International Correlation with the US and Struggling to Pick EM/ International

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nzahir
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International Correlation with the US and Struggling to Pick EM/ International

Post by nzahir »

Hi Guys,

I am struggling to pick my international holding and I need some help. I want to put about 25% of my portfolio at least in International (Want to be 100% equities overall, very young 20s). US equities have become expensive and every time this has happened, there has been a period of much lower growth, naturally this makes sense.

I understand the benefits of being diversified, which is why I want to have international, but developed International markets have been moving basically in the same direction as the US for the past 35 years (all the data I had, if anyone has more please share).

Of course there are years when one does better than the other, but they generally have been moving in the same trend over long periods.
EU seems to be more correlated than Pacific countries, and EM is the least correlated.

Isn't the purpose of diversification to find less correlated assets to reduce risk and give you a greater return for the amount of risk you take?

Or is the purpose of investing in International in case we have a time in the future where somehow we become less correlated with developed countries and they outperform the US (such as 2000s)?

I can just go with EM or I can just go with VTIAX and call it a day, but then I feel like I didn't gain much diversification.

I read this article by Larry Swedroe about why EM matters and how it has outperformed since 1988.
https://www.etf.com/sections/index-inve ... nopaging=1

I haven't found a ton of older data, and a lot has changed in the past couple of years. Looks like the returns are at 10.5% annualized, just around the S&P500 from that time period.
https://www.msci.com/documents/10199/14 ... ae72951f27

Any thoughts? What do you guys like to do for International/Emerging?

I assume I should also stick with an Index? I have seen the SPIVA data and most funds underperform (I think small cap active management was about 1/3 would outperform, but for total/large, active would underperform like the US)

Thanks in advance
Last edited by nzahir on Wed Sep 23, 2020 1:49 pm, edited 2 times in total.
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vineviz
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Re: Developed International Correlation with the US

Post by vineviz »

nzahir wrote: Wed Sep 23, 2020 12:02 pm Isn't the purpose of diversification to find less correlated assets to reduce risk and give you a greater return for the amount of risk you take?
I think that's a reasonable way to frame it. Your intuition is right: an emerging markets equity fund would provide more diversification benefits to a US stock portfolio than a fund that is mostly invested in stock from other developed markets.

My view is that a portfolio which is 75% US stocks and 25% emerging markets stocks is at least as well diversified as a portfolio that is 60% US stocks and 40% VTIAX. If you have access to Vanguard Emerging Markets Stock Index Fund (VEMAX) or an equally low-cost ETF I say go for it.
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asif408
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Re: Developed International Correlation with the US

Post by asif408 »

nzahir wrote: Wed Sep 23, 2020 12:02 pm Isn't the purpose of diversification to find less correlated assets to reduce risk and give you a greater return for the amount of risk you take?

Or is the purpose of investing in International in case we have a time in the future where somehow we become less correlated with developed countries and they outperform the US (such as 2000s)?
The above are both generally true. It's nice to find less correlated assets if you can, but realize that if you can buy an asset with the click of a button then odds are during the next really rough patch correlations of most of those asset will approach 1, because they can just as easily be sold with the click of a button. You saw that in 2008 and you saw that earlier this year. The nice thing is that most of the evidence indicates diversification still works in the long term, and correlations tend to drop as markets recover. Gold and silver mining equities, for example, fell just as much as most stocks earlier in February and March but went up 150-200% in the subsequent 6 months. So diversification into precious metals equities, if you owned them, did work this year.

So the likely benefit you get from international diversification will be from it outperforming during a rising market, or possibly falling less during a falling market, not necessarily moving in the opposite direction as US Treasuries typically do during a bear market. Personally I wouldn't stress much about your international holdings as long as you hold some of both developed ex-US and emerging markets, and enough of them to make a difference in your returns.

I use a valuation based approach to my equity investing, so I have most of my equities holding in EM Value, Int'l large and small Value, and a small portion in US Small Value. I don't suggest you follow my approach but I think whatever you pick on the international side stick to mostly plain vanilla index funds with low expense ratios and low turnover.
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nzahir
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Re: Developed International Correlation with the US

Post by nzahir »

asif408 wrote: Wed Sep 23, 2020 1:31 pm
nzahir wrote: Wed Sep 23, 2020 12:02 pm Isn't the purpose of diversification to find less correlated assets to reduce risk and give you a greater return for the amount of risk you take?

Or is the purpose of investing in International in case we have a time in the future where somehow we become less correlated with developed countries and they outperform the US (such as 2000s)?
The above are both generally true. It's nice to find less correlated assets if you can, but realize that if you can buy an asset with the click of a button then odds are during the next really rough patch correlations of most of those asset will approach 1, because they can just as easily be sold with the click of a button. You saw that in 2008 and you saw that earlier this year. The nice thing is that most of the evidence indicates diversification still works in the long term, and correlations tend to drop as markets recover. Gold and silver mining equities, for example, fell just as much as most stocks earlier in February and March but went up 150-200% in the subsequent 6 months. So diversification into precious metals equities, if you owned them, did work this year.

So the likely benefit you get from international diversification will be from it outperforming during a rising market, or possibly falling less during a falling market, not necessarily moving in the opposite direction as US Treasuries typically do during a bear market. Personally I wouldn't stress much about your international holdings as long as you hold some of both developed ex-US and emerging markets, and enough of them to make a difference in your returns.

I use a valuation based approach to my equity investing, so I have most of my equities holding in EM Value, Int'l large and small Value, and a small portion in US Small Value. I don't suggest you follow my approach but I think whatever you pick on the international side stick to mostly plain vanilla index funds with low expense ratios and low turnover.
Thanks for a lot of this info and your thoughts

I see during downturns that EM gets crushed. If/when there is a big pullback on EM (40-50%+), it will be a great opportunity.

My fear is what if the US becomes somewhat similar to Japan and has low 1% gdp growth for decades and the stock market can stay flat over years (through ups and downs, like the Nikkei). I am not as concerned because our debt to GDP is not as bad as Japan, we have more innovation, we are the worlds currency, and the developed worlds language.

I rather not have 2 funds for simplicity sake, but are there any funds that tilt to EM (more than the actual mkt cap) and still have developed International?

Should this be posted in personal investments? I may have messed up, wasn't too sure
asif408
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Re: Developed International Correlation with the US

Post by asif408 »

nzahir wrote: Wed Sep 23, 2020 1:45 pm Should this be posted in personal investments? I may have messed up, wasn't too sure
I think the moderators can move it if they believe it belongs there.
nzahir wrote: Wed Sep 23, 2020 1:45 pm I see during downturns that EM gets crushed. If/when there is a big pullback on EM (40-50%+), it will be a great opportunity.
EM stocks fell 40% from 2011 to 2016 and about 35% from January 2018-March 2020, and have lagged US stocks in the recovery and pretty dramatically this past decade. EM Value stocks fell 50% during the 2011-2016 bear market, and they are still below their 2007 highs, so there have already been several opportunities in EM and it could be argued now is one of those opportunities, particularly on the value side of EM.
nzahir wrote: Wed Sep 23, 2020 1:45 pmI rather not have 2 funds for simplicity sake, but are there any funds that tilt to EM (more than the actual mkt cap) and still have developed International?
Not that I'm aware of. I would probably just use a total international fund and then add a separate EM fund if you want to overweight EM. Otherwise you'll probably just have to accept a market cap weighting if you want simplicity.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by Robot Monster »

The ideal diversifier is not just something other than what you own, but something that contrasts with it. The typical portfolio is rich in dollar assets—in Treasuries and the leading American shares. It needs a counterweight, an anti-dollar trade. A benchmark basket of emerging-market stocks is a good one.
from "The case for emerging-market stocks"

For those worried about the possibility of Chinese stocks being delisted,
6 Reasons Not To Worry About Delisting Chinese Equities
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Re: Developed International Correlation with the US

Post by Ferdinand2014 »

vineviz wrote: Wed Sep 23, 2020 12:50 pm
nzahir wrote: Wed Sep 23, 2020 12:02 pm Isn't the purpose of diversification to find less correlated assets to reduce risk and give you a greater return for the amount of risk you take?
I think that's a reasonable way to frame it. Your intuition is right: an emerging markets equity fund would provide more diversification benefits to a US stock portfolio than a fund that is mostly invested in stock from other developed markets.

My view is that a portfolio which is 75% US stocks and 25% emerging markets stocks is at least as well diversified as a portfolio that is 60% US stocks and 40% VTIAX. If you have access to Vanguard Emerging Markets Stock Index Fund (VEMAX) or an equally low-cost ETF I say go for it.
Do you believe there is any significant benefit to adding developed international to U.S. stocks? What do you think the minimum EM is necessary to capture the majority of potential diversification benefits in an otherwise all U.S. portfolio (assuming like the Vanguard studies suggest that the volatility reduction is non linear). David Swensen for example has suggested as a consideration 5% EM, 15% Developed in his portfolio framework in ‘unconventional success’
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Re: Developed International Correlation with the US

Post by vineviz »

Ferdinand2014 wrote: Wed Sep 23, 2020 7:53 pm Do you believe there is any significant benefit to adding developed international to U.S. stocks? What do you think the minimum EM is necessary to capture the majority of potential diversification benefits in an otherwise all U.S. portfolio? David Swensen for example has suggested as a consideration 5% EM, 15% Developed in his portfolio framework in ‘unconventional success’
"Significant" is obviously a subjective term, but I do think a combination of US stocks and emerging markets stocks offers sufficient global diversification on the equity side.

I personally include some developed markets value in my own portfolio, with equal parts developed ex-US and emerging markets.
"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: Developed International Correlation with the US

Post by abuss368 »

vineviz wrote: Wed Sep 23, 2020 8:43 pm
Ferdinand2014 wrote: Wed Sep 23, 2020 7:53 pm Do you believe there is any significant benefit to adding developed international to U.S. stocks? What do you think the minimum EM is necessary to capture the majority of potential diversification benefits in an otherwise all U.S. portfolio? David Swensen for example has suggested as a consideration 5% EM, 15% Developed in his portfolio framework in ‘unconventional success’
"Significant" is obviously a subjective term, but I do think a combination of US stocks and emerging markets stocks offers sufficient global diversification on the equity side.

I personally include some developed markets value in my own portfolio, with equal parts developed ex-US and emerging markets.
Anymore, I am struggling to see how international stocks, and specifically developed countries are offering any benefit to a US only allocation. It appears the two move together. If there is a downturn, international declines much more than US. Perhaps many years ago this was not the case.

I have family and friends retired with Total Stock, Total Bond, US High Dividend, and US REITs. Retired well and living off dividends. Never had a need for international and the risk and additional complexities.

I agree with Ferdinand that the most IMPORTANT aspect is the plan that will enable an investor to not tinker and stay the course.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by HawkeyePierce »

I'm partial to a mix of EM and ex-US developed small cap for my international allocation. These asset classes are less correlated with the US market than the developed market large caps that dominate a total international fund.
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Re: Developed International Correlation with the US

Post by vineviz »

abuss368 wrote: Thu Sep 24, 2020 3:07 pm Anymore, I am struggling to see how international stocks, and specifically developed countries are offering any benefit to a US only allocation. It appears the two move together. If there is a downturn, international declines much more than US. Perhaps many years ago this was not the case.

I have family and friends retired with Total Stock, Total Bond, US High Dividend, and US REITs. Retired well and living off dividends. Never had a need for international and the risk and additional complexities.
In addition to urging folks to take steps that can help mitigate confirmation bias, I think it's important that investors to simply learn to not trust their instincts. There are a whole host of reasons that human emotions and behaviors serve us well in many other areas of our lives simply don't translate well to the domain of investing.

There's not word besides "lucky" to describe how well US-domiciled assets have performed over the past 10-15 years. Sure, most folks who retired in the late 2000s have have not needed much diversification: US large cap stocks have done extremely well, starting bond yields were high, the dollar has been strong, etc.

It's been ideal in many ways, and investors need reminding that complacency is very dangerous. There have many many groups of retirees over the past 60 years for whom global diversification meant (or would have meant) the difference between a comfortable retirement and a fearful one. I wouldn't wish the latter on anyone, and certainly not with the breadth of low-cost passive mutual funds and ETFs we have access to today.
"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: Developed International Correlation with the US

Post by vineviz »

abuss368 wrote: Thu Sep 24, 2020 3:07 pm Anymore, I am struggling to see how international stocks, and specifically developed countries are offering any benefit to a US only allocation. It appears the two move together. If there is a downturn, international declines much more than US. Perhaps many years ago this was not the case.
On this point specifically, the chorus of people who chant "ex-US stocks have grossly underperformed" and the chorus o people who chant "ex-US stocks are so highly correlated with US stocks that they are unnecessary" cannot BOTH be right.

Moreover, while correlations between US and developed market stocks were increasing during some recent periods (1993 to 2005, mostly) they've been decreasing since about 2012. Thus the recent underperformance. But ex-US stocks can be a powerful diversifier even with correlation coefficients in the 0.80 to 0.90 range.
"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 Correlation with the US and Struggling to Pick EM/ International

Post by MotoTrojan »

HawkeyePierce wrote: Thu Sep 24, 2020 5:13 pm I'm partial to a mix of EM and ex-US developed small cap for my international allocation. These asset classes are less correlated with the US market than the developed market large caps that dominate a total international fund.
I'm in a similar camp of avoiding large cap ex-US entirely, but I actually don't have any EM. My 35% ex-US stake is split between 25% FNDC (developed small-fundamental, basically small-value) and 10% IVAL (deep-value). The diversification benefit historically is close; if these funds included EM at market-weight I wouldn't be opposed, but I don't see a reason to complicate the 35% ex-US further with a EM position that would be <10% of my portfolio, and don't have a rational reason to overweight EM as a portion of ex-US.
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Re: Developed International Correlation with the US

Post by abuss368 »

vineviz wrote: Thu Sep 24, 2020 5:25 pm
abuss368 wrote: Thu Sep 24, 2020 3:07 pm Anymore, I am struggling to see how international stocks, and specifically developed countries are offering any benefit to a US only allocation. It appears the two move together. If there is a downturn, international declines much more than US. Perhaps many years ago this was not the case.

I have family and friends retired with Total Stock, Total Bond, US High Dividend, and US REITs. Retired well and living off dividends. Never had a need for international and the risk and additional complexities.
In addition to urging folks to take steps that can help mitigate confirmation bias, I think it's important that investors to simply learn to not trust their instincts. There are a whole host of reasons that human emotions and behaviors serve us well in many other areas of our lives simply don't translate well to the domain of investing.

There's not word besides "lucky" to describe how well US-domiciled assets have performed over the past 10-15 years. Sure, most folks who retired in the late 2000s have have not needed much diversification: US large cap stocks have done extremely well, starting bond yields were high, the dollar has been strong, etc.

It's been ideal in many ways, and investors need reminding that complacency is very dangerous. There have many many groups of retirees over the past 60 years for whom global diversification meant (or would have meant) the difference between a comfortable retirement and a fearful one. I wouldn't wish the latter on anyone, and certainly not with the breadth of low-cost passive mutual funds and ETFs we have access to today.
Hi vineviz -

Do you invest in international stocks and bonds? If so, at what percentage of stocks is international and what percentage of bonds is international?
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Re: Developed International Correlation with the US

Post by abuss368 »

vineviz wrote: Thu Sep 24, 2020 5:30 pm
abuss368 wrote: Thu Sep 24, 2020 3:07 pm Anymore, I am struggling to see how international stocks, and specifically developed countries are offering any benefit to a US only allocation. It appears the two move together. If there is a downturn, international declines much more than US. Perhaps many years ago this was not the case.
On this point specifically, the chorus of people who chant "ex-US stocks have grossly underperformed" and the chorus o people who chant "ex-US stocks are so highly correlated with US stocks that they are unnecessary" cannot BOTH be right.

Moreover, while correlations between US and developed market stocks were increasing during some recent periods (1993 to 2005, mostly) they've been decreasing since about 2012. Thus the recent underperformance. But ex-US stocks can be a powerful diversifier even with correlation coefficients in the 0.80 to 0.90 range.
That is a fair and reasonable point.
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Re: Developed International Correlation with the US

Post by Steve Reading »

vineviz wrote: Thu Sep 24, 2020 5:30 pm
abuss368 wrote: Thu Sep 24, 2020 3:07 pm Anymore, I am struggling to see how international stocks, and specifically developed countries are offering any benefit to a US only allocation. It appears the two move together. If there is a downturn, international declines much more than US. Perhaps many years ago this was not the case.
On this point specifically, the chorus of people who chant "ex-US stocks have grossly underperformed" and the chorus o people who chant "ex-US stocks are so highly correlated with US stocks that they are unnecessary" cannot BOTH be right.
It's possible for Ex-US to be highly correlated (even perfectly correlated) with US stocks, yet grossly underperform so those two groups can be correct.
vineviz wrote: Thu Sep 24, 2020 5:30 pm Moreover, while correlations between US and developed market stocks were increasing during some recent periods (1993 to 2005, mostly) they've been decreasing since about 2012. Thus the recent underperformance.
The recent underperformance doesn't follow at all from a decreased correlation. Correlation actually has nothing to do with the magnitude of the returns themselves. I recently corrected a poster who thought a negative correlation to USA stocks would mean negative returns. I mean, you know this very well vineviz, did you just kinda misspeak or were you trying to get at something else?
vineviz wrote: Thu Sep 24, 2020 5:30 pm But ex-US stocks can be a powerful diversifier even with correlation coefficients in the 0.80 to 0.90 range.
Agreed 100%. Diversification, in the real-world, where you don't know what returns will be in the future, is much more than just correlations and volatilities. Even if US and Ex-USA are perfectly correlated, you still are better off holding both than either because you don't know which one will have the higher return. And judging by how different the returns can be, it's clear this isn't a trivial point at all.

Of course, many act likeUS can outperform but not the other way around. In that case, the decision is pretty obvious; Ex-USA offers nothing to you at that point.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by HawkeyePierce »

MotoTrojan wrote: Thu Sep 24, 2020 5:37 pm
HawkeyePierce wrote: Thu Sep 24, 2020 5:13 pm I'm partial to a mix of EM and ex-US developed small cap for my international allocation. These asset classes are less correlated with the US market than the developed market large caps that dominate a total international fund.
I'm in a similar camp of avoiding large cap ex-US entirely, but I actually don't have any EM. My 35% ex-US stake is split between 25% FNDC (developed small-fundamental, basically small-value) and 10% IVAL (deep-value). The diversification benefit historically is close; if these funds included EM at market-weight I wouldn't be opposed, but I don't see a reason to complicate the 35% ex-US further with a EM position that would be <10% of my portfolio, and don't have a rational reason to overweight EM as a portion of ex-US.
I use ISCF instead of FNDC but they're pretty close. My EM fund is XSOE which excludes state-owned enterprises. In some ways that's the opposite of your allocation as XSOE has a bit of a growth tilt, but then I dampen that volatility by mixing it with VWOB and treating EM govt debt as equity in my AA.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by MotoTrojan »

HawkeyePierce wrote: Thu Sep 24, 2020 5:52 pm
MotoTrojan wrote: Thu Sep 24, 2020 5:37 pm
HawkeyePierce wrote: Thu Sep 24, 2020 5:13 pm I'm partial to a mix of EM and ex-US developed small cap for my international allocation. These asset classes are less correlated with the US market than the developed market large caps that dominate a total international fund.
I'm in a similar camp of avoiding large cap ex-US entirely, but I actually don't have any EM. My 35% ex-US stake is split between 25% FNDC (developed small-fundamental, basically small-value) and 10% IVAL (deep-value). The diversification benefit historically is close; if these funds included EM at market-weight I wouldn't be opposed, but I don't see a reason to complicate the 35% ex-US further with a EM position that would be <10% of my portfolio, and don't have a rational reason to overweight EM as a portion of ex-US.
I use ISCF instead of FNDC but they're pretty close. My EM fund is XSOE which excludes state-owned enterprises. In some ways that's the opposite of your allocation as XSOE has a bit of a growth tilt, but then I dampen that volatility by mixing it with VWOB and treating EM govt debt as equity in my AA.
Interesting on the ex state-owned, although who knows how much protection that really generates (just watch The China Hustle documentary so I may be recently biased).

I may not have the entire globe covered, but I think I have enough of it and maintain a moderate simplicity.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by HawkeyePierce »

MotoTrojan wrote: Thu Sep 24, 2020 5:55 pm
HawkeyePierce wrote: Thu Sep 24, 2020 5:52 pm
MotoTrojan wrote: Thu Sep 24, 2020 5:37 pm
HawkeyePierce wrote: Thu Sep 24, 2020 5:13 pm I'm partial to a mix of EM and ex-US developed small cap for my international allocation. These asset classes are less correlated with the US market than the developed market large caps that dominate a total international fund.
I'm in a similar camp of avoiding large cap ex-US entirely, but I actually don't have any EM. My 35% ex-US stake is split between 25% FNDC (developed small-fundamental, basically small-value) and 10% IVAL (deep-value). The diversification benefit historically is close; if these funds included EM at market-weight I wouldn't be opposed, but I don't see a reason to complicate the 35% ex-US further with a EM position that would be <10% of my portfolio, and don't have a rational reason to overweight EM as a portion of ex-US.
I use ISCF instead of FNDC but they're pretty close. My EM fund is XSOE which excludes state-owned enterprises. In some ways that's the opposite of your allocation as XSOE has a bit of a growth tilt, but then I dampen that volatility by mixing it with VWOB and treating EM govt debt as equity in my AA.
Interesting on the ex state-owned, although who knows how much protection that really generates (just watch The China Hustle documentary so I may be recently biased).

I may not have the entire globe covered, but I think I have enough of it and maintain a moderate simplicity.
It's something of a sector bet for sure, but my justification for XSOE is that it gets me the ex-US large caps with the most growth potential while excluding the state-owned albatrosses and all of western Europe.
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Re: Developed International Correlation with the US

Post by vineviz »

Steve Reading wrote: Thu Sep 24, 2020 5:49 pm The recent underperformance doesn't follow at all from a decreased correlation. Correlation actually has nothing to do with the magnitude of the returns themselves. I recently corrected a poster who thought a negative correlation to USA stocks would mean negative returns. I mean, you know this very well vineviz, did you just kinda misspeak or were you trying to get at something else?
I think I was rushing too quickly with what I was typing: with all the cognitive dissonance lately on both international stocks and factor investing, I probably just need to slow down and clear my mind.
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Re: Developed International Correlation with the US

Post by vineviz »

abuss368 wrote: Thu Sep 24, 2020 5:38 pm Do you invest in international stocks and bonds? If so, at what percentage of stocks is international and what percentage of bonds is international?
I allocate my equities roughly 50/50 between US and international., with international split 50/50 between developed markets and emerging markets.

The developed markets fund I use is Xtrackers MSCI EAFE High Div Yld Eq ETF (HDEF), which is a crude-but-cheap Value ETF.

For emerging markets I use SPDR Portfolio Emerging Markets ETF (SPEM) and iShares JP Morgan EM Local Ccy Bd ETF (LEMB), which is actually a bond fund but for purposes of asset allocation I include it with equities because of its volatility.
"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 Correlation with the US and Struggling to Pick EM/ International

Post by abuss368 »

I think the importance of "needing" international stocks in a portfolio is perhaps being overstated somewhat.

In analyzing various portfolios at portfolio visualizer I assumed the following:
* Start - 2000
* End - 2010
* "The Lost Decade of the US" or so it has been said
* $1,000,000 million portfolio
* withdrawal 3% or $30,000 a year
* Looked at combinations of Total Stock, Total International Stock, US High Dividend, and US REIT. The last two are popular with "Random Walk Down Wall Street".
* No bonds for this analysis.
* I used "asset allocations" and not funds or etfs. For US High Dividend I used US Large Value.

RESULTS

Portfolio #1
Total Stock - 60%
Total International - 40%
Result: Start - $1,000,000. End - $737,000. CAPR - (2.74%) and Standard Deviation - 17.37

Portfolio #2
Total Stock - 60%
US High Dividend - 20%
US REIT - 20%
Result: Start - $1,000,000. End - $1,003,000. CAPR - 0.03% and Standard Deviation - 16.70

Portfolio #3
Total Stock - 100%
Result: Start - $1,000,000. End - $657,000. CAPR - (3.75%) and Standard Deviation - 16.86

Portfolio #4
Total International Stock - 100%
Result: Start - $1,000,000. End - $843,000. CAPR - (1.54%) and Standard Deviation - 19.36

Take Away
* So international did a little better. I actually thought it would be much better so I was surprised at the overall difference.
* Adding the US High Yield and REITs made all the difference. Those funds provide dividend income of which a retiree can live from.


*** Expand the timeframe to 1994 - 2020 ***

RESULTS

Portfolio #1
Total Stock - 60%
Total International - 40%
Result: Start - $1,000,000. End - $4,679,000. CAPR - 5.96% and Standard Deviation - 15.21

Portfolio #2
Total Stock - 60%
US High Dividend - 20%
US REIT - 20%
Result: Start - $1,000,000. End - $7,873,000. CAPR - 8.05% and Standard Deviation - 14.63

Portfolio #3
Total Stock - 100%
Result: Start - $1,000,000. End - $8,130,000. CAPR - 8.18% and Standard Deviation - 15.25

Portfolio #4
Total International Stock - 100%
Result: Start - $1,000,000. End - $1,530,000. CAPR - 1.61% and Standard Deviation - 16.75

Take Away
* So international did just plain horrible. Period. 26 years. How much longer must an investor wait?
* Jack Bogle is spot on with his thoughts on international stocks and bonds.
* Adding the US High Yield and REITs resulted in a very close performance to simply Total Stock Market.

*** In my opinion it is becoming clearer that the only right portfolio is what works for you as an individual. What can you stay with. Not what an article or someone using a screen name on the internet tells you what is wrong or missing. ***

The most important aspect is to:
* Build cash over time
* Keep buying investments
* Keep costs real low
* Hold enough insurance
* Keep taxes low
* Pay down / off debt
* Spend less than you make
* Always look for ways to save and invest more each year
* Own index funds
* Invest and work hard in your job and career

THE REST IS DANCING ON THE HEAD OF A PIN AN WILL MAKE NO IMPACT!

Has anyone read "Bogle on Mutual Funds"? I looked just now at the model portfolios Mr. Bogle has in accumulation, distribution etc. He shows growth & value (which is a Total Market fund), a "specialty / sector" fund, and a equity income (or higher yield dividend fund). No international. Interesting and Mr. Bogle's recommendation would have served investors very well.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by whereskyle »

nzahir wrote: Wed Sep 23, 2020 12:02 pm Hi Guys,

I am struggling to pick my international holding and I need some help. I want to put about 25% of my portfolio at least in International (Want to be 100% equities overall, very young 20s). US equities have become expensive and every time this has happened, there has been a period of much lower growth, naturally this makes sense.

I understand the benefits of being diversified, which is why I want to have international, but developed International markets have been moving basically in the same direction as the US for the past 35 years (all the data I had, if anyone has more please share).

Of course there are years when one does better than the other, but they generally have been moving in the same trend over long periods.
EU seems to be more correlated than Pacific countries, and EM is the least correlated.

Isn't the purpose of diversification to find less correlated assets to reduce risk and give you a greater return for the amount of risk you take?

Or is the purpose of investing in International in case we have a time in the future where somehow we become less correlated with developed countries and they outperform the US (such as 2000s)?

I can just go with EM or I can just go with VTIAX and call it a day, but then I feel like I didn't gain much diversification.

I read this article by Larry Swedroe about why EM matters and how it has outperformed since 1988.
https://www.etf.com/sections/index-inve ... nopaging=1

I haven't found a ton of older data, and a lot has changed in the past couple of years. Looks like the returns are at 10.5% annualized, just around the S&P500 from that time period.
https://www.msci.com/documents/10199/14 ... ae72951f27

Any thoughts? What do you guys like to do for International/Emerging?

I assume I should also stick with an Index? I have seen the SPIVA data and most funds underperform (I think small cap active management was about 1/3 would outperform, but for total/large, active would underperform like the US)

Thanks in advance
Why not just take all the guesswork out of it and buy VT (Vanguard Total World Stock ETF, ER .08)?

I was where you were recently, recognizing that sticking with the US only is maybe not the most prudent thing to do, and yet understanding that just adding other countries' equities with their apparently inferior returns and high correlations might not make much sense. I also considered adding EM as my only ex-US fund, but then the definition of EM seemed odd to me. For instance, some EM funds include South Korea, and others don't. In the end, I just decided, as I always do, that nobody knows nothing.

Rather than settle on "the correct thing to do" by picking and choosing which parts of the global market to own, I decided that I just have no idea what the correct thing to do is (apart from buying low cost index funds).

The only fund that takes all the guesswork out of this and gives you everything is VT or an equivalent.

The performance of its index since 2003 has been frankly excellent. Low volatility, great returns, no guesswork, and it's an all-in-one fund for 8 basis points.

I really don't think there is a better option the longer I think about it.
"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
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by vineviz »

abuss368 wrote: Thu Sep 24, 2020 7:17 pm I think the importance of "needing" international stocks in a portfolio is perhaps being overstated somewhat.

In analyzing various portfolios at portfolio visualizer I assumed the following:
* Start - 2000
* End - 2010
* "The Lost Decade of the US" or so it has been said
* $1,000,000 million portfolio
* withdrawal 3% or $30,000 a year
Okay, but these conditions are virtually guaranteed to reinforce a "diversification doesn't matter" conclusion: it's a short period of just 10 years with an absurdly low withdrawal rate. Starting in 1929, 100% stocks had a 10-year SWR of nearly 7% so a 3% withdrawal rate isn't much stress.

We have real life return data for international mutual funds going back to 1961: for 30-year retirements since then allocating 30-40% to international stocks improved the sustainable withdrawal rate in 22 of the 29 rolling 30-year periods including ALL 16 of the worst periods.

For the retirements were US stocks produced a withdrawal rate of <5%, allocating just 35% to international stocks increased retirement income by an average of 14%.

The primary benefit of portfolio diversification, in my book, is help make the worst outcomes somewhat less bad, and maintaining a globally diversified equity portfolio does that. And there's plenty of historical examples for those willing to pay attention to them.
"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 Correlation with the US and Struggling to Pick EM/ International

Post by abuss368 »

vineviz wrote: Thu Sep 24, 2020 8:07 pm
Okay, but these conditions are virtually guaranteed to reinforce a "diversification doesn't matter" conclusion: it's a short period of just 10 years with an absurdly low withdrawal rate. Starting in 1929, 100% stocks had a 10-year SWR of nearly 7% so a 3% withdrawal rate isn't much stress.

We have real life return data for international mutual funds going back to 1961: for 30-year retirements since then allocating 30-40% to international stocks improved the sustainable withdrawal rate in 22 of the 29 rolling 30-year periods including ALL 16 of the worst periods.

For the retirements were US stocks produced a withdrawal rate of <5%, allocating just 35% to international stocks increased retirement income by an average of 14%.

The primary benefit of portfolio diversification, in my book, is help make the worst outcomes somewhat less bad, and maintaining a globally diversified equity portfolio does that. And there's plenty of historical examples for those willing to pay attention to them.
Not at all. I have read countless times on the forum regarding how holding international "helped' US investors during the US "lost decade" of 2000 - 2010. Since the financial crisis many documents and investors have discussed if a lower than 4% withdrawal rate would be better.

I have family invested in US only and actually lives from dividends. So I have witnessed and watched first hand in real life that it works. We can have real life data of Total Stock, US High Dividend, and US REIT going back to 1961. We can do rolling periods from there as well.

None of that matters if an investor a) does not want international investments or b) will not stay with them (or any asset class) over the long term.

Jack Bogle wrote in all his books, articles, and interviews that international was "not needed". Holding US already has international baked into it. I would rather have Jamie Dimon, Warren Buffett, and Elon Musk make capital decisions than me! Then again owning Total Stock and Total International Stock solves that!

Anyone can make an "argument" that international, small, commodities, US only, REITs, are needed or not needed!

It does not matter if an investor does not stay with it or want it!
Last edited by abuss368 on Thu Sep 24, 2020 9:08 pm, edited 1 time in total.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by LadyGeek »

I removed an off-topic post. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by abuss368 »

vineviz wrote: Thu Sep 24, 2020 8:07 pm
abuss368 wrote: Thu Sep 24, 2020 7:17 pm I think the importance of "needing" international stocks in a portfolio is perhaps being overstated somewhat.

In analyzing various portfolios at portfolio visualizer I assumed the following:
* Start - 2000
* End - 2010
* "The Lost Decade of the US" or so it has been said
* $1,000,000 million portfolio
* withdrawal 3% or $30,000 a year
Okay, but these conditions are virtually guaranteed to reinforce a "diversification doesn't matter" conclusion: it's a short period of just 10 years with an absurdly low withdrawal rate. Starting in 1929, 100% stocks had a 10-year SWR of nearly 7% so a 3% withdrawal rate isn't much stress.

We have real life return data for international mutual funds going back to 1961: for 30-year retirements since then allocating 30-40% to international stocks improved the sustainable withdrawal rate in 22 of the 29 rolling 30-year periods including ALL 16 of the worst periods.

For the retirements were US stocks produced a withdrawal rate of <5%, allocating just 35% to international stocks increased retirement income by an average of 14%.

The primary benefit of portfolio diversification, in my book, is help make the worst outcomes somewhat less bad, and maintaining a globally diversified equity portfolio does that. And there's plenty of historical examples for those willing to pay attention to them.
Hi vineviz -

Believe it or not, I honestly and really hope that international will start to have it's day in the sun. It bothers me for the risk assumed the tit has not performed better.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Developed International Correlation with the US

Post by abuss368 »

vineviz wrote: Thu Sep 24, 2020 6:14 pm
abuss368 wrote: Thu Sep 24, 2020 5:38 pm Do you invest in international stocks and bonds? If so, at what percentage of stocks is international and what percentage of bonds is international?
I allocate my equities roughly 50/50 between US and international., with international split 50/50 between developed markets and emerging markets.

The developed markets fund I use is Xtrackers MSCI EAFE High Div Yld Eq ETF (HDEF), which is a crude-but-cheap Value ETF.

For emerging markets I use SPDR Portfolio Emerging Markets ETF (SPEM) and iShares JP Morgan EM Local Ccy Bd ETF (LEMB), which is actually a bond fund but for purposes of asset allocation I include it with equities because of its volatility.
So it appears that you are not investing in Total International but rather separate Developed and Emerging? Are these the Vanguard index funds?
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by vineviz »

abuss368 wrote: Thu Sep 24, 2020 8:23 pm Jack Bogle wrote in all his books, articles, and interviews that international was "not needed". Holding US already has international baked into it. I would rather have Jamie Dimon, Warren Buffett, and Elon Musk make capital decisions than me! Then again owning Total Stock and Total International Stock solves that!

Anyone can make an "argument" that international, small, commodities, US only, REITs, are needed or not needed!

It does not matter if an investor does not stay with it or want it!
1) Bogle had an opinion that international was "not needed". I think Bogle was wrong, and I prefer to form my own opinion based on actual evidence. I can clearly see the evidence that global diversification helps investors achieve their goals, so unless Bogle thought that investors don't "need" to achieve their goals then I think we can conclude that Bogle's opinion on this topic can be dismissed.

2) Holding US does not have " international baked into it". This is merely one of the logical contortions someone must employ to keep from seeing the cognitive dissonance in the Bogle position.

3) I agree that staying the course is critically important, which is why I think that NOW is a particularly important time to be educating investors on the benefits of staying diversified. It's much harder to buy international stocks now, after a recent period of underperformance, than it will be after a period of outperformance. I don't want people buying more of assets that are "hot", and neither do you I'm sure. We want them to understand that being diversified means having some assets with recent returns that are disappointing: if you don't have something that is underperforming, you aren't diversified enough.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by abuss368 »

vineviz wrote: Fri Sep 25, 2020 6:19 am
1) I can clearly see the evidence that global diversification helps investors achieve their goals, so unless Bogle thought that investors don't "need" to achieve their goals then I think we can conclude that Bogle's opinion on this topic can be dismissed.
I respect your thoughts and post but I think it is a stretch at best to conclude that "Bogle's opinion on this topic can be dismissed".

In my opinion Jack Bogle knows more about investing than any one of us ever will.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by vineviz »

abuss368 wrote: Fri Sep 25, 2020 7:09 am In my opinion Jack Bogle knows more about investing than any one of us ever will.
That could be true and yet he could STILL be wrong about this particular topic.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by abuss368 »

vineviz wrote: Fri Sep 25, 2020 8:12 am
abuss368 wrote: Fri Sep 25, 2020 7:09 am In my opinion Jack Bogle knows more about investing than any one of us ever will.
That could be true and yet he could STILL be wrong about this particular topic.
No doubt. Over the past few years it appeared that Jack Bogle could be having second or additional thoughts on the topic. He said in an interview that I watched on YouTube that he encourage investors to talk to someone else more knowledgable on the subject that he did not know. He also said the future may be different and that no one knows.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by Ferdinand2014 »

abuss368 wrote: Thu Sep 24, 2020 7:17 pm I think the importance of "needing" international stocks in a portfolio is perhaps being overstated somewhat.

In analyzing various portfolios at portfolio visualizer I assumed the following:
* Start - 2000
* End - 2010
* "The Lost Decade of the US" or so it has been said
* $1,000,000 million portfolio
* withdrawal 3% or $30,000 a year
* Looked at combinations of Total Stock, Total International Stock, US High Dividend, and US REIT. The last two are popular with "Random Walk Down Wall Street".
* No bonds for this analysis.
* I used "asset allocations" and not funds or etfs. For US High Dividend I used US Large Value.

RESULTS

Portfolio #1
Total Stock - 60%
Total International - 40%
Result: Start - $1,000,000. End - $737,000. CAPR - (2.74%) and Standard Deviation - 17.37

Portfolio #2
Total Stock - 60%
US High Dividend - 20%
US REIT - 20%
Result: Start - $1,000,000. End - $1,003,000. CAPR - 0.03% and Standard Deviation - 16.70

Portfolio #3
Total Stock - 100%
Result: Start - $1,000,000. End - $657,000. CAPR - (3.75%) and Standard Deviation - 16.86

Portfolio #4
Total International Stock - 100%
Result: Start - $1,000,000. End - $843,000. CAPR - (1.54%) and Standard Deviation - 19.36

Take Away
* So international did a little better. I actually thought it would be much better so I was surprised at the overall difference.
* Adding the US High Yield and REITs made all the difference. Those funds provide dividend income of which a retiree can live from.


*** Expand the timeframe to 1994 - 2020 ***

RESULTS

Portfolio #1
Total Stock - 60%
Total International - 40%
Result: Start - $1,000,000. End - $4,679,000. CAPR - 5.96% and Standard Deviation - 15.21

Portfolio #2
Total Stock - 60%
US High Dividend - 20%
US REIT - 20%
Result: Start - $1,000,000. End - $7,873,000. CAPR - 8.05% and Standard Deviation - 14.63

Portfolio #3
Total Stock - 100%
Result: Start - $1,000,000. End - $8,130,000. CAPR - 8.18% and Standard Deviation - 15.25

Portfolio #4
Total International Stock - 100%
Result: Start - $1,000,000. End - $1,530,000. CAPR - 1.61% and Standard Deviation - 16.75

Take Away
* So international did just plain horrible. Period. 26 years. How much longer must an investor wait?
* Jack Bogle is spot on with his thoughts on international stocks and bonds.
* Adding the US High Yield and REITs resulted in a very close performance to simply Total Stock Market.

*** In my opinion it is becoming clearer that the only right portfolio is what works for you as an individual. What can you stay with. Not what an article or someone using a screen name on the internet tells you what is wrong or missing. ***

The most important aspect is to:
* Build cash over time
* Keep buying investments
* Keep costs real low
* Hold enough insurance
* Keep taxes low
* Pay down / off debt
* Spend less than you make
* Always look for ways to save and invest more each year
* Own index funds
* Invest and work hard in your job and career


THE REST IS DANCING ON THE HEAD OF A PIN AN WILL MAKE NO IMPACT!

Has anyone read "Bogle on Mutual Funds"? I looked just now at the model portfolios Mr. Bogle has in accumulation, distribution etc. He shows growth & value (which is a Total Market fund), a "specialty / sector" fund, and a equity income (or higher yield dividend fund). No international. Interesting and Mr. Bogle's recommendation would have served investors very well.
I completely agree with your post. In the end, without a deep conviction on a portfolio, an investor is guaranteed to sell at the worst time. That alone will torpedo your chances of success and is worth way more than any other portfolio action. One must focus on winning the big stuff like savings rate, income, career and a healthy life. Once one is having disagreements about tilts, factors, geography and Roth vs IRA, etc, you have already won the game. For what it is worth, my withdrawal rate for my spending needs will be 2.5-3% according to Fidelity retirement planning projections based on "Assuming significantly below average market conditions". This is because of a high savings rate and low spending rate. Not because of my asset allocation. That alone overcame my many stupid stock picking, trade ETF's like playing card days.
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Re: International Correlation with the US and Struggling to Pick EM/ International

Post by abuss368 »

One other consideration that can also impact investor behavior and result in mental stress during market pullbacks:

A multi fund portfolio with 5, 6, 8, or more funds may completely stress out an investor when all funds are out of balance and a ton of rebalancing is needed. Nothing feels right or as if it is working! Investors begin to second guess the "benefits" of "diversification" when in fact it may be "di-worse-ification" creeping in! But I thought I was better! I thought I was diversified! The internet message boards agreed with me! Portfolio Analysis tools told me!

As an alternative, having a 2 Fund Portfolio (or maybe 2-4) is a completely different experience. Less mutual funds with bigger, more material balances. In my experience that is much easier to rebalance and maintain in all markets. Focus on buying buying buying these funds over the long term and continue to build that passive income stream.

It works. I have watched family retire very well with this strategy.
John C. Bogle: “Simplicity is the master key to financial success."
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