Does "international" offer any diversification?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
stocksurfer
Posts: 42
Joined: Tue Oct 09, 2018 11:30 pm

Does "international" offer any diversification?

Post by stocksurfer »

I'm trying to bring some sanity into my non-US holdings and I'm scratching my head. Most of the funds I look at, whether x-US, developed countries, or EM are dominated by multinationals. E.g. Nestle, LVHM, Taiwan Semiconductor, Samsung, Alibaba, Tencen, and the list goes on. How do these companies offer any diversification from the closely related US multinationals that dominate the US market funds? Don't they sell into the same markets, draw from the same suppliers, are affected by the same global business cycles, etc?

I looked a few charts on portfolio visualizer. For example, VEA has 0.9 correlation with the US Market. EEM goes down to 0.8. So yes, slightly different sector weights, slightly different local factors, and currency effects, but overall everything pretty much marches in lock-step as far as I can see. Am I just not looking right?

I guess I was somehow hoping that some countries would have business cycles that are decoupled from the US and that I could buy into that, but I suppose this is the 21st century and I'm antiquated? :shock:

Two funds that seemed interesting are DGS and EWX (both EM small cap): looking at the top holdings shows very few companies I recognize, the top holding accounts for just around 1% of the fund. However.... both have ~30% invested in Taiwan and the top 3 countries account for 50-60% of holdings. (And I won't mention ER.) VSS (x-US small cap) does a better job at diversifying across countries IMHO, but according to PV it showed 0.86 US market correlation over the past decade.

Am I missing something? :?:
Grt2bOutdoors
Posts: 24477
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Does "international" offer any diversification?

Post by Grt2bOutdoors »

Country risk is a very real thing. There are risk managers who focus all of their energy on a country's risk. You highlighted one specific country and with it being front and center in international arena I'd say that would be a very real risk. Does it offer any diversification? I'd say yes, but we aren't going to see it until something catastrophic occurs.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
User avatar
willthrill81
Posts: 28483
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Does "international" offer any diversification?

Post by willthrill81 »

Using data from 1970-2020, I analyzed the 30 year safe withdrawal rates for two portfolios: one with only U.S. stocks and one that also included ex-U.S. stocks. The 30 year SWR for the U.S.-only portfolio was 4.4%, while it was 4.6% for the 'global' stocks portfolio.

So using that metric over that period of time, international stocks provided a small diversification benefit in the form of less downside risk.

While I'm not trying to discount that, if you're really looking for truly meaningful diversification, you need to look far beyond just diversifying across countries. Where the historic benefit has really come from is diversifying across factors, particularly size and value (i.e., small-cap value or SCV). And this extends beyond just stocks too. You should take a look at this active thread, where combining several 'controversial' assets would have resulted in remarkably good performance.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
User avatar
imak
Posts: 158
Joined: Fri Mar 22, 2019 5:18 pm
Location: Austin, TX

Re: Does "international" offer any diversification?

Post by imak »

Correlation of indices is not the only measure for International diversification. The primary goal is exposure to underlying economies over long horizons (decades+) and ignore the short term correlation spikes during crashes.

Reference:
https://www.aqr.com/Insights/Research/J ... Eventually
"Take a simple idea and take it seriously" ~ Charlie Munger
Topic Author
stocksurfer
Posts: 42
Joined: Tue Oct 09, 2018 11:30 pm

Re: Does "international" offer any diversification?

Post by stocksurfer »

willthrill81 wrote: Fri Jan 07, 2022 11:21 pm The 30 year SWR for the U.S.-only portfolio was 4.4%, while it was 4.6% for the 'global' stocks portfolio.
Yeah, that's not a whole lot of help, is it. Especially when you factor in that globalization in many of those years sure was not the same it's now...
I am diversifying elsewhere, I'm just looking at my Int'l holding and am wondering "why?". Over the past 30 years I believe they've just been a drag on the portfolio and it seems that EM is perennially undervalued and just about to go on a tear... Not holding int'l feels wrong to me, holding it seems dumb. Sigh.
User avatar
Beensabu
Posts: 1599
Joined: Sun Aug 14, 2016 3:22 pm

Re: Does "international" offer any diversification?

Post by Beensabu »

stocksurfer wrote: Fri Jan 07, 2022 11:11 pm Am I missing something? :?:
You're not missing much of anything. You're just minimizing the diversification benefits: geography, sector/industry, currency. If they really matter that little to you, then that's how it is for you. Also, some people prefer to see at least two of those benefits as "risks" or otherwise disadvantageous. Pricing in aggregate outside the US stock market also seems more driven by dividend yield and earnings growth than by change in valuation, but that may or may not be "diversification" in your book.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
000
Posts: 6591
Joined: Thu Jul 23, 2020 12:04 am

Re: Does "international" offer any diversification?

Post by 000 »

Given that US stocks outperformed international by so much recently, couldn't it go the other way?
What goes up must come down 😎
Grt2bOutdoors
Posts: 24477
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Does "international" offer any diversification?

Post by Grt2bOutdoors »

000 wrote: Fri Jan 07, 2022 11:35 pm Given that US stocks outperformed international by so much recently, couldn't it go the other way?
Do you see growth in international markets exceeding that of the US? Where? They have similar demographic issues in international, maybe even worse. Governance is a big problem for investors. Investing means taking risk, investing in many different areas of the globe means you are simply spreading your bets.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
000
Posts: 6591
Joined: Thu Jul 23, 2020 12:04 am

Re: Does "international" offer any diversification?

Post by 000 »

Grt2bOutdoors wrote: Fri Jan 07, 2022 11:43 pm Do you see growth in international markets exceeding that of the US? Where? They have similar demographic issues in international, maybe even worse. Governance is a big problem for investors. Investing means taking risk, investing in many different areas of the globe means you are simply spreading your bets.
Stock performance is a derivative of outcomes relative to expectations. Why shouldn't those things be priced in?

Governance is a big problem; some would argue the US regulatory system allows more executive shenanigans than other developed markets.
What goes up must come down 😎
User avatar
willthrill81
Posts: 28483
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Does "international" offer any diversification?

Post by willthrill81 »

stocksurfer wrote: Fri Jan 07, 2022 11:32 pm
willthrill81 wrote: Fri Jan 07, 2022 11:21 pm The 30 year SWR for the U.S.-only portfolio was 4.4%, while it was 4.6% for the 'global' stocks portfolio.
Yeah, that's not a whole lot of help, is it. Especially when you factor in that globalization in many of those years sure was not the same it's now...
I am diversifying elsewhere, I'm just looking at my Int'l holding and am wondering "why?". Over the past 30 years I believe they've just been a drag on the portfolio and it seems that EM is perennially undervalued and just about to go on a tear... Not holding int'l feels wrong to me, holding it seems dumb. Sigh.
International SCV has done considerably better than ex-U.S. LCs over the past 30 years, and it hasn't been as correlated with U.S. stock performance as ex-U.S. LCs either, which is a good thing. AVDV is a good fund for that asset class if you're interested in it.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
User avatar
willthrill81
Posts: 28483
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Does "international" offer any diversification?

Post by willthrill81 »

000 wrote: Fri Jan 07, 2022 11:51 pm
Grt2bOutdoors wrote: Fri Jan 07, 2022 11:43 pm Do you see growth in international markets exceeding that of the US? Where? They have similar demographic issues in international, maybe even worse. Governance is a big problem for investors. Investing means taking risk, investing in many different areas of the globe means you are simply spreading your bets.
Stock performance is a derivative of outcomes relative to expectations. Why shouldn't those things be priced in?
Why would you assume the global market to be that efficient at the macro level? There's arguably a big difference between micro and macro efficiency.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
RadAudit
Posts: 4155
Joined: Mon May 26, 2008 10:20 am
Location: Second star on the right and straight on 'til morning

Re: Does "international" offer any diversification?

Post by RadAudit »

000 wrote: Fri Jan 07, 2022 11:35 pm Given that US stocks outperformed international by so much recently, couldn't it go the other way?
Probably. The switch in direction may not come as soon as some might hope. It may have something to do with the concentration of some tech stocks in US stocks vs not in internationals, and rising inflation/interest rates
Last edited by RadAudit on Sat Jan 08, 2022 8:28 am, edited 2 times in total.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
Topic Author
stocksurfer
Posts: 42
Joined: Tue Oct 09, 2018 11:30 pm

Re: Does "international" offer any diversification?

Post by stocksurfer »

willthrill81 wrote: Fri Jan 07, 2022 11:54 pm
stocksurfer wrote: Fri Jan 07, 2022 11:32 pm
willthrill81 wrote: Fri Jan 07, 2022 11:21 pm The 30 year SWR for the U.S.-only portfolio was 4.4%, while it was 4.6% for the 'global' stocks portfolio.
Yeah, that's not a whole lot of help, is it. Especially when you factor in that globalization in many of those years sure was not the same it's now...
I am diversifying elsewhere, I'm just looking at my Int'l holding and am wondering "why?". Over the past 30 years I believe they've just been a drag on the portfolio and it seems that EM is perennially undervalued and just about to go on a tear... Not holding int'l feels wrong to me, holding it seems dumb. Sigh.
International SCV has done considerably better than ex-U.S. LCs over the past 30 years, and it hasn't been as correlated with U.S. stock performance as ex-U.S. LCs either, which is a good thing. AVDV is a good fund for that asset class if you're interested in it.
Here's a quick comparison of US TSM with some non-US asset classes on PV:
Image

There's the 2003-2008 period where all the non-US classes in the chart did better than US TSM. But outside of that? And overall, to my eye everything moves pretty much in lock-step.
User avatar
sf_tech_saver
Posts: 370
Joined: Sat Sep 08, 2018 9:03 pm

Re: Does "international" offer any diversification?

Post by sf_tech_saver »

I like adding some 'VT' because it's a bet on being total world neutral on 'factors' vs. whatever the US sample at the time is (currently pretty heavy on large tech growth stocks).

Today (Jan 7) was actually a good example of day when the total world VT index beat VTI/VOO because 'growth' stocks had a hard day.

I waited until my portfolio already had several million in VTI before I started blending in a small amount of VT though. I see it as a 'nice to have' at some scale of savings vs. a must at the start.

Warren Buffet wisely says all of this back and forth about VTI and VT is all just wasted energy and unless you are a pro to just buy VOO. :) He's probably right....

2-cents!
VTI is a modern marvel
000
Posts: 6591
Joined: Thu Jul 23, 2020 12:04 am

Re: Does "international" offer any diversification?

Post by 000 »

willthrill81 wrote: Fri Jan 07, 2022 11:56 pm Why would you assume the global market to be that efficient at the macro level? There's arguably a big difference between micro and macro efficiency.
I don't assume that. I asked why it shouldn't be priced in. In other words I think my default position is things are priced in and the burden of argument is on those claiming otherwise.

Differing valuations suggest the differences are priced in though, at least to the current consensus view.
What goes up must come down 😎
VTI
Posts: 153
Joined: Sun Mar 14, 2021 12:56 am

Re: Does "international" offer any diversification?

Post by VTI »

000 wrote: Sat Jan 08, 2022 1:43 am
willthrill81 wrote: Fri Jan 07, 2022 11:56 pm Why would you assume the global market to be that efficient at the macro level? There's arguably a big difference between micro and macro efficiency.
I don't assume that. I asked why it shouldn't be priced in. In other words I think my default position is things are priced in and the burden of argument is on those claiming otherwise.

Differing valuations suggest the differences are priced in though, at least to the current consensus view.
I could be mistaken, but I think it’s (mathematically) impossible for different rates of growth to be accurately priced in for two investors with different time horizons.

Thought exercise:

I have two savings accounts, both contain $10,000: One of the savings accounts has a permanent annual yield of 5%, and the other has a permanent annual yield of 10%. I am allowed to sell these accounts on the open market.

For investors with longer time horizons, the 10% account is dramatically more valuable than the 5% account. For investors with shorter time horizons, both savings accounts are similarly valuable.
Also available as an Admiral™ Shares mutual fund.
User avatar
zonto
Posts: 258
Joined: Tue Aug 24, 2010 3:45 pm
Location: Boston, MA

Re: Does "international" offer any diversification?

Post by zonto »

I’ve bookmarked these posts on the topic of international diversification in retirement:
"For real-world portfolios, the main impact of diversification is to narrow the dispersion of outcomes. [T]he most important impact is to make the worst outcomes less bad." (Vineviz)
User avatar
willthrill81
Posts: 28483
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Does "international" offer any diversification?

Post by willthrill81 »

stocksurfer wrote: Sat Jan 08, 2022 12:09 am
willthrill81 wrote: Fri Jan 07, 2022 11:54 pm
stocksurfer wrote: Fri Jan 07, 2022 11:32 pm
willthrill81 wrote: Fri Jan 07, 2022 11:21 pm The 30 year SWR for the U.S.-only portfolio was 4.4%, while it was 4.6% for the 'global' stocks portfolio.
Yeah, that's not a whole lot of help, is it. Especially when you factor in that globalization in many of those years sure was not the same it's now...
I am diversifying elsewhere, I'm just looking at my Int'l holding and am wondering "why?". Over the past 30 years I believe they've just been a drag on the portfolio and it seems that EM is perennially undervalued and just about to go on a tear... Not holding int'l feels wrong to me, holding it seems dumb. Sigh.
International SCV has done considerably better than ex-U.S. LCs over the past 30 years, and it hasn't been as correlated with U.S. stock performance as ex-U.S. LCs either, which is a good thing. AVDV is a good fund for that asset class if you're interested in it.
Here's a quick comparison of US TSM with some non-US asset classes on PV:
Image

There's the 2003-2008 period where all the non-US classes in the chart did better than US TSM. But outside of that? And overall, to my eye everything moves pretty much in lock-step.
I said that ex-U.S. SCV did better than ex-U.S. TSM, which it clearly did. I never said that it did better than U.S. TSM.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
User avatar
willthrill81
Posts: 28483
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Does "international" offer any diversification?

Post by willthrill81 »

000 wrote: Sat Jan 08, 2022 1:43 am
willthrill81 wrote: Fri Jan 07, 2022 11:56 pm Why would you assume the global market to be that efficient at the macro level? There's arguably a big difference between micro and macro efficiency.
I don't assume that. I asked why it shouldn't be priced in. In other words I think my default position is things are priced in and the burden of argument is on those claiming otherwise.

Differing valuations suggest the differences are priced in though, at least to the current consensus view.
While I don't put as much value in 'consensus views' for various reasons, I agree that the market is at least 'mostly' efficient at the micro level. But at the macro level, particularly across international borders, I'm not so sure. Home country bias is generally even stronger among ex-U.S. investors than it is with U.S. investors, and those investors continuing to buy primarily their own nations' stocks may be propping up the prices of those stocks more so than if that home country bias didn't exist.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
User avatar
nisiprius
Advisory Board
Posts: 45643
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Does "international" offer any diversification?

Post by nisiprius »

Of course it must offer some diversification, by some definition of diversification.

The problem is always with two assumptions:

a) Anything that is "diversification" must be an improvement, even if visible effects aren't detectable above the noise amid the vagaries of endpoint choices in backtesting.

b) Anything that is an improvement must be important.

To put it another way, which of these basic principles do you believe?

1) "Diversification is the only free lunch."*

2) "There ain't no such thing as a free lunch."**





*Often attributed to economist Harry Markowitz but I don't know if there's a solid citation

**Origin unknown, in use by the 1930s, popularized by science-fiction writer Robert A. Heinlein and later by economist Milton Friedman.
Last edited by nisiprius on Sat Jan 08, 2022 11:59 am, edited 1 time in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
runner540
Posts: 1489
Joined: Sun Feb 26, 2017 5:43 pm

Re: Does "international" offer any diversification?

Post by runner540 »

stocksurfer wrote: Fri Jan 07, 2022 11:11 pm I'm trying to bring some sanity into my non-US holdings and I'm scratching my head. Most of the funds I look at, whether x-US, developed countries, or EM are dominated by multinationals. E.g. Nestle, LVHM, Taiwan Semiconductor, Samsung, Alibaba, Tencen, and the list goes on. How do these companies offer any diversification from the closely related US multinationals that dominate the US market funds? Don't they sell into the same markets, draw from the same suppliers, are affected by the same global business cycles, etc?

I looked a few charts on portfolio visualizer. For example, VEA has 0.9 correlation with the US Market. EEM goes down to 0.8. So yes, slightly different sector weights, slightly different local factors, and currency effects, but overall everything pretty much marches in lock-step as far as I can see. Am I just not looking right?

I guess I was somehow hoping that some countries would have business cycles that are decoupled from the US and that I could buy into that, but I suppose this is the 21st century and I'm antiquated? :shock:

Two funds that seemed interesting are DGS and EWX (both EM small cap): looking at the top holdings shows very few companies I recognize, the top holding accounts for just around 1% of the fund. However.... both have ~30% invested in Taiwan and the top 3 countries account for 50-60% of holdings. (And I won't mention ER.) VSS (x-US small cap) does a better job at diversifying across countries IMHO, but according to PV it showed 0.86 US market correlation over the past decade.

Am I missing something? :?:
stocksurfer, good questions. You should consider diversification beyond financial assets: if you live in the US and are a US citizen, your human capital and real estate are already concentrated in the US. My time horizon is long, and over half a century things can turn dramatically even in the US.
etfan
Posts: 472
Joined: Sun May 16, 2021 4:22 pm

Re: Does "international" offer any diversification?

Post by etfan »

Why would anyone intentionally exclude Samsung, Nestle, Alibaba, etc. from their portfolio?

Are we sure those companies could never outperform their American competitors?
TDF/VBTLX | VTI/VXUS/I Bonds
User avatar
Doc
Posts: 10217
Joined: Sat Feb 24, 2007 1:10 pm
Location: Two left turns from Larry

Re: Does "international" offer any diversification?

Post by Doc »

stocksurfer wrote: Fri Jan 07, 2022 11:11 pm I'm trying to bring some sanity into my non-US holdings and I'm scratching my head. Most of the funds I look at, whether x-US, developed countries, or EM are dominated by multinationals.
Right. So when you buy a non-US fund what you are mostly getting is currency differences which many funds hedge away anyway. So you get little benefit.

One way to avoid this problem and one that I use is to limit my foreign holdings to small cap funds which are less likely to have multi-national in their portfolio.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
Topic Author
stocksurfer
Posts: 42
Joined: Tue Oct 09, 2018 11:30 pm

Re: Does "international" offer any diversification?

Post by stocksurfer »

nisiprius wrote: Sat Jan 08, 2022 10:56 am Of course it must offer some diversification, by some definition of diversification.
Yup. Perhaps I should have titled this thread "how do you get the most diversification out of international?" After initially looking at total market type of funds I went poking around to see whether I could find anything that doesn't just move in lock-step with the same equity asset class in the US. That's where I came up disappointed. Small-cap or SCV, as willthrill mentions, seems to be the most independent, which I rationalize by thinking that small companies probably tend to have a more local focus. I suspect that one thing that reduces independent movement is that many investors everywhere have a sizable fraction of their assets in global stocks and thus when there's a global crisis everyone has similar panic reactions causing the reactions to spread everywhere.

So maybe, as others have mentioned, int'l may be a useful diversifier against decade long slumps, but not much against crashes.
Doc wrote: Sat Jan 08, 2022 11:33 am
stocksurfer wrote: Fri Jan 07, 2022 11:11 pm I'm trying to bring some sanity into my non-US holdings and I'm scratching my head. Most of the funds I look at, whether x-US, developed countries, or EM are dominated by multinationals.
One way to avoid this problem and one that I use is to limit my foreign holdings to small cap funds which are less likely to have multi-national in their portfolio.
That's what I'm leaning towards as well.
drk
Posts: 2883
Joined: Mon Jul 24, 2017 10:33 pm
Location: Overlooking Elliott Bay

Re: Does "international" offer any diversification?

Post by drk »

stocksurfer wrote: Fri Jan 07, 2022 11:11 pm E.g. Nestle, LVHM, Taiwan Semiconductor, Samsung, Alibaba, Tencen, and the list goes on. How do these companies offer any diversification from the closely related US multinationals that dominate the US market funds? Don't they sell into the same markets, draw from the same suppliers, are affected by the same global business cycles, etc?
One could reasonably argue that LVMH, TSMC, half of Samsung, and Tencent have no US competitors. Ditto ASML. Unfortunately, those ex-US world-beaters only represent about 5% of Vanguard Total International.
User avatar
goldenteeth
Posts: 31
Joined: Tue Jul 06, 2021 7:47 pm
Location: New England USA

International Diversification -- why why???

Post by goldenteeth »

[Thread merged into here --admin LadyGeek]

Could people please give their opinion on why International Diversification is needed?

If I compare the Annual Returns for each individual year since 2008 between Vanguard Total Stock Market ETF (VTI) and Vanguard FTSE All-World ex-US ETF (VEU), they very closely correlate... meaning almost in every instance that one was down, the other was down, and when one was up, the other was up. Also, in every instance since 2008 except for maybe 2 years, VTI has trounced VEU in terms of Return.

I realize past performance is not indicative... blah blah... but at the moment my "future performance" crystal ball is out-of-service.

If at least their Annual performances were inverse, or at least non-correlated, that would actually provide annual return diversity, no??

Further, I think very many of the top 500 US companies in the VTI derive their annual income from gross sales outside of the USA, so wouldn't that mean we already have some international exposure within VTI??

Lastly, I personally don't want the currency risk, and the geo-political risk of foreign stocks.

Can people convince me otherwise, or do my arguments make sense?

Thank you!

Signed, Real-Newbie
The above is an opinion and is for information purposes only. It is not investment advice. Past performance is no guarantee of future results. May lose value. Not FDIC Insured. Don't drink and drive.
User avatar
zonto
Posts: 258
Joined: Tue Aug 24, 2010 3:45 pm
Location: Boston, MA

Re: Does "international" offer any diversification?

Post by zonto »

stocksurfer wrote: Sat Jan 08, 2022 11:37 am Perhaps I should have titled this thread "how do you get the most diversification out of international?" After initially looking at total market type of funds I went poking around to see whether I could find anything that doesn't just move in lock-step with the same equity asset class in the US. That's where I came up disappointed. Small-cap or SCV, as willthrill mentions, seems to be the most independent, which I rationalize by thinking that small companies probably tend to have a more local focus. I suspect that one thing that reduces independent movement is that many investors everywhere have a sizable fraction of their assets in global stocks and thus when there's a global crisis everyone has similar panic reactions causing the reactions to spread everywhere.
I think there’s something to that. By the same logic, I would think that international REITs and real estate companies would have have even more of a local focus. Nothing more local than real estate.

So maybe, as others have mentioned, int'l may be a useful diversifier against decade long slumps, but not much against crashes.
I think this is exactly right.

“What gets overlooked is, a global allocation is not meant to protect you from short term volatility or market crashes. That is what bonds are for. The point of international diversification is to avoid long term poor performance from a single market.”

Source: https://novelinvestor.com/benefit-inter ... ification/
"For real-world portfolios, the main impact of diversification is to narrow the dispersion of outcomes. [T]he most important impact is to make the worst outcomes less bad." (Vineviz)
Nathan Drake
Posts: 2905
Joined: Mon Apr 11, 2011 12:28 am

Re: International Diversification -- why why???

Post by Nathan Drake »

  • Because of Japan
  • Because of Germany
  • Because of the US during 1965 - 1982.
Because what performed best in the recent or even long-term past may not perform best in the future when you need it the most. Diversification is an acceptance of some portion of your portfolio underperforming at any given time.

I'm not sure why this is a difficult concept to grasp - can you possibly be just fine being US only? Possibly. But why take that gamble? It MAY not pay off. Markets can get overvalued even though they are still good markets. No different than an individual company stock

You say you don't want the "risk", as though "risk and returns" arent inextricably linked. Sometimes the risk shows up, sometimes it doesn't. There can, and will be, long periods where any assetclass outperforms or underperforms. US included.
Last edited by Nathan Drake on Sat Jan 08, 2022 12:31 pm, edited 1 time in total.
20% VOO | 30% VXUS | 20% AVUV | 15% AVDV | 15% AVES
User avatar
jason2459
Posts: 1113
Joined: Wed May 06, 2020 7:59 pm

Re: International Diversification -- why why???

Post by jason2459 »

Time for a "Why International" Mega Thread?
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
thenextguy
Posts: 621
Joined: Wed Mar 25, 2009 12:58 am

Re: International Diversification -- why why???

Post by thenextguy »

They are correlated in direction, but not always in performance.
VTV 15% | VUG 10% | AVUV 25% | DFAI 25% | AVDV 15% | AVES 10%
Marseille07
Posts: 7279
Joined: Fri Nov 06, 2020 1:41 pm

Re: International Diversification -- why why???

Post by Marseille07 »

"Needed" is subjective. If you're pessimistic about the US market, then you probably want international. If not, then don't bother.
Nathan Drake
Posts: 2905
Joined: Mon Apr 11, 2011 12:28 am

Re: Does "international" offer any diversification?

Post by Nathan Drake »

drk wrote: Sat Jan 08, 2022 11:51 am
stocksurfer wrote: Fri Jan 07, 2022 11:11 pm E.g. Nestle, LVHM, Taiwan Semiconductor, Samsung, Alibaba, Tencen, and the list goes on. How do these companies offer any diversification from the closely related US multinationals that dominate the US market funds? Don't they sell into the same markets, draw from the same suppliers, are affected by the same global business cycles, etc?
One could reasonably argue that LVMH, TSMC, half of Samsung, and Tencent have no US competitors. Ditto ASML. Unfortunately, those ex-US world-beaters only represent about 5% of Vanguard Total International.
But those big growth names that have no US competitors aren't always going to be the best performers. During a Value oriented market, exUS should perform better because it has higher exposure to Value type names.
20% VOO | 30% VXUS | 20% AVUV | 15% AVDV | 15% AVES
Random Walker
Posts: 5065
Joined: Fri Feb 23, 2007 8:21 pm

Re: International Diversification -- why why???

Post by Random Walker »

Correlation is one thing, covariance is a bit different. I’m not by any means a stats expert, but covariance accounts for the amplitude of the changes: absolute gains and losses. Diversification can be worthwhile even when correlation is high because expected returns and realized returns will vary over time.

Dave
Da5id
Posts: 4285
Joined: Fri Feb 26, 2016 8:20 am

Re: International Diversification -- why why???

Post by Da5id »

If only there were a thread recently discussing this... OP you can find lots of you search.

If you want a nice read on the topic I suggest https://www.bogleheads.org/blog/2020/03 ... ld-part-1/
Last edited by Da5id on Sat Jan 08, 2022 1:18 pm, edited 1 time in total.
Fastrat
Posts: 2
Joined: Mon Sep 17, 2018 5:15 am

Re: International Diversification -- why why???

Post by Fastrat »

They aren't always correlated, though looking from 2008 on I can see why you might infer that. I'd recommend to look back past 2008 as 13-14 years is an extremely short time period with which to draw investing conclusions from. Try looking 60+.....Many things come into play when looking at performance from different regions/countries, and current trade/political climate (among many other things) is not likely to be the same which can contribute to differences....just my simple .02 on reasoning it MAY not be like the past (I capitalized "MAY" for a reason).
User avatar
Candor
Posts: 811
Joined: Sat May 28, 2011 4:25 pm

Re: International Diversification -- why why???

Post by Candor »

My prediction is you will receive strident opinions for and against with compelling and some not so compelling arguments on both sides. No opinions will change and the 'debate' will ultimately devolve into name calling and the thread shut down.

Perhaps we could have a holding thread of all the Intnl vs. US threads that have followed this course, kind of like the ongoing 'pending legislation' thread, and make it a sticky. It would be unwieldy though. :sharebeer
The fool, with all his other faults, has this also - he is always getting ready to live. - Epicurus (341–270 BC)
JSPECO9
Posts: 196
Joined: Fri Nov 25, 2016 12:34 am

Re: International Diversification -- why why???

Post by JSPECO9 »

Man, these threads have existed for a long time but the last few weeks have been extra rough for some reason...

OP, you don't "need" to own stocks that are headquartered outside of the U.S. to have exposure to international markets. If you want to remain 100% VTI/VOO, you will be just fine.
40% VTI | 20% AVUV | 25% VXUS | 15% AVDV
Nathan Drake
Posts: 2905
Joined: Mon Apr 11, 2011 12:28 am

Re: International Diversification -- why why???

Post by Nathan Drake »

JSPECO9 wrote: Sat Jan 08, 2022 1:07 pm Man, these threads have existed for a long time but the last few weeks have been extra rough for some reason...

OP, you don't "need" to own stocks that are headquartered outside of the U.S. to have exposure to international markets. If you want to remain 100% VTI/VOO, you will be just fine.
Probably because US has performed worse the past week, lol.

"Wanting to remain 100% VOO" may not be "just fine". I would be more confident in a globally allocated investor "being just fine"
20% VOO | 30% VXUS | 20% AVUV | 15% AVDV | 15% AVES
JSPECO9
Posts: 196
Joined: Fri Nov 25, 2016 12:34 am

Re: International Diversification -- why why???

Post by JSPECO9 »

Nathan Drake wrote: Sat Jan 08, 2022 1:17 pm
JSPECO9 wrote: Sat Jan 08, 2022 1:07 pm Man, these threads have existed for a long time but the last few weeks have been extra rough for some reason...

OP, you don't "need" to own stocks that are headquartered outside of the U.S. to have exposure to international markets. If you want to remain 100% VTI/VOO, you will be just fine.
Probably because US has performed worse the past week, lol.

"Wanting to remain 100% VOO" may not be "just fine". I would be more confident in a globally allocated investor "being just fine"
I agree with you on that. As someone who holds both international and SCV, I believe more diversification is better than less. But OP asked why he "needed" to hold international stocks. I don't think he needs to. Unfortunately, too many people don't sleep well at night knowing that their portfolio isn't the best performing one. I hope they are able to stay the course when that's no longer the case.
40% VTI | 20% AVUV | 25% VXUS | 15% AVDV
quietseas
Posts: 157
Joined: Fri Dec 27, 2013 4:43 pm

Re: International Diversification -- why why???

Post by quietseas »

It's a personal opinion. Do what you want and will stick with once you make a decision.

Don't look for rationalizations to support your opinions.
Tom_T
Posts: 1987
Joined: Wed Aug 29, 2007 2:33 pm

Re: International Diversification -- why why???

Post by Tom_T »

Agree with previous post. There are some very smart people on this Forum who completely disagree on this topic.The bottom line is that you are not going to get one answer because nobody can predict the future. My personal approach is to hold some international just in case. If that means my portfolio underperforms a U.S.-only one, so be it. I can meet my goals without having the "best" return, whatever that is.
Triple digit golfer
Posts: 9316
Joined: Mon May 18, 2009 5:57 pm

Re: International Diversification -- why why???

Post by Triple digit golfer »

It's a different thought process.

My question is why not? The default for me is world market cap. I never ask why I need international diversification, just like I'd never ask why I need industrials or financials, why I need growth or value, or why I need large or small. I just hold it all.

If you're going to eliminate a large portion of stocks, ask yourself why you're doing so.

There will always be reason to eliminate something, but rarely a good reason.
yules
Posts: 373
Joined: Wed Nov 27, 2019 10:31 am

Re: International Diversification -- why why???

Post by yules »

goldenteeth wrote: Sat Jan 08, 2022 12:07 pm
If I compare the Annual Returns for each individual year since 2008 between Vanguard Total Stock Market ETF (VTI) and Vanguard FTSE All-World ex-US ETF (VEU), they very closely correlate... meaning almost in every instance that one was down, the other was down, and when one was up, the other was up. Also, in every instance since 2008 except for maybe 2 years, VTI has trounced VEU in terms of Return.
The fact that you specifically chose 2008 (a strange year to choose!) should make it clear to you that you are actively cherry picking data points, and that other cherry picked data points can show opposite effects.

You can sum up investing in one word: you never know

Yules
Nathan Drake
Posts: 2905
Joined: Mon Apr 11, 2011 12:28 am

Re: International Diversification -- why why???

Post by Nathan Drake »

This chart explains most of the past 30 years

Image

Image

Summary: VALUATIONS MATTER.
20% VOO | 30% VXUS | 20% AVUV | 15% AVDV | 15% AVES
User avatar
steve r
Posts: 903
Joined: Mon Feb 13, 2012 8:34 pm

Re: International Diversification -- why why???

Post by steve r »

JSPECO9 wrote: Sat Jan 08, 2022 1:23 pm
... too many people don't sleep well at night knowing that their portfolio isn't the best performing one.
+1
I do not sleep well at night if there is no ongoing international / U.S. thread on BH. I have been sleeping very well as of late. :beer
“The closer you come to holding the entire market portfolio (all traded securities) the higher your expected return for the risk you take.” William F. Sharpe | VT, BND, TIAA RE and chill.
Booogle
Posts: 268
Joined: Wed Nov 09, 2016 3:57 pm

Re: International Diversification -- why why???

Post by Booogle »

Nathan Drake wrote: Sat Jan 08, 2022 12:27 pm
  • Because of Japan
  • Because of Germany
  • Because of the US during 1965 - 1982.
Because what performed best in the recent or even long-term past may not perform best in the future when you need it the most. Diversification is an acceptance of some portion of your portfolio underperforming at any given time.

I'm not sure why this is a difficult concept to grasp - can you possibly be just fine being US only? Possibly. But why take that gamble? It MAY not pay off. Markets can get overvalued even though they are still good markets. No different than an individual company stock

You say you don't want the "risk", as though "risk and returns" arent inextricably linked. Sometimes the risk shows up, sometimes it doesn't. There can, and will be, long periods where any assetclass outperforms or underperforms. US included.
When Latvia becomes the innovation king, I will switch to Latvian stocks.

Until then, buy American stocks.
Last edited by Booogle on Sat Jan 08, 2022 3:26 pm, edited 2 times in total.
User avatar
goldenteeth
Posts: 31
Joined: Tue Jul 06, 2021 7:47 pm
Location: New England USA

Re: International Diversification -- why why???

Post by goldenteeth »

yules wrote: Sat Jan 08, 2022 1:53 pm
goldenteeth wrote: Sat Jan 08, 2022 12:07 pm
If I compare the Annual Returns for each individual year since 2008 between Vanguard Total Stock Market ETF (VTI) and Vanguard FTSE All-World ex-US ETF (VEU), they very closely correlate... meaning almost in every instance that one was down, the other was down, and when one was up, the other was up. Also, in every instance since 2008 except for maybe 2 years, VTI has trounced VEU in terms of Return.
The fact that you specifically chose 2008 (a strange year to choose!) should make it clear to you that you are actively cherry picking data points, and that other cherry picked data points can show opposite effects.

You can sum up investing in one word: you never know

Yules
Inception date of VEU is 2007... so first full year of available return is 2008. That's Why.

VTI is first available in 2002, if you pick a comparable ETF to VEU back to 2002 its the same result as I stated.

Someone smarter than me can maybe go back to 1934 or 1834 and show analysis, I just don't know how. Thx
The above is an opinion and is for information purposes only. It is not investment advice. Past performance is no guarantee of future results. May lose value. Not FDIC Insured. Don't drink and drive.
User avatar
JazzTime
Posts: 71
Joined: Mon Oct 25, 2021 8:43 am

Re: International Diversification -- why why???

Post by JazzTime »

goldenteeth wrote: Sat Jan 08, 2022 12:07 pm Could people please give their opinion on why International Diversification is needed?

If I compare the Annual Returns for each individual year since 2008 between Vanguard Total Stock Market ETF (VTI) and Vanguard FTSE All-World ex-US ETF (VEU), they very closely correlate... meaning almost in every instance that one was down, the other was down, and when one was up, the other was up. Also, in every instance since 2008 except for maybe 2 years, VTI has trounced VEU in terms of Return.
I'm with you. Sometimes diversification is spelled diworsification.

Back in the 90's I owned some international funds to "diversify" according to the "rules" of investing. I soon noticed how poorly they performed. Then some gurus suggested emerging markets. Sure, EM's sometimes have stellar years, but in the long run they stink (at least in my view). So I generally stick with US based investments. If you can't find good companies here, what's the likelihood you'll find better ones elsewhere? That said, sure there are a few solid foreign companies out there. But I don't have the time or patience to look for them.
UpperNwGuy
Posts: 7190
Joined: Sun Oct 08, 2017 7:16 pm

Re: International Diversification -- why why???

Post by UpperNwGuy »

goldenteeth wrote: Sat Jan 08, 2022 2:46 pm
yules wrote: Sat Jan 08, 2022 1:53 pm
goldenteeth wrote: Sat Jan 08, 2022 12:07 pm
If I compare the Annual Returns for each individual year since 2008 between Vanguard Total Stock Market ETF (VTI) and Vanguard FTSE All-World ex-US ETF (VEU), they very closely correlate... meaning almost in every instance that one was down, the other was down, and when one was up, the other was up. Also, in every instance since 2008 except for maybe 2 years, VTI has trounced VEU in terms of Return.
The fact that you specifically chose 2008 (a strange year to choose!) should make it clear to you that you are actively cherry picking data points, and that other cherry picked data points can show opposite effects.

You can sum up investing in one word: you never know

Yules
Inception date of VEU is 2007... so first full year of available return is 2008. That's Why.

VTI is first available in 2002, if you pick a comparable ETF to VEU back to 2002 its the same result as I stated.

Someone smarter than me can maybe go back to 1934 or 1834 and show analysis, I just don't know how. Thx
Go to the Portfolio Visualizer website and select the "Backtest Portfolio Asset Class Allocation" page. Compare US Stock Market to Global ex-US Stock Market. The data goes back to 1986.
Maciej
Posts: 3
Joined: Sat Dec 26, 2020 6:16 am

Re: International Diversification -- why why???

Post by Maciej »

It is clear that diversification brings benefits. Of course US and exUS companies have revenue exposure to many different countries but no doubt there are some great companies outside US as well. Moving outside one country is also diversifing political / regulation risks (e.g. tax increases, bison guy taking over power etc.).

Of course there is no „correct” allocation to „foreign” stocks but I thought that „share of home bias in stock allocation” should be driven by three main considerations:

- Tax implications
- Costs implications related to foreing stocks investing (guess really not an issue)
- Tacking error impacing investor behaviour i.e. foreign vs. domestic performance

However discussions on the forum are mostly related not even to tracking error (look crazy strong in US) but to the past performance of a country which dominated XX century. Such data is not very handy. Should investor just take Top 1 / 5/ 10 / 30 / 50 / 100 etc. stocks of previous 30 years and invest in them exclusively. Don’t get it :/

Ps. Yes. If you pick just one country to invest and it will be the best country in coming decades, no doubt it will beat „any mix”. Yes. If you cannot resist to have exUS in your portfolio you should not try.
Post Reply