Myths of international investing - Fidelity

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JBTX
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Re: Myth's of international investing - Fidelity

Post by JBTX »

galawdawg wrote: Fri Sep 25, 2020 8:04 am
nisiprius wrote: Fri Sep 25, 2020 6:48 am "Myth 2: International investing is too risky." Now, of course, they get off the hook by saying "too." But it's no myth that international investing is riski-ER. Not an awful lot, but some, and that shouldn't be swept under the rug. There are all sorts of legitimate ways to say "there is more risk, but it is worth it." But you have to say that there is more risk, and in the marketing piece they never do.

But Fidelity says so in their summary prospectus for the Fidelity Diversified International Fund
Principal Investment Risks...

Foreign Exposure. Foreign markets, particularly emerging markets, can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic developments and can perform differently from the U.S. market. Emerging markets can be subject to greater social, economic, regulatory, and political uncertainties and can be extremely volatile. Foreign exchange rates also can be extremely volatile.
So, who are you going to believe? Fidelity's marketing pieces or Fidelity when they're on the hook and legally responsible for what they say?
As I have posted elsewhere in a discussion of this issue, investors generally seek to be compensated for taking on increased risk. That compensation comes in the way of higher returns than one would likely realize from a less risky investment. And if that asset class has extra risk but fails to provide a risk premium, then an investor has to consider whether investment in that asset class is a wise decision. When an investor can realize the same or better returns by investing in an asset class with less risk, it is completely logical that the investor would choose the less-risky option.

In my opinion, that is a significant consideration for new investors when assessing whether to invest in international funds and if so, to what extent. As pointed out by nisiprius, Fidelity (as well as Vanguard and others) acknowledge in their disclosures that foreign investment involves increased risks. That being the case, where is the risk premium for investors?
The problem is you are framing the issue incorrectly. The question is whether adding international to your portfolio increases your risk adjusted returns of the portfolio. The question is not whether international is better or worse or riskier vs US by itself.

The fidelity article suggests over the time frame they picked international increased the risk adjusted return of a diversified portfolio. I have seen other articles that suggest having 20% to market weight increases your risk adjusted returns. Of course, you can cherry pick points in time that show the opposite. Seems to me 1950 to present is as reasonable and representative as you can get.

Also, I also happen to believe, but there may not be evidence to support it, is having some currency risk is a good thing, as somewhat of a hedge. If things go to crap here in the US, and not as much elsewhere, the dollar likely goes down, which is a portfolio hedge and also a hedge against most aspects of our financial well being which are highly linked to the economic health of the home country. Japan is an example. Of course, the US hasn't really had a protracted period of economic underperformance in the modern era, so I likely can't prove my point with historical US data.
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Re: Myth's of international investing - Fidelity

Post by pkcrafter »

nisiprius wrote: Fri Sep 25, 2020 10:32 am
pkcrafter wrote: Fri Sep 25, 2020 8:25 am...Does this mean you don't hold any international?...
No. About 20% of my stock allocation is invested in the Vanguard Total International Stock Index Fund.
...and do not recommend it to new investors?...
No. New investors need to make a decision and stick to it, and 0% is one end of a range of perfectly acceptable personal choices.

What I believe is that Fidelity's arguments are wildly exaggerated nonsense, that many arguments that imply that it is terribly important, or even necessary, are wildly exaggerated nonsense. And that the truth is that it lies in the grey area of maybe.

What I believe is that 0% international, 1/6th international (Burton Malkiel's recommendation in 1990), 20% international (Vanguard's former recommendation and practice about fifteen years ago), 30% international (which seems to be Fidelity's suggestion), 40% international (Vanguard's current recommendation and practice), and global cap weight (as in Total World, currently about 42% international but let's say "about half") are all perfectly reasonable choices.

And that new investors should spend enough time to make some kind of decision that feels right to them, acknowledge that it is a matter of personal preference, and stick to it.

For the record, Bogle's recommendation was that all-US is fine, up to 20% international is fine, but don't exceed 20%.

I know that one thing that's worked out well for me is that 20% international is a number that theoretically--according to something Vanguard published once--gives most of the diversification benefit, andat the same time is low enough that I have been able to stay the course and not get upset by a decade of underperformance.
Thank you. I'm also at 20% international and yes, there are times when even that much doesn't look useful, but I do believe I should continue to hold.

Paul
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Re: Myths of international investing - Fidelity

Post by JoMoney »

The problem with 'diversifying' currencies, is there aren't any 'good' currencies, and the 'risk' times tend to be correlated. As we've experienced in the economic crisis, in an open global market there is a "race to debase" with countries desiring to undercut other currencies to try and improve the economy by making it more attractive for others to send their capital into that currency regime in exchange for goods/services to export.
There are other options for the economy in crisis, like putting up barriers to stop/prevent capital from flowing out of the currency, but then foreign capital doesn't want to "invest" (uncertain how they'll get their capital back out to their home currency).
https://en.wikipedia.org/wiki/Impossible_trinity

Relative to debased currencies in falling economies, gold has an advantage, but it earns no interest and does nothing productive/creates nothing of value like you would hope an investment in a rental home, farm, or stocks/business would create in a good economy. Gold is kind of a hedge against currencies, but it's not really an investment, and is at it's best when everything else is at it's worst.
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Re: Myth's of international investing - Fidelity

Post by abuss368 »

MCSquared wrote: Fri Sep 25, 2020 10:34 am
galawdawg wrote: Fri Sep 25, 2020 8:04 am
nisiprius wrote: Fri Sep 25, 2020 6:48 am "Myth 2: International investing is too risky." Now, of course, they get off the hook by saying "too." But it's no myth that international investing is riski-ER. Not an awful lot, but some, and that shouldn't be swept under the rug. There are all sorts of legitimate ways to say "there is more risk, but it is worth it." But you have to say that there is more risk, and in the marketing piece they never do.

But Fidelity says so in their summary prospectus for the Fidelity Diversified International Fund
Principal Investment Risks...

Foreign Exposure. Foreign markets, particularly emerging markets, can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic developments and can perform differently from the U.S. market. Emerging markets can be subject to greater social, economic, regulatory, and political uncertainties and can be extremely volatile. Foreign exchange rates also can be extremely volatile.
So, who are you going to believe? Fidelity's marketing pieces or Fidelity when they're on the hook and legally responsible for what they say?
As I have posted elsewhere in a discussion of this issue, investors generally seek to be compensated for taking on increased risk. That compensation comes in the way of higher returns than one would likely realize from a less risky investment. And if that asset class has extra risk but fails to provide a risk premium, then an investor has to consider whether investment in that asset class is a wise decision. When an investor can realize the same or better returns by investing in an asset class with less risk, it is completely logical that the investor would choose the less-risky option.

In my opinion, that is a significant consideration for new investors when assessing whether to invest in international funds and if so, to what extent. As pointed out by nisiprius, Fidelity (as well as Vanguard and others) acknowledge in their disclosures that foreign investment involves increased risks. That being the case, where is the risk premium for investors?
Curious, did you ask yourself the same question of "where is the risk premium" when LT corporate bonds and LT Treasuries crushed the S&P 500 the past twenty years or so? Should folks dump their S&P allocation when US Agg Bonds provide a similar return (with less risk) as it did in the past 20 years? I certainly am not advocating that position just trying to understand your theory.
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Re: Myths of international investing - Fidelity

Post by abuss368 »

One issue I have with the Fidelity article is related to an investor who choses to not invest in an international fund, and "misses out on stock markets that outperform the US" (which appear to be 1% or less outside of Canada). Is it fair and reasonable then to also conclude that the investor is also missing out on the stock markets that underperform the US"?

Why is Fidelity not discussing that perspective?
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Re: Myths of international investing - Fidelity

Post by csmath »

abuss368 wrote: Fri Sep 25, 2020 11:41 am One issue I have with the Fidelity article is related to an investor who choses to not invest in an international fund, and "misses out on stock markets that outperform the US" (which appear to be 1% or less outside of Canada). Is it fair and reasonable then to also conclude that the investor is also missing out on the stock markets that underperform the US"?

Why is Fidelity not discussing that perspective?
+1 this. I'm not advocating for or against international here. But, the argument that diversification into international is good because then you have them when they outperform is completely lost on me because as you point out, not diversifying into international means you also don't get their underperformance when it happens. And if I recall the magnitude of out/under performance may favor one over the other. I don't get the "you miss the good" without also mentioning that "you miss the bad".

Now if you want to talk about how diversification can be good for overall wealth volatility and how that might benefit funding retirement successfully, I'm listening.
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Re: Myth's of international investing - Fidelity

Post by galawdawg »

MCSquared wrote: Fri Sep 25, 2020 10:34 am Curious, did you ask yourself the same question of "where is the risk premium" when LT corporate bonds and LT Treasuries crushed the S&P 500 the past twenty years or so? Should folks dump their S&P allocation when US Agg Bonds provide a similar return (with less risk) as it did in the past 20 years? I certainly am not advocating that position just trying to understand your theory.
Not at all because I decided decades ago upon my portfolio composition and have stuck to it. I started with Index 500 and added Total Stock Market index when it was created in 1992. As I approached retirement, I added Total Bond index to reach a final allocation of 75/25 which is where I will remain absent a significant change in my ability or willingness to take risk. Other than adjusting my allocation going into retirement, I have made no changes to my portfolio over more than thirty years. I don't chase returns, I don't "fiddle" with my portfolio, I don't concern myself with whether I could be doing better and don't have FOMO syndrome.

That's why my observation was directed particularly towards new investors. Those who today are in the position I was in thirty plus years ago, making decisions about how to start investing. So I believe my point, in that context, is a valid one. Each investor must form their own judgment about what portfolio is best for them and that they can commit to hold for the long-term. If an asset class has increased risk but has historically underperformed a less risky asset class, that is a factor that should be considered by the new investor. That isn't to say that they shouldn't invest internationally, just that they should understand all of the potential risks and potential rewards before making that decision.

In the ideal scenario, a new investor will choose a portfolio that will enable them to do what I did...stay the course for decades without regret or anxiety. :happy
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Re: Myth's of international investing - Fidelity

Post by UpperNwGuy »

RadAudit wrote: Fri Sep 25, 2020 8:33 am
UpperNwGuy wrote: Thu Sep 24, 2020 3:51 pm I'm sitting here waiting patiently for one of the pro-international forum members to post that same tired old chart that shows the periods in which ex-US and US took turns outperforming each other. This isn't an official international thread until that chart appears.
Wait's over. It's in the linked article.
It would be so much more helpful to see the two charts produced by Portfolio Visualizer than that same tired old chart.
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Re: Myth's of international investing - Fidelity

Post by S4C5 »

galawdawg wrote: Fri Sep 25, 2020 8:04 am In my opinion, that is a significant consideration for new investors when assessing whether to invest in international funds and if so, to what extent. As pointed out by nisiprius, Fidelity (as well as Vanguard and others) acknowledge in their disclosures that foreign investment involves increased risks. That being the case, where is the risk premium for investors?
Agree. Simply buying an S&P index and nothing else is a fine investment strategy. But if you want to take a little additional risk beyond investing in US large and small cap index funds, I think it makes more sense to either to allocate a small portion of your portfolio to buying a couple of individual stocks like MSFT or buying a solid, proven growth fund like FDGRX. Ask anyone who has held FDGRX for the past 20 years if they regret it and plan on selling it because of the high ER. I would buy FDGRX (if I could!) over any low cost international fund if my goal was to add some risk for potentially higher reward.
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Re: Myth's of international investing - Fidelity

Post by columbia »

galawdawg wrote: Fri Sep 25, 2020 12:13 pm In the ideal scenario, a new investor will choose a portfolio that will enable them to do what I did...stay the course for decades without regret or anxiety. :happy
This is most important takeaway from any asset allocation conversation.
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Re: Myth's of international investing - Fidelity

Post by investor.saver1 »

lostdog wrote: Fri Sep 25, 2020 6:47 am If a young investor is reading this, please consider some of the comments from members above are arm chair experts that suffer personal biases and over the top idolatry of Jack Bogle and Warren Buffet. There is no place for over the top hero worship and human emotion in investing. Stick with a Lifestrategy or Target Retirement fund if you feel the need to tinker when you see these comments.
+1
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Re: Myth's of international investing - Fidelity

Post by asif408 »

galawdawg wrote: Fri Sep 25, 2020 12:13 pm Those who today are in the position I was in thirty plus years ago, making decisions about how to start investing. So I believe my point, in that context, is a valid one. Each investor must form their own judgment about what portfolio is best for them and that they can commit to hold for the long-term. If an asset class has increased risk but has historically underperformed a less risky asset class, that is a factor that should be considered by the new investor. That isn't to say that they shouldn't invest internationally, just that they should understand all of the potential risks and potential rewards before making that decision.
Hopefully investors will consider 3 big historical differences from 1990 to 2020:

1) In 1990 10 year Treasury yields were 8-9%. Now they are less than 1%.
2) In 1990 foreign stock market valuations were 2-3x higher than the US, and Japan, which made up over 60% of the EAFE index, was at the top of the biggest bubble in stock market history. Today US valuations are 2-3x higher than foreign and there are no foreign stock markets anywhere close to being in a bubble:
https://www.gmo.com/contentassets/b3da1 ... ibit-4.png. The biggest country in the international index is still Japan, but it now only makes up 16% of the fund.
3) Foreign stocks funds were not readily available or cheap in 1990

It was reasonable to expect real returns well above inflation from a US only stock bond portfolio in 1990 based on modest valuations and high yields on US bonds. Today US stock market valuations are arguably above to well above average and bonds yields are unarguably low. If investors weigh those historical differences more heavily than past performance they should do fine. Today is definitely not 1990.
galawdawg wrote: Fri Sep 25, 2020 12:13 pmIn the ideal scenario, a new investor will choose a portfolio that will enable them to do what I did...stay the course for decades without regret or anxiety. :happy
If an investment performs poorly enough for long enough most investors will feel regret and give up on it. So I don't see any evidence that investors know what they can stick with until after the fact. Otherwise we wouldn't have so many posts about reducing or eliminating international allocation in recent years. You can still view forum posts from here in 2007-2010, and the most striking difference between those years and today is that more posters were increasing their foreign stock allocations, especially emerging markets, during those years. Performance chasing appears to be deeply ingrained in human nature.
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Re: Myths of international investing - Fidelity

Post by NKOTB »

I have 3 arguments to support investing in international, especially for those who have a few decades or more investing horizon.
1. Home bias eg. Japan in the 80s. This has been discussed to death.
2. International stocks are valued comparatively lower. Some say it will yield low returns and some say they are risky. Well fundamentally, if stocks have low yield, they should be safer investment and if they are risky, they should yield higher returns. but it cannot be both risky and yield low returns at the same time.
3. Population demographics and GDP. Talking about next few decades, consumer markets tend to drive the prices of stocks. The current World consumer population is distributed as 60% US and some of Europe, 40% rest (China, India etc).
The next decade it’s going to be 50:50. The decade after that the consumer population shift is projected as 40( US) and 60 ( rest of the world) and keeps going up from there.
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Re: Myth's of international investing - Fidelity

Post by 000 »

nisiprius wrote: Fri Sep 25, 2020 6:48 am "Myth 2: International investing is too risky." Now, of course, they get off the hook by saying "too." But it's no myth that international investing is riski-ER. Not an awful lot, but some, and that shouldn't be swept under the rug. There are all sorts of legitimate ways to say "there is more risk, but it is worth it." But you have to say that there is more risk, and in the marketing piece they never do.
For a person who is directly or indirectly exposed to imported goods (i.e. almost everyone), owning some international stocks is LESS risky than 100% US.

This is true because liabilities (needing to buy imported goods) are more closely matched with income sources (equity in foreign corporations).

100% Foreign is likely more risky than 100% US for a US person because of confiscation risk.
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Re: Myth's of international investing - Fidelity

Post by Northern Flicker »

abuss368 wrote: Thu Sep 24, 2020 8:27 pm The arguments for international are weak and continue to get weaker.

The most important aspect to a strategy that one can stay with in all markets. If that is US only that is fine.
Nothing is causing the case to get weaker. If anything, the risks associated with a US-only equity portfolio have increased over the last 10 years.
Risk is not a guarantor of return.
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Re: Myths of international investing - Fidelity

Post by JBTX »

NKOTB wrote: Fri Sep 25, 2020 2:18 pm I have 3 arguments to support investing in international, especially for those who have a few decades or more investing horizon.
1. Home bias eg. Japan in the 80s. This has been discussed to death.
2. International stocks are valued comparatively lower. Some say it will yield low returns and some say they are risky. Well fundamentally, if stocks have low yield, they should be safer investment and if they are risky, they should yield higher returns. but it cannot be both risky and yield low returns at the same time.
3. Population demographics and GDP. Talking about next few decades, consumer markets tend to drive the prices of stocks. The current World consumer population is distributed as 60% US and some of Europe, 40% rest (China, India etc).
The next decade it’s going to be 50:50. The decade after that the consumer population shift is projected as 40( US) and 60 ( rest of the world) and keeps going up from there.
I agree with your points. And it isn't that I necessarily think international will do better. I have no idea. It is just that international is different. The long term risks, factors and outcomes will likely be different. Maybe going forward value and traditional companies are dead meat, and it will be all about FANG and similar companies. Then the substantial US portion will benefit. Or maybe value and traditional companies mean revert. The international (and value) will outperform. Or golly forbid the US goes through some variant of Japan. At least then I'm somewhat hedged.
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Re: Myths of international investing - Fidelity

Post by Robot Monster »

JoMoney wrote: Fri Sep 25, 2020 11:30 am The problem with 'diversifying' currencies, is there aren't any 'good' currencies, and the 'risk' times tend to be correlated. As we've experienced in the economic crisis, in an open global market there is a "race to debase" with countries desiring to undercut other currencies to try and improve the economy by making it more attractive for others to send their capital into that currency regime in exchange for goods/services to export.
Which economic crisis do you mean? The recent one? Didn't the yen and the US dollar (USD) both gain value, because they're both haven currencies?

Why is the USD still so strong today compared to other currencies? What might cause it to weaken relative to them, as it has in the past? Ten years ago, the USD was weaker than the euro. Twenty years ago, the USD was weaker than both the yen and the British pound.

Forgive me, don't understand much about currencies.
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Re: Myths of international investing - Fidelity

Post by petulant »

JoMoney wrote: Fri Sep 25, 2020 11:30 am The problem with 'diversifying' currencies, is there aren't any 'good' currencies, and the 'risk' times tend to be correlated. As we've experienced in the economic crisis, in an open global market there is a "race to debase" with countries desiring to undercut other currencies to try and improve the economy by making it more attractive for others to send their capital into that currency regime in exchange for goods/services to export.
There are other options for the economy in crisis, like putting up barriers to stop/prevent capital from flowing out of the currency, but then foreign capital doesn't want to "invest" (uncertain how they'll get their capital back out to their home currency).
https://en.wikipedia.org/wiki/Impossible_trinity
This is right. Currency itself is not necessarily beneficial diversification. Currency introduces volatility and risk that is only valuable if it is compensated, for which there is little evidence, or if it hedges risk some way. For most U.S. investors, currency does not hedge risk. The vast majority of consumption in the U.S. is sourced from the U.S. economy, and our largest trading partners are Mexico and Canada, which are not significant portions of an international index fund. Many of our imports are also substitutable in the event our currency is devalued, e.g. we can switch to cars with more US inputs, buy California wine and olive oil instead of European or Australian, etc. Further, we have access to CPI-linked benefits like TIPS, Series I Bonds, and Social Security, which also offset a rise in prices from US currency weakening. Currency volatility is not beneficial for us.

The main reason we should want diversification is the traditional view that these are good businesses and we want to own them since we think diversification across firms is good. I like having shares in Toyota and Honda to complement Ford and GM, Samsung to complement Apple, Nestle and Unilever, etc.
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Re: Myths of international investing - Fidelity

Post by vineviz »

petulant wrote: Fri Sep 25, 2020 5:57 pm This is right. Currency itself is not necessarily beneficial diversification. Currency introduces volatility and risk that is only valuable if it is compensated, for which there is little evidence, or if it hedges risk some way.
It’s not strictly true that diversification benefits only accrue from sources of risk with positive expected return.

If the variance is high enough and the correlation with other assets is low enough, portfolio diversification can be improved even when the diversifying asset has a zero (or even negative) expected return. Indeed, it’s even possible for a portfolio to have a higher expected return and/or risk-adjusted return when such as asset is included.

Beyond that, however, in this context the hurdle is much lower. The currency exposure is embedded in the desirable asset (non-US stocks) and thus is free (because it requires no allocation of capital). Indeed, there is a small COST to hedge it away.

In the context of a typical US investor, currency risk simply isn’t rational reason to avoid being globally diversified. Certainly not within the equity allocation.
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Re: Myths of international investing - Fidelity

Post by petulant »

vineviz wrote: Fri Sep 25, 2020 6:45 pm
petulant wrote: Fri Sep 25, 2020 5:57 pm This is right. Currency itself is not necessarily beneficial diversification. Currency introduces volatility and risk that is only valuable if it is compensated, for which there is little evidence, or if it hedges risk some way.
It’s not strictly true that diversification benefits only accrue from sources of risk with positive expected return.

If the variance is high enough and the correlation with other assets is low enough, portfolio diversification can be improved even when the diversifying asset has a zero (or even negative) expected return. Indeed, it’s even possible for a portfolio to have a higher expected return and/or risk-adjusted return when such as asset is included.

Beyond that, however, in this context the hurdle is much lower. The currency exposure is embedded in the desirable asset (non-US stocks) and thus is free (because it requires no allocation of capital). Indeed, there is a small COST to hedge it away.

In the context of a typical US investor, currency risk simply isn’t rational reason to avoid being globally diversified. Certainly not within the equity allocation.
Interestingly, you wouldn't say the same about many other assets that may be highly volatile and uncorrelated, like platinum and orange futures. You've criticized gold allocations regularly. Currency risk being embedded in a desirable asset is doing too much work for you, I think.

What you're doing is you're saying the diversification to the companies is valuable, so maybe variance from currency is free and desirable. I think that implies currency volatility is sort of Brownian: it's random and doesn't have anything to do with anything else. I'm not sure that's right. A weaker dollar will make US inputs, including many forms of invested capital in the US, more valuable, while foreign inputs can decline. I have noticed periods where stronger currency was correlated with equity weakness in export-heavy economies like Japan (#1 VXUS constituent) and Germany. I certainly do not find clarity and unanimity about currency in the academic literature, which the unquoted portion of my post was regurgitating.

If currency risk is not independent and actually interacts with multiple other sources of utility, including by having effects on equities, labor income, and consumption, then it can be a reason for reduced allocations to US equity. I believe for a US investor there is an argument for reduced allocation.

That said, I don't find a compelling argument for 0% in particular, which I noted earlier in this thread.
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Re: Myths of international investing - Fidelity

Post by Robot Monster »

petulant wrote: Fri Sep 25, 2020 5:57 pm
JoMoney wrote: Fri Sep 25, 2020 11:30 am The problem with 'diversifying' currencies, is there aren't any 'good' currencies, and the 'risk' times tend to be correlated. As we've experienced in the economic crisis, in an open global market there is a "race to debase" with countries desiring to undercut other currencies to try and improve the economy by making it more attractive for others to send their capital into that currency regime in exchange for goods/services to export.
There are other options for the economy in crisis, like putting up barriers to stop/prevent capital from flowing out of the currency, but then foreign capital doesn't want to "invest" (uncertain how they'll get their capital back out to their home currency).
https://en.wikipedia.org/wiki/Impossible_trinity
This is right. Currency itself is not necessarily beneficial diversification. Currency introduces volatility and risk that is only valuable if it is compensated, for which there is little evidence, or if it hedges risk some way. For most U.S. investors, currency does not hedge risk. The vast majority of consumption in the U.S. is sourced from the U.S. economy, and our largest trading partners are Mexico and Canada, which are not significant portions of an international index fund. Many of our imports are also substitutable in the event our currency is devalued, e.g. we can switch to cars with more US inputs, buy California wine and olive oil instead of European or Australian, etc. Further, we have access to CPI-linked benefits like TIPS, Series I Bonds, and Social Security, which also offset a rise in prices from US currency weakening. Currency volatility is not beneficial for us.

The main reason we should want diversification is the traditional view that these are good businesses and we want to own them since we think diversification across firms is good. I like having shares in Toyota and Honda to complement Ford and GM, Samsung to complement Apple, Nestle and Unilever, etc.
Petulant,

I'm very much enjoying your observations regarding currency diversification and risk. One question: Correct me if I'm wrong, but you appear to be assuming investors who live in the US will always remain here. What if someone wants to leave for whatever reason--wouldn't a currency devaluation make that harder, or even impossible? Couldn't a devaluation essentially trap us here? I vaguely remembered Russia undergoing a currency devaluation several years ago, and, indeed, see it on Wikipedia, Russian financial crisis (2014–2017). What if we had something vaguely like that?
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Re: Myths of international investing - Fidelity

Post by petulant »

Robot Monster wrote: Sat Sep 26, 2020 9:32 am
petulant wrote: Fri Sep 25, 2020 5:57 pm
JoMoney wrote: Fri Sep 25, 2020 11:30 am The problem with 'diversifying' currencies, is there aren't any 'good' currencies, and the 'risk' times tend to be correlated. As we've experienced in the economic crisis, in an open global market there is a "race to debase" with countries desiring to undercut other currencies to try and improve the economy by making it more attractive for others to send their capital into that currency regime in exchange for goods/services to export.
There are other options for the economy in crisis, like putting up barriers to stop/prevent capital from flowing out of the currency, but then foreign capital doesn't want to "invest" (uncertain how they'll get their capital back out to their home currency).
https://en.wikipedia.org/wiki/Impossible_trinity
This is right. Currency itself is not necessarily beneficial diversification. Currency introduces volatility and risk that is only valuable if it is compensated, for which there is little evidence, or if it hedges risk some way. For most U.S. investors, currency does not hedge risk. The vast majority of consumption in the U.S. is sourced from the U.S. economy, and our largest trading partners are Mexico and Canada, which are not significant portions of an international index fund. Many of our imports are also substitutable in the event our currency is devalued, e.g. we can switch to cars with more US inputs, buy California wine and olive oil instead of European or Australian, etc. Further, we have access to CPI-linked benefits like TIPS, Series I Bonds, and Social Security, which also offset a rise in prices from US currency weakening. Currency volatility is not beneficial for us.

The main reason we should want diversification is the traditional view that these are good businesses and we want to own them since we think diversification across firms is good. I like having shares in Toyota and Honda to complement Ford and GM, Samsung to complement Apple, Nestle and Unilever, etc.
Petulant,

I'm very much enjoying your observations regarding currency diversification and risk. One question: Correct me if I'm wrong, but you appear to be assuming investors who live in the US will always remain here. What if someone wants to leave for whatever reason--wouldn't a currency devaluation make that harder, or even impossible? Couldn't a devaluation essentially trap us here? I vaguely remembered Russia undergoing a currency devaluation several years ago, and, indeed, see it on Wikipedia, Russian financial crisis (2014–2017). What if we had something vaguely like that?
Yes, an investor who plans to permanently leave would not want a heavy home bias. That investor has a utility function that is not like the typical US household because consumption will be priced in the foreign currency at some particular start date.

Note, often U.S. investors who plan to leave would be moving to smaller economies that are actually closely linked to the U.S., such as Caribbean islands or whatnot. It may be more complicated for them.
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Re: Myths of international investing - Fidelity

Post by vineviz »

petulant wrote: Fri Sep 25, 2020 6:55 pm Interestingly, you wouldn't say the same about many other assets that may be highly volatile and uncorrelated, like platinum and orange futures. You've criticized gold allocations regularly. Currency risk being embedded in a desirable asset is doing too much work for you, I think.
In principle everything I've said above would be equally true about gold or orange futures, with the key difference being that commodities and futures are capital assets (i.e. they require the allocation of capital within the portfolio). That means that increasing your capital allocation to gold, for example, means reducing your capital allocation to something else. In the context of exchange rate risk, this isn't the case.
petulant wrote: Fri Sep 25, 2020 6:55 pmWhat you're doing is you're saying the diversification to the companies is valuable, so maybe variance from currency is free and desirable. I think that implies currency volatility is sort of Brownian: it's random and doesn't have anything to do with anything else.
That's not the implication at all. Currency need not be completely uncorrelated with every other source of risk in the portfolio in order to be a diversifying asset. In fact, the minimum requirement is merely that it have a correlation with the rest of the portfolio of less than 1.0 and have a variance greater than 0.0%.
petulant wrote: Fri Sep 25, 2020 6:55 pm If currency risk is not independent and actually interacts with multiple other sources of utility, including by having effects on equities, labor income, and consumption, then it can be a reason for reduced allocations to US equity. I believe for a US investor there is an argument for reduced allocation.
We don't need to speculate about the interactive effects of currency with other sources of portfolio risk: we can simply observe them. And when we do that we clearly see that currency diversification is actually a benefit to US investors and not a cost. Indeed, the diversification benefits have historically been so strong that US investors need MORE and not less international equity exposure if they used currency hedging than if they did not.

In other words, not only does currency risk NOT support the idea of home bias it actually points in the opposite direction.
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Re: Myths of international investing - Fidelity

Post by petulant »

vineviz wrote: Sat Sep 26, 2020 10:42 am
petulant wrote: Fri Sep 25, 2020 6:55 pm Interestingly, you wouldn't say the same about many other assets that may be highly volatile and uncorrelated, like platinum and orange futures. You've criticized gold allocations regularly. Currency risk being embedded in a desirable asset is doing too much work for you, I think.
In principle everything I've said above would be equally true about gold or orange futures, with the key difference being that commodities and futures are capital assets (i.e. they require the allocation of capital within the portfolio). That means that increasing your capital allocation to gold, for example, means reducing your capital allocation to something else. In the context of exchange rate risk, this isn't the case.
That's exactly why I said that currency risk being embedded in some other desirable asset is doing too much work for you. It's keeping you from evaluating whether the currency risk itself is beneficial or not. Your position has tended to be that foreign assets are important diversifiers regardless of long stretches of underperformance, while you argue gold is not--even if it is observed to have been a better diversifier during key periods, and even if the same random walk theory you're using supports gold.
vineviz wrote: Sat Sep 26, 2020 10:42 am
petulant wrote: Fri Sep 25, 2020 6:55 pmWhat you're doing is you're saying the diversification to the companies is valuable, so maybe variance from currency is free and desirable. I think that implies currency volatility is sort of Brownian: it's random and doesn't have anything to do with anything else.
That's not the implication at all. Currency need not be completely uncorrelated with every other source of risk in the portfolio in order to be a diversifying asset. In fact, the minimum requirement is merely that it have a correlation with the rest of the portfolio of less than 1.0 and have a variance greater than 0.0%.
Correlation and variance are parameters for thinking about asset returns in Brownian terms, so I don't know that you've really addressed the point. To spell it out for other readers, the most common way for portfolio risk and return to be modeled is as a random walk: the assets have returns that cannot be precisely predicted. With multiple asset classes, the model typically also assumes that other asset classes operate on a random walk, but a model can use advanced math to tie together correlated asset classes so that both are random but move together based on correlation. What I'm saying is that if currency has complicated utility effects on other asset classes and on non-portfolio utility like consumption and labor income, then the vanilla random walk model is not an adequate paradigm. Vineviz isn't addressing the point.
vineviz wrote: Sat Sep 26, 2020 10:42 am
petulant wrote: Fri Sep 25, 2020 6:55 pm If currency risk is not independent and actually interacts with multiple other sources of utility, including by having effects on equities, labor income, and consumption, then it can be a reason for reduced allocations to US equity. I believe for a US investor there is an argument for reduced allocation.
We don't need to speculate about the interactive effects of currency with other sources of portfolio risk: we can simply observe them. And when we do that we clearly see that currency diversification is actually a benefit to US investors and not a cost. Indeed, the diversification benefits have historically been so strong that US investors need MORE and not less international equity exposure if they used currency hedging than if they did not.
This was a beneficial interaction until we got back to the traditional vineviz behavior of changing the standard, moving goalposts, and/or pointing to irrelevant issues. [OT comments removed by admin LadyGeek]

EDIT: Strangely the actual content was removed while my observation about vineviz was left. What I said was that my original comment was about household utility, which includes portfolio impact, labor income, and consumption (i.e., the budget spent to achieve a level of consumption utility). Currency volatility impacts all of these aspects of household utility and not just the portfolio's volatility. What vineviz's post has done is ignore total household utility and place focus on portfolio performance itself, despite the fact that my quoted post was clearly about total household utility. If the moderator team has a problem with me being clear about the conversation, please remove the part where I generalize about the person, not the substantive comment.
vineviz wrote: Sat Sep 26, 2020 10:42 amIn other words, not only does currency risk NOT support the idea of home bias it actually points in the opposite direction.
That's not accurate. You're relying on a modeling paradigm I think is inapplicable, and even then you won't apply it consistently to other assets like gold, platinum, and orange futures. The only data to which you refer is tied to foreign equities, not the currency itself. Plenty of academic research has been done on currency risk and many find it reasonable that currency risk is uncompensated undesirable volatility. That said, there is no consensus on the role of currency risk.
Last edited by petulant on Sun Sep 27, 2020 12:44 pm, edited 1 time in total.
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Re: Myths of international investing - Fidelity

Post by investnoob »

I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
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Re: Myths of international investing - Fidelity

Post by petulant »

investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
A huge portion of Canada's economy is linked to trade, and the stock market in Canada is concentrated in financials and minerals. That means a weaker currency may have worse household utility impacts due to more foreign inputs and a lower likelihood of substitutability of products. Many of the factors that have come up do not support a strong home bias in Canada.
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Re: Myths of international investing - Fidelity

Post by whereskyle »

50% VTI, 50% VT.

If ex-us stops sucking, I'll have more and more of it. If it keeps sucking, I'll have less and less of it.
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Re: Myths of international investing - Fidelity

Post by Anon9001 »

investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
The most important question is will you decrease the allocation if your local market out-performs significantly? If yes than it is too much.
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Re: Myths of international investing - Fidelity

Post by 000 »

investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
Banks
Oil
Gold Miners
Maple Syrup Refineries

That's all you need folks!!! :mrgreen:
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Re: Myths of international investing - Fidelity

Post by Bratbill »

Meb Faber has posted some interesting white papers on using CAPE ratio/values to show value of global assets....granted he’s selling something too...but he also has US Funds 😀

https://mebfaber.com/wp-content/uploads ... 129474.pdf

Interesting reading at a minimum.
Last edited by Bratbill on Sun Sep 27, 2020 7:55 am, edited 1 time in total.
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Re: Myth's of international investing - Fidelity

Post by Elysium »

langlands wrote: Thu Sep 24, 2020 3:00 pm These differing utility preferences mean that a European investor might not invest in the US even if the US has higher expected returns. Either way, the conclusion is that higher expected returns for the US market is not necessarily easily arbitraged away.
This. US companies simply had higher earnings growth which resulted in higher returns. It wasn't arbitraged away, since the global capital markets are not simply a big pool of efficient co-located capital, there are constraints imposed by investor preferences. Now, one can argue that the higher earnings growth of US companies will not persist into future forever and/or Europe/EM companies will have higher growth, but it becomes an active management decision at that point.

No one knows future, what we know is that US companies recovered better, had more earnings, and resulted in more share price increases coming out of global financial crisis more than a decade ago. Who will come out better out of COVID-19 induced financial losses is an unknown. If you follow Bogle and Buffett, then one should not bet against US economy. But, I no longer know if US is same as before, we may have moved past everything we have known or assumed.
Last edited by Elysium on Sun Sep 27, 2020 8:00 am, edited 1 time in total.
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Re: Myth's of international investing - Fidelity

Post by 000 »

Elysium wrote: Sun Sep 27, 2020 7:54 am
langlands wrote: Thu Sep 24, 2020 3:00 pm These differing utility preferences mean that a European investor might not invest in the US even if the US has higher expected returns. Either way, the conclusion is that higher expected returns for the US market is not necessarily easily arbitraged away.
This. US companies simply had higher earnings growth which resulted in higher returns. It wasn't arbitraged away, since the global capital markets are not simply a big pool of efficient co-located capital, there are constraints imposed by investor preferences. Now, one can argue that the higher earnings growth of US companies will not persist into future forever and/or Europe/EM companies will have higher growth, but it becomes an active management decision at that point.
Well, but the prices are set by traders, not holders. So Joe Schmo in US or Johann Schmaunn in Germany passively investing won't prevent arbitrageurs from doing their thing.

Unless all potential arbitrageurs have these same home bias preferences, I don't see why arbitrage wouldn't happen.
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Re: Myth's of international investing - Fidelity

Post by Elysium »

000 wrote: Sun Sep 27, 2020 8:00 am
Elysium wrote: Sun Sep 27, 2020 7:54 am
langlands wrote: Thu Sep 24, 2020 3:00 pm These differing utility preferences mean that a European investor might not invest in the US even if the US has higher expected returns. Either way, the conclusion is that higher expected returns for the US market is not necessarily easily arbitraged away.
This. US companies simply had higher earnings growth which resulted in higher returns. It wasn't arbitraged away, since the global capital markets are not simply a big pool of efficient co-located capital, there are constraints imposed by investor preferences. Now, one can argue that the higher earnings growth of US companies will not persist into future forever and/or Europe/EM companies will have higher growth, but it becomes an active management decision at that point.
Well, but the prices are set by traders, not holders. So Joe Schmo in US or Johann Schmaunn in Germany passively investing won't prevent arbitrageurs from doing their thing.

Unless all potential arbitrageurs have these same home bias preferences, I don't see why arbitrage wouldn't happen.
I never mentioned individual investors, passive or active. Prices are almost always determined by institutional investors, and the constraints of moving capital is not something simply related to individuals, they apply to institutions as well. There are constraints to movement of capital, either self imposed or placed by other factors.
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Re: Myth's of international investing - Fidelity

Post by 000 »

Elysium wrote: Sun Sep 27, 2020 8:07 am I never mentioned individual investors, passive or active. Prices are almost always determined by institutional investors, and the constraints of moving capital is not something simply related to individuals, they apply to institutions as well. There are constraints to movement of capital, either self imposed or placed by other factors.
The increasingly liquid and voluminous options market begs to disagree, I think.

Only a small percentage of traders being willing to engage in arbitrage is enough to keep prices relatively efficient between liquid developed markets.

If it were known there were a free lunch in US stocks, you don't think the Europeans would ever catch on?
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Re: Myths of international investing - Fidelity

Post by Elysium »

I would ignore most of what happened prior to 1990, when Internet/Tech has transformed the way everything the world has ever done. Just like periods before Motor cars or Air travel were invented.

This graph shows there was one period since 1990 when Intl outperformed US:

Image

Three other periods when US outperformed. Now, will Intl outperform US to compensate for last 30 years, outperforming in 3 out of 4 periods coming next? no one knows. I would consider it, if and when there is a large transformative change to the global economy driven by some other country/region.
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Re: Myths of international investing - Fidelity

Post by vineviz »

petulant wrote: Sun Sep 27, 2020 6:51 am Your position has tended to be that foreign assets are important diversifiers regardless of long stretches of underperformance, while you argue gold is not--even if it is observed to have been a better diversifier during key periods, and even if the same random walk theory you're using supports gold.
As I said, that is NOT my position.

petulant wrote: Fri Sep 25, 2020 6:55 pmWhat I'm saying is that if currency has complicated utility effects on other asset classes and on non-portfolio utility like consumption and labor income, then the vanilla random walk model is not an adequate paradigm. Vineviz isn't addressing the point.
I specifically addressed this point. The standard tools of statistical analysis can readily reveal everything you need to know about the relationship between currency movements and the movement of other sources of portfolio return.
petulant wrote: Fri Sep 25, 2020 6:55 pm This was a beneficial interaction until we got back to the traditional vineviz behavior of changing the standard, moving goalposts, and/or pointing to irrelevant issues.
Personal attacks merit no further response, IMHO. Let's stick to the topic, please.
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Re: Myths of international investing - Fidelity

Post by investnoob »

petulant wrote: Sun Sep 27, 2020 7:13 am
investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
A huge portion of Canada's economy is linked to trade, and the stock market in Canada is concentrated in financials and minerals. That means a weaker currency may have worse household utility impacts due to more foreign inputs and a lower likelihood of substitutability of products. Many of the factors that have come up do not support a strong home bias in Canada.
But if we swapped financials with technology, and basic materials with health care, don't you kinda get the US total market? Seems, then, that its not the market concentration that is the issue (as that is just poor timing maybe) but just the fact that Canada is not as big a player in the global market like the US - which is why international investment for Americans may not be that big a deal.

This is all tongue in cheek, as I kinda understand why Canadian market is probably not the one you want to build a portfolio around (but many here have been doing it for 60 years and have done pretty well).
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Re: Myths of international investing - Fidelity

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I removed some off-topic comments. The interchange is starting to get contentious. As a reminder, see: General Etiquette
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Re: Myths of international investing - Fidelity

Post by abuss368 »

Elysium wrote: Sun Sep 27, 2020 8:18 am I would ignore most of what happened prior to 1990, when Internet/Tech has transformed the way everything the world has ever done. Just like periods before Motor cars or Air travel were invented.

This graph shows there was one period since 1990 when Intl outperformed US:

Image

Three other periods when US outperformed. Now, will Intl outperform US to compensate for last 30 years, outperforming in 3 out of 4 periods coming next? no one knows. I would consider it, if and when there is a large transformative change to the global economy driven by some other country/region.
Often that is where my thought process is as well. Will some international companies begin to make a new product or tech that will really change the world? Even then that companies stock market may be only 1% of less of weight in Total International Stock. How much, if any, impact will this ultimately have to individual investors is the question.
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Re: Myths of international investing - Fidelity

Post by Noobvestor »

I'd like to propose a more generous reading regarding the article's list of other nations that came in first over various years (which, yes, has flaws, too). The useful takeaway isn't that you could win big by having a market-weight slice of, say, Finland, but that this idea that the 'US is always the best' is seriously misleading. The usual example I give is the fact that South Africa and Australia both had higher equity returns over the 20th century. I can't count the number of times I've seen people post on financial forums 'but the US has the best historical returns!' In short: that just isn't true over most periods. So no, you're not going to make a ton off of some random Euro-zone country you own 1% of, but 'US is best' isn't supported by data, either.

Meanwhile, the risk of telling people anything from 0% to 50% international is fine (versus IMHO the better advice of starting at market weights) is that new investors eager to chase performance see that as a green light to avoid international entirely. I get it: some people have been US-only for decades and at this point it's unlikely to make a big difference - they already have amassed returns they need and probably own more bonds now. I'm not talking about them - they can stay the course and be glad they invested as they did during a period of US outperformance. I'm talking about younger people.

The slippery slope is that new investors (I've been there, done this) often look to performance as a starting point. They see the recent outperformance of US, large, and tech in particular, and are inclined to tilt in those directions. So I'd offer this food for thought: in making the case that an investor doesn't need international, consider who might be reading the argument and where they may be in their investment journey. It's clear from many posts on this and other forums that young people or those new to indexing are eager to tilt US, and we all know the dangers of performance chasing. If they can stay the course when the US inevitably underperforms for some long period at some point, fine, but we also know the risks of capitulation. /2 cents
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Re: Myths of international investing - Fidelity

Post by Valuethinker »

petulant wrote: Sun Sep 27, 2020 7:13 am
investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
A huge portion of Canada's economy is linked to trade, and the stock market in Canada is concentrated in financials and minerals. That means a weaker currency may have worse household utility impacts due to more foreign inputs and a lower likelihood of substitutability of products. Many of the factors that have come up do not support a strong home bias in Canada.
Worse than just that.

From memory in the Canadian index you wind up w 8% in just one bank.

Although they are not at much direct capital risk from risky home loans, due to government mortgage insurance, those big 5 banks must have half their domestic mortgage books in Greater Toronto Area homes and Greater Vancouver Area. Markets which constantly appear as in the Top 10 overvalued world housing markets.

So thats nearly 40% of the index.

Then in the natural resources play the mineral in question is oil and in particular tar sands oil, the dirtiest most expensive stuff on the planet to extract and without enough oil pipeline capacity so they ship it by railcar.

So 60% say of your portfolio is GTA GVA real estate (in terms of the profits the banks make on loans backed by those assets) plus tar sands.

That really is a lot of risk concentration.
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Re: Myths of international investing - Fidelity

Post by Valuethinker »

investnoob wrote: Sun Sep 27, 2020 9:24 am
petulant wrote: Sun Sep 27, 2020 7:13 am
investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
A huge portion of Canada's economy is linked to trade, and the stock market in Canada is concentrated in financials and minerals. That means a weaker currency may have worse household utility impacts due to more foreign inputs and a lower likelihood of substitutability of products. Many of the factors that have come up do not support a strong home bias in Canada.
But if we swapped financials with technology, and basic materials with health care, don't you kinda get the US total market? Seems, then, that its not the market concentration that is the issue (as that is just poor timing maybe) but just the fact that Canada is not as big a player in the global market like the US - which is why international investment for Americans may not be that big a deal.

This is all tongue in cheek, as I kinda understand why Canadian market is probably not the one you want to build a portfolio around (but many here have been doing it for 60 years and have done pretty well).
Beware the bank stocks. Most of the long run performance has been the big 5 banks, exploiting a protected and govt subsidised home mkt (via CMHC). Canadian banking is a nice oligopoly.

You will find the private client portfolios of my father's friends (late 80s) stuffed w Bank stocks they bought in the late 70s and have held ever since. Total returns probably 50x 60x book cost in nominal terms (you'd have paid a lot of tax on the dividends though, RRSPs weren't a thing til later).

(Its a huge concentration of risk. Even before we consider the tar sands in a world of fracking (low cost competition) and net zero (in that latter, most of the oil in the sands will never be extracted -- whether you believe in net zero or not, it is a significant existential risk)).

Similarly the lack of competition or a Vanguard in fund management has allowed a high fees oligopolistic industry to exist.

Canada's index does have a high correlation w USA despite the lack of technology and healthcare stocks.

But it is very un diversified from a risk perspective.

It is probably broadly true the index does well if global inflation picks up. Because commodity prices will be higher and the extremes of real estate valuation will be reduced.
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Re: Myths of international investing - Fidelity

Post by nedsaid »

Valuethinker wrote: Sun Sep 27, 2020 10:51 am
petulant wrote: Sun Sep 27, 2020 7:13 am
investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
A huge portion of Canada's economy is linked to trade, and the stock market in Canada is concentrated in financials and minerals. That means a weaker currency may have worse household utility impacts due to more foreign inputs and a lower likelihood of substitutability of products. Many of the factors that have come up do not support a strong home bias in Canada.
Worse than just that.

From memory in the Canadian index you wind up w 8% in just one bank.

Although they are not at much direct capital risk from risky home loans, due to government mortgage insurance, those big 5 banks must have half their domestic mortgage books in Greater Toronto Area homes and Greater Vancouver Area. Markets which constantly appear as in the Top 10 overvalued world housing markets.

So thats nearly 40% of the index.

Then in the natural resources play the mineral in question is oil and in particular tar sands oil, the dirtiest most expensive stuff on the planet to extract and without enough oil pipeline capacity so they ship it by railcar.

So 60% say of your portfolio is GTA GVA real estate (in terms of the profits the banks make on loans backed by those assets) plus tar sands.

That really is a lot of risk concentration.
This is why I suggested, to no avail, that investors in English-speaking countries with stock markets that are relatively small compared to World stock market capitalization, invest in sort of an Anglosphere portfolio as their "domestic" investments. Canada is a perfect example of this, their stock market is about 2%-3% of the Total World. I wouldn't put 50% of my portfolio in 2% of the world stock market. I would envision a "domestic" stock portfolio containing Canadian/US/UK/Australian/New Zealand stocks. A "foreign" portion of the stock portfolio would be everything else. My thinking is that those of us in the Anglosphere would be quite comfortable living in any of those countries save for the funny accents. The economic/political/legal systems are all quite similar as is culture. These currencies are also relatively strong.

The "Anglosphere Domestic Stock" portfolio also gets around the sector concentration you get in single country portfolios, Canada being the most dramatic example. In John Bogle fashion, I could argue that one need not invest outside of the Anglosphere. Of course, I want to be invested all around the world but in a country such as Canada or New Zealand, I would want an expanded definition of "domestic." That being said, there are plenty of opportunities for investors outside of the Anglosphere as well and I want to be there.
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Re: Myths of international investing - Fidelity

Post by nedsaid »

Valuethinker wrote: Sun Sep 27, 2020 11:02 am
investnoob wrote: Sun Sep 27, 2020 9:24 am
petulant wrote: Sun Sep 27, 2020 7:13 am
investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
A huge portion of Canada's economy is linked to trade, and the stock market in Canada is concentrated in financials and minerals. That means a weaker currency may have worse household utility impacts due to more foreign inputs and a lower likelihood of substitutability of products. Many of the factors that have come up do not support a strong home bias in Canada.
But if we swapped financials with technology, and basic materials with health care, don't you kinda get the US total market? Seems, then, that its not the market concentration that is the issue (as that is just poor timing maybe) but just the fact that Canada is not as big a player in the global market like the US - which is why international investment for Americans may not be that big a deal.

This is all tongue in cheek, as I kinda understand why Canadian market is probably not the one you want to build a portfolio around (but many here have been doing it for 60 years and have done pretty well).
Beware the bank stocks. Most of the long run performance has been the big 5 banks, exploiting a protected and govt subsidised home mkt (via CMHC). Canadian banking is a nice oligopoly.

You will find the private client portfolios of my father's friends (late 80s) stuffed w Bank stocks they bought in the late 70s and have held ever since. Total returns probably 50x 60x book cost in nominal terms (you'd have paid a lot of tax on the dividends though, RRSPs weren't a thing til later).

(Its a huge concentration of risk. Even before we consider the tar sands in a world of fracking (low cost competition) and net zero (in that latter, most of the oil in the sands will never be extracted -- whether you believe in net zero or not, it is a significant existential risk)).

Similarly the lack of competition or a Vanguard in fund management has allowed a high fees oligopolistic industry to exist.

Canada's index does have a high correlation w USA despite the lack of technology and healthcare stocks.

But it is very un diversified from a risk perspective.

It is probably broadly true the index does well if global inflation picks up. Because commodity prices will be higher and the extremes of real estate valuation will be reduced.
Despite my musings regarding the Anglosphere, I could not bring myself to tell a Canadian investor to ignore his own Country's stock market. I would also think it too much to tell a Canadian that all he needs are US Stocks, we all have national pride and want to invest in our own country. My suspicion is that Canadians resent being viewed as a subsidiary of the United States. My Anglosphere concept is an attempt to get around these issues.
A fool and his money are good for business.
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Re: Myths of international investing - Fidelity

Post by Robot Monster »

nedsaid wrote: Sun Sep 27, 2020 11:15 am ...I could not bring myself to tell a Canadian investor to ignore his own Country's stock market.
But I can.

Dear America-to-the-north,

Have I got the ideal investment for you! FTSE Global All Cap ex Canada Index ETF (VXC) which includes China A shares and no tar sands!

Obnoxiously yours,
RM
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
petulant
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Re: Myths of international investing - Fidelity

Post by petulant »

vineviz wrote: Sun Sep 27, 2020 8:49 am
petulant wrote: Sun Sep 27, 2020 6:51 am Your position has tended to be that foreign assets are important diversifiers regardless of long stretches of underperformance, while you argue gold is not--even if it is observed to have been a better diversifier during key periods, and even if the same random walk theory you're using supports gold.
As I said, that is NOT my position.

petulant wrote: Fri Sep 25, 2020 6:55 pmWhat I'm saying is that if currency has complicated utility effects on other asset classes and on non-portfolio utility like consumption and labor income, then the vanilla random walk model is not an adequate paradigm. Vineviz isn't addressing the point.
I specifically addressed this point. The standard tools of statistical analysis can readily reveal everything you need to know about the relationship between currency movements and the movement of other sources of portfolio return.
petulant wrote: Fri Sep 25, 2020 6:55 pm This was a beneficial interaction until we got back to the traditional vineviz behavior of changing the standard, moving goalposts, and/or pointing to irrelevant issues.
Personal attacks merit no further response, IMHO. Let's stick to the topic, please.
I am talking about how currency risk impacts total household utility and how that impacts international diversification. That is connected to currency risk, which is part of the topic being discussed. Please don't change the topic to only focus on portfolio risk since that's not what I'm discussing.
petulant
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Re: Myths of international investing - Fidelity

Post by petulant »

nedsaid wrote: Sun Sep 27, 2020 11:11 am
Valuethinker wrote: Sun Sep 27, 2020 10:51 am
petulant wrote: Sun Sep 27, 2020 7:13 am
investnoob wrote: Sun Sep 27, 2020 7:06 am I am Canadian, and my allocation to international is 90%. I wonder if that is too much?
:P :wink:
A huge portion of Canada's economy is linked to trade, and the stock market in Canada is concentrated in financials and minerals. That means a weaker currency may have worse household utility impacts due to more foreign inputs and a lower likelihood of substitutability of products. Many of the factors that have come up do not support a strong home bias in Canada.
Worse than just that.

From memory in the Canadian index you wind up w 8% in just one bank.

Although they are not at much direct capital risk from risky home loans, due to government mortgage insurance, those big 5 banks must have half their domestic mortgage books in Greater Toronto Area homes and Greater Vancouver Area. Markets which constantly appear as in the Top 10 overvalued world housing markets.

So thats nearly 40% of the index.

Then in the natural resources play the mineral in question is oil and in particular tar sands oil, the dirtiest most expensive stuff on the planet to extract and without enough oil pipeline capacity so they ship it by railcar.

So 60% say of your portfolio is GTA GVA real estate (in terms of the profits the banks make on loans backed by those assets) plus tar sands.

That really is a lot of risk concentration.
This is why I suggested, to no avail, that investors in English-speaking countries with stock markets that are relatively small compared to World stock market capitalization, invest in sort of an Anglosphere portfolio as their "domestic" investments. Canada is a perfect example of this, their stock market is about 2%-3% of the Total World. I wouldn't put 50% of my portfolio in 2% of the world stock market. I would envision a "domestic" stock portfolio containing Canadian/US/UK/Australian/New Zealand stocks. A "foreign" portion of the stock portfolio would be everything else. My thinking is that those of us in the Anglosphere would be quite comfortable living in any of those countries save for the funny accents. The economic/political/legal systems are all quite similar as is culture. These currencies are also relatively strong.

The "Anglosphere Domestic Stock" portfolio also gets around the sector concentration you get in single country portfolios, Canada being the most dramatic example. In John Bogle fashion, I could argue that one need not invest outside of the Anglosphere. Of course, I want to be invested all around the world but in a country such as Canada or New Zealand, I would want an expanded definition of "domestic." That being said, there are plenty of opportunities for investors outside of the Anglosphere as well and I want to be there.
That's an interesting concept and unfortunately one difficult to implement in practice. As a U.S. investor, for example, the closest you could get would be single-county index funds from iShares, but then those often have expense ratios close to 0.50%. That's a high price to pay just to avoid Japan, Germany, China, etc.
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Re: Myth's of international investing - Fidelity

Post by Leif »

asif408 wrote: Fri Sep 25, 2020 1:10 pm
Hopefully investors will consider 3 big historical differences from 1990 to 2020:

1) In 1990 10 year Treasury yields were 8-9%. Now they are less than 1%.
2) In 1990 foreign stock market valuations were 2-3x higher than the US, and Japan, which made up over 60% of the EAFE index, was at the top of the biggest bubble in stock market history. Today US valuations are 2-3x higher than foreign and there are no foreign stock markets anywhere close to being in a bubble:
https://www.gmo.com/contentassets/b3da1 ... ibit-4.png. The biggest country in the international index is still Japan, but it now only makes up 16% of the fund.
3) Foreign stocks funds were not readily available or cheap in 1990
+1

When I checked Japan's portion of EAFE I came up with more like 25%. MSCI says 25.04% https://www.msci.com/documents/10199/47 ... 46245402e6, and Vanguard VTMGX says 22.3% https://investor.vanguard.com/mutual-fu ... olio/vtmgx.

But I take your point, much less than at the Japan peak of 1989.

I'm looking at yield of US vs International today. TTM yield of 2.47% for VTMGX vs. 1.65% for VTIAX (Vanguard S&P 500 Admiral). You at least are being paid to wait for international. Plus, they may get more US investment solely for those in search of yield.
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Re: Myths of international investing - Fidelity

Post by Robot Monster »

petulant wrote: Sun Sep 27, 2020 12:57 pm
nedsaid wrote: Sun Sep 27, 2020 11:11 am I would envision a "domestic" stock portfolio containing Canadian/US/UK/Australian/New Zealand stocks.
That's an interesting concept and unfortunately one difficult to implement in practice. As a U.S. investor, for example, the closest you could get would be single-county index funds from iShares, but then those often have expense ratios close to 0.50%. That's a high price to pay just to avoid Japan, Germany, China, etc.
Franklin Templeton offers inexpensive single country etfs--not for New Zealand, though, and the Canada and Australia ones are minuscule in total net assets:
Franklin FTSE Canada ETF (FLCA) -- $6.07 Million
Franklin FTSE United Kingdom ETF (FLGB) -- $75.67 Million
Franklin FTSE Australia ETF (FLAU) -- $13.98 Million

You could swap out New Zealand for,
Franklin FTSE Switzerland ETF (FLSW) -- $16.72 Million

Something interesting, compare this to:
Franklin FTSE Japan ETF (FLJP) -- $451.92 Million

I believe Japan is, by far, their most popular out of their single country ones.
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petulant
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Re: Myths of international investing - Fidelity

Post by petulant »

Robot Monster wrote: Sun Sep 27, 2020 1:22 pm
petulant wrote: Sun Sep 27, 2020 12:57 pm
nedsaid wrote: Sun Sep 27, 2020 11:11 am I would envision a "domestic" stock portfolio containing Canadian/US/UK/Australian/New Zealand stocks.
That's an interesting concept and unfortunately one difficult to implement in practice. As a U.S. investor, for example, the closest you could get would be single-county index funds from iShares, but then those often have expense ratios close to 0.50%. That's a high price to pay just to avoid Japan, Germany, China, etc.
Franklin Templeton offers inexpensive single country etfs--not for New Zealand, though, and the Canada and Australia ones are minuscule in total net assets:
Franklin FTSE Canada ETF (FLCA) -- $6.07 Million
Franklin FTSE United Kingdom ETF (FLGB) -- $75.67 Million
Franklin FTSE Australia ETF (FLAU) -- $13.98 Million

You could swap out New Zealand for,
Franklin FTSE Switzerland ETF (FLSW) -- $16.72 Million

Something interesting, compare this to:
Franklin FTSE Japan ETF (FLJP) -- $451.92 Million

I believe Japan is, by far, their most popular out of their single country ones.
That's a much better alternative, but you're right the AUMs are a bit concerning for long-term viability.
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