Myths of international investing - Fidelity

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petulant
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Re: Myth's of international investing - Fidelity

Post by petulant »

Leif wrote: Sun Sep 27, 2020 12:58 pm
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.
Japan is about 16% of the total international index like the FTSE one used by VXUS. EAFE is a developed markets index and VTMGX also follows a developed markets index. That's why you're seeing higher shares.
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vineviz
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Re: Myths of international investing - Fidelity

Post by vineviz »

petulant wrote: Sun Sep 27, 2020 12:46 pm 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.
By what mechanism do you believe that international stocks impact household utility OTHER than through the investment portfolio?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
petulant
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Re: Myths of international investing - Fidelity

Post by petulant »

vineviz wrote: Sun Sep 27, 2020 2:05 pm
petulant wrote: Sun Sep 27, 2020 12:46 pm 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.
By what mechanism do you believe that international stocks impact household utility OTHER than through the investment portfolio?
I didn't say that. I said currency risk impacts household utility. Currency fluctuations impact labor income by making one's job more or less prone to foreign competition, and it impacts the consumption budget by potentially making certain consumption items more expensive. Currency risk thus impacts the following four things in complex ways: 1) the domestic currency price of foreign equity assets, 2) the foreign equity price of foreign equity assets due to the impact on export/import fundamentals, 3) labor income impacts, and 4) consumption budget, especially due to import impacts. Because of these complex impacts, it is possible for a portfolio with a domestic equity bias to increase or decrease household utility depending on economic parameters affecting these areas, like whether the economy has a large import/export share, the industry focus of domestic equity, whether the household can substitute domestic products for imported ones, etc. The U.S. has a highly diversified economy with high substitutability and low share of GDP for export/import, so it is the market with the strongest argument for domestic equity bias.
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vineviz
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Re: Myths of international investing - Fidelity

Post by vineviz »

petulant wrote: Sun Sep 27, 2020 2:15 pm I didn't say that. I said currency risk impacts household utility. Currency fluctuations impact labor income by making one's job more or less prone to foreign competition, and it impacts the consumption budget by potentially making certain consumption items more expensive. Currency risk thus impacts the following four things in complex ways: 1) the domestic currency price of foreign equity assets, 2) the foreign equity price of foreign equity assets due to the impact on export/import fundamentals, 3) labor income impacts, and 4) consumption budget, especially due to import impacts. Because of these complex impacts, it is possible for a portfolio with a domestic equity bias to increase or decrease household utility depending on economic parameters affecting these areas, like whether the economy has a large import/export share, the industry focus of domestic equity, whether the household can substitute domestic products for imported ones, etc. The U.S. has a highly diversified economy with high substitutability and low share of GDP for export/import, so it is the market with the strongest argument for domestic equity bias.
I agree with most of what you've written here (everything except the last half of the final sentence).

It seems like you are suggesting that you want to measure the correlation of the investment portfolio with other factors (e.g. "labor income" and "consumption budget") with an eye towards maximizing the correlation between the returns of the portfolio and the liabilities the investor is expecting the portfolio to match. Is this your goal?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Leif
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Re: Myth's of international investing - Fidelity

Post by Leif »

petulant wrote: Sun Sep 27, 2020 1:56 pm
Leif wrote: Sun Sep 27, 2020 12:58 pm
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.
Japan is about 16% of the total international index like the FTSE one used by VXUS. EAFE is a developed markets index and VTMGX also follows a developed markets index. That's why you're seeing higher shares.
In #2 EAFE index is mentioned, so that is what I thought that was being used. Otherwise comparing 16% to 60% is not apples to apples. But again, I take the overall point.
Last edited by Leif on Sun Sep 27, 2020 3:36 pm, edited 1 time in total.
petulant
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Re: Myth's of international investing - Fidelity

Post by petulant »

Leif wrote: Sun Sep 27, 2020 3:27 pm
petulant wrote: Sun Sep 27, 2020 1:56 pm
Leif wrote: Sun Sep 27, 2020 12:58 pm
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.
Japan is about 16% of the total international index like the FTSE one used by VXUS. EAFE is a developed markets index and VTMGX also follows a developed markets index. That's why you're seeing higher shares.
In #2 he mentions EAFE index, so that is what I thought he was using. Otherwise comparing 16% to 60% is not apples to apples. But again, I take the overall point.
That's fair
petulant
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Re: Myths of international investing - Fidelity

Post by petulant »

vineviz wrote: Sun Sep 27, 2020 3:00 pm
petulant wrote: Sun Sep 27, 2020 2:15 pm I didn't say that. I said currency risk impacts household utility. Currency fluctuations impact labor income by making one's job more or less prone to foreign competition, and it impacts the consumption budget by potentially making certain consumption items more expensive. Currency risk thus impacts the following four things in complex ways: 1) the domestic currency price of foreign equity assets, 2) the foreign equity price of foreign equity assets due to the impact on export/import fundamentals, 3) labor income impacts, and 4) consumption budget, especially due to import impacts. Because of these complex impacts, it is possible for a portfolio with a domestic equity bias to increase or decrease household utility depending on economic parameters affecting these areas, like whether the economy has a large import/export share, the industry focus of domestic equity, whether the household can substitute domestic products for imported ones, etc. The U.S. has a highly diversified economy with high substitutability and low share of GDP for export/import, so it is the market with the strongest argument for domestic equity bias.
I agree with most of what you've written here (everything except the last half of the final sentence).

It seems like you are suggesting that you want to measure the correlation of the investment portfolio with other factors (e.g. "labor income" and "consumption budget") with an eye towards maximizing the correlation between the returns of the portfolio and the liabilities the investor is expecting the portfolio to match. Is this your goal?
I wouldn't confine the concepts to liabilities since many investors may have utility functions that go past liabilities (e.g. a "needs" budget, a "wants" budget, and then charity/legacy). Liability implies a known, definite cost that doesn't describe the complete utility function for many. It also implies a very high risk aversion that may be accurate for a "needs" budget but not a legacy motive.

So it's a bit broader, but yes, I'm talking about matching up non-portfolio events with portfolio performance. I would hesitate to call that "my goal" since this is a typical approach in economics literature to address domestic equity bias. A good review article is Coeurdacier and Rey, "Home Bias in Open Economy Financial Macroeconomics" (2013).
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vineviz
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Re: Myths of international investing - Fidelity

Post by vineviz »

petulant wrote: Sun Sep 27, 2020 3:44 pm I wouldn't confine the concepts to liabilities since many investors may have utility functions that go past liabilities (e.g. a "needs" budget, a "wants" budget, and then charity/legacy). Liability implies a known, definite cost that doesn't describe the complete utility function for many. It also implies a very high risk aversion that may be accurate for a "needs" budget but not a legacy motive.
In this context, "liability" is any withdrawal from the portfolio (i.e. any form on consumption) and thus subsumes the categories you mentioned (wants, need, charity, legacy).

So, with that clarification out of the way, it sounds like your goal is to match the portfolio returns as closely as possible with the household liabilities.

For example, you want a portfolio that produces higher returns when household labor income is lower and/or when consumption is higher?

And you think that the domestic/international equity allocation is a powerful tool in managing towards that goal?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
petulant
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Re: Myths of international investing - Fidelity

Post by petulant »

vineviz wrote: Sun Sep 27, 2020 3:59 pm
petulant wrote: Sun Sep 27, 2020 3:44 pm I wouldn't confine the concepts to liabilities since many investors may have utility functions that go past liabilities (e.g. a "needs" budget, a "wants" budget, and then charity/legacy). Liability implies a known, definite cost that doesn't describe the complete utility function for many. It also implies a very high risk aversion that may be accurate for a "needs" budget but not a legacy motive.
In this context, "liability" is any withdrawal from the portfolio (i.e. any form on consumption) and thus subsumes the categories you mentioned (wants, need, charity, legacy).

So, with that clarification out of the way, it sounds like your goal is to match the portfolio returns as closely as possible with the household liabilities.

For example, you want a portfolio that produces higher returns when household labor income is lower and/or when consumption is higher?

And you think that the domestic/international equity allocation is a powerful tool in managing towards that goal?
I don't really agree with that definition of "liability." That's probably a fair definition of "liability" in the context of pension fund management, but we're not talking about pension fund management. We're talking about household economic wellbeing. Further, you're going to get into a quandary if you're talking about matching liabilities in some way when we're mixing in the impact of labor income or when we're talking about substitution. Utility can change without much of a different "withdrawal" from the portfolio, and a "withdrawal" might have to be very different to achieve some utility.

For example, given that I need to have food, maybe I like to prepare my food with olive oil for a variety of reasons. I can buy olive oil from California or Italy, but I can also switch to vegetable oil or canola oil in a pinch. Currency risk can create a situation where olive oil gets more expensive so I increase withdrawals, reducing a future legacy, or where I switch to vegetable oil, reducing utility from food but preserving legacy and keeping the withdrawal the same. "Liability" as a word does not capture the right nuances.

With that clarified, yes, what I'm talking about is how the portfolio performs under different conditions to support household economic wellbeing.

The outcome of the literature that I am relaying is not whether domestic/international equity allocation is a powerful tool to manage overall risk, it's that currency risk in particular is not a beneficial aspect of international equity allocation and provides a basis for domestic equity bias.
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Re: Myths of international investing - Fidelity

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Robot Monster wrote: Sun Sep 27, 2020 12:40 pm
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
You can say it safely in New York. Go up to Toronto and say it there. I dare you. :wink:
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nedsaid
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Re: Myths of international investing - Fidelity

Post by nedsaid »

petulant wrote: Sun Sep 27, 2020 12:57 pm
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.
No. You are missing my whole point. The point wasn't to avoid countries outside of the Anglosphere but to give a smaller market investor from let's say New Zealand or Canada an expanded definition of "domestic." Probably not wise for a Canadian investor to have 50% or more of his portfolio in a stock market that is 2% of World Stock Market Capitalization. It is also a bit of a thought experiment.
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petulant
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Re: Myths of international investing - Fidelity

Post by petulant »

nedsaid wrote: Sun Sep 27, 2020 5:40 pm
petulant wrote: Sun Sep 27, 2020 12:57 pm
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

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.
No. You are missing my whole point. The point wasn't to avoid countries outside of the Anglosphere but to give a smaller market investor from let's say New Zealand or Canada an expanded definition of "domestic." Probably not wise for a Canadian investor to have 50% or more of his portfolio in a stock market that is 2% of World Stock Market Capitalization. It is also a bit of a thought experiment.
Isn't that the same thing? For a Canadian investor, including the US, UK, Australia, and NZ in the "domestic" allocation has no impact without a home bias, and the implication for a broader definition of "domestic" is then underweighting the other countries.
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Re: Myths of international investing - Fidelity

Post by BetaTracker »

The country rotation graphic (Chart #46) on this site lets you toggle between developed and emerging markets ... it seems pretty revealing:
https://www.ifa.com/charts/
Last edited by BetaTracker on Sun Sep 27, 2020 6:06 pm, edited 1 time in total.
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nedsaid
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Re: Myths of international investing - Fidelity

Post by nedsaid »

petulant wrote: Sun Sep 27, 2020 5:45 pm
nedsaid wrote: Sun Sep 27, 2020 5:40 pm
petulant wrote: Sun Sep 27, 2020 12:57 pm
nedsaid wrote: Sun Sep 27, 2020 11:11 am
Valuethinker wrote: Sun Sep 27, 2020 10:51 am

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.
No. You are missing my whole point. The point wasn't to avoid countries outside of the Anglosphere but to give a smaller market investor from let's say New Zealand or Canada an expanded definition of "domestic." Probably not wise for a Canadian investor to have 50% or more of his portfolio in a stock market that is 2% of World Stock Market Capitalization. It is also a bit of a thought experiment.
Isn't that the same thing? For a Canadian investor, including the US, UK, Australia, and NZ in the "domestic" allocation has no impact without a home bias, and the implication for a broader definition of "domestic" is then underweighting the other countries.
Most US investors have far less than 40% or 50% of their stocks in International, they are underweighting the other countries just from home country bias. But US stocks are somewhere around 50% of World Stock Market capitalization compared to 2% or so for Canada. The problem of home country bias is a lot worse for a Canadian investor than it is for a US investor. The point is that the Anglosphere countries are very similar to each other in many ways, a Canadian investor would be more comfortable with UK stocks than with let's say Japanese stocks. A Canadian investor could perhaps split a "Domestic" stock portfolio just three ways: Canada/US/UK. The idea is to look beyond just Canada.

We can nit pick this all day. I have aimed this concept towards investors in Canada, Australia, and New Zealand. The Brits might take exception to having their market being called relatively small. Even if such an investor did not adopt the concept of "Anglosphere as Domestic", hopefully it gets them to think beyond their own country. It is also a way of getting around pretty much telling people not to invest in their own country. As Valuethinker posted above, the Canadian Stock Market is not all that diversified, as I recall most everything is in just 4 sectors. I just am not going to tell a Canadian to invest 0% of his or her stock portfolio in Canadian stocks. What I am saying is that a Canadian needs to really think about International Diversification, in part because International investing spreads your risk across more industry sectors. Even a US investor should think beyond US borders even though the US Stock Market is more diversified and is about 50% of World Stock Market capitalization.

Like I said, the purpose of this is to get people to think.
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Re: Myths of international investing - Fidelity

Post by BetaTracker »

That makes sense to me ... instead of looking at international diversification as a black and white issue (none or lots), it's more a matter of deciding a proper asset allocation percentage. Do you put 15%-20% of your stock allocation to international? Maybe 30%, or possibly 40%? And what about bonds ... if it makes sense to diversify in stocks, why not bonds?
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Re: Myths of international investing - Fidelity

Post by columbia »

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.
One could could invest in the URTH ETF (being discussed in another thread right now) and have just shy of 80% in Canadian/US/UK/Australian/New Zealand stocks
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Re: Myths of international investing - Fidelity

Post by absolute zero »

nedsaid wrote: Sun Sep 27, 2020 6:04 pm
petulant wrote: Sun Sep 27, 2020 5:45 pm
nedsaid wrote: Sun Sep 27, 2020 5:40 pm
petulant wrote: Sun Sep 27, 2020 12:57 pm
nedsaid wrote: Sun Sep 27, 2020 11:11 am

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.
No. You are missing my whole point. The point wasn't to avoid countries outside of the Anglosphere but to give a smaller market investor from let's say New Zealand or Canada an expanded definition of "domestic." Probably not wise for a Canadian investor to have 50% or more of his portfolio in a stock market that is 2% of World Stock Market Capitalization. It is also a bit of a thought experiment.
Isn't that the same thing? For a Canadian investor, including the US, UK, Australia, and NZ in the "domestic" allocation has no impact without a home bias, and the implication for a broader definition of "domestic" is then underweighting the other countries.
Most US investors have far less than 40% or 50% of their stocks in International, they are underweighting the other countries just from home country bias. But US stocks are somewhere around 50% of World Stock Market capitalization compared to 2% or so for Canada. The problem of home country bias is a lot worse for a Canadian investor than it is for a US investor. The point is that the Anglosphere countries are very similar to each other in many ways, a Canadian investor would be more comfortable with UK stocks than with let's say Japanese stocks. A Canadian investor could perhaps split a "Domestic" stock portfolio just three ways: Canada/US/UK. The idea is to look beyond just Canada.

We can nit pick this all day. I have aimed this concept towards investors in Canada, Australia, and New Zealand. The Brits might take exception to having their market being called relatively small. Even if such an investor did not adopt the concept of "Anglosphere as Domestic", hopefully it gets them to think beyond their own country. It is also a way of getting around pretty much telling people not to invest in their own country. As Valuethinker posted above, the Canadian Stock Market is not all that diversified, as I recall most everything is in just 4 sectors. I just am not going to tell a Canadian to invest 0% of his or her stock portfolio in Canadian stocks. What I am saying is that a Canadian needs to really think about International Diversification, in part because International investing spreads your risk across more industry sectors. Even a US investor should think beyond US borders even though the US Stock Market is more diversified and is about 50% of World Stock Market capitalization.

Like I said, the purpose of this is to get people to think.
I still don’t get the whole anglosphere thing. Basically you’re suggesting that people try to replace their irrational bias against foreign countries with a somewhat less damaging irrational bias against non-English speaking countries?

Like “don’t smoke cigarettes, but instead smoke these e-cigarettes which are still unhealthy but better than cigarettes.” Is that sort of the idea?
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Re: Myths of international investing - Fidelity

Post by 000 »

absolute zero wrote: Sun Sep 27, 2020 7:20 pm I still don’t get the whole anglosphere thing. Basically you’re suggesting that people try to replace their irrational bias against foreign countries with a somewhat less damaging irrational bias against non-English speaking countries?

Like “don’t smoke cigarettes, but instead smoke these e-cigarettes which are still unhealthy but better than cigarettes.” Is that sort of the idea?
Fear of confiscation risk is not irrational.

Nor is thinking that that risk is less when investing within jurisdictions subject to the same Sovereignty.

UK, Canada, Australia, and New Zealand are all under the same Sovereign.
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Re: Myths of international investing - Fidelity

Post by absolute zero »

000 wrote: Sun Sep 27, 2020 7:28 pm
absolute zero wrote: Sun Sep 27, 2020 7:20 pm I still don’t get the whole anglosphere thing. Basically you’re suggesting that people try to replace their irrational bias against foreign countries with a somewhat less damaging irrational bias against non-English speaking countries?

Like “don’t smoke cigarettes, but instead smoke these e-cigarettes which are still unhealthy but better than cigarettes.” Is that sort of the idea?
Fear of confiscation risk is not irrational.

Nor is thinking that that risk is less when investing within jurisdictions subject to the same Sovereignty.

UK, Canada, Australia, and New Zealand are all under the same Sovereign.
Fear of confiscation is not irrational, but it is idiosyncratic and thus easily minimized through diversification.
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Re: Myths of international investing - Fidelity

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000 wrote: Sun Sep 27, 2020 7:28 pm
absolute zero wrote: Sun Sep 27, 2020 7:20 pm I still don’t get the whole anglosphere thing. Basically you’re suggesting that people try to replace their irrational bias against foreign countries with a somewhat less damaging irrational bias against non-English speaking countries?

Like “don’t smoke cigarettes, but instead smoke these e-cigarettes which are still unhealthy but better than cigarettes.” Is that sort of the idea?
Fear of confiscation risk is not irrational.
The U.S. government has already confiscated significant financial assets. It was called executive order 6102 and required citizens to turn in their gold.
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Re: Myths of international investing - Fidelity

Post by vineviz »

petulant wrote: Sun Sep 27, 2020 4:52 pm With that clarified, yes, what I'm talking about is how the portfolio performs under different conditions to support household economic wellbeing.

The outcome of the literature that I am relaying is not whether domestic/international equity allocation is a powerful tool to manage overall risk, it's that currency risk in particular is not a beneficial aspect of international equity allocation and provides a basis for domestic equity bias.
The question in this thread is specifically about the domestic/international equity allocation within an investment portfolio, though, right?

I mean, the question of whether a worker's labor income is sensitive to exchange rates is an interesting topic to some economists I'm sure but it's only relevant to this discussion to the extent that it drives a decision about investing.

Is your argument that moving from a 100% domestic equity allocation to one that is globally diversified 1) significantly impacts the nature of portfolio returns; and 2) does this in a direction that reduces household utility?

If that's your argument, I'm afraid that I don't find either of those components very convincing.
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Re: Myths of international investing - Fidelity

Post by 000 »

willthrill81 wrote: Sun Sep 27, 2020 7:38 pm The U.S. government has already confiscated significant financial assets. It was called executive order 6102 and required citizens to turn in their gold.
True, and a bad thing to be sure, but they received USD in exchange and, considering the USD-Gold ratio, suffered about -41%, not -100%.

How did US investors in German, Japanese, and Italian stocks or other assets fare during this historical time period?
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Re: Myths of international investing - Fidelity

Post by willthrill81 »

000 wrote: Sun Sep 27, 2020 7:46 pm
willthrill81 wrote: Sun Sep 27, 2020 7:38 pm The U.S. government has already confiscated significant financial assets. It was called executive order 6102 and required citizens to turn in their gold.
True, and a bad thing to be sure, but they received USD in exchange and, considering the USD-Gold ratio, suffered about -41%, not -100%.

How did US investors in German, Japanese, and Italian stocks or other assets fare during this historical time period?
Certainly they all did worse than U.S. investors. My point is merely that all roads have risk, though some roads certainly seem riskier than others. By my estimation, ex-U.S. stock is certainly riskier than U.S. stock. Whether it's worth the additional risk is a matter of opinion.

The idea that owning something like 20% ex-U.S. stock is some kind of protection against the U.S. performing like Japan has for the last 30 years makes no sense to me. Having 80% of one's stock holdings have negative returns for multiple decades would not be offset in a meaningful way with a mere 20% allocation to the rest of the world. In my view, if you're ex-U.S. holdings aren't at least roughly 50%, then they should probably be zero.
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Re: Myths of international investing - Fidelity

Post by 000 »

willthrill81 wrote: Sun Sep 27, 2020 8:08 pm Certainly they all did worse than U.S. investors. My point is merely that all roads have risk, though some roads certainly seem riskier than others. By my estimation, ex-U.S. stock is certainly riskier than U.S. stock. Whether it's worth the additional risk is a matter of opinion.

The idea that owning something like 20% ex-U.S. stock is some kind of protection against the U.S. performing like Japan has for the last 30 years makes no sense to me. Having 80% of one's stock holdings have negative returns for multiple decades would not be offset in a meaningful way with a mere 20% allocation to the rest of the world. In my view, if you're ex-U.S. holdings aren't at least roughly 50%, then they should probably be zero.
Do you think ex-US Developed is riskier than US outside of confiscation risk? If so, why?

I agree than 20% is on the low side, but it seems having even 20% doing well in this hypothetical situation is better than 0%, no?

Don't you think buying stock in the producers of the many goods the US imports can reduce risk by more closely matching income with expenditure?
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Re: Myths of international investing - Fidelity

Post by willthrill81 »

000 wrote: Sun Sep 27, 2020 8:16 pm
willthrill81 wrote: Sun Sep 27, 2020 8:08 pm Certainly they all did worse than U.S. investors. My point is merely that all roads have risk, though some roads certainly seem riskier than others. By my estimation, ex-U.S. stock is certainly riskier than U.S. stock. Whether it's worth the additional risk is a matter of opinion.

The idea that owning something like 20% ex-U.S. stock is some kind of protection against the U.S. performing like Japan has for the last 30 years makes no sense to me. Having 80% of one's stock holdings have negative returns for multiple decades would not be offset in a meaningful way with a mere 20% allocation to the rest of the world. In my view, if you're ex-U.S. holdings aren't at least roughly 50%, then they should probably be zero.
Do you think ex-US Developed is riskier than US outside of confiscation risk? If so, why?

I agree than 20% is on the low side, but it seems having even 20% doing well in this hypothetical situation is better than 0%, no?

Don't you think buying stock in the producers of the many goods the US imports can reduce risk by more closely matching income with expenditure?
Currency risk is a big one. Yes, most international funds hedge this risk, but that is a cost that is not compensated with additional expected return.

Country risk, while on the surface appearing to be largely eliminated by diversifying across countries, is not insignificant. Japan and China alone comprise 28% of Vanguard's international index fund. Europe is 39%; while that's a continent, it's significantly impacted by EU decisions. Even if we remove the U.K., it still means that 58% of the fund is in two nations and one international government.

I find it very ironic that while many hold ex-U.S., at least in part, to try to protect against a Japan-like scenario, ex-U.S. stock has had zero real returns for about the last 13 years. The effort was counter-productive.

20% is arguably better than zero, but it might be a lot like two people lost at sea, one of whom is 200 miles offshore and another who is 100 miles offshore. The latter is better off, but they're both most likely shark bait.

My preferred means of addressing this conundrum (at least, it is for me) is laid out in my trend following strategy that I no longer openly discuss on the forum.
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Re: Myths of international investing - Fidelity

Post by petulant »

vineviz wrote: Sun Sep 27, 2020 7:42 pm
petulant wrote: Sun Sep 27, 2020 4:52 pm With that clarified, yes, what I'm talking about is how the portfolio performs under different conditions to support household economic wellbeing.

The outcome of the literature that I am relaying is not whether domestic/international equity allocation is a powerful tool to manage overall risk, it's that currency risk in particular is not a beneficial aspect of international equity allocation and provides a basis for domestic equity bias.
The question in this thread is specifically about the domestic/international equity allocation within an investment portfolio, though, right?

I mean, the question of whether a worker's labor income is sensitive to exchange rates is an interesting topic to some economists I'm sure but it's only relevant to this discussion to the extent that it drives a decision about investing.

Is your argument that moving from a 100% domestic equity allocation to one that is globally diversified 1) significantly impacts the nature of portfolio returns; and 2) does this in a direction that reduces household utility?

If that's your argument, I'm afraid that I don't find either of those components very convincing.
You are moving the goalposts and changing the topic. This is the claim that started our exchange:
petulant wrote: Fri Sep 25, 2020 5:57 pmCurrency 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.
I am arguing that currency risk is not a beneficial impact of foreign equities and the presence of it is a reason to hold a foreign allocation at less than market weight.

This was your claim:
vineviz wrote: Fri Sep 25, 2020 6:45 pmIt’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.
I have argued that your opinion here relies on currency risk acting like a random walk and that the presence of currency risk embedded in other assets is doing too much work, i.e. it's not convincing. The upshot of my opinion is that currency risk does provide support for domestic equity bias. I have provided examples of how currency risk is not just a random walk layer on top of the portfolio; it has complex impacts on household utility in a number of ways. I have also provided citations to academic research discussing currency risk and its potential support for domestic equity bias.

If you're not convinced that currency risk impacts household utility in notable ways that could impact the strategic decision around domestic/foreign equity allocation, okay. In the meantime, you haven't said anything interesting to the effect that currency volatility is good for investors--and my original claim was that there is little evidence currency risk is compensated. Hmm.
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Re: Myths of international investing - Fidelity

Post by 000 »

willthrill81 wrote: Sun Sep 27, 2020 8:24 pm Currency risk is a big one. Yes, most international funds hedge this risk, but that is a cost that is not compensated with additional expected return.
It seems with the large amount of imported goods, being all USD has more currency risk than having some exposure to foreign currency. Also I think most international funds (at least, TMK, Vanguard funds like VEA, VWO, and VXUS) do not hedge currency.

willthrill81 wrote: Sun Sep 27, 2020 8:24 pm Country risk, while on the surface appearing to be largely eliminated by diversifying across countries, is not insignificant. Japan and China alone comprise 28% of Vanguard's international index fund. Europe is 39%; while that's a continent, it's significantly impacted by EU decisions. Even if we remove the U.K., it still means that 58% of the fund is in two nations and one international government.
I use VEA as my sole international holding. Here are its top eight countries (78.3% of the fund):

Code: Select all

Japan           22.3%
United Kingdom  12.3%
Canada           8.7%
Switzerland      8.2%
France           8.0%
Germany          7.9%
Australia        6.4%
Korea            4.5%
IMO those are some pretty big economies I don't want to miss out on.

Concerning political concentration, VEA has:

Code: Select all

EU                31.5%
UK, Can, Aus, NZ  27.8%
Japan             22.3%
Switzerland        8.2%
Korea              4.5%
Hong Kong          3.1%
Other              2.6%
While VTI has 25.2% in just ten stocks, mostly tech.

willthrill81 wrote: Sun Sep 27, 2020 8:24 pm I find it very ironic that while many hold ex-U.S., at least in part, to try to protect against a Japan-like scenario, ex-U.S. stock has had zero real returns for about the last 13 years. The effort was counter-productive.
The same "irony" has applied to <100% stock portfolios, <100% tech portfolios, and actually <100% MNST portfolios.
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Re: Myths of international investing - Fidelity

Post by petulant »

000 wrote: Sun Sep 27, 2020 8:47 pm
willthrill81 wrote: Sun Sep 27, 2020 8:24 pm Currency risk is a big one. Yes, most international funds hedge this risk, but that is a cost that is not compensated with additional expected return.
It seems with the large amount of imported goods, being all USD has more currency risk than having some exposure to foreign currency. Also I think most international funds (at least, TMK, Vanguard funds like VEA, VWO, and VXUS) do not hedge currency.
Can you estimate how much of your budget comes from imports, and specifically from countries with a material position in the VEA fund? For reference, about 15% of US GDP is composed of imports. The S&P 500 alone has a higher share of foreign revenue than what US GDP comes from imports.
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Re: Myths of international investing - Fidelity

Post by 000 »

petulant wrote: Sun Sep 27, 2020 8:49 pm Can you estimate how much of your budget comes from imports, and specifically from countries with a material position in the VEA fund? For reference, about 15% of US GDP is composed of imports. The S&P 500 alone has a higher share of foreign revenue than what US GDP comes from imports.
No, because I don't have sufficient data on the whole global supply chain.
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Re: Myths of international investing - Fidelity

Post by nedsaid »

absolute zero wrote: Sun Sep 27, 2020 7:20 pm

I still don’t get the whole anglosphere thing. Basically you’re suggesting that people try to replace their irrational bias against foreign countries with a somewhat less damaging irrational bias against non-English speaking countries?

Like “don’t smoke cigarettes, but instead smoke these e-cigarettes which are still unhealthy but better than cigarettes.” Is that sort of the idea?
You are arguing against things I never said. Please read what I actually wrote.

The idea of the Anglosphere is not xenophobia, I have said that investors should invest around the world. The idea of the Anglosphere has to do with English speaking nations whose stock markets are a very small part of World Stock Market capitalization. A US Investor could go 50% domestic/50% international stock portfolio no sweat as US is 50% or so of the World Stock Market. A Canadian wanting to invest 50% stocks in Canada and 50% outside of Canada is putting 50% of his stocks in 2-3% of the World Stock market. Furthermore, the Canadian Stock Market is concentrated in just 4 industry sectors.

The idea of the Anglosphere is also considering English speaking countries that are all very similar as part of a Domestic Allocation. For a Canadian, perhaps a Canadian/US/UK "Domestic" Allocation would put that portion of stocks into Countries with which he or she would be very familiar. Some Bogleheads are US only investors. John Bogle could make a pretty could case for home bias for a US investor but couldn't make the same home bias case for a Canadian investor. It is sort of expanding your idea of "home" or "domestic". Bogle could make a good case for a Anglosphere-only portfolio which would be about 65% of the World Stock Market as opposed to 2-3% for Canada.

Again, I have always said that I want to invest all over the world. About 25% to 30% of my stocks are International. I have recommended an International allocation for stocks of anywhere between 20% and 50%.

This has nothing to do with xenophobia or e-cigarettes vs. cigarettes.
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Re: Myths of international investing - Fidelity

Post by willthrill81 »

000 wrote: Sun Sep 27, 2020 8:53 pm
petulant wrote: Sun Sep 27, 2020 8:49 pm Can you estimate how much of your budget comes from imports, and specifically from countries with a material position in the VEA fund? For reference, about 15% of US GDP is composed of imports. The S&P 500 alone has a higher share of foreign revenue than what US GDP comes from imports.
No, because I don't have sufficient data on the whole global supply chain.
Looking at the BLS Consumer Expenditure Survey data, we can be very confident that the overwhelming majority of Americans' spending is for American products, both goods and services. Housing is overwhelming American 'made', with only a very small proportion of the costs involved in building homes being foreign made. The same largely goes for food, though there are a few large ex-U.S. food producers. Healthcare, utilities, fuels, and public services are overwhelmingly American and bump the running total up to 60%, probably at least 55% of which is American produced.

In fact, the only big categories of spending that I can think of where foreign goods and services have substantial market share is automobiles (all of which are 7% of all spending), electronics (hard to isolate but probably no more than about 5%), and clothing/shoes (3%).

Altogether, I would estimate that 85-90% of Americans' spending is for American products.

P.S.: My estimate matches with the Federal Reserve's estimate of 11% being spent on foreign products.
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Re: Myths of international investing - Fidelity

Post by 000 »

willthrill81 wrote: Sun Sep 27, 2020 9:15 pm Looking at the BLS Consumer Expenditure Survey data, we can be very confident that the overwhelming majority of Americans' spending is for American products, both goods and services. Housing is overwhelming American 'made', with only a very small proportion of the costs involved in building homes being foreign made. The same largely goes for food, though there are a few large ex-U.S. food producers. Healthcare, utilities, fuels, and public services are overwhelmingly American and bump the running total up to 60%, probably at least 55% of which is American produced.

In fact, the only big categories of spending that I can think of where foreign goods and services have substantial market share is automobiles (all of which are 7% of all spending), electronics (hard to isolate but probably no more than about 5%), and clothing/shoes (3%).

Altogether, I would estimate that 85-90% of Americans' spending is for American products.

P.S.: My estimate matches with the Federal Reserve's estimate of 11% being spent on foreign products.
I guess as long as a person is confident that US consumer spending will remain elevated, most US consumer spending will continue to be on products from US corporations, the US will continue to grow faster than the rest of the world, and the rest of the world won't factor this into stock valuations, then it's probably safe to ignore all of the 6000+ ex-US stocks.
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Re: Myths of international investing - Fidelity

Post by reln »

pkcrafter wrote: Thu Sep 24, 2020 10:39 am Myths of international investing

https://www.fidelity.com/viewpoints/inv ... ting-myths

The international allocation in Vanguard's Total World Stock Index is 39-40%. Are you comfortable with that much? Did reading this article change your view?

Paul
Yes i am comfortable with 40% ex USA and for that matter any allocation the world goes to as per etf VT.
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Re: Myths of international investing - Fidelity

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Re: Myths of international investing - Fidelity

Post by abuss368 »

willthrill81 wrote: Sun Sep 27, 2020 8:24 pm
000 wrote: Sun Sep 27, 2020 8:16 pm
willthrill81 wrote: Sun Sep 27, 2020 8:08 pm Certainly they all did worse than U.S. investors. My point is merely that all roads have risk, though some roads certainly seem riskier than others. By my estimation, ex-U.S. stock is certainly riskier than U.S. stock. Whether it's worth the additional risk is a matter of opinion.

The idea that owning something like 20% ex-U.S. stock is some kind of protection against the U.S. performing like Japan has for the last 30 years makes no sense to me. Having 80% of one's stock holdings have negative returns for multiple decades would not be offset in a meaningful way with a mere 20% allocation to the rest of the world. In my view, if you're ex-U.S. holdings aren't at least roughly 50%, then they should probably be zero.
Do you think ex-US Developed is riskier than US outside of confiscation risk? If so, why?

I agree than 20% is on the low side, but it seems having even 20% doing well in this hypothetical situation is better than 0%, no?

Don't you think buying stock in the producers of the many goods the US imports can reduce risk by more closely matching income with expenditure?
Currency risk is a big one. Yes, most international funds hedge this risk, but that is a cost that is not compensated with additional expected return.

Country risk, while on the surface appearing to be largely eliminated by diversifying across countries, is not insignificant. Japan and China alone comprise 28% of Vanguard's international index fund. Europe is 39%; while that's a continent, it's significantly impacted by EU decisions. Even if we remove the U.K., it still means that 58% of the fund is in two nations and one international government.

I find it very ironic that while many hold ex-U.S., at least in part, to try to protect against a Japan-like scenario, ex-U.S. stock has had zero real returns for about the last 13 years. The effort was counter-productive.

20% is arguably better than zero, but it might be a lot like two people lost at sea, one of whom is 200 miles offshore and another who is 100 miles offshore. The latter is better off, but they're both most likely shark bait.

My preferred means of addressing this conundrum (at least, it is for me) is laid out in my trend following strategy that I no longer openly discuss on the forum.
Excellent post. I have raised many of the same issues. There have been no real returns in international for 13 years. A large allocation to international has resulted in a large drag on portfolio performance.
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Re: Myths of international investing - Fidelity

Post by Alchemist »

willthrill81 wrote: Sun Sep 27, 2020 9:15 pm Looking at the BLS Consumer Expenditure Survey data, we can be very confident that the overwhelming majority of Americans' spending is for American products, both goods and services. Housing is overwhelming American 'made', with only a very small proportion of the costs involved in building homes being foreign made. The same largely goes for food, though there are a few large ex-U.S. food producers. Healthcare, utilities, fuels, and public services are overwhelmingly American and bump the running total up to 60%, probably at least 55% of which is American produced.

In fact, the only big categories of spending that I can think of where foreign goods and services have substantial market share is automobiles (all of which are 7% of all spending), electronics (hard to isolate but probably no more than about 5%), and clothing/shoes (3%).

Altogether, I would estimate that 85-90% of Americans' spending is for American products.

P.S.: My estimate matches with the Federal Reserve's estimate of 11% being spent on foreign products.
Now that is astounding. I already knew that non-NAFTA trade only accounted for a tiny portion of GDP, but have never seen the numbers broken down at the consumer level. Thank you for bringing this to my attention and laying out the data so succinctly (and providing the source document links!).
000 wrote: Sun Sep 27, 2020 9:58 pm I guess as long as a person is confident that US consumer spending will remain elevated, most US consumer spending will continue to be on products from US corporations, the US will continue to grow faster than the rest of the world, and the rest of the world won't factor this into stock valuations, then it's probably safe to ignore all of the 6000+ ex-US stocks.
We can remain quite confident indeed; at least in comparison to Europe, Japan, and China. All of their consumer populations (Working Age Populations or WAP) are shrinking while the United States has a growing number of consumers (WAP). More workers/consumers, more consumer spending, more economic growth, and more profits for our publicly traded corporations.
Forbes wrote:Over the next several decades, the growth rate of the U.S.’s working age population will outpace other developed economies. Right now, Japan, Europe and China are feeling the economic pinch as their societies age. However in the U.S., with the Baby Boomer generation entering retirement, the workforce has backup from two legions of young people: Millennials and Gen Z.
Link: https://www.forbes.com/sites/randybrown ... 4bb6ac5d61
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Re: Myths of international investing - Fidelity

Post by abuss368 »

BetaTracker wrote: Sun Sep 27, 2020 6:12 pm That makes sense to me ... instead of looking at international diversification as a black and white issue (none or lots), it's more a matter of deciding a proper asset allocation percentage. Do you put 15%-20% of your stock allocation to international? Maybe 30%, or possibly 40%? And what about bonds ... if it makes sense to diversify in stocks, why not bonds?
Jack Bogle did not think international investing was needed. However, he did say for those investors so inclined limit the allocation to no more than 20% of stocks. He also said international bonds were not needed.

One has to step back and look at that. At retirement if an investor is 40% stock and 60% bond, a 20% allocation of stock to international is only 8% overall. One has to decide if that is worth it. Personally I look at that as not even moving the needle.
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Re: Myths of international investing - Fidelity

Post by vineviz »

petulant wrote: Sun Sep 27, 2020 8:36 pm I am arguing that currency risk is not a beneficial impact of foreign equities and the presence of it is a reason to hold a foreign allocation at less than market weight.
You keep repeating this, yes, and I've been asking you (so far unsuccessfully) to explain HOW you think that works.

A portfolio produces a stream of returns, and asset allocation is the primary mechanism we have for shaping that stream of returns to meet our objectives. I presume we agree on this.

If we treat the investor's liabilities as completely exogenous (i.e. we assume that household labor income and consumption are completely unrelated to exchange rates), then I think we agree that the currency risk associated with the domestic/international allocation is relatively easy to evaluate. As I demonstrated earlier, in this case the currency diversification embedded in international equities is a desirable property for individual investors even with a long-run expected return of zero.

You seem more interested in a model that treats things like household labor income and consumption as partly dependent on the movement of exchange rates. I agree that this is is a more robust model, at least in theory, but it doesn't automatically lead to the conclusion that investors should "hold a foreign allocation at less than market weight."

For instance, if labor income is less correlated with international stock returns than with US stock returns (a very reasonable possibility for the typical US employee of a US-based company) then the prediction could be that a US investor should own MORE than market weight in foreign stocks.

On the other hand, if household consumption is less correlated with international stock returns than with US stock returns (a very reasonable possibility for the typical US household) then the prediction could be that a US investor should own LESS than market weight in foreign stocks.

In EITHER example, the pure portfolio benefits of currency diversification could be strong enough that they would push the optimal allocation in the opposite direction.

My current view: a statement that "currency risk is uncompensated" is definitely untrue and possibly misleading. Untrue because there is a compensation in terms of pure portfolio diversification benefits, and "possibly misleading" because I think it improperly implies that currency risk is an obvious reason to reduce international equity allocations below market weights.
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Re: Myths of international investing - Fidelity

Post by petulant »

vineviz wrote: Mon Sep 28, 2020 8:19 am
petulant wrote: Sun Sep 27, 2020 8:36 pm I am arguing that currency risk is not a beneficial impact of foreign equities and the presence of it is a reason to hold a foreign allocation at less than market weight.
You keep repeating this, yes, and I've been asking you (so far unsuccessfully) to explain HOW you think that works.

A portfolio produces a stream of returns, and asset allocation is the primary mechanism we have for shaping that stream of returns to meet our objectives. I presume we agree on this.

If we treat the investor's liabilities as completely exogenous (i.e. we assume that household labor income and consumption are completely unrelated to exchange rates), then I think we agree that the currency risk associated with the domestic/international allocation is relatively easy to evaluate. As I demonstrated earlier, in this case the currency diversification embedded in international equities is a desirable property for individual investors even with a long-run expected return of zero.

You seem more interested in a model that treats things like household labor income and consumption as partly dependent on the movement of exchange rates. I agree that this is is a more robust model, at least in theory, but it doesn't automatically lead to the conclusion that investors should "hold a foreign allocation at less than market weight."

For instance, if labor income is less correlated with international stock returns than with US stock returns (a very reasonable possibility for the typical US employee of a US-based company) then the prediction could be that a US investor should own MORE than market weight in foreign stocks.

On the other hand, if household consumption is less correlated with international stock returns than with US stock returns (a very reasonable possibility for the typical US household) then the prediction could be that a US investor should own LESS than market weight in foreign stocks.

In EITHER example, the pure portfolio benefits of currency diversification could be strong enough that they would push the optimal allocation in the opposite direction.

My current view: a statement that "currency risk is uncompensated" is definitely untrue and possibly misleading. Untrue because there is a compensation in terms of pure portfolio diversification benefits, and "possibly misleading" because I think it improperly implies that currency risk is an obvious reason to reduce international equity allocations below market weights.
You're right that currency risk and volatility doesn't automatically reduce household utility. The economics literature has identified a couple pathways where household utility correlations with currency movements actually indicate foreign equity bias. As I have said, the literature has not reached a consensus.

As for whether currency risk is compensated, you haven't provided any evidence that currency risk is compensated. But thanks for being clear enough.
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Re: Myths of international investing - Fidelity

Post by abuss368 »

I think the Fidelity article was one sided. The article attempted to show the advantage of including international stocks in a portfolio including capturing the returns of various stocks markets that outperform the US. However, the article failed to also mention that not investing in international also avoids the stock markets that underperform the US.

I have been asking and thinking the exact point for a long time. Something just does not seem on about the international index.
* Is it too massive?
* Too many companies?
* Too much diversification (otherwise known as di-worse-ification)?
* Too much currency risk?
* Diluted and not enough meaningful impact?
* ADRs?
* Shell Chinese companies in Caymans?
* No voting rights?
* No shareholder rights?
* Different laws?
* Limited or no investor protections?
* Foreign taxes?

I see more questions and negatives than positives!

Every time I have considered international investing with stocks and bonds, I pause and have more questions than answers. If there was a history of performance above US for the risks, and a pattern, I would be in line to invest. Where is it? A 40 years graph showing some international companies outperforming US and the rest underperforming US? Really? The Japan argument? What other countries suffered the Japan issue? And if the US suffers a Japan like underperformance, having 20% of stocks in international is not going to mean anything!

For me it has become very simple. I am relying more on investment experts who say it is not needed or perhaps will not make any difference than an internet post telling me why I need it, what I am missing on, what opinion or point I am missing, etc. For example, a retire has an allocation of 40% stock and 60% bond with 20% of stock to international. That is 8% of the portfolio. So at $1,000,000 we are talking $80,000 when $920,000 is US. Really? Really? Really?

There is HORRIBLE performance! Not even close!

How many investors have planned on retirement, retired, or had to delay retirement because of this international wildcard?

There is one MASSIVE inconsistency in all the arguments, opinions, and points made by global investors that I have noticed. International stocks are needed, but international bonds (i.e. that is the asset class that is the worlds BIGGEST) are not needed! Is that cherry picking assets classes and data? If one is a global investor than is should be pure and include both US and International stocks and bonds!

*** I don't want the same performance or close enough performance to the US! For the additional risk, I want additional risk premium and additional return ***.

That one seems to be lost in the endless international debates.

Two of the best investors of all time on the PLANET in Jack Bogle and Warren Buffett, who know more about investing than any of us on a forum can, have said international is not needed!

Honestly, I'll invest in REITs, Healthcare, or a Technology fund for a speculative position before International! Why not? "Bogle on Mutual Funds" has example portfolios with a 15% allocation to a sector/specialty fund! At least those funds have made a lot of moolah over the decades!

There is simply too much uncertainty!
Last edited by abuss368 on Mon Sep 28, 2020 12:47 pm, edited 1 time in total.
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Re: Myths of international investing - Fidelity

Post by aj76er »

whereskyle wrote: Sun Sep 27, 2020 7:17 am 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.
+1

I essentially use 67% VT + 33% VTI

But I implement in terms of VXUS + VTI for the reduced cost, better tax benefits, and slightly higher diversification.
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Re: Myths of international investing - Fidelity

Post by Steve Reading »

abuss368 wrote: Mon Sep 28, 2020 11:43 am There is one MASSIVE inconsistency in all the arguments, opinions, and points made by global investors that I have noticed. International stocks are needed, but international bonds (i.e. that is the asset class that is the worlds BIGGEST) are not needed!
Lmao yes, checkmate International lovers :twisted:
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Re: Myths of international investing - Fidelity

Post by whereskyle »

Steve Reading wrote: Mon Sep 28, 2020 12:37 pm
abuss368 wrote: Mon Sep 28, 2020 11:43 am There is one MASSIVE inconsistency in all the arguments, opinions, and points made by global investors that I have noticed. International stocks are needed, but international bonds (i.e. that is the asset class that is the worlds BIGGEST) are not needed!
Lmao yes, checkmate International lovers :twisted:
At least international lovers who invest in bonds...
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Re: Myths of international investing - Fidelity

Post by asif408 »

abuss368 wrote: Mon Sep 28, 2020 11:43 am Honestly, I'll invest in REITs, Healthcare, or a Technology fund for a speculative position before International! Why not? "Bogle on Mutual Funds" has example portfolios with a 15% allocation to a sector/specialty fund! At least those funds have made a lot of moolah over the decades!
As long as its not a foreign REIT, healthcare, or Tech fund that is ok. Anything else is sacrilege.

Praise St. Jack and St. Warren! USA!! USA!!
abuss368 wrote: Mon Sep 28, 2020 11:43 am There is simply too much uncertainty!
Agreed. We all know the best forward looking returns tend to be found where there is the least amount of uncertainty.
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Re: Myths of international investing - Fidelity

Post by lostdog »

abuss368 wrote: Mon Sep 28, 2020 11:43 am I think the Fidelity article was one sided. The article attempted to show the advantage of including international stocks in a portfolio including capturing the returns of various stocks markets that outperform the US. However, the article failed to also mention that not investing in international also avoids the stock markets that underperform the US.

I have been asking and thinking the exact point for a long time. Something just does not seem on about the international index.
* Is it too massive?
* Too many companies?
* Too much diversification (otherwise known as di-worse-ification)?
* Too much currency risk?
* Diluted and not enough meaningful impact?
* ADRs?
* Shell Chinese companies in Caymans?
* No voting rights?
* No shareholder rights?
* Different laws?
* Limited or no investor protections?
* Foreign taxes?

I see more questions and negatives than positives!

Every time I have considered international investing with stocks and bonds, I pause and have more questions than answers. If there was a history of performance above US for the risks, and a pattern, I would be in line to invest. Where is it? A 40 years graph showing some international companies outperforming US and the rest underperforming US? Really? The Japan argument? What other countries suffered the Japan issue? And if the US suffers a Japan like underperformance, having 20% of stocks in international is not going to mean anything!

For me it has become very simple. I am relying more on investment experts who say it is not needed or perhaps will not make any difference than an internet post telling me why I need it, what I am missing on, what opinion or point I am missing, etc. For example, a retire has an allocation of 40% stock and 60% bond with 20% of stock to international. That is 8% of the portfolio. So at $1,000,000 we are talking $80,000 when $920,000 is US. Really? Really? Really?

There is HORRIBLE performance! Not even close!

How many investors have planned on retirement, retired, or had to delay retirement because of this international wildcard?

There is one MASSIVE inconsistency in all the arguments, opinions, and points made by global investors that I have noticed. International stocks are needed, but international bonds (i.e. that is the asset class that is the worlds BIGGEST) are not needed! Is that cherry picking assets classes and data? If one is a global investor than is should be pure and include both US and International stocks and bonds!

*** I don't want the same performance or close enough performance to the US! For the additional risk, I want additional risk premium and additional return ***.

That one seems to be lost in the endless international debates.

Two of the best investors of all time on the PLANET in Jack Bogle and Warren Buffett, who know more about investing than any of us on a forum can, have said international is not needed!

Honestly, I'll invest in REITs, Healthcare, or a Technology fund for a speculative position before International! Why not? "Bogle on Mutual Funds" has example portfolios with a 15% allocation to a sector/specialty fund! At least those funds have made a lot of moolah over the decades!

There is simply too much uncertainty!
I thought total index investing was buying the haystack? Not based on emotions and the over the top Jack and Warren worshipping.
VTI+VXUS. Global Market Weight.
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Re: Myths of international investing - Fidelity

Post by lostdog »

asif408 wrote: Mon Sep 28, 2020 1:36 pm
abuss368 wrote: Mon Sep 28, 2020 11:43 am Honestly, I'll invest in REITs, Healthcare, or a Technology fund for a speculative position before International! Why not? "Bogle on Mutual Funds" has example portfolios with a 15% allocation to a sector/specialty fund! At least those funds have made a lot of moolah over the decades!
As long as its not a foreign REIT, healthcare, or Tech fund that is ok. Anything else is sacrilege.

Praise St. Jack and St. Warren! USA!! USA!!
abuss368 wrote: Mon Sep 28, 2020 11:43 am There is simply too much uncertainty!
Agreed. We all know the best forward looking returns tend to be found where there is the least amount of uncertainty.
+1
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Re: Myths of international investing - Fidelity

Post by abuss368 »

lostdog wrote: Mon Sep 28, 2020 3:24 pm
abuss368 wrote: Mon Sep 28, 2020 11:43 am I think the Fidelity article was one sided. The article attempted to show the advantage of including international stocks in a portfolio including capturing the returns of various stocks markets that outperform the US. However, the article failed to also mention that not investing in international also avoids the stock markets that underperform the US.

I have been asking and thinking the exact point for a long time. Something just does not seem on about the international index.
* Is it too massive?
* Too many companies?
* Too much diversification (otherwise known as di-worse-ification)?
* Too much currency risk?
* Diluted and not enough meaningful impact?
* ADRs?
* Shell Chinese companies in Caymans?
* No voting rights?
* No shareholder rights?
* Different laws?
* Limited or no investor protections?
* Foreign taxes?

I see more questions and negatives than positives!

Every time I have considered international investing with stocks and bonds, I pause and have more questions than answers. If there was a history of performance above US for the risks, and a pattern, I would be in line to invest. Where is it? A 40 years graph showing some international companies outperforming US and the rest underperforming US? Really? The Japan argument? What other countries suffered the Japan issue? And if the US suffers a Japan like underperformance, having 20% of stocks in international is not going to mean anything!

For me it has become very simple. I am relying more on investment experts who say it is not needed or perhaps will not make any difference than an internet post telling me why I need it, what I am missing on, what opinion or point I am missing, etc. For example, a retire has an allocation of 40% stock and 60% bond with 20% of stock to international. That is 8% of the portfolio. So at $1,000,000 we are talking $80,000 when $920,000 is US. Really? Really? Really?

There is HORRIBLE performance! Not even close!

How many investors have planned on retirement, retired, or had to delay retirement because of this international wildcard?

There is one MASSIVE inconsistency in all the arguments, opinions, and points made by global investors that I have noticed. International stocks are needed, but international bonds (i.e. that is the asset class that is the worlds BIGGEST) are not needed! Is that cherry picking assets classes and data? If one is a global investor than is should be pure and include both US and International stocks and bonds!

*** I don't want the same performance or close enough performance to the US! For the additional risk, I want additional risk premium and additional return ***.

That one seems to be lost in the endless international debates.

Two of the best investors of all time on the PLANET in Jack Bogle and Warren Buffett, who know more about investing than any of us on a forum can, have said international is not needed!

Honestly, I'll invest in REITs, Healthcare, or a Technology fund for a speculative position before International! Why not? "Bogle on Mutual Funds" has example portfolios with a 15% allocation to a sector/specialty fund! At least those funds have made a lot of moolah over the decades!

There is simply too much uncertainty!
I thought total index investing was buying the haystack? Not based on emotions and the over the top Jack and Warren worshipping.
I agree with you that Jack Bogle and Warren Buffett know more about investing than any of us and to own the haystack with Total Stock! :beer
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Re: Myths of international investing - Fidelity

Post by galawdawg »

lostdog wrote: Thu May 26, 2016 10:27 am My Jack Bogle portfolio is Vanguard Total Stock Market Admiral and Vanguard Intermediate-Term Bond Index Fund. Very simple. Re-balance once a year with a 5% band in my retirement accounts. I am not interested in International investing as it most likely won't make a difference anyway ("When experts disagree, it is often because it does not make a foreseeable difference." -- Taylor Larimore, author of The Bogleheads' Guide to Investing).

In my taxable I have the Vanguard Balanced Index Fund Admiral. I have a different goal for my taxable account and it is not part of my retirement AA. I call my taxable account the semi-retirement goal. I am in a low tax bracket, the fund doesn't create capital gains distributions, it's always at a 60/40 AA with no capital gains for rebalancing and I don't care about the long term capital gains when selling small portions of the fund.

viewtopic.php?p=2918959#p2918959
+1
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Re: Myths of international investing - Fidelity

Post by lostdog »

galawdawg wrote: Mon Sep 28, 2020 3:44 pm
lostdog wrote: Thu May 26, 2016 10:27 am My Jack Bogle portfolio is Vanguard Total Stock Market Admiral and Vanguard Intermediate-Term Bond Index Fund. Very simple. Re-balance once a year with a 5% band in my retirement accounts. I am not interested in International investing as it most likely won't make a difference anyway ("When experts disagree, it is often because it does not make a foreseeable difference." -- Taylor Larimore, author of The Bogleheads' Guide to Investing).

In my taxable I have the Vanguard Balanced Index Fund Admiral. I have a different goal for my taxable account and it is not part of my retirement AA. I call my taxable account the semi-retirement goal. I am in a low tax bracket, the fund doesn't create capital gains distributions, it's always at a 60/40 AA with no capital gains for rebalancing and I don't care about the long term capital gains when selling small portions of the fund.

viewtopic.php?p=2918959#p2918959
+1
This was posted many times in the past. This was before I finally figured it out. Almost every investor makes mistakes when they're learning. Young investors need to see this. Thanks for posting.

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Re: Myths of international investing - Fidelity

Post by vineviz »

abuss368 wrote: Mon Sep 28, 2020 3:26 pm

I agree with you that Jack Bogle and Warren Buffett know more about investing than any of us and to own the haystack with Total Stock! :beer
I think you misinterpreted the comment to which you replied.

Anyone who simply takes a stance of agreeing with Boyle and Buffet funds themselves in a pickle, since both men frequently contradicted themselves.

Sometimes even the biggest Bogle fan will reach a point of having to think for themselves.
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