International stock investing is industry diversification and style diversification

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asif408
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Re: International stock investing is industry diversification and style diversification

Post by asif408 »

Forester wrote: Wed Sep 09, 2020 4:08 pm Thanks, out of interest how did you come across that Barclays CAPE link? I wasn't aware of that resource.

This is a great counterpoint to the US deserving uniquely high valuations. I believe the US should do so to an extent due to a mix of USD status, size of the economy, sector diversity and so on. However buying Russia at the 2007 valuation would be almost unthinkable today, yet that was the market consensus just a decade ago!
I came across it from another poster, I can't remember which poster specifically, but I wasn't aware of it either until I saw it posted. I don't see it cited here too often.

Another chart from GMO shows that during the 7 year period from 2005-2011, EM had equal or higher valuation as measured by the CAPE ratio: https://www.gmo.com/contentassets/b3da1 ... ibit-4.png, which is from this post: https://www.gmo.com/americas/research-l ... different/. So there were quite a few years when EM was the consensus pick.

Edit: here is the poster I learned about it from, just remembered: viewtopic.php?t=224374
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Re: International stock investing is industry diversification and style diversification

Post by abuss368 »

Alchemist wrote: Wed Sep 09, 2020 6:21 am This is an easy assertion to test. With respect to Mr Ferri, I do not think the data holds up.

From VGTSX (Vanguard Total International) inception in May 1996 until August 2020, it performed quite differently from a U.S. Value fund (Vanguard Value Index VIVAX).

Total Return:

VGTSX - 4.60% vs VIVAX - 7.83%

Standard Deviation:

VGTSX - 17.12% vs VIVAX - 15.48%

Largest Drawdown:

VGTSX - 58.5% vs VIVAX - 54.86%

Half the return, more risk. I do not see the parallel, at least in the past. Is the thesis that this is only a forward looking effect?

Portfolio Visualizer Data with Vanguard S&P 500 (VFINX) included for reference:
https://www.portfoliovisualizer.com/bac ... ion3_3=100
Is it apples to apples to compare to a US Value fund or would an alternative comparison be to an International Value fund?
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Re: International stock investing is industry diversification and style diversification

Post by Impatience »

I don’t trust foreign corporate governance. Even if those companies outperform, will that outperformance go to the shareholders? Does anyone care about the shareholders? The US basically invented the concept (not literally but we codified the philosophy, law, and academic backing of it).

US companies may have their issues but we also have a fantastically well developed court and legal system for these matters as well as the SEC, laws like Sarbanes-Oxley, etc.
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Re: International stock investing is industry diversification and style diversification

Post by Seasonal »

Impatience wrote: Wed Sep 09, 2020 5:50 pm I don’t trust foreign corporate governance. Even if those companies outperform, will that outperformance go to the shareholders? Does anyone care about the shareholders? The US basically invented the concept (not literally but we codified the philosophy, law, and academic backing of it).

US companies may have their issues but we also have a fantastically well developed court and legal system for these matters as well as the SEC, laws like Sarbanes-Oxley, etc.
How much research have you done into European corporate regulation, disclosure and shareholder rights? Do you remember why Sarbanes-Oxley was enacted?
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Re: International stock investing is industry diversification and style diversification

Post by Croissant »

Robot Monster wrote: Wed Sep 09, 2020 10:13 am I've seen the assertion before that a large part of the reason Total International has a much different performance than Total US is because of sector-weight differences e.g. 26.70% technology weight for Total US vs 12.08 for Total International. I wondered, therefore, what would happen if we "reweighed" Total US's sectors to match Total International's. Would the performance of the "US sectors weighted to Total International" portfolio be very much like Total International's?

(For this experiment, I created a portfolio out of Vanguard's sector funds weighed according to Total International's sector composition.)

The results are surprising.

CAGR from Jan 2005 - Aug 2020
Total US -- 9.35%
Total International -- 4.69%
US sectors weighted to Total International -- 8.92%

Source

My conclusion: the majority of the performance difference between Total US and Total International is not attributable to sector-weight differences.

Note:
The sector composition of Total International, I got here.

The sector weights on that page add up to 99.99%. For the backtest, I added .01% allocation cash, because the website insists things add up to 100%. It's a bit of a fudge, but has a negligible impact on the findings.

Edit: I did just realize I forgot something...changes over time of the sector composition! Whoops.
you'll find this handy: morning star did a similar comparison of US vs ex-US stocks based on sector weighting and performance; concluded that US simply performed better on multiple expansion (PE) and EPS growth.
https://www.morningstar.com/articles/10 ... ost-decade

genuine question, the presence of US companies can be seen and felt all over the world (especially well represented in tech where margins are high), now for international companies which ones have a major presence in the US? I ask b/c US is probably the biggest market in terms of disposable income. there's tencent (we chat, tiktok, epic games, unreal engine etc), alibaba (piping goods to amzn), Samsung, TSMC (chip maker). what else, VW? Zara?
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Re: International stock investing is industry diversification and style diversification

Post by columbia »

Deutsche Bank seems like an outstanding investment. ;)
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Re: International stock investing is industry diversification and style diversification

Post by Elysium »

Croissant wrote: Wed Sep 09, 2020 7:52 pm
genuine question, the presence of US companies can be seen and felt all over the world (especially well represented in tech where margins are high), now for international companies which ones have a major presence in the US? I ask b/c US is probably the biggest market in terms of disposable income. there's tencent (we chat, tiktok, epic games, unreal engine etc), alibaba (piping goods to amzn), Samsung, TSMC (chip maker). what else, VW? Zara?
Many. Novartis, AstraZeneca, Nestle, GlaxoSmithKline, Siemens, Sony, Toyota, SAP, Roche, so on...
pascalwager
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Re: International stock investing is industry diversification and style diversification

Post by pascalwager »

Scooter57 wrote: Wed Sep 09, 2020 2:45 pm
MotoTrojan wrote: Wed Sep 09, 2020 2:13 pm
Scooter57 wrote: Wed Sep 09, 2020 1:05 pm
MotoTrojan wrote: Wed Sep 09, 2020 7:24 am
Scooter57 wrote: Wed Sep 09, 2020 7:20 am Energy and financials look more like value traps to me. How do insurers make money in a longterm suppressed rate environment? How does energy perform with years long retreats to the home?

Layoffs are accelerating which can't be good for either.

To me the value label must describe a stock that is mispriced, not one that factors in future declines on the business. I have been doing a lot of screening of late and find very little true value in the market.
Do you think you are the only person out there that views energy and financials as value traps? Of course not. This is why the premium works; people push them down just a little more than they deserve, and thus push other sectors/stocks up just a little more than they deserve, and you eventually get the spread between those mispricings back as a premium.
That's the theory. In practice the kind of value investors who buy indexes have been waiting a long time to see that premium and there is not much chance they will see it soon. Financials are strongly cyclical to start with, and the current rate environment is something that has never been seen before. Energy (which is dominated by oil) has been on a downward course for quite a while and, again, there is no reason to believe it is going to head up anytime soon. European banks are dealing with negative interest rates, fer crying out loud.

Probably all that keeps those sectors from being in worse shape is index investors who don't understand what is in the funds and ETFs they are buying who continue to buy them because they are told to by advisors applying cookie cutter portfolios at their employers' behest.
If it is so certain that the business are going to continue declining, would you not expect evenas a a weakly efficient market to price that in today? Why wait until the certainty comes to fruition?
I don't believe that markets are efficient when large numbers of buy and hold retirement savers just buy index funds and free trades !are it so prices are set by day traders and algos. The market was very different 30-some years ago when that theory was hatched using back testing.
Isn't 90% of the trading performed by PhD's in finance/math representing large investment companies and other financial institutions? Also, when we buy index funds aren't we just buying a market that was already determined by those same PhD's?
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Re: International stock investing is industry diversification and style diversification

Post by Robert T »

Rick Ferri wrote: Tue Sep 08, 2020 5:38 pmIt's truly is a global market.
Markets are not fully integrated i.e. global factors (market, size, and value) don't explain the performance of domestic stock returns as well as local factors. As per earlier work by Fama-French ("integrated pricing across regions does not get strong support in our tests") and earlier work on global vs country specific factors. And the results are still valid today. If indeed, markets were fully integrated one could simply achieve the same "industry and style diversification" in a cheaper way by tilting to US (smaller cap) value. But would you consider a US only titled portfolio to be as diversified as a US+Non-US portfolio with the same tilts? My view is no, consistent with the above linked Fama-French work. International investing (particularly smaller cap value) still provides 'local' condition diversification.
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Re: International stock investing is industry diversification and style diversification

Post by Scooter57 »

Northern Flicker wrote: Wed Sep 09, 2020 4:54 pm
Scooter57 wrote: I don't believe that markets are efficient when large numbers of buy and hold retirement savers just buy index funds and free trades !are it so prices are set by day traders and algos. The market was very different 30-some years ago when that theory was hatched using back testing.
The empirical evidence is that the market is more efficient today than it was 30+ years ago. Trading costs being miniscule removed barriers to arbitrage, and major market participants have their high performance computers co-located on the internal networks (LANs) of the exchanges so that they can use high frequency trading needed to exploit inefficiences that do not persist long enough to exploit without these measures.
The inefficiencies high speed traders exploit have nothing to do with the intrinsic value of the companies whose stocks they trade to capture the differences in price between one exchange and another over microseconds or to get ahead on momentum trades in response to news they get access to microseconds before everyone else. That's my point. The idea that market efficiency has anything to do with the companies behind stocks is a quaint artifact of the world before mass computerization.
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Re: International stock investing is industry diversification and style diversification

Post by Scooter57 »

pascalwager wrote: Wed Sep 09, 2020 10:35 pm
Isn't 90% of the trading performed by PhD's in finance/math representing large investment companies and other financial institutions? Also, when we buy index funds aren't we just buying a market that was already determined by those same PhD's?
Absolutely not. There are conflicting reports of how much trading is automated, how much trend following quant strategies, and how much indexed, but they all point to the declining impact of the kind of company-based analysis that was prevalent decades ago. Two years ago, it was reported that algorithmic trading made up 50-60% of all daily trading. Last year, The Economist
reported that 35% of trading was done by computers, and only 24% by humans. https://www.statista.com/chart/20245/sh ... -equities/ Yet another set of statistics found that 60% of all investments now were passive (i.e. indexed) and 20% using quantitative trend following models. https://www.cnbc.com/2019/06/28/80perce ... pilot.html. It is probably very hard to get completely accurate statistics, but all the numbers we see point in the same direction. Wise PhDs who spend hours poring over balance sheets and interviewing top corporate executives have little to do with how prices are now being set.

The prices you see displayed of the market is the price that the last lot of shares of a security trade at. Almost always these shares trade in blocks of 100. Many of these are automated trades performed by the supercomputers that have lightning fast connections to the stock exchanges and buy and sell 100 share lots every second so that they can make money on fractions of a cent differences in price. You can go to the NASDAQ site and track the trades for any given stock in real time to see how true this is. Rarely a block of more shares trades. But it is possible for the sale of a single share to change the price of a security and because everyone with PhDs is aware of how dominant momentum is, that is where the geniuses are putting their attention as there are many, many ways that these prices can be manipulated. The PhDs today are often PhDs in physics and math because those are the PhDs who can do the kind of very complex, computerized math it takes to make money in this environment.

I am close to someone who does the kind of math that Wall Street pays $$$$ for you can be sure, they aren't using that math to discount the value of future earnings of companies. The typical actively traded share is not held for more than a day or two, often only for a few minutes.
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Re: International stock investing is industry diversification and style diversification

Post by Seasonal »

Scooter57 wrote: Thu Sep 10, 2020 5:47 am
pascalwager wrote: Wed Sep 09, 2020 10:35 pm
Isn't 90% of the trading performed by PhD's in finance/math representing large investment companies and other financial institutions? Also, when we buy index funds aren't we just buying a market that was already determined by those same PhD's?
Absolutely not. There are conflicting reports of how much trading is automated, how much trend following quant strategies, and how much indexed, but they all point to the declining impact of the kind of company-based analysis that was prevalent decades ago. Two years ago, it was reported that algorithmic trading made up 50-60% of all daily trading. Last year, The Economist
reported that 35% of trading was done by computers, and only 24% by humans. https://www.statista.com/chart/20245/sh ... -equities/ Yet another set of statistics found that 60% of all investments now were passive (i.e. indexed) and 20% using quantitative trend following models. https://www.cnbc.com/2019/06/28/80perce ... pilot.html. It is probably very hard to get completely accurate statistics, but all the numbers we see point in the same direction. Wise PhDs who spend hours poring over balance sheets and interviewing top corporate executives have little to do with how prices are now being set.

The prices you see displayed of the market is the price that the last lot of shares of a security trade at. Almost always these shares trade in blocks of 100. Many of these are automated trades performed by the supercomputers that have lightning fast connections to the stock exchanges and buy and sell 100 share lots every second so that they can make money on fractions of a cent differences in price. You can go to the NASDAQ site and track the trades for any given stock in real time to see how true this is. Rarely a block of more shares trades. But it is possible for the sale of a single share to change the price of a security and because everyone with PhDs is aware of how dominant momentum is, that is where the geniuses are putting their attention as there are many, many ways that these prices can be manipulated. The PhDs today are often PhDs in physics and math because those are the PhDs who can do the kind of very complex, computerized math it takes to make money in this environment.

I am close to someone who does the kind of math that Wall Street pays $$$$ for you can be sure, they aren't using that math to discount the value of future earnings of companies. The typical actively traded share is not held for more than a day or two, often only for a few minutes.
The cited statistics do not appear to address the issue of the impact of company performance on price. Purely momentum trading would not seem to explain a large price movement based on a Fed announcement or a company announcing earnings far from expectations. To illustrate with made up numbers, it may be the case that 90% of trades are high speed front running or arbitrage between markets, but that does not mean these activities have as much impact on price as the 10% who are relying on other analyses.

How much of the automated trading is based on computerized analysis of fundamentals? How many traders in the days before automation were doing fundamental analysis and how many were doing charts or other analysis similar to trend following models? How much of an impact on price is there from high speed trading?
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Re: International stock investing is industry diversification and style diversification

Post by Alchemist »

Morningstar has a timely article on exactly this his topic. The entire article is well written with lots of excellent data and graphs, but I think the key take away is this:
Morningstar wrote:While the U.S. market has clearly benefited from both trends, a deeper analysis reveals that differences in sector composition and a strong dollar played a relatively small role. As it turns out (and as should be no surprise) differences in earnings growth explain most of this gap. U.S. companies had much loftier earnings-growth rates than their foreign counterparts after controlling for their sector composition, which fueled their superior performance......

....Cumulatively, VTI outperformed VXUS by 227 percentage points over the period. Of that, only 27 percentage points were attributable to differences in sector weights. The bulk of the difference, 200 percentage points, was due to performance differences among the underlying stocks. While the VTI's larger allocation to tech stocks and exposure to better-performing names within the sector were the largest contributors to its relative performance, they still only explained roughly a fourth of the return difference. Across the board, U.S. companies outperformed their overseas counterparts in every sector.
Link: https://www.morningstar.com/articles/10 ... ost-decade

Even when controlling for sector effects U.S. companies simply earned more money than foreign ones. Or put differently, the U.S. recovered from the Great Recession while most equity markets did not.
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Re: International stock investing is industry diversification and style diversification

Post by Robot Monster »

Alchemist wrote: Thu Sep 10, 2020 10:42 am Morningstar has a timely article on exactly this his topic. The entire article is well written with lots of excellent data and graphs, but I think the key take away is this:
Morningstar wrote:While the U.S. market has clearly benefited from both trends, a deeper analysis reveals that differences in sector composition and a strong dollar played a relatively small role. As it turns out (and as should be no surprise) differences in earnings growth explain most of this gap. U.S. companies had much loftier earnings-growth rates than their foreign counterparts after controlling for their sector composition, which fueled their superior performance......

....Cumulatively, VTI outperformed VXUS by 227 percentage points over the period. Of that, only 27 percentage points were attributable to differences in sector weights. The bulk of the difference, 200 percentage points, was due to performance differences among the underlying stocks. While the VTI's larger allocation to tech stocks and exposure to better-performing names within the sector were the largest contributors to its relative performance, they still only explained roughly a fourth of the return difference. Across the board, U.S. companies outperformed their overseas counterparts in every sector.
Link: https://www.morningstar.com/articles/10 ... ost-decade

Even when controlling for sector effects U.S. companies simply earned more money than foreign ones. Or put differently, the U.S. recovered from the Great Recession while most equity markets did not.
Here's something interesting. If you take the top ten holdings of Vanguard Developed International (with the exception of Samsung which Portfolio Visualizer for some reason does not recognize) it had a CAGR of 13.03% from Jan 2011 - Aug 2020, not so dissimilar from the S&P's 13.34%, and significantly better than Total International's 3.76%.
https://www.portfoliovisualizer.com/bac ... on12_3=100

Edit: test repeated for biggest 20 developed international companies
https://www.portfoliovisualizer.com/bac ... tion20_1=5
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Re: International stock investing is industry diversification and style diversification

Post by 000 »

Robot Monster wrote: Thu Sep 10, 2020 6:04 pm
Alchemist wrote: Thu Sep 10, 2020 10:42 am Morningstar has a timely article on exactly this his topic. The entire article is well written with lots of excellent data and graphs, but I think the key take away is this:
Morningstar wrote:While the U.S. market has clearly benefited from both trends, a deeper analysis reveals that differences in sector composition and a strong dollar played a relatively small role. As it turns out (and as should be no surprise) differences in earnings growth explain most of this gap. U.S. companies had much loftier earnings-growth rates than their foreign counterparts after controlling for their sector composition, which fueled their superior performance......

....Cumulatively, VTI outperformed VXUS by 227 percentage points over the period. Of that, only 27 percentage points were attributable to differences in sector weights. The bulk of the difference, 200 percentage points, was due to performance differences among the underlying stocks. While the VTI's larger allocation to tech stocks and exposure to better-performing names within the sector were the largest contributors to its relative performance, they still only explained roughly a fourth of the return difference. Across the board, U.S. companies outperformed their overseas counterparts in every sector.
Link: https://www.morningstar.com/articles/10 ... ost-decade

Even when controlling for sector effects U.S. companies simply earned more money than foreign ones. Or put differently, the U.S. recovered from the Great Recession while most equity markets did not.
Here's something interesting. If you take the top ten holdings of Vanguard Developed International (with the exception of Samsung which Portfolio Visualizer for some reason does not recognize) it had a CAGR of 13.03% from Jan 2011 - Aug 2020, not so dissimilar from the S&P's 13.34%, and significantly better than Total International's 3.76%.
https://www.portfoliovisualizer.com/bac ... on12_3=100

Edit: test repeated for biggest 20 developed international companies
https://www.portfoliovisualizer.com/bac ... tion20_1=5
Were those the top holdings in Jan 2011?

Or did you pick the winners of today and chart them from Jan 2011?
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Re: International stock investing is industry diversification and style diversification

Post by UpsetRaptor »

Robot Monster wrote: Thu Sep 10, 2020 6:04 pm
Alchemist wrote: Thu Sep 10, 2020 10:42 am Morningstar has a timely article on exactly this his topic. The entire article is well written with lots of excellent data and graphs, but I think the key take away is this:
Morningstar wrote:While the U.S. market has clearly benefited from both trends, a deeper analysis reveals that differences in sector composition and a strong dollar played a relatively small role. As it turns out (and as should be no surprise) differences in earnings growth explain most of this gap. U.S. companies had much loftier earnings-growth rates than their foreign counterparts after controlling for their sector composition, which fueled their superior performance......

....Cumulatively, VTI outperformed VXUS by 227 percentage points over the period. Of that, only 27 percentage points were attributable to differences in sector weights. The bulk of the difference, 200 percentage points, was due to performance differences among the underlying stocks. While the VTI's larger allocation to tech stocks and exposure to better-performing names within the sector were the largest contributors to its relative performance, they still only explained roughly a fourth of the return difference. Across the board, U.S. companies outperformed their overseas counterparts in every sector.
Link: https://www.morningstar.com/articles/10 ... ost-decade

Even when controlling for sector effects U.S. companies simply earned more money than foreign ones. Or put differently, the U.S. recovered from the Great Recession while most equity markets did not.
Here's something interesting. If you take the top ten holdings of Vanguard Developed International (with the exception of Samsung which Portfolio Visualizer for some reason does not recognize) it had a CAGR of 13.03% from Jan 2011 - Aug 2020, not so dissimilar from the S&P's 13.34%, and significantly better than Total International's 3.76%.
https://www.portfoliovisualizer.com/bac ... on12_3=100

Edit: test repeated for biggest 20 developed international companies
https://www.portfoliovisualizer.com/bac ... tion20_1=5
Not really surprising. Large cap growth has done well recently. The US would be similar.
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Re: International stock investing is industry diversification and style diversification

Post by Robot Monster »

000 wrote: Thu Sep 10, 2020 7:06 pm
Robot Monster wrote: Thu Sep 10, 2020 6:04 pm
Alchemist wrote: Thu Sep 10, 2020 10:42 am Morningstar has a timely article on exactly this his topic. The entire article is well written with lots of excellent data and graphs, but I think the key take away is this:
Morningstar wrote:While the U.S. market has clearly benefited from both trends, a deeper analysis reveals that differences in sector composition and a strong dollar played a relatively small role. As it turns out (and as should be no surprise) differences in earnings growth explain most of this gap. U.S. companies had much loftier earnings-growth rates than their foreign counterparts after controlling for their sector composition, which fueled their superior performance......

....Cumulatively, VTI outperformed VXUS by 227 percentage points over the period. Of that, only 27 percentage points were attributable to differences in sector weights. The bulk of the difference, 200 percentage points, was due to performance differences among the underlying stocks. While the VTI's larger allocation to tech stocks and exposure to better-performing names within the sector were the largest contributors to its relative performance, they still only explained roughly a fourth of the return difference. Across the board, U.S. companies outperformed their overseas counterparts in every sector.
Link: https://www.morningstar.com/articles/10 ... ost-decade

Even when controlling for sector effects U.S. companies simply earned more money than foreign ones. Or put differently, the U.S. recovered from the Great Recession while most equity markets did not.
Here's something interesting. If you take the top ten holdings of Vanguard Developed International (with the exception of Samsung which Portfolio Visualizer for some reason does not recognize) it had a CAGR of 13.03% from Jan 2011 - Aug 2020, not so dissimilar from the S&P's 13.34%, and significantly better than Total International's 3.76%.
https://www.portfoliovisualizer.com/bac ... on12_3=100

Edit: test repeated for biggest 20 developed international companies
https://www.portfoliovisualizer.com/bac ... tion20_1=5
Were those the top holdings in Jan 2011?

Or did you pick the winners of today and chart them from Jan 2011?
The winners of today are what investors of the fund currently own, so why not look at the historical performance of what's currently being investing in?
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Re: International stock investing is industry diversification and style diversification

Post by 000 »

Robot Monster wrote: Thu Sep 10, 2020 9:44 pm The winners of today are what investors of the fund currently own, so why not look at the historical performance of what's currently being investing in?
Then a fair comparison is with the top companies of the S&P 500 today.

Bet that one won't look so good.
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Re: International stock investing is industry diversification and style diversification

Post by Robot Monster »

000 wrote: Thu Sep 10, 2020 9:45 pm
Robot Monster wrote: Thu Sep 10, 2020 9:44 pm The winners of today are what investors of the fund currently own, so why not look at the historical performance of what's currently being investing in?
Then a fair comparison is with the top companies of the S&P 500 today.

Bet that one won't look so good.
Sorry for being so dreadfully unfair.
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Re: International stock investing is industry diversification and style diversification

Post by Ciel »

Admittedly I'm growing skeptical of my global market weight asset allocation.

This topic got me wondering -- would a dynamic allocation to international make sense? For example, increasing international allocation after a one year period of ex-US outperforming, but otherwise tilting to US.

It looks like ex-US outperformance usually happens over a period of multiple years, so increasing allocation to it after one year of outperformance might capture some of it even if it misses the beginning.

We are at about a decade of US outperformance. And while there are good reasons to think that it won't continue, I think there are also good reasons to believe it will.

According to portfolio visualizer, ex-US CAGR since 1986 is 6.8%. US CAGR since 1986 is 10.54% The magnitude of that difference is huge and makes me feel like there must be some way to strategically tilt to the US as a default but increase international allocation when certain conditions are met, and then back again. Any thoughts on that? I know this is relying on various biases to some extent.
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Re: International stock investing is industry diversification and style diversification

Post by Stef »

Ciel wrote: Fri Sep 11, 2020 1:01 am According to portfolio visualizer, ex-US CAGR since 1986 is 6.8%. US CAGR since 1986 is 10.54% The magnitude of that difference is huge and makes me feel like there must be some way to strategically tilt to the US as a default but increase international allocation when certain conditions are met, and then back again. Any thoughts on that? I know this is relying on various biases to some extent.
Recency bias.

Compare 20 year rolling returns or 1980-2010 for example.
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Re: International stock investing is industry diversification and style diversification

Post by Forester »

Ciel wrote: Fri Sep 11, 2020 1:01 am
According to portfolio visualizer, ex-US CAGR since 1986 is 6.8%. US CAGR since 1986 is 10.54% The magnitude of that difference is huge and makes me feel like there must be some way to strategically tilt to the US as a default but increase international allocation when certain conditions are met, and then back again. Any thoughts on that? I know this is relying on various biases to some extent.
Put 10% or so of your portfolio in $ROMO which will automatically buy more of the US index if it outperforms ex-US. Safer to scratch that itch this way, than try to do it yourself.
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Re: International stock investing is industry diversification and style diversification

Post by occambogle »

Forester wrote: Fri Sep 11, 2020 4:01 am Put 10% or so of your portfolio in $ROMO which will automatically buy more of the US index if it outperforms ex-US. Safer to scratch that itch this way, than try to do it yourself.
That's an interesting strategy, but it seems to have performed pretty terribly....

https://stockcharts.com/h-perf/ui?s=VOO ... 4156923889
Aoiowl
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Re: International stock investing is industry diversification and style diversification

Post by Aoiowl »

As a British expat who invests mainly in VWRL, it's always struck me as odd how so many on this forum advocate a 100% US tilt to the stock part of their portfolio. Isn't past performance supposed to be no guarantee of future results? The US has done very well in the last few decades, but is this expected to continue for the next 50 years?
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jason2459
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Re: International stock investing is industry diversification and style diversification

Post by jason2459 »

Aoiowl wrote: Fri Sep 11, 2020 6:13 am As a British expat who invests mainly in VWRL, it's always struck me as odd how so many on this forum advocate a 100% US tilt to the stock part of their portfolio. Isn't past performance supposed to be no guarantee of future results? The US has done very well in the last few decades, but is this expected to continue for the next 50 years?
Only the last decade. 2000-2010 total ex-US outperformed. 2010-2020 total US outperformed. My profile avatar with the shark shows the cyclical pattern of US vs ex-US. No idea how it will keep going into the future. But I like my chances and the diversity it gives.

2000-2010 ex-US wins
https://www.portfoliovisualizer.com/bac ... ion2_2=100

2010-2020 US wins
https://www.portfoliovisualizer.com/bac ... ion2_2=100


Edit: fyi if you keep going 1990-2000 US wins and 1980-1990 ex-US wins...
Last edited by jason2459 on Fri Sep 11, 2020 9:24 am, edited 1 time in total.
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Re: International stock investing is industry diversification and style diversification

Post by asif408 »

Ciel wrote: Fri Sep 11, 2020 1:01 am According to portfolio visualizer, ex-US CAGR since 1986 is 6.8%. US CAGR since 1986 is 10.54% The magnitude of that difference is huge and makes me feel like there must be some way to strategically tilt to the US as a default but increase international allocation when certain conditions are met, and then back again. Any thoughts on that? I know this is relying on various biases to some extent.
Why, when from 1970-2007 (a 38 year period) adding any amount of international stocks increased returns?: https://www.bogleheads.org/wiki/File:US ... erging.png. And in 3 of the last 5 decades international stocks have beaten US stocks?: https://www.bogleheads.org/w/images/c/c ... decade.png

Maybe the US outperformance in the last decade is an exception, and you should tilt internationally as default but increase US allocation when certain conditions are met? And maybe your selection of a 1986 start date is extremely biased, as foreign valuations were dramatically higher than US valuations at that time, and now they are much lower?: https://www.gmo.com/contentassets/b3da1 ... ibit-4.png
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Re: International stock investing is industry diversification and style diversification

Post by UpsetRaptor »

US outperformance goes far beyond the last couple decades, despite the "recency bias" fallacy often thrown about.

In the 20th century the US outperformed ex-US by 2%, according to the Dimson-Marsh data. And 200 years ago the US was not even a top 10 economy. It has actually outperformed for centuries.

That of course does not guarantee anything regarding the rest of each of our investing lifetimes. However, that's also not "recency bias".
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Re: International stock investing is industry diversification and style diversification

Post by DB2 »

Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm International stock investing is becoming more about diversifying industry groups and styles rather than diversifying currencies. Do a "Compare" of VTI and VXUS on the Vanguard website, scroll down to industry group comparisons, and you'll see what I mean. International stock represents many of the products we buy as consumers even though we don't make those products in the US anymore. It's truly is a global market. You'll also see that investing internationally is value investing. The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.

Rick Ferri
Do you think global market cap is "too much" International? Holding a single global equity fund (like VT or VTWAX) that goes where the growth is at has a strong appeal to me; simplistic and set/forget.
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Re: International stock investing is industry diversification and style diversification

Post by vineviz »

UpsetRaptor wrote: Fri Sep 11, 2020 8:45 am In the 20th century the US outperformed ex-US by 2%, according to the Dimson-Marsh data. And 200 years ago the US was not even a top 10 economy. It has actually outperformed for centuries.
That's interesting.

Can you call up a comparison of VTSMX vs VGTSX from, say, 1789 to present so we can visualize this outperformance?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: International stock investing is industry diversification and style diversification

Post by asif408 »

vineviz wrote: Fri Sep 11, 2020 9:20 am
UpsetRaptor wrote: Fri Sep 11, 2020 8:45 am In the 20th century the US outperformed ex-US by 2%, according to the Dimson-Marsh data. And 200 years ago the US was not even a top 10 economy. It has actually outperformed for centuries.
That's interesting.

Can you call up a comparison of VTSMX vs VGTSX from, say, 1789 to present so we can visualize this outperformance?
I'd be interested as well. Maybe if I live and invest for 100 years and things repeat in the 21st century I'll be 140 years old and can then beat my chest and chant "USA, USA!" Or the next 60 years could turn out like the 1950-2009 period: https://twitter.com/mebfaber/status/109 ... 84?lang=en
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Re: International stock investing is industry diversification and style diversification

Post by jason2459 »

asif408 wrote: Fri Sep 11, 2020 9:36 am
vineviz wrote: Fri Sep 11, 2020 9:20 am
UpsetRaptor wrote: Fri Sep 11, 2020 8:45 am In the 20th century the US outperformed ex-US by 2%, according to the Dimson-Marsh data. And 200 years ago the US was not even a top 10 economy. It has actually outperformed for centuries.
That's interesting.

Can you call up a comparison of VTSMX vs VGTSX from, say, 1789 to present so we can visualize this outperformance?
I'd be interested as well. Maybe if I live and invest for 100 years and things repeat in the 21st century I'll be 140 years old and can then beat my chest and chant "USA, USA!" Or the next 60 years could turn out like the 1950-2009 period: https://twitter.com/mebfaber/status/109 ... 84?lang=en
Not a very convincing argument
Want to know how much of that outperformance has come since 2009?

All of it.
There has been a consistent flip flop between us vs ex-us. It's not always about total return at a specific point in time.
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Re: International stock investing is industry diversification and style diversification

Post by UpsetRaptor »

vineviz wrote: Fri Sep 11, 2020 9:20 am
UpsetRaptor wrote: Fri Sep 11, 2020 8:45 am In the 20th century the US outperformed ex-US by 2%, according to the Dimson-Marsh data. And 200 years ago the US was not even a top 10 economy. It has actually outperformed for centuries.
That's interesting.

Can you call up a comparison of VTSMX vs VGTSX from, say, 1789 to present so we can visualize this outperformance?
It's basic history. The US entered the 19th century as a small, fledgling economy. We spent most of the 19th century, when we weren't fighting ourselves over slavery, stealing land and resources from natives and weaker neighbors. Growth was very rapid, and around the turn of the 20th century, the US took over Britain as the world's largest economy. The 20th century was also favorable to the US, assisted by the two "official" World Wars. The start of the 20th century also represents the start of the earliest pseudo-reliable (though that's debatable in of itself) equity datasets, the Dimson-Marsh data, which shows US outperformance of 2% over ex-US since 1900. As you well know, indexes of VTSMX and VGTSX unfortunately do not go back centuries, but one does not go from small, fledgling economy to >50% global market cap without large long-term outperformance, and none of this should be surprising or tough to visualize to anyone who understands history.

As I said though, this doesn't guarantee anything regarding the rest of our investing lifetimes. It's just not "recency bias".
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Re: International stock investing is industry diversification and style diversification

Post by DaufuskieNate »

If index funds had existed 200 years ago, the ancestors of today's "all-U.S. Bogleheads" would have recommended an "All-British-Empire" index fund. Virtually no Boglehead would have put all their eggs in the "single-country emerging market all-U.S. index." In hindsight, that would have been a great choice. But successfully choosing the best country to invest in over a long-term investment horizon of 30-50 years is pure luck. That's why many on this forum would advocate broad country diversification.
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Re: International stock investing is industry diversification and style diversification

Post by Stef »

DaufuskieNate wrote: Fri Sep 11, 2020 11:50 am If index funds had existed 200 years ago, the ancestors of today's "all-U.S. Bogleheads" would have recommended an "All-British-Empire" index fund. Virtually no Boglehead would have put all their eggs in the "single-country emerging market all-U.S. index." In hindsight, that would have been a great choice. But successfully choosing the best country to invest in over a long-term investment horizon of 30-50 years is pure luck. That's why many on this forum would advocate broad country diversification.
That's why I try to mimic VT and stay close to market cap weights. Not to maximize returns, but to minimize regret.
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Re: International stock investing is industry diversification and style diversification

Post by AlwaysLearningMore »

Mr. Bogle's take on a simplified investing strategy at the 2017 Bogleheads Confernce. Question and response start around 59:00.

Question for Mr. Bogle: If I were to include Social Security as part of my fixed income, what would be wrong with holding the Balanced Index Fund for life? My plan is to put it in this one fund and never look back.

Mr. Bogle’s response: Nothing. That is, nothing would be wrong.

https://vimeo.com/channels/bogleheads/241479867

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Re: International stock investing is industry diversification and style diversification

Post by Rick Ferri »

DB2 wrote: Fri Sep 11, 2020 9:18 am
Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm International stock investing is becoming more about diversifying industry groups and styles rather than diversifying currencies. Do a "Compare" of VTI and VXUS on the Vanguard website, scroll down to industry group comparisons, and you'll see what I mean. International stock represents many of the products we buy as consumers even though we don't make those products in the US anymore. It's truly is a global market. You'll also see that investing internationally is value investing. The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.

Rick Ferri
Do you think global market cap is "too much" International? Holding a single global equity fund (like VT or VTWAX) that goes where the growth is at has a strong appeal to me; simplistic and set/forget.
I don't know what too much international is. I would probably draw the line at 50% international and 50% US. I think 15% is too little. But this cannot be known in advance. We'll only know what optimal was 25 years from now.

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Re: International stock investing is industry diversification and style diversification

Post by abuss368 »

Rick Ferri wrote: Fri Sep 11, 2020 9:00 pm
DB2 wrote: Fri Sep 11, 2020 9:18 am
Rick Ferri wrote: Tue Sep 08, 2020 5:38 pm International stock investing is becoming more about diversifying industry groups and styles rather than diversifying currencies. Do a "Compare" of VTI and VXUS on the Vanguard website, scroll down to industry group comparisons, and you'll see what I mean. International stock represents many of the products we buy as consumers even though we don't make those products in the US anymore. It's truly is a global market. You'll also see that investing internationally is value investing. The industry groups like energy and finance and industrial are where value stocks come from. That's why international stocks have lower valuations than US stocks. Again, look at the "Compare." I recommend one-third of stock allocation to international.

Rick Ferri
Do you think global market cap is "too much" International? Holding a single global equity fund (like VT or VTWAX) that goes where the growth is at has a strong appeal to me; simplistic and set/forget.
I don't know what too much international is. I would probably draw the line at 50% international and 50% US. I think 15% is too little. But this cannot be known in advance. We'll only know what optimal was 25 years from now.

Rick Ferri
Rick -

Do you think Vanguard will eventually move to a 50% US and 50% International recommendation and also adjust the Target and LifeStrategy funds?
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Re: International stock investing is industry diversification and style diversification

Post by Alchemist »

DaufuskieNate wrote: Fri Sep 11, 2020 11:50 am If index funds had existed 200 years ago, the ancestors of today's "all-U.S. Bogleheads" would have recommended an "All-British-Empire" index fund. Virtually no Boglehead would have put all their eggs in the "single-country emerging market all-U.S. index." In hindsight, that would have been a great choice. But successfully choosing the best country to invest in over a long-term investment horizon of 30-50 years is pure luck. That's why many on this forum would advocate broad country diversification.
Two centuries ago my ancestors were poor farmers being ruthlessly oppressed by the British Empire. Their descendants fled to the United States as soon as passage became cheap enough for poor immigrants like themselves.

In other words, my ancestors did bet on America over the British Empire. So did most Americans' ancestors who immigrated voluntarily over the last 200 years.

With all that being said, a 'buy and hold' index investor in the UK stock market for the last 200 years would have done just fine.
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Re: International stock investing is industry diversification and style diversification

Post by Stef »

abuss368 wrote: Fri Sep 11, 2020 9:32 pm Do you think Vanguard will eventually move to a 50% US and 50% International recommendation and also adjust the Target and LifeStrategy funds?
Why should they do that? US makes up close to 60% of the world, why should the intentionally overweight exUS?
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Re: International stock investing is industry diversification and style diversification

Post by abuss368 »

Stef wrote: Sat Sep 12, 2020 1:36 am
abuss368 wrote: Fri Sep 11, 2020 9:32 pm Do you think Vanguard will eventually move to a 50% US and 50% International recommendation and also adjust the Target and LifeStrategy funds?
Why should they do that? US makes up close to 60% of the world, why should the intentionally overweight exUS?
I did not know it was 60%. I thought it was about 50/50 (realizing it is a moving target).
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Re: International stock investing is industry diversification and style diversification

Post by sycamore »

abuss368 wrote: Sat Sep 12, 2020 6:55 am
Stef wrote: Sat Sep 12, 2020 1:36 am
abuss368 wrote: Fri Sep 11, 2020 9:32 pm Do you think Vanguard will eventually move to a 50% US and 50% International recommendation and also adjust the Target and LifeStrategy funds?
Why should they do that? US makes up close to 60% of the world, why should the intentionally overweight exUS?
I did not know it was 60%. I thought it was about 50/50 (realizing it is a moving target).
As of Sep 10, US is 58.1% and ex-US is 41.9%. Reference: MSCI ACWI (All Country World Index) shown on Morningstar https://www.morningstar.com/etfs/xnas/acwi/portfolio

Another source is Vanguard's Total World Stock Index Fund . As of 7/31/2020, US was at 57.1%.
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Re: International stock investing is industry diversification and style diversification

Post by Call_Me_Op »

Rick,

I believe you are overthinking this. If you believe in cap weighting, that should extend outside of US borders. Otherwise, why not parse the US market based upon sectors and reallocate your money in some way other than cap weighting? Or why not exclude stocks of companies west of the Mississippi (if you could)?

I buy stocks from across the world because that provides greater diversification. If stocks were traded on Mars, I would hold some (index funds, of course). It does not seem rational to me to exclude specific geographical areas. And the fact that international markets have lagged for the past 20 years really means nothing. To act on that is a form of recency bias.
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Re: International stock investing is industry diversification and style diversification

Post by Rick Ferri »

Call_Me_Op wrote: Sat Sep 12, 2020 7:25 am Rick,

I believe you are overthinking this. If you believe in cap weighting, that should extend outside of US borders. Otherwise, why not parse the US market based upon sectors and reallocate your money in some way other than cap weighting? Or why not exclude stocks of companies west of the Mississippi (if you could)?
I don't think taking a 30% or so allocation to a total international stock index fund is overthinking anything. We have to pay our bills in US dollars, so a home country bias in US stocks is not a crazy idea.

These concepts are touchy-feely. Do more if you want, and less if you don't. This stuff is the flavor of the icing on the cake, not the cake.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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