Reasons to invest internationally, or not.

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k b
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Re: Reasons to invest internationally, or not.

Post by k b »

Stef wrote: Tue Sep 15, 2020 12:29 am
k b wrote: Sat Sep 12, 2020 12:23 pm
Robot Monster wrote: Sat Sep 12, 2020 10:48 am
k b wrote: Sat Sep 12, 2020 10:35 am US investors able to invest in US companies get intl exposure via the companies they invest in.
At least in 2016, US revenues are largely domestically driven, with 63% exposure vs:

Revenue from US
Europe -- 20%
Japan -- 14%
EM -- 8%

Source:
https://seekingalpha.com/article/404743 ... -come-from
This means 37% exposure to non-US markets, just by investing in US companies? Sounds like reasonable exposure to me.

Am I reading this wrong?
Nestle has 98% exposure to non-Swiss markets. Should I just buy Nestle now?
Single company exposure. I would never do it.
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UpsetRaptor
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Re: Reasons to invest internationally, or not.

Post by UpsetRaptor »

For everyone picking various endpoints to debate what is "recency bias" and not, according to the Dimson-Marsh data the US has outperformed ex-US by 2% since 1900. And 200 years ago the US was not even a top 10 economy.
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Stef
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Re: Reasons to invest internationally, or not.

Post by Stef »

UpsetRaptor wrote: Tue Sep 15, 2020 10:57 am For everyone picking various endpoints to debate what is "recency bias" and not, according to the Dimson-Marsh data the US has outperformed ex-US by 2% since 1900. And 200 years ago the US was not even a top 10 economy.
It's funny that you didn't get what recency bias is about lol.
whereskyle
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Re: Reasons to invest internationally, or not.

Post by whereskyle »

burritoLover wrote: Tue Sep 15, 2020 10:44 am
whereskyle wrote: Tue Sep 15, 2020 10:31 am "Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund."

This is where our conversation began. You cast past performance as a rule of conditional logic: when this happens, that happens. That is not what past performance tells us, unfortunately for us.

Jack cautioned us about using backtesting to explain pretty much anything apart from what happened. That was the only thing I wanted to point out.
That's interesting since the analogy that I was responding to, Santiago was ruined (and likely to starve) when he went all-in on his "US-only" field. Didn't hear the "conditional logic" strawman from you about his analogy - only my response. Is that because his narrative more closely fit with your own? Had I not responded to that, would have chimed in with the same chastising that you applied to me? Or would you have selectively ignored it?
Wow. Sooooo, poster was talking about diversification. I completely agree that the example was hyperbolic. You then talked about correlations and underperformance as some sort of logical rule. I took issue with that because it is untrue.

I'm sorry I didn't also point a finger at the post you were responding to. My failure to do that does not make your point correct.
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asif408
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Re: Reasons to invest internationally, or not.

Post by asif408 »

UpsetRaptor wrote: Tue Sep 15, 2020 10:57 am For everyone picking various endpoints to debate what is "recency bias" and not, according to the Dimson-Marsh data the US has outperformed ex-US by 2% since 1900. And 200 years ago the US was not even a top 10 economy.
Right, but Australia has the best returns of any country, according to the latest DMS report: https://www.credit-suisse.com/about-us/ ... tions.html. So why not Australia?
burritoLover
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Re: Reasons to invest internationally, or not.

Post by burritoLover »

whereskyle wrote: Tue Sep 15, 2020 11:07 am
burritoLover wrote: Tue Sep 15, 2020 10:44 am
whereskyle wrote: Tue Sep 15, 2020 10:31 am "Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund."

This is where our conversation began. You cast past performance as a rule of conditional logic: when this happens, that happens. That is not what past performance tells us, unfortunately for us.

Jack cautioned us about using backtesting to explain pretty much anything apart from what happened. That was the only thing I wanted to point out.
That's interesting since the analogy that I was responding to, Santiago was ruined (and likely to starve) when he went all-in on his "US-only" field. Didn't hear the "conditional logic" strawman from you about his analogy - only my response. Is that because his narrative more closely fit with your own? Had I not responded to that, would have chimed in with the same chastising that you applied to me? Or would you have selectively ignored it?
Wow. Sooooo, poster was talking about diversification. I completely agree that the example was hyperbolic. You then talked about correlations and underperformance as some sort of logical rule. I took issue with that because it is untrue.

I'm sorry I didn't also point a finger at the post you were responding to. My failure to do that does not make your point correct.
Both his analogy and my follow-up analogy were both obviously hyperbole. Yet, somehow, you read into my farming analogy response, not as hyperbole, but as logical rules for predicting future performance of US markets - which is an utterly fantastic leap. Not only that, you assumed that I was all-in on US and that I advocated for that as well when I said absolutely nothing to that effect (and which is not even true). I would be careful to not let your own biases read information into a discussion that is not there.
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UpsetRaptor
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Re: Reasons to invest internationally, or not.

Post by UpsetRaptor »

asif408 wrote: Tue Sep 15, 2020 11:09 am
UpsetRaptor wrote: Tue Sep 15, 2020 10:57 am For everyone picking various endpoints to debate what is "recency bias" and not, according to the Dimson-Marsh data the US has outperformed ex-US by 2% since 1900. And 200 years ago the US was not even a top 10 economy.
Right, but Australia has the best returns of any country, according to the latest DMS report: https://www.credit-suisse.com/about-us/ ... tions.html. So why not Australia?
I've never seen anybody here try to argue that Australia is a large, diverse enough market to invest most/all of the equities portion of their portfolio.
Stef wrote: Tue Sep 15, 2020 11:05 am
UpsetRaptor wrote: Tue Sep 15, 2020 10:57 am For everyone picking various endpoints to debate what is "recency bias" and not, according to the Dimson-Marsh data the US has outperformed ex-US by 2% since 1900. And 200 years ago the US was not even a top 10 economy.
It's funny that you didn't get what recency bias is about lol.
I'm not sure what exactly you're trying to say with that zinger, but my point was that on every one of these threads there will invariably be some claim that US outperformance is only a recent thing, which of course untrue, since it has actually outperformed for centuries.


Look, what are the basic Boglehead principles:
1) Use index funds where possible
2) Keep costs low
3) Diversify
4) Simplicity
5) Keep tax costs low
6) Stay the course

Theoretically, the optimal way to get the full logical extreme of
2) is to use zero cost basis funds like FZRO.
3) is to use global cap for equities, global cap for bonds, and depending on how one looks at things gold, REIT, and private equity too.
4) is to just use a single target date fund

The reality of course, is that Vanguard funds are plenty cheap enough, Total US stock market (>5000 stocks; large, mid, small, growth, value, etc) is plenty diverse, and a 3-fund portfolio is plenty simple enough. Reasonable people can choose these things.
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Taylor Larimore
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Re: Reasons to invest internationally, or not.

Post by Taylor Larimore »

Bogleheads:

I allocated 20% of equity to The Three-Fund Portfolio. You can read why here:

How Much International? A Suggestion.

Best wishes
Taylor
Jack Bogle's Words of Wisdom: “Your exposure to mutual funds investing in foreign stocks should not exceed 20% of your equity portfolio.”
"Simplicity is the master key to financial success." -- Jack Bogle
asif408
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Re: Reasons to invest internationally, or not.

Post by asif408 »

UpsetRaptor wrote: Tue Sep 15, 2020 11:46 am
asif408 wrote: Tue Sep 15, 2020 11:09 am
UpsetRaptor wrote: Tue Sep 15, 2020 10:57 am For everyone picking various endpoints to debate what is "recency bias" and not, according to the Dimson-Marsh data the US has outperformed ex-US by 2% since 1900. And 200 years ago the US was not even a top 10 economy.
Right, but Australia has the best returns of any country, according to the latest DMS report: https://www.credit-suisse.com/about-us/ ... tions.html. So why not Australia?
I've never seen anybody here try to argue that Australia is a large, diverse enough market to invest most/all of the equities portion of their portfolio.
So I assume the US was a diverse market at the beginning of the time frame. Maybe you can shed some insight. Oh, wait, never mind.......it's in the yearbook. The US market was more than half concentrated in the railroad sector in 1900. So it has gotten more diversified sector wise but was heavily concentrated to start. So maybe we should pick heavily concentrated countries.
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Stef
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Re: Reasons to invest internationally, or not.

Post by Stef »

Do you know how much of this 2%/year outperformance of US since 1900 is contributed by 2008-2020? Almost all of it.
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UpsetRaptor
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Re: Reasons to invest internationally, or not.

Post by UpsetRaptor »

Stef wrote: Tue Sep 15, 2020 12:01 pm Do you know how much of this 2%/year outperformance of US since 1900 is contributed by 2008-2020? Almost all of it.
This is not true. Outperformance was 2% in the 20th century itself.
columbia
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Re: Reasons to invest internationally, or not.

Post by columbia »

asif408 wrote: Tue Sep 15, 2020 11:09 am
UpsetRaptor wrote: Tue Sep 15, 2020 10:57 am For everyone picking various endpoints to debate what is "recency bias" and not, according to the Dimson-Marsh data the US has outperformed ex-US by 2% since 1900. And 200 years ago the US was not even a top 10 economy.
Right, but Australia has the best returns of any country, according to the latest DMS report: https://www.credit-suisse.com/about-us/ ... tions.html. So why not Australia?
This is a high end (or is it low rent?) straw man argument. I've never seen a single human claim that one country would have the best individual stock performance.
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Stef
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Re: Reasons to invest internationally, or not.

Post by Stef »

UpsetRaptor wrote: Tue Sep 15, 2020 12:03 pm
Stef wrote: Tue Sep 15, 2020 12:01 pm Do you know how much of this 2%/year outperformance of US since 1900 is contributed by 2008-2020? Almost all of it.
This is not true. Outperformance was 2% in the 20th century itself.
So you are taking the biggest bubble moment in US history as your endpoint? Right before the lost decade? How convenient.
whereskyle
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Re: Reasons to invest internationally, or not.

Post by whereskyle »

burritoLover wrote: Tue Sep 15, 2020 11:24 am
whereskyle wrote: Tue Sep 15, 2020 11:07 am
burritoLover wrote: Tue Sep 15, 2020 10:44 am
whereskyle wrote: Tue Sep 15, 2020 10:31 am "Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund."

This is where our conversation began. You cast past performance as a rule of conditional logic: when this happens, that happens. That is not what past performance tells us, unfortunately for us.

Jack cautioned us about using backtesting to explain pretty much anything apart from what happened. That was the only thing I wanted to point out.
That's interesting since the analogy that I was responding to, Santiago was ruined (and likely to starve) when he went all-in on his "US-only" field. Didn't hear the "conditional logic" strawman from you about his analogy - only my response. Is that because his narrative more closely fit with your own? Had I not responded to that, would have chimed in with the same chastising that you applied to me? Or would you have selectively ignored it?
Wow. Sooooo, poster was talking about diversification. I completely agree that the example was hyperbolic. You then talked about correlations and underperformance as some sort of logical rule. I took issue with that because it is untrue.

I'm sorry I didn't also point a finger at the post you were responding to. My failure to do that does not make your point correct.
Both his analogy and my follow-up analogy were both obviously hyperbole. Yet, somehow, you read into my farming analogy response, not as hyperbole, but as logical rules for predicting future performance of US markets - which is an utterly fantastic leap. Not only that, you assumed that I was all-in on US and that I advocated for that as well when I said absolutely nothing to that effect (and which is not even true). I would be careful to not let your own biases read information into a discussion that is not there.
You were spelling out evidence of persistent US outperformance after I tried to talk about whether the "if, then" statements you made were correct. Your discussions about US outperformance led me to believe that you were defending a US-only portfolio. I don't think we have much more to add to this thread by going back and forth as to whether I treated you fairly enough. I was trying to address a simple point, and you responded to it by talking about US outperformance rather than by talking about whether your joke suggesting "when this happen, that happens" was an accurate statement. Our discussion speaks for itself. Hopefully, our next interaction will be more pleasant!
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
burritoLover
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Re: Reasons to invest internationally, or not.

Post by burritoLover »

whereskyle wrote: Tue Sep 15, 2020 12:19 pm
burritoLover wrote: Tue Sep 15, 2020 11:24 am
whereskyle wrote: Tue Sep 15, 2020 11:07 am
burritoLover wrote: Tue Sep 15, 2020 10:44 am
whereskyle wrote: Tue Sep 15, 2020 10:31 am "Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund."

This is where our conversation began. You cast past performance as a rule of conditional logic: when this happens, that happens. That is not what past performance tells us, unfortunately for us.

Jack cautioned us about using backtesting to explain pretty much anything apart from what happened. That was the only thing I wanted to point out.
That's interesting since the analogy that I was responding to, Santiago was ruined (and likely to starve) when he went all-in on his "US-only" field. Didn't hear the "conditional logic" strawman from you about his analogy - only my response. Is that because his narrative more closely fit with your own? Had I not responded to that, would have chimed in with the same chastising that you applied to me? Or would you have selectively ignored it?
Wow. Sooooo, poster was talking about diversification. I completely agree that the example was hyperbolic. You then talked about correlations and underperformance as some sort of logical rule. I took issue with that because it is untrue.

I'm sorry I didn't also point a finger at the post you were responding to. My failure to do that does not make your point correct.
Both his analogy and my follow-up analogy were both obviously hyperbole. Yet, somehow, you read into my farming analogy response, not as hyperbole, but as logical rules for predicting future performance of US markets - which is an utterly fantastic leap. Not only that, you assumed that I was all-in on US and that I advocated for that as well when I said absolutely nothing to that effect (and which is not even true). I would be careful to not let your own biases read information into a discussion that is not there.
You were spelling out evidence of persistent US outperformance after I tried to talk about whether the "if, then" statements you made were correct. Your discussions about US outperformance led me to believe that you were defending a US-only portfolio. I don't think we have much more to add to this thread by going back and forth as to whether I treated you fairly enough. I was trying to address a simple point, and you responded to it by talking about US outperformance rather than by talking about whether your joke suggesting "when this happen, that happens" was an accurate statement. Our discussion speaks for itself. Hopefully, our next interaction will be more pleasant!
Sure. :sharebeer
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UpsetRaptor
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Re: Reasons to invest internationally, or not.

Post by UpsetRaptor »

Stef wrote: Tue Sep 15, 2020 12:16 pm
UpsetRaptor wrote: Tue Sep 15, 2020 12:03 pm
Stef wrote: Tue Sep 15, 2020 12:01 pm Do you know how much of this 2%/year outperformance of US since 1900 is contributed by 2008-2020? Almost all of it.
This is not true. Outperformance was 2% in the 20th century itself.
So you are taking the biggest bubble moment in US history as your endpoint? Right before the lost decade? How convenient.
With that long of a timeframe, starting in 1900 when the US was only just passing Britain as the largest economy in the world and a couple other European countries weren't far behind, any relatively recent endpoint one chooses (including picking an endpoint favorable to ex-US, like 2008) yields only a tiny change. You still end up with a solid US long term outperformance, around ~2%, according to the Dimson-Marsh data. This should not be surprising for those who know history.

That's not any guarantee of anything moving forward, and if you want to diversify further and invest elsewhere, that's totally fine. It's just not "recency bias" and we don't need to fudge the facts or pretend like "most of its outperformance is since 2008" or other such factually untrue things.
Robot Monster
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Re: Reasons to invest internationally, or not.

Post by Robot Monster »

burritoLover wrote: Tue Sep 15, 2020 10:27 am
Robot Monster wrote: Tue Sep 15, 2020 10:21 am
burritoLover wrote: Tue Sep 15, 2020 9:43 am
Robot Monster wrote: Tue Sep 15, 2020 9:30 am For reference, as far as who trounced whom over what periods,

Image

Also, historical CAPE,

Image
Yep, the US has trounced ex-US for the last 30 years.
Mostly, yes, the US has trounced ex-US for the past 30 yrs, with the notable exception being 2003-2007.

In 2003, the US had a higher CAPE than international. Then, US underperformed.

In 2007, international had a higher CAPE. Then, international underperformed.

Today, the US has a much higher CAPE than international.
Yeah, you probably shouldn't lump sum a $1 million dollar inheritance right now into all-US if you are earmarking that for your entire retirement. If instead, you are periodically investing monthly for your retirement over the next 30 years, then current CAPE is irrelevant. Unless you are suggesting try to market time.
Wasn't suggesting a strategy, really, just want people to keep things in perspective regarding historical valuations when they look back on historical performance.
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Ciel
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Re: Reasons to invest internationally, or not.

Post by Ciel »

Valuethinker wrote: Tue Sep 15, 2020 7:49 am
The real arguments are around tax drag & foreign exchange risk (against) v diversification (for).

Instead we wind up discussing Chinese and Italian demographics.
Is it known how much on average these factors (tax drag, currency risk) have brought down ex-US returns? Any good way to estimate this? Something like an ER-equivalent?

I'm particularly interested in figuring this out for tax-advantaged accounts -- no foreign tax credit.
Robot Monster
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Re: Reasons to invest internationally, or not.

Post by Robot Monster »

Ciel wrote: Tue Sep 15, 2020 1:39 pm
Valuethinker wrote: Tue Sep 15, 2020 7:49 am
The real arguments are around tax drag & foreign exchange risk (against) v diversification (for).

Instead we wind up discussing Chinese and Italian demographics.
Is it known how much on average these factors (tax drag, currency risk) have brought down ex-US returns? Any good way to estimate this? Something like an ER-equivalent?
Currency exposure is a form of diversification, no? I'm happy to have the exposure from what's going on:

"The U.S. dollar has been heading lower over the past several months as it has become clear that the coronavirus crisis is hitting the U.S. harder than many other advanced economies, and as the crisis has been met with unprecedented fiscal and monetary loosening...There are many reasons to expect further weakness. Chief among them is the Federal Reserve’s new policy framework unveiled last month." Source
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
Ciel
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Re: Reasons to invest internationally, or not.

Post by Ciel »

Robot Monster wrote: Tue Sep 15, 2020 1:46 pm
Ciel wrote: Tue Sep 15, 2020 1:39 pm
Valuethinker wrote: Tue Sep 15, 2020 7:49 am
The real arguments are around tax drag & foreign exchange risk (against) v diversification (for).

Instead we wind up discussing Chinese and Italian demographics.
Is it known how much on average these factors (tax drag, currency risk) have brought down ex-US returns? Any good way to estimate this? Something like an ER-equivalent?
Currency exposure is a form of diversification, no? I'm happy to have the exposure from what's going on:

"The U.S. dollar has been heading lower over the past several months as it has become clear that the coronavirus crisis is hitting the U.S. harder than many other advanced economies, and as the crisis has been met with unprecedented fiscal and monetary loosening...There are many reasons to expect further weakness. Chief among them is the Federal Reserve’s new policy framework unveiled last month." Source
True. I'm really more interested in visualizing tax drag.
asif408
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Re: Reasons to invest internationally, or not.

Post by asif408 »

columbia wrote: Tue Sep 15, 2020 12:09 pm I've never seen a single human claim that one country would have the best individual stock performance.
You must not come here very often, then.
petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

Robot Monster wrote: Tue Sep 15, 2020 1:46 pm
Ciel wrote: Tue Sep 15, 2020 1:39 pm
Valuethinker wrote: Tue Sep 15, 2020 7:49 am
The real arguments are around tax drag & foreign exchange risk (against) v diversification (for).

Instead we wind up discussing Chinese and Italian demographics.
Is it known how much on average these factors (tax drag, currency risk) have brought down ex-US returns? Any good way to estimate this? Something like an ER-equivalent?
Currency exposure is a form of diversification, no? I'm happy to have the exposure from what's going on:

"The U.S. dollar has been heading lower over the past several months as it has become clear that the coronavirus crisis is hitting the U.S. harder than many other advanced economies, and as the crisis has been met with unprecedented fiscal and monetary loosening...There are many reasons to expect further weakness. Chief among them is the Federal Reserve’s new policy framework unveiled last month." Source
There is not actually a clear answer on the impact of currency exposure, and the article you cite is a classic example of financial journalism rationalizing market movements in a way that BH regularly regard to be noise.

The naive view of currency exposure as a form of diversification is that it's an object with a price that moves apparently randomly that can be rebalanced within an overall portfolio. So, yes, having currency exposure is diversification. It's diversification in the same way that orange futures or platinum metal provide diversification.

That's not exactly how we would build a portfolio; generally, our criteria is going to be more complicated, like having a positive reward in light of the risk taken, plus a lack of correlation with our main stock exposure. Thus, if currency exposure had an expected return and a reasonably estimated volatility that can be measured in terms of correlation with stocks, it could be positive. Two key problems immediately arise--currency does not have an expected return, and understanding the interplay of currency and stocks can be difficult since correlations are not permanent.

On the first point, without an expected return for a currency, it is hard to say exposure to it is beneficial. This is called "uncompensated risk."

On the second, there can be strange interactions between currency and stocks. Japan is a great example where many of the largest businesses there are major exporters. A weaker yen can make these companies much more profitable priced in yen, while a stronger yen can make them less profitable. In the last 15 years, the Japanese stock market followed this pattern: when the yen rallied strongly during the financial crisis, the stocks tanked, and especially when the yen weakened again around 2012, Japanese stocks took off. Japanese stock returns as measured by the NIKKEI or TOPIX over the last 10 years have been very respectable. The returns look worse for USD investors and contribute to low returns over the last 10 years. (Plus, note the stock-currency relationship didn't follow the pattern during the 15 years before that.) That's before even getting into the complicated models for how foreign currency impacts domestic companies with FDI and exporting operations.

The second problem, currency-stock interactions, eventually points to stranger problems like welfare impacts. For a U.S. resident, a weaker dollar may or may not hurt welfare since a high % of GDP is actually domestic and most of the inputs we consume are US-based. The academic models looking at this have dramatically different results depending on how exactly they try to model the welfare function.

Bottom line, it is not clear that currency exposure is beneficial diversification.
Robot Monster
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Re: Reasons to invest internationally, or not.

Post by Robot Monster »

petulant wrote: Tue Sep 15, 2020 4:00 pm
Robot Monster wrote: Tue Sep 15, 2020 1:46 pm
Ciel wrote: Tue Sep 15, 2020 1:39 pm
Valuethinker wrote: Tue Sep 15, 2020 7:49 am
The real arguments are around tax drag & foreign exchange risk (against) v diversification (for).

Instead we wind up discussing Chinese and Italian demographics.
Is it known how much on average these factors (tax drag, currency risk) have brought down ex-US returns? Any good way to estimate this? Something like an ER-equivalent?
Currency exposure is a form of diversification, no? I'm happy to have the exposure from what's going on:

"The U.S. dollar has been heading lower over the past several months as it has become clear that the coronavirus crisis is hitting the U.S. harder than many other advanced economies, and as the crisis has been met with unprecedented fiscal and monetary loosening...There are many reasons to expect further weakness. Chief among them is the Federal Reserve’s new policy framework unveiled last month." Source
There is not actually a clear answer on the impact of currency exposure, and the article you cite is a classic example of financial journalism rationalizing market movements in a way that BH regularly regard to be noise.

The naive view of currency exposure as a form of diversification is that it's an object with a price that moves apparently randomly that can be rebalanced within an overall portfolio. So, yes, having currency exposure is diversification. It's diversification in the same way that orange futures or platinum metal provide diversification.

That's not exactly how we would build a portfolio; generally, our criteria is going to be more complicated, like having a positive reward in light of the risk taken, plus a lack of correlation with our main stock exposure. Thus, if currency exposure had an expected return and a reasonably estimated volatility that can be measured in terms of correlation with stocks, it could be positive. Two key problems immediately arise--currency does not have an expected return, and understanding the interplay of currency and stocks can be difficult since correlations are not permanent.

On the first point, without an expected return for a currency, it is hard to say exposure to it is beneficial. This is called "uncompensated risk."

On the second, there can be strange interactions between currency and stocks. Japan is a great example where many of the largest businesses there are major exporters. A weaker yen can make these companies much more profitable priced in yen, while a stronger yen can make them less profitable. In the last 15 years, the Japanese stock market followed this pattern: when the yen rallied strongly during the financial crisis, the stocks tanked, and especially when the yen weakened again around 2012, Japanese stocks took off. Japanese stock returns as measured by the NIKKEI or TOPIX over the last 10 years have been very respectable. The returns look worse for USD investors and contribute to low returns over the last 10 years. (Plus, note the stock-currency relationship didn't follow the pattern during the 15 years before that.) That's before even getting into the complicated models for how foreign currency impacts domestic companies with FDI and exporting operations.

The second problem, currency-stock interactions, eventually points to stranger problems like welfare impacts. For a U.S. resident, a weaker dollar may or may not hurt welfare since a high % of GDP is actually domestic and most of the inputs we consume are US-based. The academic models looking at this have dramatically different results depending on how exactly they try to model the welfare function.

Bottom line, it is not clear that currency exposure is beneficial diversification.
Thank you for that very detailed response, petulant! That is an interesting comparison of foreign currency exposure to commodities futures. (I actually do own a little of Vanguard Commodities fund, so, am not against having some exposure to that type of diversification.) I don't have enough background in finance/economics to argue about this issue, so, gonna invite my pal David Swensen up on the stage...

From his book Unconventional Success (pg. 60):

Fortunately, finance theorists conclude that some measure of foreign exchange exposure adds to portfolio diversification. Unless foreign currency positions constitute more than roughly one-quarter of portfolio assets, currency exposure serves to reduce overall portfolio risk. Beyond a quarter of portfolio assets, the currency exposure constitutes a source of unwanted risk.
Too lazy to actually type all that out myself, I grabbed the quote from Bogleheads, and see nisiprius addressed whether Swensen right about this:
I don't know. I believe what I believe. I haven't read the Swensen book. Does he name the "finance theorists" and the relevant papers? I think the only way they can possibly be right if they are making some strong assumptions I don't know about, assumptions that are outside the scope of modern portfolio theory, beyond "low correlation" or "zero correlation," some kind of persistent "tends-to" pattern or something of that sort.

I really think "zero return can improve a portfolio if there is zero correlation" is a fairly obvious impossibility. To believe that, you have to believe that it would be beneficial to your portfolio to keep 10% of your portfolio in cash, and every week meet someone and bet it on a fair coin flip, then rebalance.
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Re: Reasons to invest internationally, or not.

Post by GaryA505 »

I'm not attempting to derail this lively discussion, but I have a question.

The policy statements for both Vanguard Wellesley and Vanguard Wellington say they can invest up to 25% of assets in foreign securities, yet Wellesley has only about 10% non-US equities (according to Morningstar), and Wellington only 15%. We know they both have a high-dividend equities tilt, but does that only explain why they aren't higher in non-US?

And yes I know they have global versions of both those funds, but I believe that the above percentages were about the same before the new global funds existed.
petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

Robot Monster wrote: Tue Sep 15, 2020 5:28 pm
petulant wrote: Tue Sep 15, 2020 4:00 pm
Robot Monster wrote: Tue Sep 15, 2020 1:46 pm
Ciel wrote: Tue Sep 15, 2020 1:39 pm
Valuethinker wrote: Tue Sep 15, 2020 7:49 am
The real arguments are around tax drag & foreign exchange risk (against) v diversification (for).

Instead we wind up discussing Chinese and Italian demographics.
Is it known how much on average these factors (tax drag, currency risk) have brought down ex-US returns? Any good way to estimate this? Something like an ER-equivalent?
Currency exposure is a form of diversification, no? I'm happy to have the exposure from what's going on:

"The U.S. dollar has been heading lower over the past several months as it has become clear that the coronavirus crisis is hitting the U.S. harder than many other advanced economies, and as the crisis has been met with unprecedented fiscal and monetary loosening...There are many reasons to expect further weakness. Chief among them is the Federal Reserve’s new policy framework unveiled last month." Source
There is not actually a clear answer on the impact of currency exposure, and the article you cite is a classic example of financial journalism rationalizing market movements in a way that BH regularly regard to be noise.

The naive view of currency exposure as a form of diversification is that it's an object with a price that moves apparently randomly that can be rebalanced within an overall portfolio. So, yes, having currency exposure is diversification. It's diversification in the same way that orange futures or platinum metal provide diversification.

That's not exactly how we would build a portfolio; generally, our criteria is going to be more complicated, like having a positive reward in light of the risk taken, plus a lack of correlation with our main stock exposure. Thus, if currency exposure had an expected return and a reasonably estimated volatility that can be measured in terms of correlation with stocks, it could be positive. Two key problems immediately arise--currency does not have an expected return, and understanding the interplay of currency and stocks can be difficult since correlations are not permanent.

On the first point, without an expected return for a currency, it is hard to say exposure to it is beneficial. This is called "uncompensated risk."

On the second, there can be strange interactions between currency and stocks. Japan is a great example where many of the largest businesses there are major exporters. A weaker yen can make these companies much more profitable priced in yen, while a stronger yen can make them less profitable. In the last 15 years, the Japanese stock market followed this pattern: when the yen rallied strongly during the financial crisis, the stocks tanked, and especially when the yen weakened again around 2012, Japanese stocks took off. Japanese stock returns as measured by the NIKKEI or TOPIX over the last 10 years have been very respectable. The returns look worse for USD investors and contribute to low returns over the last 10 years. (Plus, note the stock-currency relationship didn't follow the pattern during the 15 years before that.) That's before even getting into the complicated models for how foreign currency impacts domestic companies with FDI and exporting operations.

The second problem, currency-stock interactions, eventually points to stranger problems like welfare impacts. For a U.S. resident, a weaker dollar may or may not hurt welfare since a high % of GDP is actually domestic and most of the inputs we consume are US-based. The academic models looking at this have dramatically different results depending on how exactly they try to model the welfare function.

Bottom line, it is not clear that currency exposure is beneficial diversification.
Thank you for that very detailed response, petulant! That is an interesting comparison of foreign currency exposure to commodities futures. (I actually do own a little of Vanguard Commodities fund, so, am not against having some exposure to that type of diversification.) I don't have enough background in finance/economics to argue about this issue, so, gonna invite my pal David Swensen up on the stage...

From his book Unconventional Success (pg. 60):

Fortunately, finance theorists conclude that some measure of foreign exchange exposure adds to portfolio diversification. Unless foreign currency positions constitute more than roughly one-quarter of portfolio assets, currency exposure serves to reduce overall portfolio risk. Beyond a quarter of portfolio assets, the currency exposure constitutes a source of unwanted risk.
Too lazy to actually type all that out myself, I grabbed the quote from Bogleheads, and see nisiprius addressed whether Swensen right about this:
I don't know. I believe what I believe. I haven't read the Swensen book. Does he name the "finance theorists" and the relevant papers? I think the only way they can possibly be right if they are making some strong assumptions I don't know about, assumptions that are outside the scope of modern portfolio theory, beyond "low correlation" or "zero correlation," some kind of persistent "tends-to" pattern or something of that sort.

I really think "zero return can improve a portfolio if there is zero correlation" is a fairly obvious impossibility. To believe that, you have to believe that it would be beneficial to your portfolio to keep 10% of your portfolio in cash, and every week meet someone and bet it on a fair coin flip, then rebalance.
Thanks for sharing those quotes. I tend to agree with the input from nisiprius. I am very skeptical of David Swensen's claim that financial theorists as a group concluded something about this topic. Before participating in this thread, I spent quite a while reviewing SSRN and other materials and found that inclusion of currency in CAPM made many conclusions unclear. Here are some passages from one my favorite papers, which was posted on SSRN this year:
Lucas (1982) investigates a two-country endowment economy . . . [and concludes that] [p]erfect risk-sharing in this economy is achieved if all agents hold a percentage of their wealth in the stock of a given country which is equal to the relative size of its market capitalization. [This is naive market portfolio diversification across countries.] . . . [Baxter and Jermann] add labor income to Lucas' one-good model and find that in order to hedge labor income risk it is optimal for agents to short home equity and to take up large long positions in foreign equity. [This is an example of including overall welfare impacts.] . . . Heathcote and Perri (2013) . . . investigate a two good production economy with labor and capital income and find that a standard international macroeconomic model . . . can rationalize the equity home bias to a large extent. This is because in their framework domestic equity is a good hedge against labor income risk. [Another welfare model points in the other direction.]
https://papers.ssrn.com/sol3/Papers.cfm ... id=3553245

I would want to review the papers cited by Swensen and compare to other literature. For example, it could just be an application of the "zero return, uncorrelated volatility, rebalance" paradigm where the gains from diversification appear to come from diversification so they only apply up to some portion of the portfolio before impacting expected return too much.
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Re: Reasons to invest internationally, or not.

Post by bck63 »

dwickenh wrote: Sat Sep 12, 2020 6:49 am I read 2 good articles this morning concerning the reasons to invest in foreign markets, or to invest only in the US. Compelling arguments for both are included in the linked articles below.

Happier at Home

Venturing Abroad

[links fixed by admin LadyGeek]

The academics mostly promote International investing. I don't think it will make a big difference either way.

Dan
Developed international markets, maybe. But I'm not turning my money over to some banana republic or the communist party in China. I'll pass.
typical.investor
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Re: Reasons to invest internationally, or not.

Post by typical.investor »

bck63 wrote: Tue Sep 15, 2020 7:15 pm
dwickenh wrote: Sat Sep 12, 2020 6:49 am I read 2 good articles this morning concerning the reasons to invest in foreign markets, or to invest only in the US. Compelling arguments for both are included in the linked articles below.

Happier at Home

Venturing Abroad

[links fixed by admin LadyGeek]

The academics mostly promote International investing. I don't think it will make a big difference either way.

Dan
Developed international markets, maybe. But I'm not turning my money over to some banana republic or the communist party in China. I'll pass.
In terms of banana republics, I'd say the US is moving its way steadily towards the top for sure.

I suppose this will just be another case where posters are free to disparage other countries at will, but as soon as comments are made about the US; then posters will be warned and comments deleted despite this being about law and not politics.

Anyway, the list of examples of how the US is turning its back on the rule of law would surely bring the hammer down, but suffice it to say as an investor I am concerned about Dictators coming to power in America as much as I am about anywhere else.

Not saying China is a great place but only that I don't see anyplace as beyond question.
bck63
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Re: Reasons to invest internationally, or not.

Post by bck63 »

typical.investor wrote: Tue Sep 15, 2020 7:37 pm
bck63 wrote: Tue Sep 15, 2020 7:15 pm
dwickenh wrote: Sat Sep 12, 2020 6:49 am I read 2 good articles this morning concerning the reasons to invest in foreign markets, or to invest only in the US. Compelling arguments for both are included in the linked articles below.

Happier at Home

Venturing Abroad

[links fixed by admin LadyGeek]

The academics mostly promote International investing. I don't think it will make a big difference either way.

Dan
Developed international markets, maybe. But I'm not turning my money over to some banana republic or the communist party in China. I'll pass.
In terms of banana republics, I'd say the US is moving its way steadily towards the top for sure.

I suppose this will just be another case where posters are free to disparage other countries at will, but as soon as comments are made about the US; then posters will be warned and comments deleted despite this being about law and not politics.

Anyway, the list of examples of how the US is turning its back on the rule of law would surely bring the hammer down, but suffice it to say as an investor I am concerned about Dictators coming to power in America as much as I am about anywhere else.

Not saying China is a great place but only that I don't see anyplace as beyond question.
Point well taken. Thank you. It wasn't my intent to disparage other nations. Perhaps I could have said that the political instability of some emerging market countries gives me pause when I think about investing there.
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Re: Reasons to invest internationally, or not.

Post by lostdog »

I sleep well at night holding world market cap. I never have to worry about US vs International. I have both and will ride both up and down.

If I was all US, I sure as hell would worry. I can't imagine how I would have handled the lost decade for the US index.
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LTCM
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Re: Reasons to invest internationally, or not.

Post by LTCM »

petulant wrote: Mon Sep 14, 2020 4:23 pm The academic literature suggests dividend withholding taxes are a real drain on foreign equity investments. Generally, foreign countries withhold more than 15% of the dividends, the U.S. allows a foreign tax credit claim of 15%, and the investor then has to make a claim in the foreign county for a refund of the remainder above 15%. Most individual U.S. investors never ask for a refund of the excess withholding because it is prohibitively costly, and many of us don't even receive the benefit of the foreign tax credit since we hold the stocks in tax-advantaged accounts like the 401(k). If foreign firms have payout ratios in the range of 40% and withhold 25% as taxes, you have a permanent reduction to earnings of 10%.
I found this argument persuasive. I'm just starting out and had planned to go 20/40/40 Bond/US-stock/International-stock. I have plenty of space in tax free & tax deferred accounts so am I right in thinking this additional tax withholding drag applies to me even more? If that's the case and the "standard" expense ratio on an international stock mutual fund is 0.1% what is the "effective" expense ratio if I'm not able to claim back those foreign taxes? 0.15%? 0.11%? 0.101%? What order of magnitude am I dealing with here?
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Re: Reasons to invest internationally, or not.

Post by UpperNwGuy »

lostdog wrote: Tue Sep 15, 2020 8:53 pm I sleep well at night holding world market cap. I never have to worry about US vs International. I have both and will ride both up and down.

If I was all US, I sure as hell would worry. I can't imagine how I would have handled the lost decade for the US index.
I sleep well at night holding mostly US equities. I never have to worry about US vs international. I have both in the proportions that I want and will ride both up and down.

If I were Total World, I sure as hell would worry. I can't imagine how I would have handled the most recent decade for ex-US equities.
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Re: Reasons to invest internationally, or not.

Post by Ciel »

LTCM wrote: Tue Sep 15, 2020 9:50 pm
petulant wrote: Mon Sep 14, 2020 4:23 pm The academic literature suggests dividend withholding taxes are a real drain on foreign equity investments. Generally, foreign countries withhold more than 15% of the dividends, the U.S. allows a foreign tax credit claim of 15%, and the investor then has to make a claim in the foreign county for a refund of the remainder above 15%. Most individual U.S. investors never ask for a refund of the excess withholding because it is prohibitively costly, and many of us don't even receive the benefit of the foreign tax credit since we hold the stocks in tax-advantaged accounts like the 401(k). If foreign firms have payout ratios in the range of 40% and withhold 25% as taxes, you have a permanent reduction to earnings of 10%.
I found this argument persuasive. I'm just starting out and had planned to go 20/40/40 Bond/US-stock/International-stock. I have plenty of space in tax free & tax deferred accounts so am I right in thinking this additional tax withholding drag applies to me even more? If that's the case and the "standard" expense ratio on an international stock mutual fund is 0.1% what is the "effective" expense ratio if I'm not able to claim back those foreign taxes? 0.15%? 0.11%? 0.101%? What order of magnitude am I dealing with here?
This is exactly what I'm trying to figure out. Does VXUS/VTIAX reveal how much is withheld by foreign governments annually? I assume you would just multiply that percentage (an average figure over a number of years) by the average dividend yield, and then add the result to the published ER to get the "effective" ER for holding in a tax deferred account. Of course it would vary year to year but it would be helpful to the know the approximate magnitude of this.

Edit: According to a poster in this thread viewtopic.php?t=299607 the average amount withheld in VTIAX by foreign governments is about 7%. If the average dividend yield over the past decade is about 3.2% and that approximate 7% figure is correct, then the drag from foreign taxes only would be about 0.22%. Does that sound right?
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Re: Reasons to invest internationally, or not.

Post by Stef »

I now managed to read both articles. Questions:

1. US investors aren't exposed to FX risk, this should be plain wrong as we are talking about highly globalized companies?

2. He talks about the problems that international stocks are having. Japan struggling with demographics, Europe with too many regulations and investor-unfriendly policies, emerging markets with corruption and stock dilution. Why shouldn't that be priced in?

3. If US tanks, the rest of the world will likely too. On what basis is he assuming that? 30 years ago Japan was the biggest country in the world by market cap. They were the technical world leaders. Despite what happened there, the rest of the world did just fine. So why couldn't this happen to the US? The resemblance is striking. Biggest market in the world and highest valuations too.

4. Diversification is clearly underestimated? While US stocks crashed almost -90% in the Great Depression, exUS didn't do that bad. Switzerland for example crashed -50%, so close to the financial crisis in 2008.
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Re: Reasons to invest internationally, or not.

Post by 000 »

Stef wrote: Wed Sep 16, 2020 12:36 am 3. If US tanks, the rest of the world will likely too. On what basis is he assuming that? 30 years ago Japan was the biggest country in the world by market cap. They were the technical world leaders. Despite what happened there, the rest of the world did just fine. So why couldn't this happen to the US? The resemblance is striking. Biggest market in the world and highest valuations too.
One school of thought is that Japan and much of Western Europe need US military support to remain economically prosperous.

The US keeps the seas safe for Developed Markets imports and exports among other things.

Although this may only be tenuously related to stock valuations.
Last edited by 000 on Wed Sep 16, 2020 8:36 am, edited 1 time in total.
whereskyle
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Re: Reasons to invest internationally, or not.

Post by whereskyle »

UpperNwGuy wrote: Tue Sep 15, 2020 9:52 pm
lostdog wrote: Tue Sep 15, 2020 8:53 pm I sleep well at night holding world market cap. I never have to worry about US vs International. I have both and will ride both up and down.

If I was all US, I sure as hell would worry. I can't imagine how I would have handled the lost decade for the US index.
I sleep well at night holding mostly US equities. I never have to worry about US vs international. I have both in the proportions that I want and will ride both up and down.

If I were Total World, I sure as hell would worry. I can't imagine how I would have handled the most recent decade for ex-US equities.
You'd worry about a 10.68% annual return since 2009?
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

LTCM wrote: Tue Sep 15, 2020 9:50 pm
petulant wrote: Mon Sep 14, 2020 4:23 pm The academic literature suggests dividend withholding taxes are a real drain on foreign equity investments. Generally, foreign countries withhold more than 15% of the dividends, the U.S. allows a foreign tax credit claim of 15%, and the investor then has to make a claim in the foreign county for a refund of the remainder above 15%. Most individual U.S. investors never ask for a refund of the excess withholding because it is prohibitively costly, and many of us don't even receive the benefit of the foreign tax credit since we hold the stocks in tax-advantaged accounts like the 401(k). If foreign firms have payout ratios in the range of 40% and withhold 25% as taxes, you have a permanent reduction to earnings of 10%.
I found this argument persuasive. I'm just starting out and had planned to go 20/40/40 Bond/US-stock/International-stock. I have plenty of space in tax free & tax deferred accounts so am I right in thinking this additional tax withholding drag applies to me even more? If that's the case and the "standard" expense ratio on an international stock mutual fund is 0.1% what is the "effective" expense ratio if I'm not able to claim back those foreign taxes? 0.15%? 0.11%? 0.101%? What order of magnitude am I dealing with here?
The iShares MSCI EAFE ETF shows a dividend yield of 2.15% and a P/E of 16.44. The earnings yield from that P/E is 6.08%. Assuming the dividend payout ratio includes average withholding of 15% (some countries withhold more, a couple have 0% treaties), the 2.15% may reflect an actual pre-withholding dividend of 2.53%. The dividend payout ratio may be around 40% in that case. If the market-cap-weighted average withholding is just 15%, then earnings are reduced by .15*.40=.06, and drag would be .15*2.53=.38%. So if you start with an expense ratio of 10 bps, the real expense ratio could be 48 bps. Do if investors from those countries don't have these problems and the stocks are prices fairly, we're overpaying 6% and getting a lower return if the EAFE is the benchmark.

The problem to me is that this is an average and does not reflect specific countries. I also spitballed the average. Some countries, potentially many, are withholding higher percentages, so we're supposed to file for refunds to get those back. One paper I saw said that Germany withholds an effective 23%. If enough countries are doing that, and there is some indication they are, then 38 bps drag estimate is a bit low.

To be clear, the lower return because of withholding taxes doesn't necessarily militate in favor of no international allocation. There would still be diversification benefits and a positive expected return. It would probably indicate a reduced or haircut allocation.
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Re: Reasons to invest internationally, or not.

Post by hisdudeness »

lostdog wrote: Tue Sep 15, 2020 8:53 pm I sleep well at night holding world market cap. I never have to worry about US vs International. I have both and will ride both up and down.

If I was all US, I sure as hell would worry. I can't imagine how I would have handled the lost decade for the US index.
We get it.
Your portfolio is superior.
Everyone should invest like you.
You're beating off a dead horse at this point.
lostdog
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Re: Reasons to invest internationally, or not.

Post by lostdog »

hisdudeness wrote: Wed Sep 16, 2020 7:42 am
lostdog wrote: Tue Sep 15, 2020 8:53 pm I sleep well at night holding world market cap. I never have to worry about US vs International. I have both and will ride both up and down.

If I was all US, I sure as hell would worry. I can't imagine how I would have handled the lost decade for the US index.
We get it.
Your portfolio is superior.
Everyone should invest like you.
You're beating off a dead horse at this point.
Thanks. :sharebeer :moneybag

Beating a dead horse? Not even close.

Here to save novice investors from people like you.

Supposedly buying the haystack is a hard concept for the human brain to grasp.
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Re: Reasons to invest internationally, or not.

Post by Actin »

Buying international and bonds is market timing
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Re: Reasons to invest internationally, or not.

Post by Robot Monster »

petulant wrote: Tue Sep 15, 2020 6:13 pm ...I spent quite a while reviewing SSRN and other materials and found that inclusion of currency in CAPM made many conclusions unclear. Here are some passages from one my favorite papers, which was posted on SSRN this year:
Lucas (1982) investigates a two-country endowment economy . . . [and concludes that] [p]erfect risk-sharing in this economy is achieved if all agents hold a percentage of their wealth in the stock of a given country which is equal to the relative size of its market capitalization. [This is naive market portfolio diversification across countries.] . . . [Baxter and Jermann] add labor income to Lucas' one-good model and find that in order to hedge labor income risk it is optimal for agents to short home equity and to take up large long positions in foreign equity. [This is an example of including overall welfare impacts.] . . . Heathcote and Perri (2013) . . . investigate a two good production economy with labor and capital income and find that a standard international macroeconomic model . . . can rationalize the equity home bias to a large extent. This is because in their framework domestic equity is a good hedge against labor income risk. [Another welfare model points in the other direction.]
https://papers.ssrn.com/sol3/Papers.cfm ... id=3553245
Honestly cannot make head, nor tail, of that. A "two-country endowment economy"? "Naive market portfolio diversification"? "Add labor income to Lucas' one-good model." "A two good production economy"? Feels like I have to go back to school, and get a PhD in economics, just to understand this. You know the Books for Dummies series? That's more my level. The dummer, the better. Not quite picture books and crayons, but certainly approaching that.
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
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Re: Reasons to invest internationally, or not.

Post by Robot Monster »

Actin wrote: Wed Sep 16, 2020 8:28 am Buying international and bonds is market timing
Simply stated, yet confusing!
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Re: Reasons to invest internationally, or not.

Post by petulant »

Robot Monster wrote: Wed Sep 16, 2020 8:35 am
petulant wrote: Tue Sep 15, 2020 6:13 pm ...I spent quite a while reviewing SSRN and other materials and found that inclusion of currency in CAPM made many conclusions unclear. Here are some passages from one my favorite papers, which was posted on SSRN this year:
Lucas (1982) investigates a two-country endowment economy . . . [and concludes that] [p]erfect risk-sharing in this economy is achieved if all agents hold a percentage of their wealth in the stock of a given country which is equal to the relative size of its market capitalization. [This is naive market portfolio diversification across countries.] . . . [Baxter and Jermann] add labor income to Lucas' one-good model and find that in order to hedge labor income risk it is optimal for agents to short home equity and to take up large long positions in foreign equity. [This is an example of including overall welfare impacts.] . . . Heathcote and Perri (2013) . . . investigate a two good production economy with labor and capital income and find that a standard international macroeconomic model . . . can rationalize the equity home bias to a large extent. This is because in their framework domestic equity is a good hedge against labor income risk. [Another welfare model points in the other direction.]
https://papers.ssrn.com/sol3/Papers.cfm ... id=3553245
Honestly cannot make head, nor tail, of that. A "two-country endowment economy"? "Naive market portfolio diversification"? "Add labor income to Lucas' one-good model." "A two good production economy"? Feels like I have to go back to school, and get a PhD in economics, just to understand this. You know the Books for Dummies series? That's more my level. The dummer, the better. Not quite picture books and crayons, but certainly approaching that.
What I'm saying is that the literature has models that show foreign diversification has different impacts on your pocket book depending on how they measure the impact. So there is not a clear answer.

For example, let's say you combine your portfolio performance with what you actually buy. If the USD gets weaker, your spending on imports gets more expensive but you might switch to US goods. If many people do so, then US companies benefit. Your holdings in foreign companies are worth more from currency, but if they lose sales, then they might actually lose value on net. So in this instance--called high "substitutability" since you can move to US goods--holding US companies is actually the better strategy since your stocks go up to compensate for your lost consumption utility. If you have low substitutability for goods as a large % of your budget, like you might in Luxembourg, then diversification is much more important. But that model doesn't necessarily address US/domestic companies having foreign investment, and it doesn't address impact on your labor income. The answers are not complete.
Last edited by petulant on Wed Sep 16, 2020 9:29 am, edited 1 time in total.
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Re: Reasons to invest internationally, or not.

Post by UpsetRaptor »

lol, Robot Monster is on fire this morning! :D
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Re: Reasons to invest internationally, or not.

Post by UpperNwGuy »

whereskyle wrote: Wed Sep 16, 2020 5:45 am
UpperNwGuy wrote: Tue Sep 15, 2020 9:52 pm
lostdog wrote: Tue Sep 15, 2020 8:53 pm I sleep well at night holding world market cap. I never have to worry about US vs International. I have both and will ride both up and down.

If I was all US, I sure as hell would worry. I can't imagine how I would have handled the lost decade for the US index.
I sleep well at night holding mostly US equities. I never have to worry about US vs international. I have both in the proportions that I want and will ride both up and down.

If I were Total World, I sure as hell would worry. I can't imagine how I would have handled the most recent decade for ex-US equities.
You'd worry about a 10.68% annual return since 2009?
I'd worry about the lost opportunity to earn even more with US equities.
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Re: Reasons to invest internationally, or not.

Post by whereskyle »

UpperNwGuy wrote: Wed Sep 16, 2020 9:31 am
whereskyle wrote: Wed Sep 16, 2020 5:45 am
UpperNwGuy wrote: Tue Sep 15, 2020 9:52 pm
lostdog wrote: Tue Sep 15, 2020 8:53 pm I sleep well at night holding world market cap. I never have to worry about US vs International. I have both and will ride both up and down.

If I was all US, I sure as hell would worry. I can't imagine how I would have handled the lost decade for the US index.
I sleep well at night holding mostly US equities. I never have to worry about US vs international. I have both in the proportions that I want and will ride both up and down.

If I were Total World, I sure as hell would worry. I can't imagine how I would have handled the most recent decade for ex-US equities.
You'd worry about a 10.68% annual return since 2009?
I'd worry about the lost opportunity to earn even more with US equities.
https://www.bogleheads.org/wiki/FTSE_Gl ... _Cap_Index

Check out the performance of VT's index since 2003. It's rather impressive. I certainly am sympathetic to the US's long record of above-average performance, but this century seems to me to be favoring a global portfolio so far, such that I feel more comfortable and less worried by just holding everything in near global-weight proportions.

But, to each his own!
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
Robot Monster
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Location: New York

Re: Reasons to invest internationally, or not.

Post by Robot Monster »

petulant wrote: Wed Sep 16, 2020 9:26 am What I'm saying is that the literature has models that show foreign diversification has different impacts on your pocket book depending on how they measure the impact. So there is not a clear answer.

For example, let's say you combine your portfolio performance with what you actually buy. If the USD gets weaker, your spending on imports gets more expensive but you might switch to US goods. If many people do so, then US companies benefit. Your holdings in foreign companies are worth more from currency, but if they lose sales, then they might actually lose value on net. So in this instance--called high "substitutability" since you can move to US goods--holding US companies is actually the better strategy since your stocks go up to compensate for your lost consumption utility. If you have low substitutability for goods as a large % of your budget, like you might in Luxembourg, then diversification is much more important. But that model doesn't necessarily address US/domestic companies having foreign investment, and it doesn't address impact on your labor income. The answers are not complete.
That, I understood. Thank you. So, a company like GlaxoSmithKline, which has about 40% revenue exposure to the US, is vulnerable to your above example as far as how much of that revenue comes from "high substitutability" products like their toothpaste and nose strips offerings. Of course, such a company that has so much exposure to the US, and the tenuous variety at that, doesn't seem like the best kind of diversifer in the first place. Seems like you just added another reason to want to shy away from such companies. Sadly, an index doesn't allow one to pick and choose. Going by just revenue exposure among (leaving substitutability aside) they do differ from region to region:

Revenue from US
Europe -- 20%
Japan -- 14%
EM -- 8%
Source

And I'm guessing international small caps might have less exposure than that.
UpsetRaptor wrote: Wed Sep 16, 2020 9:27 am lol, Robot Monster is on fire this morning! :D
Appreciated.
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Reasons to invest internationally, or not.

Post by petulant »

Robot Monster wrote: Wed Sep 16, 2020 10:31 am
petulant wrote: Wed Sep 16, 2020 9:26 am What I'm saying is that the literature has models that show foreign diversification has different impacts on your pocket book depending on how they measure the impact. So there is not a clear answer.

For example, let's say you combine your portfolio performance with what you actually buy. If the USD gets weaker, your spending on imports gets more expensive but you might switch to US goods. If many people do so, then US companies benefit. Your holdings in foreign companies are worth more from currency, but if they lose sales, then they might actually lose value on net. So in this instance--called high "substitutability" since you can move to US goods--holding US companies is actually the better strategy since your stocks go up to compensate for your lost consumption utility. If you have low substitutability for goods as a large % of your budget, like you might in Luxembourg, then diversification is much more important. But that model doesn't necessarily address US/domestic companies having foreign investment, and it doesn't address impact on your labor income. The answers are not complete.
That, I understood. Thank you. So, a company like GlaxoSmithKline, which has about 40% revenue exposure to the US, is vulnerable to your above example as far as how much of that revenue comes from "high substitutability" products like their toothpaste and nose strips offerings. Of course, such a company that has so much exposure to the US, and the tenuous variety at that, doesn't seem like the best kind of diversifer in the first place. Seems like you just added another reason to want to shy away from such companies. Sadly, an index doesn't allow one to pick and choose. Going by just revenue exposure among (leaving substitutability aside) they do differ from region to region:

Revenue from US
Europe -- 20%
Japan -- 14%
EM -- 8%
Source

And I'm guessing international small caps might have less exposure than that.
UpsetRaptor wrote: Wed Sep 16, 2020 9:27 am lol, Robot Monster is on fire this morning! :D
Appreciated.
Exactly. One thing to keep in mind is that economics papers tend to move forward by identifying a puzzle and then making a model that is dramatically simplified from real life. What economists try to do is look at the logic from that simplified model and see if it solves the puzzle. Then, they can measure something tied to the model in real life and see if the model was "right" or helpful in explaining the puzzle. So the paper I summarized above is looking at one thing, substitutability in a simplified international economy, and seeing if it explains home bias as a rational strategy. They're not looking at all issues and concluding something. It's much harder to add things like US companies that have FDI and exports overseas, and foreign companies with US operations, especially since mixing like this typically includes both US-exposed revenues and exports. (For example, Honda may assemble cars in the U.S. with higher-than-average Japanese inputs to the cars compared to GM or Ford, so even though it looks Honda isn't exporting that much, there's still exports baked in.) Then layer on that some of these companies may be engaged in currency hedging...it's complicated.
GaryA505
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Location: New Mexico

Re: Reasons to invest internationally, or not.

Post by GaryA505 »

GaryA505 wrote: Tue Sep 15, 2020 6:06 pm I'm not attempting to derail this lively discussion, but I have a question.

The policy statements for both Vanguard Wellesley and Vanguard Wellington say they can invest up to 25% of assets in foreign securities, yet Wellesley has only about 10% non-US equities (according to Morningstar), and Wellington only 15%. We know they both have a high-dividend equities tilt, but does that only explain why they aren't higher in non-US?

And yes I know they have global versions of both those funds, but I believe that the above percentages were about the same before the new global funds existed.
I was hoping someone would take a stab at explaining this. Anyone? Anyone?
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Reasons to invest internationally, or not.

Post by petulant »

GaryA505 wrote: Wed Sep 16, 2020 11:28 am
GaryA505 wrote: Tue Sep 15, 2020 6:06 pm I'm not attempting to derail this lively discussion, but I have a question.

The policy statements for both Vanguard Wellesley and Vanguard Wellington say they can invest up to 25% of assets in foreign securities, yet Wellesley has only about 10% non-US equities (according to Morningstar), and Wellington only 15%. We know they both have a high-dividend equities tilt, but does that only explain why they aren't higher in non-US?

And yes I know they have global versions of both those funds, but I believe that the above percentages were about the same before the new global funds existed.
I was hoping someone would take a stab at explaining this. Anyone? Anyone?
Generally the policy numbers like this are legal maximums the portfolio manager can do without a change from the board of directors or fund investors. There is not an obligation to actually invest that much.
GaryA505
Posts: 684
Joined: Wed Feb 08, 2017 2:59 pm
Location: New Mexico

Re: Reasons to invest internationally, or not.

Post by GaryA505 »

petulant wrote: Wed Sep 16, 2020 11:38 am
GaryA505 wrote: Wed Sep 16, 2020 11:28 am
GaryA505 wrote: Tue Sep 15, 2020 6:06 pm I'm not attempting to derail this lively discussion, but I have a question.

The policy statements for both Vanguard Wellesley and Vanguard Wellington say they can invest up to 25% of assets in foreign securities, yet Wellesley has only about 10% non-US equities (according to Morningstar), and Wellington only 15%. We know they both have a high-dividend equities tilt, but does that only explain why they aren't higher in non-US?

And yes I know they have global versions of both those funds, but I believe that the above percentages were about the same before the new global funds existed.
I was hoping someone would take a stab at explaining this. Anyone? Anyone?
Generally the policy numbers like this are legal maximums the portfolio manager can do without a change from the board of directors or fund investors. There is not an obligation to actually invest that much.
True, but they could if they wanted to, so my curiosity was about why they don't. I'll be watching to see if what they do, when (and if) this half of the cycle appears to be nearing it's end.

We're about 9.5 years into the US half of the cycle that on average has lasted only 7.6 years, so I'd say all bets are off.
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