How much International allocation is good insurance?

[gavinsiu]

A lot of threads debate the merits of international allocation or whether to have it or not. Most debate seems to center around whether international drags down long term returns. However, this is something that someone in the US would complaint about with its above world average returns. Investors in Japan and even the UK probably think differently. I currently have a 1/3 of my stock portfolio in international. Would that even make a difference if I were a investor in Japan for example. I was thinking of the allocation was more of a defense. I wouldn't like to bet against the US economy, but I also feel that it is not forever. Unfortunately, visual portfolio virtualizer don't do stuff like historical data in Japan.

On the flip-side, what about bonds? Would bond return be just as bad as stock when the country goes stagnate? I had previously never allocated international bond due to currency risk. I wonder would I think different if bond returns were close to zero while international bonds have a higher return.

[arcticpineapplecorp.]

i don't see that international bonds performance would be tremendously different (even if higher) than US. And even if they were higher, wouldnt' that mean you were taking higher risk with international bonds because safe bonds pay less interest. So it's not an apples to apples comparison.

Also, if you hold international bonds, it's recommended to hold currency hedged international bonds. So after that effect, you're getting more US like return anyway (i.e., any currency benefit that might exist, would be hedged away).

Finally, even though people say US and Int equity is behaving more similarly than the past, there's more likelihood that one will do better than the other and vice versa even if only by a few percentage points in any given year. Take 2017 as one example international beat US by about 5.6%. Some might see that as a significant amount to diversify. Others might not see it as meaningful. Regardless, you won't see even those kinds of variation per year between US and total international (hedged) bonds. So the diversification benefit matters more in equities than in the bond space, in my opinion. And I wouldn't buy unhedged international bonds either to try to overcome that dampening effect of hedged bonds. You want to take that risk (currency, etc) on the stock, not the bond side of your portfolio.

[NiceUnparticularMan]

Some of the Vanguard white papers on these subjects look not just at US investors but also investors in other countries, which I always find interesting/

At a high level, I think a few things are pretty uncontroversial.

(1) If you hedge your non-domestic bonds then you really need quite a bit of bonds generally for a reasonable allocation to non-domestic bonds to have much benefit.

Personal comment: I am not much of a nominal bond guy to begin with, preferring to use IP bonds and things like stable value funds and the TSP G Fund anyway. So, I personally have ignored non-USD bonds.

(2) Non-domestic stocks are similarly going to be the most meaningful if you have quite a bit of stocks.

Personal comment: I use a lot of stocks so now this is an important issue.

(3) But unhedged non-domestic stocks introduce currency risk, so there is a rational home country bias that arises from trying to moderate currency risk in stock-heavy portfolios.

Personal comment: sounds right to me!

OK, so Vanguard has looked at different countries and sort of estimated a tradeoff curve between the benefits of diversification versus the costs of currency risk. The upshot in one version of their studies was this:

https://corporate.vanguard.com/content/ ... Online.pdf

In each market we examined, our analysis indicated that volatility was reduced most with an allocation to international equities of between 35% and 55%.

So there are a lot of comments one could make.

First, volatility is not necessarily the only, or the main, or really any part of the risks one might be managing in a long-term portfolio. Indeed, I am personally far more concerned about what I would call various tail risks. Still, this is sort of pointing out that if you are somewhere in that range, you are not necessarily doing anything obviously bad.

Second, for US investors in particular, being in this range would mean only a mild home country bias, and perhaps none at all. Contrast that with, say, a Canadian or Australian investor, where being in this range would imply a far higher home country bias.

OK, so suppose you then go with "only" something like 35-55% non-domestic, and your 45-65% in domestic then does relatively poorly over a critical period. Well, that's definitely not great. And for a non-US investor who exhibited a lot of home country bias, that might be a real cause of regret.

But for a US investor? Well, unless you were planning to dramatically underweight US stocks--meh, it isn't going to make that much difference with a mild home country bias only.

[strummer6969]

How do you insure against risk by taking more risk?

Equity diversification =/= insurance.

[Nathan Drake]

How do you insure against risk by taking more risk?

Equity diversification =/= insurance.

Not true

Read up on Markowitz

[km91]

How do you insure against risk by taking more risk?

Equity diversification =/= insurance.

If an investor views a single country equity portfolio, like US only, as a concentration risk they can insure this risk away by diversifying across international markets

[strummer6969]

How do you insure against risk by taking more risk?

Equity diversification =/= insurance.

Not true

Read up on Markowitz

I have international, but I have never thought about it as good insurance in a world of fat tail risks (e.g., 2008, 2020). If we remove such risks (both upside and downside), perhaps returns follow more of a Gaussian distribution where international can be expected to diversify certain risks of a U.S.-only portfolio. That's why I hold them, not for any particular insurance purposes.

[NiceUnparticularMan]

At a high level I would agree a lot of unnecessary confusion comes out of using the same terms for different risk management techniques. Diversification, insurance, and hedging are all different, but some people use those terms almost like they were synonyms.

So if the basic idea is there is idiosyncratic risk associated with the stocks listed in individual countries for which there is no expected return premium--and that is a reasonable idea--then the idea you can moderate such risks by investing in many countries without losing expected return premiums is a form of diversification.

Insurance usually involves some form of paying another party to accept a transfer of risk from you. That's not really the same thing.

[secondopinion]

Some of the Vanguard white papers on these subjects look not just at US investors but also investors in other countries, which I always find interesting/

At a high level, I think a few things are pretty uncontroversial.

(1) If you hedge your non-domestic bonds then you really need quite a bit of bonds generally for a reasonable allocation to non-domestic bonds to have much benefit.

Personal comment: I am not much of a nominal bond guy to begin with, preferring to use IP bonds and things like stable value funds and the TSP G Fund anyway. So, I personally have ignored non-USD bonds.

(2) Non-domestic stocks are similarly going to be the most meaningful if you have quite a bit of stocks.

Personal comment: I use a lot of stocks so now this is an important issue.

(3) But unhedged non-domestic stocks introduce currency risk, so there is a rational home country bias that arises from trying to moderate currency risk in stock-heavy portfolios.

Personal comment: sounds right to me!

OK, so Vanguard has looked at different countries and sort of estimated a tradeoff curve between the benefits of diversification versus the costs of currency risk. The upshot in one version of their studies was this:

https://corporate.vanguard.com/content/ ... Online.pdf

In each market we examined, our analysis indicated that volatility was reduced most with an allocation to international equities of between 35% and 55%.

So there are a lot of comments one could make.

First, volatility is not necessarily the only, or the main, or really any part of the risks one might be managing in a long-term portfolio. Indeed, I am personally far more concerned about what I would call various tail risks. Still, this is sort of pointing out that if you are somewhere in that range, you are not necessarily doing anything obviously bad.

Second, for US investors in particular, being in this range would mean only a mild home country bias, and perhaps none at all. Contrast that with, say, a Canadian or Australian investor, where being in this range would imply a far higher home country bias.

OK, so suppose you then go with "only" something like 35-55% non-domestic, and your 45-65% in domestic then does relatively poorly over a critical period. Well, that's definitely not great. And for a non-US investor who exhibited a lot of home country bias, that might be a real cause of regret.

But for a US investor? Well, unless you were planning to dramatically underweight US stocks--meh, it isn't going to make that much difference with a mild home country bias only.

I am about 50/50 with international versus domestic (US) stocks; I think the tail risks of not having international are worse than having it, and I would almost be more comfortable with 100% international stocks than 100% US stocks. I already work in the US, save money in the US, buy fixed income in the US, etc. Why should I also wager all my stocks in the US as well? I am not expecting a cataclysm in the US, but I rather have something going for me if it goes through hard times localized to the US. If it hits the rest of the world, then hopefully bonds work somewhat. If not, then maybe my on hand commodities? If not, then I guess it is the end of the world.

[gavinsiu]

I was looking at this article

https://www.bogleheads.org/blog/2017/02 ... se-crisis/

The AA chart shows a considerable difference in return when the portfolio was world index with japanese tilt. I am not entire sure about the comment about equity risk. I tend to group all equity broad developed market index to be about equal in risk. The international is just riskier due to currency flucation.

[Marseille07]

If an investor views a single country equity portfolio, like US only, as a concentration risk they can insure this risk away by diversifying across international markets

You might be able to reduce the US risk somewhat. We're pretty big and it's not so easy to insure the US risk away, especially when you merely diversify (i.e. still holding US equities).

[unwitting_gulag]

"Insurance" is an apt term. Insurance is never free. We pay for health insurance, homeowners' insurance, car insurance and so on. If a driver never has an accident, or a homeowner never sustains damage that merits filing a claim, then insurance is just a fee, or a drag on wealth-accumulation. Speculatively, the most lucrative approach is to eschew all insurance. But going without insurance is probably foolish, because of potentially catastrophic risks.

In recent decades, US-based investors who diversified internationally would indeed have been buying insurance. They potentially reduce risks. This is probably true in any economic-conditions, with any home-country. But said US-based investors would have been paying a hefty fee for such insurance, in the form of substantial drag on portfolio growth. Is the cost of insurance justified? It's a personal judgment call.

[Nathan Drake]

How do you insure against risk by taking more risk?

Equity diversification =/= insurance.

Not true

Read up on Markowitz

I have international, but I have never thought about it as good insurance in a world of fat tail risks (e.g., 2008, 2020). If we remove such risks (both upside and downside), perhaps returns follow more of a Gaussian distribution where international can be expected to diversify certain risks of a U.S.-only portfolio. That's why I hold them, not for any particular insurance purposes.

Short term risks aren’t the sorts of risks equity investors should be chiefly concerned with

[Doc]

I am not entire sure about the comment about equity risk. I tend to group all equity broad developed market index to be about equal in risk. The international is just riskier due to currency flucation.

Agree:

1) The largest holdings in an international market are funds likely to be dominated by international firms and therefore have little difference from US.

2) Look at your choices for international funds/ETFS. I haven't looked in years but in the past US based internationals funds/ETFs hedged the currency difference so you gain nothing on that front.

I limit my international to small cap (value) developed to get around the "it's no difference". I also avoid foreign small cap international that has large positions in emerging markets because the potential benefit is likely outweighed by heart my heart failure.

[anil686]

Not sure to the OP. I tend to agree that total international (if that is the OPs idea of diversification) is going to be top heavy in a cap weighted index with multinationals that - in their respective industries - will probably be similar to the US multinationals (oil/gas, consumer discretionary, consumer staples, communications) except for currency risk which may or may not be hedged based on your fund of choice. Thus I am not sure it makes a difference too much except in two cases -
A) for some reason a number of large cap companies redomicile to another country a la the pharmaceutical companies of 2015
B). Reserve currency moves away from the dollar -

In both those cases, obviously, US equities will go down and international equities will go up - JMO though. Are either of these likely - not really sure tbh and as others have intimated, international has trailed and could trail US for a period of time….

[km91]

If an investor views a single country equity portfolio, like US only, as a concentration risk they can insure this risk away by diversifying across international markets

You might be able to reduce the US risk somewhat. We're pretty big and it's not so easy to insure the US risk away, especially when you merely diversify (i.e. still holding US equities).

In my mind the biggest risk of a US only portfolio is not a drawdown scenario where US zigs and ex US zags, but a period of prolonged underperformance of US due to current valuations. For the 12 year period ending in 2021 US stocks returned 16%/year. This is a phenomenal return for equities but it is not normal or sustainable. US stocks have become more richly valued than ex US stocks and history shows us that assets that have such run ups in price tend to underperform on a forward going basis, at least for some period. Valuations and fundamentals do matter in the long term and the risk of a concentrated US only portfolio is that relatively expensive current valuations lead to lower returns for the next 10 or 20 years. Will US stocks mean revert and return something like 4%/year over the next decade to get back to the 10%/year long term trend? I have no idea but I don't want to take that risk

[Marseille07]

In my mind the biggest risk of a US only portfolio is not a drawdown scenario where US zigs and ex US zags, but a period of prolonged underperformance of US due to current valuations. For the 12 year period ending in 2021 US stocks returned 16%/year. This is a phenomenal return for equities but it is not normal or sustainable. US stocks have become more richly valued than ex US stocks and history shows us that assets that have such run ups in price tend to underperform on a forward going basis, at least for some period. Valuations and fundamentals do matter in the long term and the risk of a concentrated US only portfolio is that relatively expensive current valuations lead to lower returns for the next 10 or 20 years. Will US stocks mean revert and return something like 4%/year over the next decade to get back to the 10%/year long term trend? I have no idea but I don't want to take that risk

The purpose of a US only portfolio is to track US market returns. It is irrelevant how ex-US performs. I don't share the biggest risk you're describing.

[km91]

In my mind the biggest risk of a US only portfolio is not a drawdown scenario where US zigs and ex US zags, but a period of prolonged underperformance of US due to current valuations. For the 12 year period ending in 2021 US stocks returned 16%/year. This is a phenomenal return for equities but it is not normal or sustainable. US stocks have become more richly valued than ex US stocks and history shows us that assets that have such run ups in price tend to underperform on a forward going basis, at least for some period. Valuations and fundamentals do matter in the long term and the risk of a concentrated US only portfolio is that relatively expensive current valuations lead to lower returns for the next 10 or 20 years. Will US stocks mean revert and return something like 4%/year over the next decade to get back to the 10%/year long term trend? I have no idea but I don't want to take that risk

The purpose of a US only portfolio is to track US market returns. It is irrelevant how ex-US performs. I don't see "the biggest risk" you're describing.

If you acknowledge that a US only investor is exposed to a large degree of concentration risk, particularly in high valuation, relatively expensive stocks, you might see that ex US offers an easy way to diversify your portfolio across valuations in markets that aren't 100% correlated to US equities. A US only investor clearly has concentration risk: concentration to a single economy, concentration to a single government / regulator, concentration to a small subset of all global listed publicly traded companies. I'm telling you that I view US only as a risk and look for ways to diversify this risk. The performance of ex-US is very relevant to me

[JBTX]

In my mind the biggest risk of a US only portfolio is not a drawdown scenario where US zigs and ex US zags, but a period of prolonged underperformance of US due to current valuations. For the 12 year period ending in 2021 US stocks returned 16%/year. This is a phenomenal return for equities but it is not normal or sustainable. US stocks have become more richly valued than ex US stocks and history shows us that assets that have such run ups in price tend to underperform on a forward going basis, at least for some period. Valuations and fundamentals do matter in the long term and the risk of a concentrated US only portfolio is that relatively expensive current valuations lead to lower returns for the next 10 or 20 years. Will US stocks mean revert and return something like 4%/year over the next decade to get back to the 10%/year long term trend? I have no idea but I don't want to take that risk

The purpose of a US only portfolio is to track US market returns. It is irrelevant how ex-US performs. I don't share the biggest risk you're describing.

So are you saying you don’t think the US market will ever underperform for a protracted period, or you don’t particularly care if it does?

[Marseille07]

So are you saying you don’t think the US market will ever underperform for a protracted period, or you don’t particularly care if it does?

I don't particularly care if it does.

[Marseille07]

If you acknowledge that a US only investor is exposed to a large degree of concentration risk, particularly in high valuation, relatively expensive stocks, you might see that ex US offers an easy way to diversify your portfolio across valuations in markets that aren't 100% correlated to US equities. A US only investor clearly has concentration risk: concentration to a single economy, concentration to a single government / regulator, concentration to a small subset of all global listed publicly traded companies. I'm telling you that I view US only as a risk and look for ways to diversify this risk. The performance of ex-US is very relevant to me

I don't think ex-US offers an easy way to diversify your portfolio because large international businesses need US-sourced revenue. If we falter, their earnings also take a hit. The correlation may not be 100%, but it is something like 0.9 - very high correlation.

You are certainly free to construct your portfolio however you like, but you should carefully evaluate if you are really hedging the US risk as much as you think you are.

[km91]

If you acknowledge that a US only investor is exposed to a large degree of concentration risk, particularly in high valuation, relatively expensive stocks, you might see that ex US offers an easy way to diversify your portfolio across valuations in markets that aren't 100% correlated to US equities. A US only investor clearly has concentration risk: concentration to a single economy, concentration to a single government / regulator, concentration to a small subset of all global listed publicly traded companies. I'm telling you that I view US only as a risk and look for ways to diversify this risk. The performance of ex-US is very relevant to me

I don't think ex-US offers an easy way to diversify your portfolio because large international businesses depend on US-sourced revenue. If we falter, their earnings also take a hit. The correlation may not be 100%, but it is something like 0.9 - very high correlation.

You are certainly free to construct your portfolio however you like, but you should carefully evaluate if you are really hedging the US risk as much as you think you are.

With a US only portfolio I have concentration to a single economy, single business cycle, single demography, single stock market of listed companies, relatively high valuations, and 30% of my portfolio is in 10 companies concentrated in particular sectors. With a globally invested portfolio I am diversified across many economies, many business cycles, many demographics, many listed stocks, and a range of valuations from cheap to expensive. Yes, the US is a big and important economy, but it's not the only one. I don't see any compelling evidence to hold a US only portfolio when I can easily buy a global index portfolio from Vanguard

[Marseille07]

With a US only portfolio I have concentration to a single economy, single business cycle, single demography, single stock market of listed companies, relatively high valuations, and 30% of my portfolio is in 10 companies concentrated in particular sectors. With a globally invested portfolio I am diversified across many economies, many business cycles, many demographics, many listed stocks, and a range of valuations from cheap to expensive. Yes, the US is a big and important economy, but it's not the only one. I don't see any compelling evidence to hold a US only portfolio when I can easily buy a global index portfolio from Vanguard

Are we talking about holding a global portfolio or hedging the US-only risk? These two items aren't the same because I'm essentially arguing that VT does not hedge US risk; not by much, anyway.

[JBTX]

If you acknowledge that a US only investor is exposed to a large degree of concentration risk, particularly in high valuation, relatively expensive stocks, you might see that ex US offers an easy way to diversify your portfolio across valuations in markets that aren't 100% correlated to US equities. A US only investor clearly has concentration risk: concentration to a single economy, concentration to a single government / regulator, concentration to a small subset of all global listed publicly traded companies. I'm telling you that I view US only as a risk and look for ways to diversify this risk. The performance of ex-US is very relevant to me

I don't think ex-US offers an easy way to diversify your portfolio because large international businesses need US-sourced revenue. If we falter, their earnings also take a hit. The correlation may not be 100%, but it is something like 0.9 - very high correlation.

You are certainly free to construct your portfolio however you like, but you should carefully evaluate if you are really hedging the US risk as much as you think you are.

Where there may be a difference is valuations, as well as currency.

In terms of diversification, it really depends on time frame. It is true that in the short term, if one crashes they all crash to varying degree. However, over intermediate or longer terms, US and ex US performance have clearly diverged. Unless one believes the US will always outperform (as some clearly believe) over the next 10 years, or 20 years, etc, the US could similarly underperform, either via mean mean reversion, or just chance.

[secondopinion]

If you acknowledge that a US only investor is exposed to a large degree of concentration risk, particularly in high valuation, relatively expensive stocks, you might see that ex US offers an easy way to diversify your portfolio across valuations in markets that aren't 100% correlated to US equities. A US only investor clearly has concentration risk: concentration to a single economy, concentration to a single government / regulator, concentration to a small subset of all global listed publicly traded companies. I'm telling you that I view US only as a risk and look for ways to diversify this risk. The performance of ex-US is very relevant to me

I don't think ex-US offers an easy way to diversify your portfolio because large international businesses depend on US-sourced revenue. If we falter, their earnings also take a hit. The correlation may not be 100%, but it is something like 0.9 - very high correlation.

You are certainly free to construct your portfolio however you like, but you should carefully evaluate if you are really hedging the US risk as much as you think you are.

With a US only portfolio I have concentration to a single economy, single business cycle, single demography, single stock market of listed companies, relatively high valuations, and 30% of my portfolio is in 10 companies concentrated in particular sectors. With a globally invested portfolio I am diversified across many economies, many business cycles, many demographics, many listed stocks, and a range of valuations from cheap to expensive. Yes, the US is a big and important economy, but it's not the only one. I don't see any compelling evidence to hold a US only portfolio when I can easily buy a global index portfolio from Vanguard

To add, an efficient global economy will have some countries have more companies in one sector than others (as a means to optimize). It does not scare me that US is somewhat tilted sector-wise, not as along as I hold the companies of the other countries.

[km91]

With a US only portfolio I have concentration to a single economy, single business cycle, single demography, single stock market of listed companies, relatively high valuations, and 30% of my portfolio is in 10 companies concentrated in particular sectors. With a globally invested portfolio I am diversified across many economies, many business cycles, many demographics, many listed stocks, and a range of valuations from cheap to expensive. Yes, the US is a big and important economy, but it's not the only one. I don't see any compelling evidence to hold a US only portfolio when I can easily buy a global index portfolio from Vanguard

Are we talking about holding a global portfolio or hedging the US-only risk? These two items aren't the same because I'm essentially arguing that VT does not hedge US risk; not by much, anyway.

I'm talking about holding a global portfolio to hedge US-only concentration risks that I listed above. I don't find your argument compelling, it's like arguing in favor of holding the S&P 100 vs the S&P 500 because they're 98% correlated and derive their earnings from the same economy. The S&P 500 might not hedge the risks of the S&P 100 by much, but I'm going to choose the more diversified option, not the less diversified

[Marseille07]

I'm talking about holding a global portfolio to hedge US-only concentration risks that I listed above. I don't find your argument compelling, it's like arguing in favor of holding the S&P 100 vs the S&P 500 because they're 98% correlated and derive their earnings from the same economy. The S&P 500 might not hedge the risks of the S&P 100 by much, but I'm going to choose the more diversified option, not the less diversified

? Go run PV yourself and you see that VT isn't hedging the US-only risk by much. It is 60% US after all, on top of the fact that equities are highly correlated. This is why I suggested earlier to carefully evaluate how much you are actually hedging.

[riverant]

I upped mine from 11% to 20%. That felt too high, so I lowered down to 18%. Within that range, I don’t think it makes a lick of difference except retrospectively.

[Nathan Drake]

So are you saying you don’t think the US market will ever underperform for a protracted period, or you don’t particularly care if it does?

I don't particularly care if it does.

The risk of US stocks doing horribly so you can’t meet your goals is still there

[Nathan Drake]

I'm talking about holding a global portfolio to hedge US-only concentration risks that I listed above. I don't find your argument compelling, it's like arguing in favor of holding the S&P 100 vs the S&P 500 because they're 98% correlated and derive their earnings from the same economy. The S&P 500 might not hedge the risks of the S&P 100 by much, but I'm going to choose the more diversified option, not the less diversified

? Go run PV yourself and you see that VT isn't hedging the US-only risk by much. It is 60% US after all, on top of the fact that equities are highly correlated. This is why I suggested earlier to carefully evaluate how much you are actually hedging.

We’ve debunked this claim before

60/40 (US/exUS) vs 100 (US only) was the difference between a 2M+ portfolio and going broke before reaching 30 years of retirement from 1966-1996

[Marseille07]

We’ve debunked this claim before

60/40 (US/exUS) vs 100 (US only) was the difference between a 2M+ portfolio and going broke before reaching 30 years of retirement from 1966-1996

Not at all. I'm talking about equity performance not a 60/40 portfolio in (presumably) retirement scenario running 4% SWR. You can't insert a plethora of conditions I didn't set forth.

[km91]

I'm talking about holding a global portfolio to hedge US-only concentration risks that I listed above. I don't find your argument compelling, it's like arguing in favor of holding the S&P 100 vs the S&P 500 because they're 98% correlated and derive their earnings from the same economy. The S&P 500 might not hedge the risks of the S&P 100 by much, but I'm going to choose the more diversified option, not the less diversified

? Go run PV yourself and you see that VT isn't hedging the US-only risk by much. It is 60% US after all, on top of the fact that equities are highly correlated. This is why I suggested earlier to carefully evaluate how much you are actually hedging.

I am directly hedging these specific risks when holding VT over VTI:
- concentration to a single economy
- concentration to a single business cycle
- concentration to a single demography
- concentration to ~40% of globally listed stocks
- concentration to the 10 largest US companies
- sector concentration, particularly to tech
- concentration to stocks with relatively high valuations by historical standards

I actually hold 40% US / 60% ex US, but in any case the argument that US is 60% of VT so might as well hold 100% US is not compelling. A US concentrated portfolio is exposed to much more idiosyncratic risk than a globally diversified portfolio. I see little reason to exclude Swiss pharma, German chemical companies, Dutch semiconductor manufacturers, or Canadian banks from my portfolio

[Nathan Drake]

We’ve debunked this claim before

60/40 (US/exUS) vs 100 (US only) was the difference between a 2M+ portfolio and going broke before reaching 30 years of retirement from 1966-1996

Not at all. I'm talking about equity performance not a 60/40 portfolio in (presumably) retirement scenario running 4% SWR. You can't insert a plethora of conditions I didn't set forth.

The only difference between the two portfolios was one had 60% US and 40% International and the other was 100% US

The fixed income for both was the same

[Marseille07]

The only difference between the two portfolios was one had 60% US and 40% International

The fixed income for both was the same

But *having* fixed income altered the return profile & influenced the chance of running out of money. As I said, I was purely talking about equity performance irrespective of withdrawals.

[Marseille07]

I am directly hedging these specific risks when holding VT over VTI:
- concentration to a single economy
- concentration to a single business cycle
- concentration to a single demography
- concentration to ~40% of globally listed stocks
- concentration to the 10 largest US companies
- sector concentration, particularly to tech
- concentration to stocks with relatively high valuations by historical standards

I actually hold 40% US / 60% ex US, but in any case the argument that US is 60% of VT so might as well hold 100% US is not compelling. A US concentrated portfolio is exposed to much more idiosyncratic risk than a globally diversified portfolio. I see little reason to exclude Swiss pharma, German chemical companies, Dutch semiconductor manufacturers, or Canadian banks from my portfolio

No, I didn't say might as well hold 100% US. What I said is to *evaluate* the impact of hedging you think you're getting. We have PV available today to run backtests however you want.

[Nathan Drake]

The only difference between the two portfolios was one had 60% US and 40% International

The fixed income for both was the same

But *having* fixed income altered the return profile & influenced the chance of running out of money. As I said, I was purely talking about equity performance irrespective of withdrawals.

The only variable different between the two was the equity

This isn’t hard to understand

[Marseille07]

The only variable different between the two was the equity

This isn’t hard to understand

Do you say the same thing if the portfolio was 10/90? This isn't hard to understand.

[whodidntante]

I wonder if it's somehow possible to harness the energy put into this ceaseless discussion topic.

[Nathan Drake]

The only variable different between the two was the equity

This isn’t hard to understand

Do you say the same thing if the portfolio was 10/90? This isn't hard to understand.

The $2M gap was due to US vs exUS sequence risk

The bonds are irrelevant.

[Marseille07]

The $2M gap was due to US vs exUS sequence risk

The bonds are irrelevant.

You can't say that unless you have 100/0 data.

[Nathan Drake]

The $2M gap was due to US vs exUS sequence risk

The bonds are irrelevant.

You can't say that unless you have 100/0 data.

Yes we can if no rebalancing

Regardless, this example proves you wrong. A 40% allocation can make a big difference even when bonds reduce the total equity

[Marseille07]

Yes we can if no rebalancing

Regardless, this example proves you wrong. A 40% allocation can make a big difference even when bonds reduce the total equity

Not at all. I already stated that I was talking about equity performance only.

Don't bring in bonds and tuck in SWR on top and claim this and that. They aren't what I was talking about. You proved nothing.

[Nathan Drake]

Yes we can if no rebalancing

Regardless, this example proves you wrong. A 40% allocation can make a big difference even when bonds reduce the total equity

Not at all. I already stated that I was talking about equity performance only.

Don't bring in bonds and tuck on SWR on top and claim this and that. They aren't what I was talking about. You proved nothing.

Go run the numbers on 1966-1996 with equity only. You’ll get a similar if not larger result

Again, it’s wrong to say a 40% exUS allocation is inconsequential yet you are claiming a 40% allocation to bonds is big enough to make a difference even though they’re the same for both portfolios?

What kind of illogical reasoning is that?

[Marseille07]

Go run the numbers on 1966-1996 with equity only. You’ll get a similar if not larger result

PV doesn't go that far. If you have another backtester, I'll check it out.

[km91]

I am directly hedging these specific risks when holding VT over VTI:
- concentration to a single economy
- concentration to a single business cycle
- concentration to a single demography
- concentration to ~40% of globally listed stocks
- concentration to the 10 largest US companies
- sector concentration, particularly to tech
- concentration to stocks with relatively high valuations by historical standards

I actually hold 40% US / 60% ex US, but in any case the argument that US is 60% of VT so might as well hold 100% US is not compelling. A US concentrated portfolio is exposed to much more idiosyncratic risk than a globally diversified portfolio. I see little reason to exclude Swiss pharma, German chemical companies, Dutch semiconductor manufacturers, or Canadian banks from my portfolio

No, I didn't say might as well hold 100% US. What I said is to *evaluate* the impact of hedging you think you're getting. We have PV available today to run backtests however you want.

I have evaluated, I keep telling you that I view the above list as risks. The impact of holding a globally diversified portfolio vs a US only portfolio is easy to see. It is quite apparent that I lessen these risks when I hold a global portfolio

[Marseille07]

I have evaluated, I keep telling you that I view the above list as risks. The impact of holding a globally diversified portfolio vs a US only portfolio is easy to see. It is quite apparent that I lessen these risks when I hold a global portfolio

So where do you see the risk hedged by holding VT? https://www.portfoliovisualizer.com/bac ... tion2_2=40

I don't claim that these two charts are exactly the same, but the difference seems immaterial.

[km91]

I have evaluated, I keep telling you that I view the above list as risks. The impact of holding a globally diversified portfolio vs a US only portfolio is easy to see. It is quite apparent that I lessen these risks when I hold a global portfolio

So where do you see the risk hedged by holding VT? https://www.portfoliovisualizer.com/bac ... tion2_2=40

I don't claim that these two charts are exactly the same, but the difference seems immaterial.

Presumably all the times the global portfolio outperformed the US only portfolio. The global portfolio underperformed the US only portfolio, we gave up potential upside to achieve a less risky portfolio, which sounds like the textbook definition of a hedge. Just because the US concentration risks didn't come to fruition in the backtest data doesn't mean they aren't there though or that the factors that lead to 10 years of amazing US performance can't easily reverse

[SB1234]

Webster's defines insurance as "coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril" since there is no guarantee its kind of a weird question. As any amount of international will be enough to guarantee only squat.

[Marseille07]

Presumably all the times the global portfolio outperformed the US only portfolio. The global portfolio underperformed the US only portfolio, we gave up potential upside to achieve a less risky portfolio, which sounds like the textbook definition of a hedge. Just because the US concentration risks didn't come to fruition in the backtest data doesn't mean they aren't there though or that the factors that lead to 10 years of amazing US performance can't easily reverse

But the fact is VT is 60% US. It's not that the US concentration risks didn't come to fruition; it is that when the risks came, VT also went down (as it should, since the US is a major holding). This is what I mean by understand how much you're actually hedging.

[km91]

Presumably all the times the global portfolio outperformed the US only portfolio. The global portfolio underperformed the US only portfolio, we gave up potential upside to achieve a less risky portfolio, which sounds like the textbook definition of a hedge. Just because the US concentration risks didn't come to fruition in the backtest data doesn't mean they aren't there though or that the factors that lead to 10 years of amazing US performance can't easily reverse

But the fact is VT is 60% US. It's not that the US concentration risks didn't come to fruition; it is that when the risks came, VT also went down (as it should, since the US is a major holding). This is what I mean by understand how much you're actually hedging.

But I keep telling you I understand how much I'm really hedging. You just keep pointing to the fact that VT is 60% US. I understand that the US is a large portion of the global market cap and global economy, and that equity markets corelate in times of crisis. But I want a more diversified portfolio, not a less diversified portfolio, so I hold more than US only. Like I said, my actual allocation is 40/60 US/ex US which is a further tilt than most all world index funds