, and now their index outperformed many other countries.
All it takes is a few good or bad moves by the government and you'll find yourself in a different world. A single tax cut can (and did) shoot up share prices.

Therefore investing in the entire world is simply superior. Diversification doesn't reduce return, it only reduces risk.

1. timeframe picked because this MSCI document tells me so: https://www.msci.com/documents/10199/db ... eb6a47faf0
2. 10 years because of the current valuations (https://pressroom.vanguard.com/nonindex ... k_2020.pdf)
3. https://www.youtube.com/watch?v=udqrpYbArCI (reforms start at about the 11 minute mark)

[willthrill81]

Diversification doesn't reduce return, it only reduces risk.

My comment isn't specific to the U.S./ex-U.S. issue, but this is only true (1) if the assets in question have the same long-term returns and (2) the assets are held over the very long-term (i.e. approaching infinity).

For instance, I can diversify a stock only portfolio with bonds, but because this does not mean that I've reduced risk while not reducing returns because the return expectations of the two differ significantly. So do the risks.

Beyond moving away from individual stocks to index funds, it's actually been surprisingly difficult in practice to reduce risk without reducing returns. The huge university endowment fund managers, Larry Swedroe, and many others have been searching for alternatives that can do it, but collectively they haven't been very successful.

[vineviz]

Karsten (of German birth) found that since 1970, ex-U.S. didn't provide much diversification when U.S. investors really needed it (i.e. when U.S. returns were poor).

Does the chart following this quote come from Karsten and represented the basis for this statement?

If so, it'd be a shame to believe them: that x-y plot of returns doesn't represent any evidence about diversification one way or another.

[wackerdr]

If 80% in US based balanced portfolio is going to tank for prolonged period of time, I don’t see how much difference a 20 % allocation of international is going to buffer that.

The heavy exposure to the U.S. even in global portfolios leads the Economist article entitled "Should investors diversify away from America?" to come to this surprising conclusion:

A good investment rule, then, might be to allocate a third of an equity portfolio to American stocks, a third to an index of stocks listed in other rich countries and a third to emerging-market shares. Such a portfolio would better reflect the make-up of global gdp. It would cap exposure to any one bloc. And it would anticipate a secular shift.
https://www.economist.com/finance-and-e ... om-america

Good one. I would say , if someone wants to truly hold the whole haystack, they have to do global cap weighted portfolio that is no more weighted on US than it deserves. Anything else, they are picking bets based on their preferences or beliefs.

[willthrill81]

Karsten (of German birth) found that since 1970, ex-U.S. didn't provide much diversification when U.S. investors really needed it (i.e. when U.S. returns were poor).

Does the chart following this quote come from Karsten and represented the basis for this statement?

If so, it'd be a shame to believe them: that x-y plot of returns doesn't represent any evidence about diversification one way or another.

See for yourself. I provided the link at the bottom of the chart.

Here's an excerpt immediately following that chart and from the same page.

When U.S. equities are down significantly year-over-year, say, 20, 30 or even 40% and more then there is relatively little benefit from diversification. As we like to say in the finance industry,

“When the [expletive] hits the fan all correlations go to one!”

In other words, if the U.S. goes through a stock market crash then the rest of the world will surely follow. Even worse, when the U.S. suffers a bear market (-20% and worse) or a crash (-30% or worse) the majority of the blue dots are below the 45-degree line, therefore, when the U.S. market went down, global equities tended to drop even more, on average.

That’s the kind of diversification I don’t like! It looks more like diworsefication!

On the other hand, when U.S. returns were between not too awful (>-10%) all the way up to +60%, then we observe significant differences in overseas returns. For example, when the U.S. returned +20%, global return ranged from -10% to +70% on a year-over-year basis.

Summary so far:

International diversification doesn’t work when I need it the most. And it works best when I need it the least.

Further below in that same post, he said this.

This post is written from the perspective of a U.S.-based investor. When the U.S. economy struggles the whole world will feel the effects. In contrast, smaller countries can have recessions and market crashes without much of an impact on the rest of the world. So if you live outside the U.S., you’d greatly benefit from investing outside your own country!

https://earlyretirementnow.com/2017/08/ ... ification/

If an American by birth had said that, many would be quick to say that that is a thinly veiled argument in favor of U.S. exceptionalism, but especially when you read the context of Karsten's entire post, you find that it clearly is not.

[abuss368]

I had a friend of the family who owned direct real estate and moved to REITs. Large allocation and very material cash flows from dividends. The result was retired early over 20 years ago and still going strong.

I scratch my head sometimes at that!

[willthrill81]

Anything else, they are picking bets based on their preferences or beliefs.

No matter how we invest, that's exactly what everyone is doing.

Beliefs are not mere abstract concepts that only exist in a philosopher's ivory tower. They are fundamental to how we interpret and respond to reality.

Let's make it clear that the so-called 'default' approach to investing, no matter the context, does not exist. What is one person's 'default' may be abhorrent to another.

[Northern Flicker]

Anything else, they are picking bets based on their preferences or beliefs.

No matter how we invest, that's exactly what everyone is doing.

Those can be predictions or beliefs about what will outperform (usually a bad idea) or attempts to address risk (often a good idea).

[vineviz]

If an American by birth had said that, many would be quick to say that that is a thinly veiled argument in favor of U.S. exceptionalism, but especially when you read the context of Karsten's entire post, you find that it clearly is not.

His Teutonic heritage doesn’t make the argument any more coherent, unfortunately.

As I alluded earlier, Karsten may be using the word “diversification” but that’s not at all what he’s actually discussing . S

[7eight9]

Given the current situation it looks like there may be some good reasons to expect outperformance from ex-US ...

Financial markets, which have hitherto proved insensitive to differences in countries’ handling of the pandemic, appear to be taking note. Since May 14, the Euro Stoxx 50 index, the main gauge of euro zone shares, has risen 17 per cent, compared with an increase of just 9 per cent for the benchmark S&P 500 index.
Even the equity market of Italy – one of the countries hardest hit by Covid-19 – has outperformed the technology-heavy Nasdaq Composite index, which hit an all-time high on June 23.
Some fund managers are becoming more bullish on European stocks. Blackrock, a large asset manager, has just upgraded the region’s equities to “overweight”, partly “due to its public health measures”.
https://www.scmp.com/comment/opinion/ar ... ism-drives

[Beensabu]

The ex-US allocation is for the dollar falling part of the currency cycle, or for if the dollar becomes devalued long-term, or if the dollar loses its status as the world's primary reserve currency, or for sectors other than tech making a comeback. This is it. You get to decide. Choose your own adventure.

[zaboomafoozarg]

All I know is that if I decrease my ex-US allocation, they'll magically start to perform better

[JimmyJammy]

I'm comfortable with 20% devoted to ex-US with a slight tilt towards emerging markets. This is significantly less than what Vanguard recommends in its Target Retirement funds.

For now, I'll just keep monitoring the world situation and will up my allocation if there seems to be a trend towards non-US dominance.

[willthrill81]

So the question is , will international provide the right level of insurance or diversification. Since majority of the suggested allocations are around 20% for international, it will not amplify overall the returns even if international substantially outperforms US.

If 80% in US based balanced portfolio is going to tank for prolonged period of time, I don’t see how much difference a 20 % allocation of international is going to buffer that.Economy is far too global. For that money / insurance, a more conservative US based allocation is my preference. Or a less correlated asset and less volatile asset class including cash or gold.But everyone is different. This coming from someone invested directly in India market for past 20 years. Overall it has been ok for a 20 year holding, but the currency depreciation has taken a significant bite, so has performance in the past 3-4 years in India. I am still invested there about 15% of total assets and 7% of stock portfolio.

I fully agree. The seemingly common 20% ex-U.S. allocation around here puzzles me. Yes, it provides the opportunity for some added diversification, but as you point out, if 80% of one's stock holdings falter, the 20% is very unlikely to provide a significant counter-balancing effect.

In my view, those who really want to protect against things like single-country risk and the U.S. becoming Japan 2.0 should at least have the global market cap weighting for ex-U.S. (~45%) and very possibly even more.

[AreaEco]

So the question is , will international provide the right level of insurance or diversification. Since majority of the suggested allocations are around 20% for international, it will not amplify overall the returns even if international substantially outperforms US.

If 80% in US based balanced portfolio is going to tank for prolonged period of time, I don’t see how much difference a 20 % allocation of international is going to buffer that.Economy is far too global. For that money / insurance, a more conservative US based allocation is my preference. Or a less correlated asset and less volatile asset class including cash or gold.But everyone is different. This coming from someone invested directly in India market for past 20 years. Overall it has been ok for a 20 year holding, but the currency depreciation has taken a significant bite, so has performance in the past 3-4 years in India. I am still invested there about 15% of total assets and 7% of stock portfolio.

I fully agree. The seemingly common 20% ex-U.S. allocation around here puzzles me. Yes, it provides the opportunity for some added diversification, but as you point out, if 80% of one's stock holdings falter, the 20% is very unlikely to provide a significant counter-balancing effect.

In my view, those who really want to protect against things like single-country risk and the U.S. becoming Japan 2.0 should at least have the global market cap weighting for ex-U.S. (~45%) and very possibly even more.

Willthrill81, this is my exact sentiment. I don’t have anything substantive to add but as someone who is at 20%, I often question if it’s too low or unnecessary altogether. I don’t want to go above the 20%, but feel there are good arguments for an increased allocation. I’m early on in accumulation (early 30s couple, very low six figure portfolio) so I’m trying to do research now to cast a more concrete plan going forward.

These international threads are so intriguing and I always learn a lot.

[wackerdr]

So the question is , will international provide the right level of insurance or diversification. Since majority of the suggested allocations are around 20% for international, it will not amplify overall the returns even if international substantially outperforms US.

If 80% in US based balanced portfolio is going to tank for prolonged period of time, I don’t see how much difference a 20 % allocation of international is going to buffer that.Economy is far too global. For that money / insurance, a more conservative US based allocation is my preference. Or a less correlated asset and less volatile asset class including cash or gold.But everyone is different. This coming from someone invested directly in India market for past 20 years. Overall it has been ok for a 20 year holding, but the currency depreciation has taken a significant bite, so has performance in the past 3-4 years in India. I am still invested there about 15% of total assets and 7% of stock portfolio.

I fully agree. The seemingly common 20% ex-U.S. allocation around here puzzles me. Yes, it provides the opportunity for some added diversification, but as you point out, if 80% of one's stock holdings falter, the 20% is very unlikely to provide a significant counter-balancing effect.

In my view, those who really want to protect against things like single-country risk and the U.S. becoming Japan 2.0 should at least have the global market cap weighting for ex-U.S. (~45%) and very possibly even more.

Willthrill81, this is my exact sentiment. I don’t have anything substantive to add but as someone who is at 20%, I often question if it’s too low or unnecessary altogether. I don’t want to go above the 20%, but feel there are good arguments for an increased allocation. I’m early on in accumulation (early 30s couple, very low six figure portfolio) so I’m trying to do research now to cast a more concrete plan going forward.

These international threads are so intriguing and I always learn a lot.

I got pulled into India market because of home country bias. 10 years ago, my allocation was 50%, over time, I didn’t add there, and it came down to about 15%. I am looking for phased exit because of repatriation complications, since I invested directly in the market.

If I were to do my 20 year journey again, I would eschew international and stay in US markets. If risk appetite is higher than usual, leveraged portfolios are much easier to construct here. If conservative allocation is needed, variety of other instruments are available. I just believe there is too much of currency risk, structural risk and corporate governance risk in international, particularly emerging markets. In my investment horizon (15-20 years), I do not see such macro shifts happening that will make international more attractive than US.

But if the concern is country risk of US, then a truly global cap weighted portfolio would be right approach, IMO.

[Northern Flicker]

So the question is , will international provide the right level of insurance or diversification. Since majority of the suggested allocations are around 20% for international, it will not amplify overall the returns even if international substantially outperforms US.

If 80% in US based balanced portfolio is going to tank for prolonged period of time, I don’t see how much difference a 20 % allocation of international is going to buffer that.Economy is far too global. For that money / insurance, a more conservative US based allocation is my preference. Or a less correlated asset and less volatile asset class including cash or gold.But everyone is different. This coming from someone invested directly in India market for past 20 years. Overall it has been ok for a 20 year holding, but the currency depreciation has taken a significant bite, so has performance in the past 3-4 years in India. I am still invested there about 15% of total assets and 7% of stock portfolio.

I fully agree. The seemingly common 20% ex-U.S. allocation around here puzzles me. Yes, it provides the opportunity for some added diversification, but as you point out, if 80% of one's stock holdings falter, the 20% is very unlikely to provide a significant counter-balancing effect.

In my view, those who really want to protect against things like single-country risk and the U.S. becoming Japan 2.0 should at least have the global market cap weighting for ex-U.S. (~45%) and very possibly even more.

It did not need to be that high. Here are some relative returns all in USD terms from 1/1/1990 to 1/1/2000. In USD terms, 75% Nikkei and 25% World Allocation was up about 34%.

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

The world allocation includes Japan so that was lower that 25% world ex-Japan. A higher allocation to US equities than the world allocation would have improved returns, as the higher return of the S&P500 shows.

The yen appreciated 42% against the dollar suring the period, so the Nikkei actually lost about 50% in JPY terms, and the 75/25 Nikkei/World portfolio lost about 6% in JPY terms. A 60/40 bond portfolio with 45% Nikkei stocks, 15% world stocks, and 40% Japanese bonds would have done fine given that Japanese interest rates also fell sharply in the period. But 60% Nikkei 40% Japanese bonds would have lost money since the bonds would not have appreciated enough to cover the stock loss with 100% of equities indexed to the Nikkei. A 40% allocation to bonds only needed to cover a 6% loss with 25% of equities diversified internationally, but would have needed to cover a 50% loss of equities with full home country bias.

[TwoIdenticalIndexes]

It literally takes about 5 minutes of economics class to figure out why historical asset out-performance will not predict future out-performance. Asset prices already assume that American earnings growth will be stronger than ex-US earnings growth. For perpetual out-performance, American earnings growth would have to perpetually outpace expectations. After not too long, American GDP would be infinityX ex-US GDP.

This is an extremely uninteresting, pointless argument.

People in this thread: "US has outperformed over the last couple of decades!"

Me, with an emerging market tilt: "SCHE is up 8% in the last week "

Past performance is not predictive of future performance unless you can justify with a premium. There is no American premium.

[Robot Monster]

It literally takes about 5 minutes of economics class to figure out why historical asset out-performance will not predict future out-performance. Asset prices already assume that American earnings growth will be stronger than ex-US earnings growth. For perpetual out-performance, American earnings growth would have to perpetually outpace expectations. After not too long, American GDP would be infinityX ex-US GDP.

This is an extremely uninteresting, pointless argument.

People in this thread: "US has outperformed over the last couple of decades!"

Me, with an emerging market tilt: "SCHE is up 8% in the last week "

Past performance is not predictive of future performance unless you can justify with a premium. There is no American premium.

Yes, many are letting what happened in the past be an indicator for what will happen in the future. People are using ex-US's past underperformance as a prediction of its future performance.

[wackerdr]

It literally takes about 5 minutes of economics class to figure out why historical asset out-performance will not predict future out-performance. Asset prices already assume that American earnings growth will be stronger than ex-US earnings growth. For perpetual out-performance, American earnings growth would have to perpetually outpace expectations. After not too long, American GDP would be infinityX ex-US GDP.

This is an extremely uninteresting, pointless argument.

People in this thread: "US has outperformed over the last couple of decades!"

Me, with an emerging market tilt: "SCHE is up 8% in the last week "

Past performance is not predictive of future performance unless you can justify with a premium. There is no American premium.

Yes, many are letting what happened in the past be an indicator for what will happen in the future. People are using ex-US's past underperformance as a prediction of its future performance.

Besides past “under performance “ as the reason to perform better in future, are there any structural reasons that would make ex-US more attractive than US? I am genuinely curious: Are there any studies or recent research that is projecting better years ahead to ex-US? Or, a scenarios where US could become a Japan 2.0

If someone really wants to hedge entirely, the global TSM is way to go.

[asif408]

It literally takes about 5 minutes of economics class to figure out why historical asset out-performance will not predict future out-performance. Asset prices already assume that American earnings growth will be stronger than ex-US earnings growth. For perpetual out-performance, American earnings growth would have to perpetually outpace expectations. After not too long, American GDP would be infinityX ex-US GDP.

This is an extremely uninteresting, pointless argument.

People in this thread: "US has outperformed over the last couple of decades!"

Me, with an emerging market tilt: "SCHE is up 8% in the last week "

Past performance is not predictive of future performance unless you can justify with a premium. There is no American premium.

Yes, many are letting what happened in the past be an indicator for what will happen in the future. People are using ex-US's past underperformance as a prediction of its future performance.

Besides past “under performance “ as the reason to perform better in future, are there any structural reasons that would make ex-US more attractive than US? I am genuinely curious: Are there any studies or recent research that is projecting better years ahead to ex-US? Or, a scenarios where US could become a Japan 2.0

If someone really wants to hedge entirely, the global TSM is way to go.

I can't predict a structural reason, but those types are things are difficult to predict anyway. The US has been very shareholder friendly relative to other countries. It's possible a structural change in the future (e.g,. change in political administration) would make US equities less shareholder friendly in the future relative to foreign countries.

I think even the most avid ex-US enthusiasts here aren't predicting what happened to Japan will happen here in the US anytime soon (although it could). Valuations in Japan at its peak in the late 1980s were multiple times higher than the US valuations are right now. But it's entirely possible the US could have low single digit returns over the next decade or two and developed foreign stocks or emerging markets could return double digits. The 1970-1990 period was a particular good one for ex-US stocks, IIRC ex-US stocks returns for most countries during that time were 5-10% higher CAGR, and Japan's stock market beat the US by about that amount for the complete 1960-1990 period. You can be sure that if that happens performance chasing of ex-US stocks will become commonplace.

[Stef]

I wonder if one should equalweight exUS developed and emerging markets or just stick to market cap weight ratios.

[Northern Flicker]

I wonder if one should equalweight exUS developed and emerging markets or just stick to market cap weight ratios.

What are you trying to accomplish? How would overweighting EM increase your chances of accomplishing the goal?

[Northern Flicker]

Besides past “under performance “ as the reason to perform better in future, are there any structural reasons that would make ex-US more attractive than US? I am genuinely curious: Are there any studies or recent research that is projecting better years ahead to ex-US? Or, a scenarios where US could become a Japan 2.0

If someone really wants to hedge entirely, the global TSM is way to go.

Hedge what entirely? There are different risks. Global market cap makes sense if the assers will be used to consume goods and services balanced the same as global production. That probably is not a correct assumption. A retiree probably has at least some home country bias in spending.

[Stef]

What are you trying to accomplish? How would overweighting EM increase your chances of accomplishing the goal?

Less correlation with the US.

[Northern Flicker]

What are you trying to accomplish? How would overweighting EM increase your chances of accomplishing the goal?

Less correlation with the US.

The problem is that while EM has a little lower correlation with US, it is much more volatile than US or non-US DM so that trying to exploit the lower correlation to reduce variance does not work. Increasing EM increases variance despite the lower correlation.

If I run an optimization to minimize variance/volatility with PV using US at 60% and EM, and non-US DM unconstrained so that tge optimizer can choose, I get 60% US 40% DM, ie zero EM for the time period used (maximum data available in PV):

https://www.portfoliovisualizer.com/opt ... Weight1=60

Higher US allocations lead to the same result of zero EM. I thus consider cap-weighting EM within non-US as my maximum allocation (zero EM is also ok). And not constraining US leads to zero non-US as minimum variance, which is why I don't use global market cap. I split the difference between global market cap (match global production) and 100% US (minimize variance) by holding non-US at about 25% of equities (average of the two cases).

[wackerdr]

Besides past “under performance “ as the reason to perform better in future, are there any structural reasons that would make ex-US more attractive than US? I am genuinely curious: Are there any studies or recent research that is projecting better years ahead to ex-US? Or, a scenarios where US could become a Japan 2.0

If someone really wants to hedge entirely, the global TSM is way to go.

Hedge what entirely?

Hedge country risk. It will probably introduce other risks though. For the record, I am not a proponent of international.

[Northern Flicker]

Besides past “under performance “ as the reason to perform better in future, are there any structural reasons that would make ex-US more attractive than US? I am genuinely curious: Are there any studies or recent research that is projecting better years ahead to ex-US? Or, a scenarios where US could become a Japan 2.0

If someone really wants to hedge entirely, the global TSM is way to go.

Hedge what entirely?

Hedge country risk. It will probably introduce other risks though. For the record, I am not a proponent of international.

The optimal retirement portfolio (probably unattainable) would be always to match the global weight of production of what you will consume in retirement. This probably includes some home country bias and maybe even a mild tilt to the health care sector (which I do not attempt to do).

The case for a higher non-US allocation is that a much lower percentage of GDP takes place in publicly traded corporations outside the US than inside the US. But it is unclear that increasing allocation to non-US companies captures that GDP in a meaningful way.

[willthrill81]

Besides past “under performance “ as the reason to perform better in future, are there any structural reasons that would make ex-US more attractive than US? I am genuinely curious: Are there any studies or recent research that is projecting better years ahead to ex-US? Or, a scenarios where US could become a Japan 2.0

If someone really wants to hedge entirely, the global TSM is way to go.

Hedge what entirely?

Hedge country risk. It will probably introduce other risks though. For the record, I am not a proponent of international.

As I noted above, I'm not convinced that a global market cap weighted approach would be a truly effective 'hedge' in the typical investing sense of the word. Investpedia defines a hedge as "an investment to reduce the risk of adverse price movements in an asset." You can find about as many historic periods where owning ex-U.S. would have hurt U.S. investors as the number where it would have helped them. That's not a very effective hedge. An example of an effective hedge against a specific risk is TIPS, which are very effective at removing inflation risk from the funds used to buy the TIPS, though this hedging does not apply to the rest of the portfolio in any way (i.e. there is not likely to be a counter-balancing effect to the other assets in one's portfolio).

If the U.S. market suffers due to something like a poor economy, it's hard to see how it wouldn't hurt ex-U.S. Yes, there could still be some diversification benefit, but ex-U.S. doesn't seem like it's been a good hedge. Just this year, despite the U.S. having seemingly had a higher per capita rate of infection of COVID-19, U.S. stocks have fared much better than ex-U.S. In this instance, owning ex-U.S. did the opposite of hedging. The same was true during the Great Financial Crisis.

That's why I asked the question further up the thread as to whether ex-U.S. stock is the best choice available to U.S. investors who want to "reduce the risk of adverse price movements" in their U.S. stock holdings. Some believe that ex-U.S. fits that bill and may be right going forward. Others do not and may be right. There are no easy answers.

[Northern Flicker]

If the U.S. market suffers due to something like a poor economy, it's hard to see how it wouldn't hurt ex-U.S. Yes, there could still be some diversification benefit, but ex-U.S. doesn't seem like a good hedge.

In the case of robust US inflation, we have a historical example where int'l diversification worked.

[willthrill81]

If the U.S. market suffers due to something like a poor economy, it's hard to see how it wouldn't hurt ex-U.S. Yes, there could still be some diversification benefit, but ex-U.S. doesn't seem like a good hedge.

In the case of robust US inflation, we have a historical example where int'l diversification worked.

Absolutely. I'm not saying that ex-U.S. has not helped at times because it obviously did. But there's more reason to believe, as evidenced by the last 50 years of data, that U.S. and ex-U.S. will, to some extent, rise and fall together than independently.

[abuss368]

As I noted above, I'm not convinced that a global market cap weighted approach would be a truly effective 'hedge' in the typical investing sense of the word. Investpedia defines a hedge as "an investment to reduce the risk of adverse price movements in an asset." You can find about as many historic periods where owning ex-U.S. would have hurt U.S. investors as the number where it would have helped them. That's not a very effective hedge.

This is a key point. International has been down cumulative over 30 years that I would think it would have to outperform US by a material amount to make up for the underperformance. Vanguard was picking international as a top class in 2020. With the year past the halfway point I am not so sure that will happen.

[scubadiver]

scubadiver

[vineviz]

Anyone wishing to engage me in an endless debate on corona virus is encouraged to spare the others in this thread and send me a PM.

Probably would have been better for this thread if you’d followed your own advice, but now I must point out that willthrill81 said not one word about COVID fatalities.

[Northern Flicker]

If the U.S. market suffers due to something like a poor economy, it's hard to see how it wouldn't hurt ex-U.S. Yes, there could still be some diversification benefit, but ex-U.S. doesn't seem like a good hedge.

In the case of robust US inflation, we have a historical example where int'l diversification worked.

Absolutely. I'm not saying that ex-U.S. has not helped at times because it obviously did. But there's more reason to believe, as evidenced by the last 50 years of data, that U.S. and ex-U.S. will, to some extent, rise and fall together than independently.

Hopefully this will be to a large extent. I want to protect against the risk of robust inflation and the risk of a lost decade and deflation, but that does not mean I expect them to happen or that I'm rooting for one of those outcomes.

[scubadiver]

scubadiver

[abuss368]

How much of ex-US do you have allocated to your portfolio?

I followed Vanguard's recommendation and allocated exactly 40% to it a few years ago. However, it keeps dropping below 40% as VTSAX keeps rising while VTIAX goes down or sideways. I kept buying up more ex-US to rebalance per my original plan, but it's really starting to feel like throwing good money after bad into a bottomless pit.

Thus, my current dilemma is whether to keep rebalancing, or just leave ex-US alone and plow all new cash into VTSAX.

I would consider simplifying with Total Stock (or S&P 500) and Total Bond as recommended by Jack Bogle and Warren Buffet!

[scubadiver]

For those Vanguard investors who have substantial international exposure, what funds are you holding? VTIAX? VTWAX? Something else? And are you just in international equities or do you have an International bond exposure as well?

[whereskyle]

For those Vanguard investors who have substantial international exposure, what funds are you holding? VTIAX? VTWAX? Something else? And are you just in international equities or do you have an International bond exposure as well?

Currently 50% VTSAX/50% VTWAX. I hold no bonds us or ex-us.

[Anon9001]

Long term growth is not guaranteed. Not even for your local equity investments. We could have decade long stagnation event for equities. It would not even surprise me considering the huge amount of negative yielding bonds. Considering this it is prudent to diversify beyond equities to bonds and gold. The International Diversification is not going to be as good as that.

[asif408]

For those Vanguard investors who have substantial international exposure, what funds are you holding? VTIAX? VTWAX? Something else? And are you just in international equities or do you have an International bond exposure as well?

I'm over 90% international. Most of my holdings are in emerging market fund PXH (value play). I also hold plain vanilla VTIAX and Vanguard's Emerging Market Index fund VEMAX. These 3 make up about 75% of my international holdings.

The rest of the international allocation is in a Global Energy Producers fund and a Global Silver Miners fund, along with some minor holdings (<10% total) in a few individual country ETFs (Brazil, Poland, South Korea, Russia, Turkey). I don't hold emerging market bonds, though I'm not against holding them.

[mikeyzito22]

How much of ex-US do you have allocated to your portfolio?

I followed Vanguard's recommendation and allocated exactly 40% to it a few years ago. However, it keeps dropping below 40% as VTSAX keeps rising while VTIAX goes down or sideways. I kept buying up more ex-US to rebalance per my original plan, but it's really starting to feel like throwing good money after bad into a bottomless pit.

Thus, my current dilemma is whether to keep rebalancing, or just leave ex-US alone and plow all new cash into VTSAX.

I recently split up my international. I exchanged half of VTIAX holdings and put it in VWIGX. It has a higher expense ratio, but it has been averaging over 10% since inception in the 80s. I know...past performance...Will it work? It's actively managed and has some high flyers in there and its less diversified. Ever since I set up my asset allocation, I've been suspect of a high international allocation. I figure since my international allocation is pretty low anyway, it wont kill me either way.

I want to believe both sides. I want to believe (as some here have advocated) that a two fund of Total Market and Total Bond will work. I want to believe that international will eventually have its day. I struggle with it as well, but you couldn't get me to put 40% into international. That's why I dont do life strategy or target date funds. Just too much international for me. One piece of advice, you could slow contributions into International and see how it makes you feel. You don't have to go all in or all out, right?

[l1am]

I don’t consider my 20% international exposure a “hedge” against US. I consider it extended diversification beyond US, just like VTI is more broadly diversified than VOO, then VGT, then MSFT etc.

Areas or sectors of my haystack will by definition underperform other areas. Why not dump VTI for VGT, given the complete outperformance?

The only reasonable criticism I’ve heard is the differing politics/regulations/governance/culture for US vs. some other countries. But then I wonder why does that only hold since 2009? What changed and is it likely to continue?

[BJJ_GUY]

I own the global equity market cap passively, but not for diversification. I'm simply not taking an active approach to tactically tilting exposures. The idea behind owning the global equity market is to avoid making what amounts to a tactical bet on a country/region, and inherently against another, wherever the capital was sourced.

But, yeah, the diversification benefits to portfolio risk (from owning multiple equity exposures) are mostly statistical over time, and driven by relationships during increasing, and steady or 'normal' market environments - basically doing very little good in the grand scheme. When U.S. Equity is in a bad drawdown, those correlations spike, making this a rather useless diversifier.

[CDub]

I'd like to point out though that VTIAX hasn't merely "underperformed the US" - it performed poorly, period. In absolute terms, it was just a poorly yielding investment for the past 10 years. Is that normal?

By that logic, around 2008-2009 you would've dumped all your U.S. stocks, too, right? How would that have worked out? BTW Vanguard Total International has returned about 4.7% annually (CAGR) over the past decade. Not spectacular and far behind US, but if you think that's "poor", you have some surprises coming to you in your investing lifetime.

+1

The "you would've dumped all your U.S. stocks in 2008-2009" argument is a bit different than what we've seen the last 10 years though.
From 1999-2009, the US CAGR was 1.71%. While the Global EX-US was 4.54%.

Code: Select all

Portfolio	Initial	Final	        CAGR	Stdev	Best    Worst	Max. Drawdown	Sharpe Ratio	Sortino Ratio	US Mkt Correlation
US TSM		$10,000	$12,050 	1.71% 	16.39%	31.35%	-37.04%	-50.89% 	         0.01	                0.01	                1.00
Global EX-US	$10,000	$16,290 	4.54% 	18.62%	40.34%	-44.10%	-58.50% 	         0.18	                0.24	                0.89

Compare that to 2010-Present. The US CAGR was 12.25% vs Global EX-US 3.69% over the same time period.

Code: Select all

Portfolio	Initial	Final		CAGR	Stdev	Best Year	Worst Year	Max. Drawdown	Sharpe Ratio	Sortino Ratio	US Mkt Correlation
US TSM		$10,000	$33,647 	12.25% 	14.26%	33.35%	-5.26%	-20.89% 	0.84	1.31	1.00
INTL TSM	$10,000	$14,624 	3.69% 	15.73%	27.40%	-14.56%	-25.55% 	0.27	0.39	0.87

Your point was well-taken as a response to the "it was just a poorly yielding investment for the past 10 years" comment. However, it's easy to see why the comparison to 1999-2009 isn't the same. The final balance in dollars over the past ten years is an obvious reason why so many people are struggling to stick to ex-us.

https://www.portfoliovisualizer.com/bac ... ion2_2=100