Does "international" offer any diversification?

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Nathan Drake
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

nigel_ht wrote: Sun Jan 16, 2022 3:03 pm
vineviz wrote: Sun Jan 16, 2022 2:18 pm
nigel_ht wrote: Sun Jan 16, 2022 1:58 pm
40% international doesn’t do much for me given that it’s large cap and what? 70-80% correlation in the last couple decades?
Why does it have to be large cap? There are lots of good choices if your prefer to avoid that:

Schwab International Small-Cap Eq ETF (SCHC)
Avantis International Small Cap Val ETF (AVDV)
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)

Plus, a correlation coefficient of 0.70. or 0.8 is nothing to sneeze at: it's plenty low enough to make a significant difference in outcomes. However, it you want lower correlations just favor emerging markets instead.

Vanguard FTSE Emerging Markets ETF (VWO)
SPDR Portfolio Emerging Markets ETF (SPEM)
Avantis Emerging Markets Value ETF (AVES)
Dimensional Emerging Core Equity Mkt ETF (DFAE)

Again, it’s a zero sum game. Capping VXUS at 20% is good enough to capture the majority of international diversification benefit to allow spending the other 20% on some other asset type.
And you know the future, how?
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Patzer
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Re: Does "international" offer any diversification?

Post by Patzer »

bling wrote: Sun Jan 16, 2022 2:35 pm
Patzer wrote: Sun Jan 16, 2022 11:53 am
bling wrote: Sun Jan 16, 2022 11:48 am
Patzer wrote: Sun Jan 16, 2022 11:23 am Would you have been happy holding total world when Japan peaked, or would you have preferred to be able to rebalance a little bit out of that?
you can only know that in hindsight.
If in the next 5 years Sweden became half of the global stock market, would you want to keep half of your equity in Sweden or would you think Sweden might be mispriced and want to diversify out of that and back to something more balanced?
If you have invest only in a global market cap ETF to cover the market's it's very expensive to do that, especially in a taxable account.
how is it expensive? VT has a 0.08% expense ratio and it's tax efficient.

if Sweden ended up being 50% of the market i would be a very happy camper because i would have owned it for its entire duration to the top. and it doesn't matter if Sweden, or US, is the most allocated. the point is that whatever it happens to be, that is what the market values it to be. and if history is any indication, most people can't beat the market.
It's expensive to sell when there are tax consequences and you can't just sell Sweden, you have to sell everything.
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Re: Does "international" offer any diversification?

Post by willthrill81 »

vineviz wrote: Sun Jan 16, 2022 11:29 am
willthrill81 wrote: Sun Jan 16, 2022 10:30 am
As I posted fairly early in this thread, the historic benefit of owning ex-U.S. stock has been small. The 30 year SWR since 1970 only increased from 4.4% to 4.6% by owning 50% U.S. and 50% ex-U.S. versus 100% U.S.
It might seem like that is a small improvement, but for an investor who is withdrawing at something close to the rate the difference can be quite dramatic.
Indeed it has been significant at times, but the SWRs have been what they have been. I don't discount that a 4.6% SWR is almost 5% higher than a 4.4%, but the impact of one's year of retirement alone has been far larger than whether a U.S. investor owned ex-U.S. stock. This has also been the case with allocations to SCV and even gold, where both had a far bigger benefit on SWRs than ex-U.S. investing on SWRs since 1970. Of course, investors now have good access to ex-U.S. SCV, which has also performed far better than ex-U.S. large-caps over the last 10+ years, though that's seldom mentioned in the 'SCV is dead' arguments.
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Re: Does "international" offer any diversification?

Post by willthrill81 »

Patzer wrote: Sun Jan 16, 2022 3:18 pm
bling wrote: Sun Jan 16, 2022 2:35 pm
Patzer wrote: Sun Jan 16, 2022 11:53 am
bling wrote: Sun Jan 16, 2022 11:48 am
Patzer wrote: Sun Jan 16, 2022 11:23 am Would you have been happy holding total world when Japan peaked, or would you have preferred to be able to rebalance a little bit out of that?
you can only know that in hindsight.
If in the next 5 years Sweden became half of the global stock market, would you want to keep half of your equity in Sweden or would you think Sweden might be mispriced and want to diversify out of that and back to something more balanced?
If you have invest only in a global market cap ETF to cover the market's it's very expensive to do that, especially in a taxable account.
how is it expensive? VT has a 0.08% expense ratio and it's tax efficient.

if Sweden ended up being 50% of the market i would be a very happy camper because i would have owned it for its entire duration to the top. and it doesn't matter if Sweden, or US, is the most allocated. the point is that whatever it happens to be, that is what the market values it to be. and if history is any indication, most people can't beat the market.
It's expensive to sell when there are tax consequences and you can't just sell Sweden, you have to sell everything.
You could use futures contracts to effectively zero out your Sweden position, though there are some costs for doing so, and it's not 'simple'.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Nathan Drake wrote: Sun Jan 16, 2022 3:15 pm
nigel_ht wrote: Sun Jan 16, 2022 3:03 pm
vineviz wrote: Sun Jan 16, 2022 2:18 pm
nigel_ht wrote: Sun Jan 16, 2022 1:58 pm
40% international doesn’t do much for me given that it’s large cap and what? 70-80% correlation in the last couple decades?
Why does it have to be large cap? There are lots of good choices if your prefer to avoid that:

Schwab International Small-Cap Eq ETF (SCHC)
Avantis International Small Cap Val ETF (AVDV)
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)

Plus, a correlation coefficient of 0.70. or 0.8 is nothing to sneeze at: it's plenty low enough to make a significant difference in outcomes. However, it you want lower correlations just favor emerging markets instead.

Vanguard FTSE Emerging Markets ETF (VWO)
SPDR Portfolio Emerging Markets ETF (SPEM)
Avantis Emerging Markets Value ETF (AVES)
Dimensional Emerging Core Equity Mkt ETF (DFAE)

Again, it’s a zero sum game. Capping VXUS at 20% is good enough to capture the majority of international diversification benefit to allow spending the other 20% on some other asset type.
And you know the future, how?
The same way you do.

How do you know that market weight international will be superior diversification to US large cap + US small cap?
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 3:03 pm
Meh, beyond a certain point it becomes over complicated…I don’t see any need for VSS if I hold VIOV or VBR. Nor do I see a need for VWO when holding VXUS. A home bias works if you live in the US.
"I just don't want to" tends to be a hard position to move past in a discussion.

This is only overly complicated if you decide to make it so. A simple combination of 2 to 4 equity funds in a portfolio can get you whatever factor and geographic diversification you want. How hard is it to manage VTI/VIOV/VSS/VWO or VTI/VIOV/VXUS or VTI/VIOV/VWO or VIOV/VXUS or VIOV/VXUS/VWO or ....
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

nigel_ht wrote: Sun Jan 16, 2022 3:31 pm
Nathan Drake wrote: Sun Jan 16, 2022 3:15 pm
nigel_ht wrote: Sun Jan 16, 2022 3:03 pm
vineviz wrote: Sun Jan 16, 2022 2:18 pm
nigel_ht wrote: Sun Jan 16, 2022 1:58 pm
40% international doesn’t do much for me given that it’s large cap and what? 70-80% correlation in the last couple decades?
Why does it have to be large cap? There are lots of good choices if your prefer to avoid that:

Schwab International Small-Cap Eq ETF (SCHC)
Avantis International Small Cap Val ETF (AVDV)
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)

Plus, a correlation coefficient of 0.70. or 0.8 is nothing to sneeze at: it's plenty low enough to make a significant difference in outcomes. However, it you want lower correlations just favor emerging markets instead.

Vanguard FTSE Emerging Markets ETF (VWO)
SPDR Portfolio Emerging Markets ETF (SPEM)
Avantis Emerging Markets Value ETF (AVES)
Dimensional Emerging Core Equity Mkt ETF (DFAE)

Again, it’s a zero sum game. Capping VXUS at 20% is good enough to capture the majority of international diversification benefit to allow spending the other 20% on some other asset type.
And you know the future, how?
The same way you do.

How do you know that market weight international will be superior diversification to US large cap + US small cap?
I allocate to US TSM, exUS TSM, US SCV, DM SCV, and EM SCV and tilt towards areas with lower valuations. So that kind of portfolio is consistent with a "not knowing the future" allocation rather than someone just going with "US only large + small tilt" at the exclusion of most of the world's investable markets.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 3:31 pm How do you know that market weight international will be superior diversification to US large cap + US small cap?
You don't need to know the future to know that "US large cap + US small cap" is less diversified than "US large cap + US small cap + international". You only need to know math.
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Re: Does "international" offer any diversification?

Post by Random Walker »

GaryA505 wrote: Sun Jan 16, 2022 11:19 am https://ibb.co/Ln2vtJ6

To me, this is one of the most interesting charts. What the heck is going on? Why is the last period of US outperformance lasting so much longer than might be expected, based on earlier cycles.
I have a totally unsubstantiated theory that all of our technological advances have resulted in amplification of human behavioral anomalies rather than minimization of them. Same with value underperformance.

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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 3:39 pm
nigel_ht wrote: Sun Jan 16, 2022 3:03 pm
Meh, beyond a certain point it becomes over complicated…I don’t see any need for VSS if I hold VIOV or VBR. Nor do I see a need for VWO when holding VXUS. A home bias works if you live in the US.
"I just don't want to" tends to be a hard position to move past in a discussion.

This is only overly complicated if you decide to make it so. A simple combination of 2 to 4 equity funds in a portfolio can get you whatever factor and geographic diversification you want. How hard is it to manage VTI/VIOV/VSS/VWO or VTI/VIOV/VXUS or VTI/VIOV/VWO or VIOV/VXUS or VIOV/VXUS/VWO or ....
I still don’t think you’ve shown that moving past VTI/VXUS/VIOV is required or that 20% VXUS is insufficient to capture international diversification.

I’m not saying that international diversification isn’t worthwhile but that:

A) it’s a zero sum game. The more large cap international I hold the less of something else I have.

B) I don’t NEED more than 20% in any asset class to capture sufficient diversification. I sure don’t NEED 40%+ VXUS to successfully have a 4% SWR over 30 year retirement with social security.

Historically, I don’t need ANY international.

Some folks here insist that international market weight is the “correct” baseline. It’s tedious. They want to start with VT as their core holding, great for them but it’s this constant chip on their shoulder in nearly every thread they are on.
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Re: Does "international" offer any diversification?

Post by Random Walker »

vineviz wrote: Sun Jan 16, 2022 3:39 pm
nigel_ht wrote: Sun Jan 16, 2022 3:03 pm
Meh, beyond a certain point it becomes over complicated…I don’t see any need for VSS if I hold VIOV or VBR. Nor do I see a need for VWO when holding VXUS. A home bias works if you live in the US.
"I just don't want to" tends to be a hard position to move past in a discussion.

This is only overly complicated if you decide to make it so. A simple combination of 2 to 4 equity funds in a portfolio can get you whatever factor and geographic diversification you want. How hard is it to manage VTI/VIOV/VSS/VWO or VTI/VIOV/VXUS or VTI/VIOV/VWO or VIOV/VXUS or VIOV/VXUS/VWO or ....
I agree with Vineviz; I think simplicity is overrated. As one goes down the path of increased diversification and increased complexity, the marginal benefits of portfolio additions are smaller and the marginal costs of portfolio additions greater. But if one perceives the marginal benefit as greater than the marginal cost, may as well make the addition. Once the more complex portfolio is set up, it’s basically on autopilot. A few extra rows or columns on a spreadsheet to determine where to add new money or withdraw from first doesn’t seem like a big deal to me.

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Re: Does "international" offer any diversification?

Post by Random Walker »

Nathan Drake wrote: Sun Jan 16, 2022 3:40 pm I allocate to US TSM, exUS TSM, US SCV, DM SCV, and EM SCV and tilt towards areas with lower valuations. So that kind of portfolio is consistent with a "not knowing the future" allocation rather than someone just going with "US only large + small tilt" at the exclusion of most of the world's investable markets.
I think it’s fair to say that one’s US:Int split is a measure of his belief in market efficiency.

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Re: Does "international" offer any diversification?

Post by Random Walker »

vineviz wrote: Sun Jan 16, 2022 3:41 pm
nigel_ht wrote: Sun Jan 16, 2022 3:31 pm How do you know that market weight international will be superior diversification to US large cap + US small cap?
You don't need to know the future to know that "US large cap + US small cap" is less diversified than "US large cap + US small cap + international". You only need to know math.
Hard to disagree with this, but I do believe that factor diversification is potentially more effective than geographic diversification. In my own portfolio, my equities are evenly split US:Int and very heavily tilted to SV in both.

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Re: Does "international" offer any diversification?

Post by JoMoney »

vineviz wrote: Sun Jan 16, 2022 3:41 pm
nigel_ht wrote: Sun Jan 16, 2022 3:31 pm How do you know that market weight international will be superior diversification to US large cap + US small cap?
You don't need to know the future to know that "US large cap + US small cap" is less diversified than "US large cap + US small cap + international". You only need to know math.
... maybe, presuming the definition of "diversification" used is simply dividing across more stocks or classes of stocks, and not one that's nuanced by the correlation of of those stocks/asset classes, and that "superior" means having more of that (even if it means a worse outcome by some other measure)
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 4:24 pm
A) it’s a zero sum game. The more large cap international I hold the less of something else I have.
As I pointed out earlier, "international" doesn't have to be "large cap" and certainly not "large cap developed". This zero sum game argument is a red herring.
nigel_ht wrote: Sun Jan 16, 2022 4:24 pm B) I don’t NEED more than 20% in any asset class to capture sufficient diversification. I sure don’t NEED 40%+ VXUS to successfully have a 4% SWR over 30 year retirement with social security.
This is a circular argument. You're defining "sufficient diversification" as the amount you'd get from a 20% allocation, and then arguing that 20% is sufficient.

If you want to maximize your chances of getting a withdrawal rate > 4%, or maximize your expected withdrawal rate, a 20% international allocation isn't "sufficient". Your best chance of getting a high withdrawal rate comes at higher levels of diversification than that.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 3:41 pm
nigel_ht wrote: Sun Jan 16, 2022 3:31 pm How do you know that market weight international will be superior diversification to US large cap + US small cap?
You don't need to know the future to know that "US large cap + US small cap" is less diversified than "US large cap + US small cap + international". You only need to know math.
The challenge is to show that market weight international is more diverse/better than us large cap and us small cap.

Then people can assert that VT is the “proper” baseline vs a US centric AA that could be 60% Large cap growth and 40% SCV.

Otherwise you’re trying to claim that I’m wrong about diversification by doing exactly what you recommend doing. My baseline equity holdings ARE VTI/VXUS/VIOV.

Why must I hold international large cap at market weight? To assume “market weight” is neutral is as arbitrary as assuming “equal weight” is neutral from a diversification standpoint.

I could have an even more effectively diverse portfolio holding RSP vs VT.
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Re: Does "international" offer any diversification?

Post by vineviz »

Random Walker wrote: Sun Jan 16, 2022 4:36 pm Hard to disagree with this, but I do believe that factor diversification is potentially more effective than geographic diversification.
Thankfully, the modern investor doesn't face this as an "either / or" situation as you already observed. We can effectively diversify across risk factors and geographies simultaneously using low-cost tax-efficient funds.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 4:41 pm
The challenge is to show that market weight international is more diverse/better than us large cap and us small cap.
Who said anything about "market weight international"?

It's trivially easy to see that a "market weight global" portfolio is more diversified than a "market weight US" portfolio. And for any non-market weight US portfolio it's also equally easy to construct a non-market weight global portfolio.

There's no need to construct a false dichotomy pitting "factor optimized US" versus "market weight international".
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 4:40 pm
nigel_ht wrote: Sun Jan 16, 2022 4:24 pm
A) it’s a zero sum game. The more large cap international I hold the less of something else I have.
As I pointed out earlier, "international" doesn't have to be "large cap" and certainly not "large cap developed". This zero sum game argument is a red herring.
nigel_ht wrote: Sun Jan 16, 2022 4:24 pm B) I don’t NEED more than 20% in any asset class to capture sufficient diversification. I sure don’t NEED 40%+ VXUS to successfully have a 4% SWR over 30 year retirement with social security.
This is a circular argument. You're defining "sufficient diversification" as the amount you'd get from a 20% allocation, and then arguing that 20% is sufficient.

If you want to maximize your chances of getting a withdrawal rate > 4%, or maximize your expected withdrawal rate, a 20% international allocation isn't "sufficient". Your best chance of getting a high withdrawal rate comes at higher levels of diversification than that.
Maximizing my outcome evidently includes 15% gold. Which comes from somewhere.

Maximizing my outcome includes some amount of bonds. Which comes from somewhere.

So since you know that capping my international to 20% of my AA is insufficient perhaps you can enlighten us on what the optimal AA will be?

Show that my current 40 VTI/20 VXUS/10 VIOV/20 VGLT/10 GLDM target really is insufficient to “maximize my outcome” for a 30-40 year retirement within the margin of error.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 4:45 pm
nigel_ht wrote: Sun Jan 16, 2022 4:41 pm
The challenge is to show that market weight international is more diverse/better than us large cap and us small cap.
Who said anything about "market weight international"?

It's trivially easy to see that a "market weight global" portfolio is more diversified than a "market weight US" portfolio. And for any non-market weight US portfolio it's also equally easy to construct a non-market weight global portfolio.

There's no need to construct a false dichotomy pitting "factor optimized US" versus "market weight international".
It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.

So they should show that 60/40 VTI/VXUS is better than 60/40 VTI/VBR as a baseline.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 5:04 pm
vineviz wrote: Sun Jan 16, 2022 4:45 pm
nigel_ht wrote: Sun Jan 16, 2022 4:41 pm
The challenge is to show that market weight international is more diverse/better than us large cap and us small cap.
Who said anything about "market weight international"?

It's trivially easy to see that a "market weight global" portfolio is more diversified than a "market weight US" portfolio. And for any non-market weight US portfolio it's also equally easy to construct a non-market weight global portfolio.

There's no need to construct a false dichotomy pitting "factor optimized US" versus "market weight international".
It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.
That’s a straw man: no one here has said that “ market weight international is the MINIMUM you should start with”. Certainly not me.
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Re: Does "international" offer any diversification?

Post by CletusCaddy »

Can’t believe global market cap weight is now 60/40. Eventually the “why international” question will become moot when the US becomes the entire global equity market.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 5:03 pm Maximizing my outcome evidently includes 15% gold. Which comes from somewhere.

Maximizing my outcome includes some amount of bonds. Which comes from somewhere.

So since you know that capping my international to 20% of my AA is insufficient perhaps you can enlighten us on what the optimal AA will be?

Show that my current 40 VTI/20 VXUS/10 VIOV/20 VGLT/10 GLDM target really is insufficient to “maximize my outcome” for a 30-40 year retirement within the margin of error.
If 40 VTI/20 VXUS/10 VIOV/20 VGLT/10 GLDM is really your target allocation, then you've ALREADY allocated 28%+ of your equity allocation to international stocks. Kudos.

Would it really be painful to move to 35% VTI/15% VXUS/10% VWO/10% VIOV/20% VGLT/10% GLDM?
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Re: Does "international" offer any diversification?

Post by abuss368 »

CletusCaddy wrote: Sun Jan 16, 2022 5:09 pm Can’t believe global market cap weight is now 60/40. Eventually the “why international” question will become moot when the US becomes the entire global equity market.
Is that mathematically possible?

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Re: Does "international" offer any diversification?

Post by bling »

nigel_ht wrote: Sun Jan 16, 2022 5:04 pm It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.

So they should show that 60/40 VTI/VXUS is better than 60/40 VTI/VBR as a baseline.
absent of any other starting point why wouldn't you start with the market capitalization of the world, which is how the market has already priced everything? is this not *the most* passive portfolio someone can make?

you can of course add/remove from that as much as you like, but with each change you are trending more and more towards active management. there's nothing wrong with that, just that it's exceedingly difficult to beat the market.
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Re: Does "international" offer any diversification?

Post by willthrill81 »

bling wrote: Sun Jan 16, 2022 5:36 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.

So they should show that 60/40 VTI/VXUS is better than 60/40 VTI/VBR as a baseline.
absent of any other starting point why wouldn't you start with the market capitalization of the world, which is how the market has already priced everything? is this not *the most* passive portfolio someone can make?
Because there are logical reasons for investors in all nations to have some degree of tilt toward their home country, as shown here.
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Re: Does "international" offer any diversification?

Post by vineviz »

willthrill81 wrote: Sun Jan 16, 2022 5:43 pm
bling wrote: Sun Jan 16, 2022 5:36 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.

So they should show that 60/40 VTI/VXUS is better than 60/40 VTI/VBR as a baseline.
absent of any other starting point why wouldn't you start with the market capitalization of the world, which is how the market has already priced everything? is this not *the most* passive portfolio someone can make?
Because there are logical reasons for investors in all nations to have some degree of tilt toward their home country, as shown here.
Sure, but the logic would be to start with global MCW and then adjust the allocations based on taxes, preferences, diversification desires, and so on.

If we agree that a “home bias” might be a reasonable end point, the starting REFERENCE point can’t logically be 100% home country.
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Re: Does "international" offer any diversification?

Post by willthrill81 »

vineviz wrote: Sun Jan 16, 2022 5:57 pm
willthrill81 wrote: Sun Jan 16, 2022 5:43 pm
bling wrote: Sun Jan 16, 2022 5:36 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.

So they should show that 60/40 VTI/VXUS is better than 60/40 VTI/VBR as a baseline.
absent of any other starting point why wouldn't you start with the market capitalization of the world, which is how the market has already priced everything? is this not *the most* passive portfolio someone can make?
Because there are logical reasons for investors in all nations to have some degree of tilt toward their home country, as shown here.
Sure, but the logic would be to start with global MCW and then adjust the allocations based on taxes, preferences, diversification desires, and so on.

If we agree that a “home bias” might be a reasonable end point, the starting REFERENCE point can’t logically be 100% home country.
I don't disagree, though U.S. investors have the natural advantage here since, as I recently heard, 60% of global stock cap is U.S. Consequently, holding something close to 80% of one's stocks in the U.S. may be close to 'optimal', depending greatly on precisely what one is optimizing for.
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

willthrill81 wrote: Sun Jan 16, 2022 6:54 pm
vineviz wrote: Sun Jan 16, 2022 5:57 pm
willthrill81 wrote: Sun Jan 16, 2022 5:43 pm
bling wrote: Sun Jan 16, 2022 5:36 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.

So they should show that 60/40 VTI/VXUS is better than 60/40 VTI/VBR as a baseline.
absent of any other starting point why wouldn't you start with the market capitalization of the world, which is how the market has already priced everything? is this not *the most* passive portfolio someone can make?
Because there are logical reasons for investors in all nations to have some degree of tilt toward their home country, as shown here.
Sure, but the logic would be to start with global MCW and then adjust the allocations based on taxes, preferences, diversification desires, and so on.

If we agree that a “home bias” might be a reasonable end point, the starting REFERENCE point can’t logically be 100% home country.
I don't disagree, though U.S. investors have the natural advantage here since, as I recently heard, 60% of global stock cap is U.S. Consequently, holding something close to 80% of one's stocks in the U.S. may be close to 'optimal', depending greatly on precisely what one is optimizing for.
The drift to 60% or more is recency bias. US has fluctuated from 1/3 to 2/3. You need a more fundamental weighting than pure market cap.

There are arguments that could be made that going forward, on a valuation basis, tilting to exUS would be more optimal on a forward looking basis.
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Re: Does "international" offer any diversification?

Post by willthrill81 »

Nathan Drake wrote: Sun Jan 16, 2022 7:04 pm
willthrill81 wrote: Sun Jan 16, 2022 6:54 pm
vineviz wrote: Sun Jan 16, 2022 5:57 pm
willthrill81 wrote: Sun Jan 16, 2022 5:43 pm
bling wrote: Sun Jan 16, 2022 5:36 pm
absent of any other starting point why wouldn't you start with the market capitalization of the world, which is how the market has already priced everything? is this not *the most* passive portfolio someone can make?
Because there are logical reasons for investors in all nations to have some degree of tilt toward their home country, as shown here.
Sure, but the logic would be to start with global MCW and then adjust the allocations based on taxes, preferences, diversification desires, and so on.

If we agree that a “home bias” might be a reasonable end point, the starting REFERENCE point can’t logically be 100% home country.
I don't disagree, though U.S. investors have the natural advantage here since, as I recently heard, 60% of global stock cap is U.S. Consequently, holding something close to 80% of one's stocks in the U.S. may be close to 'optimal', depending greatly on precisely what one is optimizing for.
The drift to 60% or more is recency bias. US has fluctuated from 1/3 to 2/3. You need a more fundamental weighting than pure market cap.

There are arguments that could be made that going forward, on a valuation basis, tilting to exUS would be more optimal on a forward looking basis.
As I said, it depends greatly on what one is optimizing for. Optimizing for expected returns vis-à-vis a valuation metric may lead to a very different conclusion than other goals.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 5:08 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm
vineviz wrote: Sun Jan 16, 2022 4:45 pm
nigel_ht wrote: Sun Jan 16, 2022 4:41 pm
The challenge is to show that market weight international is more diverse/better than us large cap and us small cap.
Who said anything about "market weight international"?

It's trivially easy to see that a "market weight global" portfolio is more diversified than a "market weight US" portfolio. And for any non-market weight US portfolio it's also equally easy to construct a non-market weight global portfolio.

There's no need to construct a false dichotomy pitting "factor optimized US" versus "market weight international".
It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.
That’s a straw man: no one here has said that “ market weight international is the MINIMUM you should start with”. Certainly not me.
Nathan has made that remark in the past And you are supporting using global market weight as the default starting point.
vineviz wrote: Sun Jan 16, 2022 5:57 pm
Sure, but the logic would be to start with global MCW and then adjust the allocations based on taxes, preferences, diversification desires, and so on.

If we agree that a “home bias” might be a reasonable end point, the starting REFERENCE point can’t logically be 100% home country.
Why can’t 100% home country be the starting reference point when home bias is the end point?

With the US at 60% then if the end point is 80% US and 20% international it’s the same amount of adjustment whether you start at 100% US or 60%.

We are the dominant political and military power, the largest economy and the dollar is the reserve currency. Why cant the logical starting point be US 100% for US citizens?
Last edited by nigel_ht on Sun Jan 16, 2022 10:00 pm, edited 2 times in total.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

bling wrote: Sun Jan 16, 2022 5:36 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.

So they should show that 60/40 VTI/VXUS is better than 60/40 VTI/VBR as a baseline.
absent of any other starting point why wouldn't you start with the market capitalization of the world, which is how the market has already priced everything? is this not *the most* passive portfolio someone can make?
Equal market weight is equally passive. Market weight favors large cap and popular sectors rather than a more diversified portfolio…so then you need to tilt for diversification.
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Re: Does "international" offer any diversification?

Post by Da5id »

nigel_ht wrote: Sun Jan 16, 2022 9:49 pm
vineviz wrote: Sun Jan 16, 2022 5:08 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm
vineviz wrote: Sun Jan 16, 2022 4:45 pm
nigel_ht wrote: Sun Jan 16, 2022 4:41 pm
The challenge is to show that market weight international is more diverse/better than us large cap and us small cap.
Who said anything about "market weight international"?

It's trivially easy to see that a "market weight global" portfolio is more diversified than a "market weight US" portfolio. And for any non-market weight US portfolio it's also equally easy to construct a non-market weight global portfolio.

There's no need to construct a false dichotomy pitting "factor optimized US" versus "market weight international".
It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.
That’s a straw man: no one here has said that “ market weight international is the MINIMUM you should start with”. Certainly not me.
Nathan has made that remark in the past.
You said folks, which made it sound like a common belief than just one person. I don't know where Nathan said that, though I'd believe he did. But does anyone else? In any case, not at all frequently stated here. By far the most common equities holdings for ex-US in the forums seem to me to be 0%, 20%, and 40%/market.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Da5id wrote: Sun Jan 16, 2022 9:54 pm
nigel_ht wrote: Sun Jan 16, 2022 9:49 pm
vineviz wrote: Sun Jan 16, 2022 5:08 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm
vineviz wrote: Sun Jan 16, 2022 4:45 pm

Who said anything about "market weight international"?

It's trivially easy to see that a "market weight global" portfolio is more diversified than a "market weight US" portfolio. And for any non-market weight US portfolio it's also equally easy to construct a non-market weight global portfolio.

There's no need to construct a false dichotomy pitting "factor optimized US" versus "market weight international".
It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.
That’s a straw man: no one here has said that “ market weight international is the MINIMUM you should start with”. Certainly not me.
Nathan has made that remark in the past.
You said folks, which made it sound like a common belief than just one person. I don't know where Nathan said that, though I'd believe he did. But does anyone else? In any case, not at all frequently stated here. By far the most common equities holdings for ex-US in the forums seem to me to be 0%, 20%, and 40%/market.
Not for those that bang the drum for international.

And 40% is global market weight. And again here in this thread the international proponents once again advance that global market weight should be the “logical” starting point and 100% as a starting point is “illogical”.

PLUS vineviz is has asserted that 20% is totally insufficient to maximize for success. Mkay, so what is the minimum international allocation you think he feels is required?
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Re: Does "international" offer any diversification?

Post by Da5id »

nigel_ht wrote: Sun Jan 16, 2022 10:06 pm
Da5id wrote: Sun Jan 16, 2022 9:54 pm
nigel_ht wrote: Sun Jan 16, 2022 9:49 pm
vineviz wrote: Sun Jan 16, 2022 5:08 pm
nigel_ht wrote: Sun Jan 16, 2022 5:04 pm

It’s not a false dichotomy when folks insist that market weight international is the MINIMUM you should start with.
That’s a straw man: no one here has said that “ market weight international is the MINIMUM you should start with”. Certainly not me.
Nathan has made that remark in the past.
You said folks, which made it sound like a common belief than just one person. I don't know where Nathan said that, though I'd believe he did. But does anyone else? In any case, not at all frequently stated here. By far the most common equities holdings for ex-US in the forums seem to me to be 0%, 20%, and 40%/market.
Not for those that bang the drum for international.

And 40% is global market weight. And again here in this thread the international proponents once again advance that global market weight should be the “logical” starting point and 100% as a starting point is “illogical”.

PLUS vineviz is has asserted that 20% is totally insufficient to maximize for success. Mkay, so what is the minimum international allocation you think he feels is required?
Not answering for others. Just for your characterization of the state of the debate, which seems way overstated. Can you identify the "folks" you referred to or not?
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 5:16 pm
nigel_ht wrote: Sun Jan 16, 2022 5:03 pm Maximizing my outcome evidently includes 15% gold. Which comes from somewhere.

Maximizing my outcome includes some amount of bonds. Which comes from somewhere.

So since you know that capping my international to 20% of my AA is insufficient perhaps you can enlighten us on what the optimal AA will be?

Show that my current 40 VTI/20 VXUS/10 VIOV/20 VGLT/10 GLDM target really is insufficient to “maximize my outcome” for a 30-40 year retirement within the margin of error.
If 40 VTI/20 VXUS/10 VIOV/20 VGLT/10 GLDM is really your target allocation, then you've ALREADY allocated 28%+ of your equity allocation to international stocks. Kudos.

Would it really be painful to move to 35% VTI/15% VXUS/10% VWO/10% VIOV/20% VGLT/10% GLDM?
Show me that it makes any likely difference whatsoever given the error bars.

You can’t.

The harsh reality is that luck plays a huge part in outcome and the error bars are very wide.

So following Bogle’s guideline of no more than 20% international isn’t any sort of significant handicap so long as the US remains dominant.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 9:49 pm
Nathan has made that remark in the past And you are supporting using global market weight as the default starting point.
A starting point is NOT the same as a minimum: start with the MCW and increase or decrease based on resources, constraints, needs, and/or preferences.
nigel_ht wrote: Sun Jan 16, 2022 9:49 pm Why can’t 100% home country be the starting reference point when home bias is the end point?
Because if you start your reference with 100% home country stocks, there's no room left to bias more towards the home country: you're already all the way there.
Last edited by vineviz on Sun Jan 16, 2022 10:48 pm, edited 1 time in total.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 10:06 pm PLUS vineviz is has asserted that 20% is totally insufficient to maximize for success. Mkay, so what is the minimum international allocation you think he feels is required?
I never said that. Don't misrepresent me.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 10:26 pm
vineviz wrote: Sun Jan 16, 2022 5:16 pm
Would it really be painful to move to 35% VTI/15% VXUS/10% VWO/10% VIOV/20% VGLT/10% GLDM?
Show me that it makes any likely difference whatsoever given the error bars.
I feel like we've been over this ground before: the maximum diversification benefit comes with an international allocation of roughly 40% to 50% of stocks.

Is there uncertainty in possible outcomes? Obviously. But that doesn't change the facts of where the optimal strategy lies.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 10:48 pm
nigel_ht wrote: Sun Jan 16, 2022 10:06 pm PLUS vineviz is has asserted that 20% is totally insufficient to maximize for success. Mkay, so what is the minimum international allocation you think he feels is required?
I never said that. Don't misrepresent me.
vineviz wrote: Sun Jan 16, 2022 4:40 pm If you want to maximize your chances of getting a withdrawal rate > 4%, or maximize your expected withdrawal rate, a 20% international allocation isn't "sufficient". Your best chance of getting a high withdrawal rate comes at higher levels of diversification than that.
So 20% is now sufficient to maximize my safe withdrawal rate?

The higher your SWR relative to your actual required withdrawal rate to meet expenses the higher your success rate because you have greater margin for error.

Just because SWR hit 100% chance of historical survival doesn’t mean your actual success rate is 100% because outcomes can be worse than historical and you may have underestimated your expenses.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 10:51 pm
nigel_ht wrote: Sun Jan 16, 2022 10:26 pm
vineviz wrote: Sun Jan 16, 2022 5:16 pm
Would it really be painful to move to 35% VTI/15% VXUS/10% VWO/10% VIOV/20% VGLT/10% GLDM?
Show me that it makes any likely difference whatsoever given the error bars.
I feel like we've been over this ground before: the maximum diversification benefit comes with an international allocation of roughly 40% to 50% of stocks.
This isn’t materially different than asserting that 40-50% is the minimal allocation (aka market weight) required.

Something you claim is a strawman.
Is there uncertainty in possible outcomes? Obviously. But that doesn't change the facts of where the optimal strategy lies.
And the point of error bars is to provide indication that the uncertainty range for any “optimal” strategy.

What is your uncertainty range for your “40-50%” figure and how did you estimate it? Is it +/- 5%? +/- 50%? +/- 500%?

It makes a difference.

Is my 28% allocation within the margin of error?
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 11:10 pm
This isn’t materially different than asserting that 40-50% is the minimal allocation (aka market weight) required.

It is if you understand the difference between an "optimal" allocation and a "minimum" allocation. I don't use those words as synonyms.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 11:17 pm
nigel_ht wrote: Sun Jan 16, 2022 11:10 pm
This isn’t materially different than asserting that 40-50% is the minimal allocation (aka market weight) required.
It is if you understand the difference between an "optimal" allocation and a "minimum" allocation. I don't use those words as synonyms.
And folks understand that when you say that 20% is too little and the optimal outcome occurs between 40% and 50% the implication is that 40% (aka market weight) is the minimum you should start at and maybe ought to go overweight at 50%.

Dance all you want but among the international proponents in this forum there is significant sentiment that not being global market weight is ignorant, not “passive” and not Boglehead.

Maybe it comes from too many folks, Bogle included, who disagree but whatever the reason it’s annoying that even if you think that some international is a good diversification that somehow that’s not acceptable.

You guys do you and stop being so judgy. 20% is just fine.
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Re: Does "international" offer any diversification?

Post by lostdog »

nigel_ht wrote: Mon Jan 17, 2022 6:41 am
vineviz wrote: Sun Jan 16, 2022 11:17 pm
nigel_ht wrote: Sun Jan 16, 2022 11:10 pm
This isn’t materially different than asserting that 40-50% is the minimal allocation (aka market weight) required.
It is if you understand the difference between an "optimal" allocation and a "minimum" allocation. I don't use those words as synonyms.
And folks understand that when you say that 20% is too little and the optimal outcome occurs between 40% and 50% the implication is that 40% (aka market weight) is the minimum you should start at and maybe ought to go overweight at 50%.

Dance all you want but among the international proponents in this forum there is significant sentiment that not being global market weight is ignorant, not “passive” and not Boglehead.

Maybe it comes from too many folks, Bogle included, who disagree but whatever the reason it’s annoying that even if you think that some international is a good diversification that somehow that’s not acceptable.

You guys do you and stop being so judgy. 20% is just fine.
"International Proponents" on this forum provide valid arguments so novice and new investors can make decisions based in this information.

This forum is mostly filled with 100% U.S. index investors. It's important to identify members that performance chase. They "cloak" their behavior with other reasons.

Examples being "Jack and Warren recommend this, so this excuses my performance chasing behavior.". "I'm dropping international in the name of simplicity". " I don't trust countries outside of the U.S.". There are many others but these are the most popular.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

lostdog wrote: Mon Jan 17, 2022 7:02 am
nigel_ht wrote: Mon Jan 17, 2022 6:41 am
vineviz wrote: Sun Jan 16, 2022 11:17 pm
nigel_ht wrote: Sun Jan 16, 2022 11:10 pm
This isn’t materially different than asserting that 40-50% is the minimal allocation (aka market weight) required.
It is if you understand the difference between an "optimal" allocation and a "minimum" allocation. I don't use those words as synonyms.
And folks understand that when you say that 20% is too little and the optimal outcome occurs between 40% and 50% the implication is that 40% (aka market weight) is the minimum you should start at and maybe ought to go overweight at 50%.

Dance all you want but among the international proponents in this forum there is significant sentiment that not being global market weight is ignorant, not “passive” and not Boglehead.

Maybe it comes from too many folks, Bogle included, who disagree but whatever the reason it’s annoying that even if you think that some international is a good diversification that somehow that’s not acceptable.

You guys do you and stop being so judgy. 20% is just fine.
"International Proponents" on this forum provide valid arguments so novice and new investors can make decisions based in this information.

This forum is mostly filled with 100% U.S. index investors. It's important to identify members that performance chase. They "cloak" their behavior with other reasons.

Examples being "Jack and Warren recommend this, so this excuses my performance chasing behavior.". "I'm dropping international in the name of simplicity". " I don't trust countries outside of the U.S.". There are many others but these are the most popular.
And none of that matter to the passive BH investor that want to Trinity their way to a better than average retirement. 0% works. 20% works. 40% works.

And how do you know people are “cloaking” performance chasing by going US only?

“VTSAX and chill” is really all a novice investor needs equity wise to beat the vast majority of investors. They are far better off learning and internalizing nothing more than LBYM, max your tax deferred and “VTSAX and chill” and then leaving the forum until close to retirement as opposed to all the performance chasing…excuse me, optimization…more seasoned posters do to try to get from 3.9% SWR to 4.x% SWR via diversification, tilts, etc. The more you tinker, tweak and optimize and the greater opportunity for behavioral errors to creep in.

Leave off the “what about the kids?” argument. They want to three or four fund, awesome but the whole international vs scv vs whatever diversification is all “performance chasing” past the baseline of what you get just doing two fund 60/40 or 50/50 S&P 500 + LTT passive investing in tax advantaged.

None of this extra diversification stuff is more important than LBYM and constantly arguing about market weight international should be the baseline and Bogle was wrong, blah blah blah, especially while it’s underperforming, isn’t helping novices as opposed to increasing the chances of confusing some of them.

I side with Taylor. Bogle said no more than 20%, Vanguard says no less that 20%. 20% is likely good enough for most folks to capture the majority of the benefits of international diversification.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Mon Jan 17, 2022 6:41 am And folks understand that when you say that 20% is too little and the optimal outcome occurs between 40% and 50% the implication is that 40% (aka market weight) is the minimum you should start at and maybe ought to go overweight at 50%.
I'll spell out my position in broad terms so others aren't confused by your interpretation of it.

Investing in both US and ex-US stocks provides a measurable benefit in portfolio diversification.

US-based investors will get maximum benefit when 40% to 50% of stocks are allocated to international.*

US-based investors will get significant benefit when 20% to 40% of stocks are allocated to international.

US-based investors will get minimal benefit when 1% to 20% of stocks are allocated to international.

*Note this is less than current market-cap weight. Full MCW is not necessary to achieve maximum benefit, and less-than-MCW may be preferred by many investors for tax and/or liability-matching reasons.
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Re: Does "international" offer any diversification?

Post by vanbogle59 »

vineviz wrote: Mon Jan 17, 2022 8:24 am
nigel_ht wrote: Mon Jan 17, 2022 6:41 am And folks understand that when you say that 20% is too little and the optimal outcome occurs between 40% and 50% the implication is that 40% (aka market weight) is the minimum you should start at and maybe ought to go overweight at 50%.
I'll spell out my position in broad terms so others aren't confused by your interpretation of it.

Investing in both US and ex-US stocks provides a measurable benefit in portfolio diversification.

US-based investors will get maximum benefit when 40% to 50% of stocks are allocated to international.*

US-based investors will get significant benefit when 20% to 40% of stocks are allocated to international.

US-based investors will get minimal benefit when 1% to 20% of stocks are allocated to international.

*Note this is less than current market-cap weight. Full MCW is not necessary to achieve maximum benefit, and less-than-MCW may be preferred by many investors for tax and/or liability-matching reasons.
In this scenario, how would one go about quantifying the difference between minimal, significant and maximum?
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Re: Does "international" offer any diversification?

Post by burritoLover »

Did we really need 6 pages of discussion as to answer the question if adding 7500+ stocks to your portfolio that you didn't own before across different countries and markets you weren't invested in before offers you "any" diversification? lol, lol, lol.
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Re: Does "international" offer any diversification?

Post by Triple digit golfer »

burritoLover wrote: Mon Jan 17, 2022 8:31 am Did we really need 6 pages of discussion as to answer the question if adding 7500+ stocks to your portfolio that you didn't own before across different countries and markets you weren't invested in before offers you "any" diversification? lol, lol, lol.
No, but we all knew it would happen anyway.
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Re: Does "international" offer any diversification?

Post by vineviz »

vanbogle59 wrote: Mon Jan 17, 2022 8:29 am
In this scenario, how would one go about quantifying the difference between minimal, significant and maximum?
Here is the experience for three possible 1966 retirees withdrawing $350/month (inflation adjusted) from a $100k portfolio with various allocations to international stocks: 10% ("minimal"), 30% ("significant"), and 50% ("maximum"). All portfolios are 60% stock and 40% bonds.

Image
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