Should you own only non-U.S. stocks?

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CULater
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Should you own only non-U.S. stocks?

Post by CULater » Fri Nov 10, 2017 2:10 pm

According to Rob Arnott's group, Research Affiliates, you shouldn't own any U.S. stocks at all right now:
Let’s take yet a deeper dive into the composition of 10%-volatility efficient portfolio, which at first glance may appear relatively benign to most investors. In particular, let’s look at the equity allocation. Start by asking whether 27% in equities seems too little, too much, or just right. We would not be surprised by the response “too little,” because many investors and advisors think of the stock market as the main place to allocate investment dollars for the long run. Now take a look at the following breakdown. Approximately 67% of the equity allocation is in emerging markets and 33% in Europe, Australasia, and the Far East (EAFE), with a 0% allocation to US equities. This is not a typo: today’s diversified portfolio does not invest in US equities at all.
https://www.researchaffiliates.com/en_u ... tburn.html
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Re: Should you own only non-U.S. stocks?

Post by brad.clarkston » Fri Nov 10, 2017 2:13 pm

I was all excited about reading the blog post and then noticed it's from RA which is a non-starter for me.

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Portfolio7
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Re: Should you own only non-U.S. stocks?

Post by Portfolio7 » Fri Nov 10, 2017 3:33 pm

Are you a betting man (or woman)?

I am ok with a tilt towards Int'l, but only with about 10-15% of my portfolio. S&P is also up 15% this year.
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Re: Should you own only non-U.S. stocks?

Post by oldcomputerguy » Fri Nov 10, 2017 7:51 pm

CULater wrote:
Fri Nov 10, 2017 2:10 pm
According to Rob Arnott's group, Research Affiliates, you shouldn't own any U.S. stocks at all right now:
Doesn’t that “right now” imply market timing?
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Re: Should you own only non-U.S. stocks?

Post by in_reality » Sat Nov 11, 2017 12:21 am

CULater wrote:
Fri Nov 10, 2017 2:10 pm
According to Rob Arnott's group, Research Affiliates, you shouldn't own any U.S. stocks at all right now:
Let’s take yet a deeper dive into the composition of 10%-volatility efficient portfolio, which at first glance may appear relatively benign to most investors. In particular, let’s look at the equity allocation. Start by asking whether 27% in equities seems too little, too much, or just right. We would not be surprised by the response “too little,” because many investors and advisors think of the stock market as the main place to allocate investment dollars for the long run. Now take a look at the following breakdown. Approximately 67% of the equity allocation is in emerging markets and 33% in Europe, Australasia, and the Far East (EAFE), with a 0% allocation to US equities. This is not a typo: today’s diversified portfolio does not invest in US equities at all.
https://www.researchaffiliates.com/en_u ... tburn.html
It makes sense to me from the standpoint of expected returns. Due to high valuations, the US has lower future expected returns. I don't think that is disputable.

"Expected returns" though are ex-ante (before the fact), and what matters is ex-post (after the fact). They are definitely not the same thing, and while making a bet with your allocation may be rewarding it is also concentrating your positions which may come back to bite you.

So yes, at some point in the future, I am 95%+ sure that international stocks will have a better run than US equities due to the current starting point. What I don't know is the timing of that or if it will occur in my investing horizon. Worst would be not diversifying and then having some black swan event occur to non-US investments causing them to underperform significantly in my investment horizon.

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Re: Should you own only non-U.S. stocks?

Post by whodidntante » Sat Nov 11, 2017 2:50 pm

If you're adopting tactical allocation then adopting a tilt to EM followed by DM is reasonable. I personally would not exclude US stocks entirely, but I get why others might. If I could only hold one, then I would dump my US stocks right now.

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Re: Should you own only non-U.S. stocks?

Post by RyeWhiskey » Sat Nov 11, 2017 3:10 pm

A quick check tells me that Vanguard Total World Stock Index is at 52.1% domestic equity, so that's where I'll remain. I'm willing to bet that in the long run this index outperforms whatever 'method' is used to jump between domestic and international, but only time will tell. :beer
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Re: Should you own only non-U.S. stocks?

Post by Tycoon » Sat Nov 11, 2017 3:14 pm

No, I shouldn't own only non-U.S. stocks.
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Re: Should you own only non-U.S. stocks?

Post by Dottie57 » Sat Nov 11, 2017 3:30 pm

RyeWhiskey wrote:
Sat Nov 11, 2017 3:10 pm
A quick check tells me that Vanguard Total World Stock Index is at 52.1% domestic equity, so that's where I'll remain. I'm willing to bet that in the long run this index outperforms whatever 'method' is used to jump between domestic and international, but only time will tell. :beer
+1

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Re: Should you own only non-U.S. stocks?

Post by CULater » Sat Nov 11, 2017 5:28 pm

The authors are suggesting only a 27% allocation to stocks, which projects about 10% annualized SD in returns, with the rest of portfolio in other investments. Not sure I'd want all 27% in non-U.S. stocks only, but I don't think it would be completely bonkers with such a small allocation; especially given the nosebleed valuations on U.S. stocks right now.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: Should you own only non-U.S. stocks?

Post by staythecourse » Sat Nov 11, 2017 6:11 pm

Well that is just idiotic.

One can do whatever they want, but how could you exclude almost 50% of the equity in the WORLD and still say you are diversified? That makes no sense. Of course, I would say the same to an investor who is 100% U.S. so guess at least I am consistent. :D

Good luck.
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Re: Should you own only non-U.S. stocks?

Post by KyleAAA » Sat Nov 11, 2017 6:15 pm

No. Same answer for if you should own only US stocks. The end.

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Re: Should you own only non-U.S. stocks?

Post by nisiprius » Sat Nov 11, 2017 6:24 pm

I used to say "just tell me how much of your stock allocation you want to be invested internationally, from 0 to 50%, and I can find you an expert who recommends that allocation." Now I can take out that reservation and just say, unconditionally, "just tell me how much of your stock allocation you want to be invested internationally and I can find you an expert who recommends that allocation."
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Re: Should you own only non-U.S. stocks?

Post by TheTimeLord » Sat Nov 11, 2017 7:58 pm

Tycoon wrote:
Sat Nov 11, 2017 3:14 pm
No, I shouldn't own only non-U.S. stocks.
I agree, I have no interest in owning only International equities.
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Re: Should you own only non-U.S. stocks?

Post by pascalwager » Sat Nov 11, 2017 8:31 pm

Portfolio7 wrote:
Fri Nov 10, 2017 3:33 pm
Are you a betting man (or woman)?

I am ok with a tilt towards Int'l, but only with about 10-15% of my portfolio. S&P is also up 15% this year.
You're not tilting towards int'l, you're tilting away from int'l and strongly towards US. (Today, int'l is 47.6% of world market.)

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Re: Should you own only non-U.S. stocks?

Post by columbia » Sat Nov 11, 2017 11:16 pm

SCV is cheaper than TISM. Perhaps people should only own the former. ;)

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Re: Should you own only non-U.S. stocks?

Post by arcticpineapplecorp. » Sat Nov 11, 2017 11:53 pm

funny how things change. Just a few years ago people were asking "Should you own any international stocks?"
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Re: Should you own only non-U.S. stocks?

Post by HomerJ » Sun Nov 12, 2017 12:19 am

According to Rob Arnott's group, Research Affiliates
What did they predict in the past? Were they correct?

I just did a quick google search and I'm not finding a lot of their old predictions.

I did see something where Rob Arnott was part of a group that predicted a lower equity premium going forward for the U.S. About 6.5% nominal total return was the prediction.

Instead, we've gotten 14% nominal a year for the past 6 years.

Does it sound like his models are accurate? Should one really be making all-in 100% in one direction bets based on what some random group on the Internet says?

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Re: Should you own only non-U.S. stocks?

Post by dkturner » Sun Nov 12, 2017 10:08 am

oldcomputerguy wrote:
Fri Nov 10, 2017 7:51 pm
CULater wrote:
Fri Nov 10, 2017 2:10 pm
According to Rob Arnott's group, Research Affiliates, you shouldn't own any U.S. stocks at all right now:
Doesn’t that “right now” imply market timing?

I would certainly hope so. I would hate to pay the fees that Research Affiliates charges for a static buy and hold portfolio.

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Re: Should you own only non-U.S. stocks?

Post by TheNightsToCome » Sun Nov 12, 2017 10:57 am

CULater wrote:
Fri Nov 10, 2017 2:10 pm
According to Rob Arnott's group, Research Affiliates, you shouldn't own any U.S. stocks at all right now:
Let’s take yet a deeper dive into the composition of 10%-volatility efficient portfolio, which at first glance may appear relatively benign to most investors. In particular, let’s look at the equity allocation. Start by asking whether 27% in equities seems too little, too much, or just right. We would not be surprised by the response “too little,” because many investors and advisors think of the stock market as the main place to allocate investment dollars for the long run. Now take a look at the following breakdown. Approximately 67% of the equity allocation is in emerging markets and 33% in Europe, Australasia, and the Far East (EAFE), with a 0% allocation to US equities. This is not a typo: today’s diversified portfolio does not invest in US equities at all.
https://www.researchaffiliates.com/en_u ... tburn.html
I have only 25% of my portfolio in equities, all international. I did this because US valuations are currently among the highest in history. International valuations appear to be relatively more attractive, albeit unexciting.

Thanks for the link. I'm very interested to read what Arnott has to say.

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TD2626
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Re: Should you own only non-U.S. stocks?

Post by TD2626 » Sun Nov 12, 2017 11:00 am

nisiprius wrote:
Sat Nov 11, 2017 6:24 pm
I used to say "just tell me how much of your stock allocation you want to be invested internationally, from 0 to 50%, and I can find you an expert who recommends that allocation." Now I can take out that reservation and just say, unconditionally, "just tell me how much of your stock allocation you want to be invested internationally and I can find you an expert who recommends that allocation."
A fairly cynical but very reasonable rule of thumb is this: in any field, you can find an well-credentialed expert, or a formal academic paper, advocating almost anything. Sure, virtually all experts may say tobacco is bad for health... but you can probably find one oddball M.D. who says otherwise. Sure, even though there's (as far as I can tell) an overwhelming consensus among investment experts that it is not just reasonable but necessary to hold US stocks, you can always find one naysayer.

Note that a lot of times the naysayers are speaking to a different audience. Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors. Someone suggesting tobacco isn't bad for health (despite the overwhelming consensus) is probably speaking to or for their (tobacco co.) employer.

So it's a matter of finding what the consensus is in a given field. That is harder than simply reading one peer reviewed paper. One needs to read a lot of papers, and a lot of meta-analyses and white papers. There's no authoritative source for what the "consensus" is. In investing, though, looking at what Vanguard and Fidelity default to using in target date funds could be helpful. Also, sources like the Bogleheads wiki and articles by Morningstar or similar sources could provide additional sources. While the consensus in my opinion represents what is thought to be the best way to invest by the most people, it is imperfectly defined and could be wrong.

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Re: Should you own only non-U.S. stocks?

Post by Flugugrubah » Sun Nov 12, 2017 11:21 am

Here's my take on the question:

Predicting the future return of an asset is hard, most models involve some sort of subjective opinion. The closest one can come to predicting the future, is through back testing, and in doing so trying to find a strategy that can outperform the market (Since in saying you should not invest in US you have to believe you can predict the future and use this to profit thereby overperforming the market benchmark). There are a few strategies out there that say they can do so, these strategies are said to be statistically significant and robust (ex. Fama & French 4 Factor Model), however one can never be 100 percent certain. What one can do to maximize returns for ones given risk level is to diversify, in diversifying one should try to look at all different types of asset classes in all different geographical regions. One can of course believe a certain geographical region is overvalued (ex. like many think the US is at the moment). But remember that in saying a region is “overvalued” one has to believe it is overvalued relative to what is expected of it in the future. And as stated above predicting the future is hard, if anything I would then recommend using a strategy that has been tested and is robust/statistically significant when trying to predict the future. With all this being said, even if it is possible to use a strategy to predict the future outcome of a region always remember that the market is highly irrational, so a continuously higher return than what you expect from your predictions is possible, even if your predictions regarding the true value is correct. As a final note there are of course certain strategies which try to incorporate market irrationality into their predictions, but in the end one can never be 100% certain. So when you overweight a certain part of your portfolio or exclude certain regions from it you are making a bet against the market being efficient.

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Re: Should you own only non-U.S. stocks?

Post by TheNightsToCome » Sun Nov 12, 2017 11:29 am

TD2626 wrote:
Sun Nov 12, 2017 11:00 am
nisiprius wrote:
Sat Nov 11, 2017 6:24 pm
I used to say "just tell me how much of your stock allocation you want to be invested internationally, from 0 to 50%, and I can find you an expert who recommends that allocation." Now I can take out that reservation and just say, unconditionally, "just tell me how much of your stock allocation you want to be invested internationally and I can find you an expert who recommends that allocation."
A fairly cynical but very reasonable rule of thumb is this: in any field, you can find an well-credentialed expert, or a formal academic paper, advocating almost anything. Sure, virtually all experts may say tobacco is bad for health... but you can probably find one oddball M.D. who says otherwise. Sure, even though there's (as far as I can tell) an overwhelming consensus among investment experts that it is not just reasonable but necessary to hold US stocks, you can always find one naysayer.

Note that a lot of times the naysayers are speaking to a different audience. Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors. Someone suggesting tobacco isn't bad for health (despite the overwhelming consensus) is probably speaking to or for their (tobacco co.) employer.

So it's a matter of finding what the consensus is in a given field. That is harder than simply reading one peer reviewed paper. One needs to read a lot of papers, and a lot of meta-analyses and white papers. There's no authoritative source for what the "consensus" is. In investing, though, looking at what Vanguard and Fidelity default to using in target date funds could be helpful. Also, sources like the Bogleheads wiki and articles by Morningstar or similar sources could provide additional sources. While the consensus in my opinion represents what is thought to be the best way to invest by the most people, it is imperfectly defined and could be wrong.
"Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors."

Valuing the market is not timing the market.

Short-term market timers buy because they think a price is going to go up (for whatever reason, often simply because it has been rising recently) over the short term. They pay no attention to valuation.

Valuation is a strong predictor of long-term market returns, but it predicts very little about short-term returns. Investors who use valuations to guide decisions are not market-timers. Value investors often buy securities that have been falling in price with the intention of holding them for the long term. They (value investors) are the antithesis of market timers.

This misconception that valuing an asset is "market-timing" is repeated frequently on this forum.

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Re: Should you own only non-U.S. stocks?

Post by abuss368 » Sun Nov 12, 2017 11:31 am

nisiprius wrote:
Sat Nov 11, 2017 6:24 pm
I used to say "just tell me how much of your stock allocation you want to be invested internationally, from 0 to 50%, and I can find you an expert who recommends that allocation." Now I can take out that reservation and just say, unconditionally, "just tell me how much of your stock allocation you want to be invested internationally and I can find you an expert who recommends that allocation."
Very true indeed. I wonder if Vanguard will eventually recommend a 50% U.S. and 50% International equity allocation.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Should you own only non-U.S. stocks?

Post by abuss368 » Sun Nov 12, 2017 11:32 am

Does this "advice" not violate all three strategies of investment return:

1) Asset Allocation
2) Market Timing
3) Security Selection
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Re: Should you own only non-U.S. stocks?

Post by TheNightsToCome » Sun Nov 12, 2017 11:40 am

Flugugrubah wrote:
Sun Nov 12, 2017 11:21 am
Here's my take on the question:

Predicting the future return of an asset is hard, most models involve some sort of subjective opinion. The closest one can come to predicting the future, is through back testing, and in doing so trying to find a strategy that can outperform the market (Since in saying you should not invest in US you have to believe you can predict the future and use this to profit thereby overperforming the market benchmark). There are a few strategies out there that say they can do so, these strategies are said to be statistically significant and robust (ex. Fama & French 4 Factor Model), however one can never be 100 percent certain. What one can do to maximize returns for ones given risk level is to diversify, in diversifying one should try to look at all different types of asset classes in all different geographical regions. One can of course believe a certain geographical region is overvalued (ex. like many think the US is at the moment). But remember that in saying a region is “overvalued” one has to believe it is overvalued relative to what is expected of it in the future. And as stated above predicting the future is hard, if anything I would then recommend using a strategy that has been tested and is robust/statistically significant when trying to predict the future. With all this being said, even if it is possible to use a strategy to predict the future outcome of a region always remember that the market is highly irrational, so a continuously higher return than what you expect from your predictions is possible, even if your predictions regarding the true value is correct. As a final note there are of course certain strategies which try to incorporate market irrationality into their predictions, but in the end one can never be 100% certain. So when you overweight a certain part of your portfolio or exclude certain regions from it you are making a bet against the market being efficient.
"Predicting the future return of an asset is hard"

But bogleheads do it all the time. Usually, they use the historical average return to predict the future return.

Research Affiliates--and John Bogle himself--use the historical record, but don't settle on the historical average return. Instead, they understand the components of returns, the drivers of the historical average return: dividends paid, dividend growth, and valuation change. They use this additional data to provide a better prediction.

RA publishes two alternative methods: one using only dividend yield and dividend growth, and a second that incorporates a reversion toward historical average valuations over a given horizon (e.g., 10 years).

If the current yield is lower and the current valuation is higher than the historical mean, then the future return cannot be equal to the historical mean return unless future growth is higher than the historical rate and/or the future valuation rises even higher. That is just math.

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Re: Should you own only non-U.S. stocks?

Post by TD2626 » Sun Nov 12, 2017 11:55 am

TheNightsToCome wrote:
Sun Nov 12, 2017 11:29 am
TD2626 wrote:
Sun Nov 12, 2017 11:00 am
nisiprius wrote:
Sat Nov 11, 2017 6:24 pm
I used to say "just tell me how much of your stock allocation you want to be invested internationally, from 0 to 50%, and I can find you an expert who recommends that allocation." Now I can take out that reservation and just say, unconditionally, "just tell me how much of your stock allocation you want to be invested internationally and I can find you an expert who recommends that allocation."
A fairly cynical but very reasonable rule of thumb is this: in any field, you can find an well-credentialed expert, or a formal academic paper, advocating almost anything. Sure, virtually all experts may say tobacco is bad for health... but you can probably find one oddball M.D. who says otherwise. Sure, even though there's (as far as I can tell) an overwhelming consensus among investment experts that it is not just reasonable but necessary to hold US stocks, you can always find one naysayer.

Note that a lot of times the naysayers are speaking to a different audience. Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors. Someone suggesting tobacco isn't bad for health (despite the overwhelming consensus) is probably speaking to or for their (tobacco co.) employer.

So it's a matter of finding what the consensus is in a given field. That is harder than simply reading one peer reviewed paper. One needs to read a lot of papers, and a lot of meta-analyses and white papers. There's no authoritative source for what the "consensus" is. In investing, though, looking at what Vanguard and Fidelity default to using in target date funds could be helpful. Also, sources like the Bogleheads wiki and articles by Morningstar or similar sources could provide additional sources. While the consensus in my opinion represents what is thought to be the best way to invest by the most people, it is imperfectly defined and could be wrong.
"Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors."

Valuing the market is not timing the market.

Short-term market timers buy because they think a price is going to go up (for whatever reason, often simply because it has been rising recently) over the short term. They pay no attention to valuation.

Valuation is a strong predictor of long-term market returns, but it predicts very little about short-term returns. Investors who use valuations to guide decisions are not market-timers. Value investors often buy securities that have been falling in price with the intention of holding them for the long term. They (value investors) are the antithesis of market timers.

This misconception that valuing an asset is "market-timing" is repeated frequently on this forum.
Maybe there's a misconception over what we are each thinking when we say "long term" and "short term".

To me, investors who invest in stocks in their 20s and plan to have at least some positions in stocks until their mid 90s have a time horizon of 70 years. Thus, 7 decades is "long term" in that view. Relative to that, anything less than about 20-30 years is short-term in my opinion.

For speculative professional traders/arbitrageurs making millisecond-based trades, making second-by-second trades is long-term relative to that.

An individual investor is much closer to the 70 year time horizon scenario. That is why I consider definitions of "long-term" and "short-term" to be on the order of decades. Thus, trading in and out over timescales of 3-5 years is short term speculative market timing, in my opinion.

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Re: Should you own only non-U.S. stocks?

Post by TheNightsToCome » Sun Nov 12, 2017 12:44 pm

TD2626 wrote:
Sun Nov 12, 2017 11:55 am
TheNightsToCome wrote:
Sun Nov 12, 2017 11:29 am
TD2626 wrote:
Sun Nov 12, 2017 11:00 am
nisiprius wrote:
Sat Nov 11, 2017 6:24 pm
I used to say "just tell me how much of your stock allocation you want to be invested internationally, from 0 to 50%, and I can find you an expert who recommends that allocation." Now I can take out that reservation and just say, unconditionally, "just tell me how much of your stock allocation you want to be invested internationally and I can find you an expert who recommends that allocation."
A fairly cynical but very reasonable rule of thumb is this: in any field, you can find an well-credentialed expert, or a formal academic paper, advocating almost anything. Sure, virtually all experts may say tobacco is bad for health... but you can probably find one oddball M.D. who says otherwise. Sure, even though there's (as far as I can tell) an overwhelming consensus among investment experts that it is not just reasonable but necessary to hold US stocks, you can always find one naysayer.

Note that a lot of times the naysayers are speaking to a different audience. Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors. Someone suggesting tobacco isn't bad for health (despite the overwhelming consensus) is probably speaking to or for their (tobacco co.) employer.

So it's a matter of finding what the consensus is in a given field. That is harder than simply reading one peer reviewed paper. One needs to read a lot of papers, and a lot of meta-analyses and white papers. There's no authoritative source for what the "consensus" is. In investing, though, looking at what Vanguard and Fidelity default to using in target date funds could be helpful. Also, sources like the Bogleheads wiki and articles by Morningstar or similar sources could provide additional sources. While the consensus in my opinion represents what is thought to be the best way to invest by the most people, it is imperfectly defined and could be wrong.
"Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors."

Valuing the market is not timing the market.

Short-term market timers buy because they think a price is going to go up (for whatever reason, often simply because it has been rising recently) over the short term. They pay no attention to valuation.

Valuation is a strong predictor of long-term market returns, but it predicts very little about short-term returns. Investors who use valuations to guide decisions are not market-timers. Value investors often buy securities that have been falling in price with the intention of holding them for the long term. They (value investors) are the antithesis of market timers.

This misconception that valuing an asset is "market-timing" is repeated frequently on this forum.
Maybe there's a misconception over what we are each thinking when we say "long term" and "short term".

To me, investors who invest in stocks in their 20s and plan to have at least some positions in stocks until their mid 90s have a time horizon of 70 years. Thus, 7 decades is "long term" in that view. Relative to that, anything less than about 20-30 years is short-term in my opinion.

For speculative professional traders/arbitrageurs making millisecond-based trades, making second-by-second trades is long-term relative to that.

An individual investor is much closer to the 70 year time horizon scenario. That is why I consider definitions of "long-term" and "short-term" to be on the order of decades. Thus, trading in and out over timescales of 3-5 years is short term speculative market timing, in my opinion.
"Thus, trading in and out over timescales of 3-5 years is short term speculative market timing, in my opinion."

I agree. The point is the same.

From Siegel's Stocks for the Long Run, the total real return between 1871 and 2001 was 6.8%. This return was provided by a 4.6% dividend yield and 2.1% real capital appreciation. (See Table 1-1 on page 13 in the Third Edition.) Real capital appreciation is composed of real earnings growth and valuation change. The real earnings growth was 1.25% (Table 6-1, page 94, same book). Therefore, the rest of the 2.1% capital appreciation was a rise in valuation.

The current dividend yield is 1.95% (Barrons.com). The mean PE10 since 1881 is about 16.8. The current PE10 is about 31.33 (Robert Shiller's website).

Shiller reported (in recent interview) that real earnings growth from 1881 until the present is about 1.8% (better than Siegel's reported 1.25%).

Starting with a 1.95% dividend, and assuming the historical growth rate (Shiller's higher number) of 1.8%, we should expect a long-term S&P 500 return of 3.75%--if the valuation never falls. This is way below the historical average of 6.8%, but this estimate is derived from the historical record. It simply makes better use of the data in the historical record than the simplistic use of the overall average return. Starting conditions matter.

This framework is the basis for one of the methods published by Research Affiliates. A 3-5 year horizon is so short that this method, or any other method, is unlikely to be useful except by chance. However, if long-term future growth is similar to past growth, then it will be much more accurate than using the average 6.8% historical return.

The method above ignores valuation. The change in valuation matters less and less as the horizon increases, but it still matters a lot at 30 years, which is a very important length of time relative to the investing lives of most of us. Historically, valuations have reverted to the mean in 12 years or less. The effect of valuation change is the dominate determinant of returns at 10-12 years.

Research Affiliates uses a second method identical to the above, except it projects that valuations fall only halfway to the long-term mean over a 10 year horizon. (GMO uses a 7-year horizon for a full reversion to its estimate of the future mean, which is higher than the historical mean, i.e., PE10 of 21-22. John Hussman uses a 10-12 year horizon for reversion to the historical mean. These horizons are based on examinations of the historical record.)

If the valuation (PE10) falls toward 16.8 from 31.3, then it will provide a haircut to the 3.75% estimate above. This is why Bogle estimates a 10-year nominal return of 4% (which might be a real return of about 2%) instead of 6%.

My horizon is 30+ years (knock on wood). I think I will probably have an opportunity to buy foreign equities at lower prices. That is, I expect to lose money between now and the next major bear market. However, I could be wrong about that, and foreign equities appear to offer a relatively attractive long-term real return. That's why I own them, not because I expect higher prices over the short-term; I don't.

US stocks have almost never been more expensive (i.e., expected returns so low). To the extent that I own equities, I prefer to invest elsewhere.

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Re: Should you own only non-U.S. stocks?

Post by Flugugrubah » Sun Nov 12, 2017 1:56 pm

TheNightsToCome wrote:
Sun Nov 12, 2017 11:40 am
Flugugrubah wrote:
Sun Nov 12, 2017 11:21 am
Here's my take on the question:

Predicting the future return of an asset is hard, most models involve some sort of subjective opinion. The closest one can come to predicting the future, is through back testing, and in doing so trying to find a strategy that can outperform the market (Since in saying you should not invest in US you have to believe you can predict the future and use this to profit thereby overperforming the market benchmark). There are a few strategies out there that say they can do so, these strategies are said to be statistically significant and robust (ex. Fama & French 4 Factor Model), however one can never be 100 percent certain. What one can do to maximize returns for ones given risk level is to diversify, in diversifying one should try to look at all different types of asset classes in all different geographical regions. One can of course believe a certain geographical region is overvalued (ex. like many think the US is at the moment). But remember that in saying a region is “overvalued” one has to believe it is overvalued relative to what is expected of it in the future. And as stated above predicting the future is hard, if anything I would then recommend using a strategy that has been tested and is robust/statistically significant when trying to predict the future. With all this being said, even if it is possible to use a strategy to predict the future outcome of a region always remember that the market is highly irrational, so a continuously higher return than what you expect from your predictions is possible, even if your predictions regarding the true value is correct. As a final note there are of course certain strategies which try to incorporate market irrationality into their predictions, but in the end one can never be 100% certain. So when you overweight a certain part of your portfolio or exclude certain regions from it you are making a bet against the market being efficient.
"Predicting the future return of an asset is hard"

But bogleheads do it all the time. Usually, they use the historical average return to predict the future return.

Research Affiliates--and John Bogle himself--use the historical record, but don't settle on the historical average return. Instead, they understand the components of returns, the drivers of the historical average return: dividends paid, dividend growth, and valuation change. They use this additional data to provide a better prediction.

RA publishes two alternative methods: one using only dividend yield and dividend growth, and a second that incorporates a reversion toward historical average valuations over a given horizon (e.g., 10 years).

If the current yield is lower and the current valuation is higher than the historical mean, then the future return cannot be equal to the historical mean return unless future growth is higher than the historical rate and/or the future valuation rises even higher. That is just math.
In my opinion, saying bogleheads are able to correctly predict future returns "all the time" is quite naive. It's easy to say that one can "understand the components of the returns" but unless you are able to factor in investor behavior and irrationality into your calculations in a reliable way (which I highly doubt) I wouldn't say you truly understand all the components.

As an example of the complexity of valuation (without consideration taken to investor behavior): In regards to looking at dividends and dividend growth, firms rarely ever shift their dividends in accordance with their earnings, when they do it remains the same over a long period of time since they don't want to spook the market. If the dividend is ever higher than expected the firms call this a special dividend and it is excluded from the calculation. On top of this firms may start managing their earnings to make their numbers look better than they do whilst continuing to pay out the same dividends as before. I have on multiple occasions seen firms taking loans which then are used to pay out dividends to shareholders, ofcourse this is highly detrimental to shareholders, but through only looking at dividends and earnings you will fail to see that. On top of that using dividends to predict future price means you have to be able to reliably predict the amount of shares the firm will have going forward. Unless you can correctly predict the exact amount of future share repurchases or new equity issuance the firm will do, that factor will also heavily influence your prediction. A good way to get around this is ofcourse to look at other metrics and use other valuation techniques aswell, however that will mean the simplicity of looking at one metric goes out the window. Since no model is perfect and all models are built on a certain set of assumptions it will mean your final valuation will be even more uncertain.

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Re: Should you own only non-U.S. stocks?

Post by Valuethinker » Sun Nov 12, 2017 5:07 pm

CULater wrote:
Fri Nov 10, 2017 2:10 pm
According to Rob Arnott's group, Research Affiliates, you shouldn't own any U.S. stocks at all right now:
Let’s take yet a deeper dive into the composition of 10%-volatility efficient portfolio, which at first glance may appear relatively benign to most investors. In particular, let’s look at the equity allocation. Start by asking whether 27% in equities seems too little, too much, or just right. We would not be surprised by the response “too little,” because many investors and advisors think of the stock market as the main place to allocate investment dollars for the long run. Now take a look at the following breakdown. Approximately 67% of the equity allocation is in emerging markets and 33% in Europe, Australasia, and the Far East (EAFE), with a 0% allocation to US equities. This is not a typo: today’s diversified portfolio does not invest in US equities at all.
https://www.researchaffiliates.com/en_u ... tburn.html
Yes

- your home equity & labour income are correlated with US economy and to some extent US interest rate cycle and stock market

If you work for a New York investment bank, for example, this view has degree of strength

No

- you are throwing away half of all world stock markets including diversification into the bulk of its largest companies. In particular, you are missing the technology sector, there are not simple proxies for Google Amazon Apple Facebook (Intel, Cisco, Microsoft, IBM) in other stock markets

- you are losing USD diversification and that is c. 20% of world GDP + all the countries that proxy the USD + all the commodities (all of them) & other goods and services that are priced in USD

Conclusion

As an American this would be a significant error. As a British/ Japanese/ German/ Canadian etc. investor it would be a truly gross error whereas we could, by the same logic, safely ignore our domestic market (assuming our bonds were held in our home currency, at least).

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Re: Should you own only non-U.S. stocks?

Post by Portfolio7 » Sun Nov 12, 2017 5:50 pm

pascalwager wrote:
Sat Nov 11, 2017 8:31 pm
Portfolio7 wrote:
Fri Nov 10, 2017 3:33 pm
Are you a betting man (or woman)?

I am ok with a tilt towards Int'l, but only with about 10-15% of my portfolio. S&P is also up 15% this year.
You're not tilting towards int'l, you're tilting away from int'l and strongly towards US. (Today, int'l is 47.6% of world market.)
Sorry to confuse you, I could have said that more clearly. The 10-15% tilt would be in excess of one's base AA. Since you are talking percent of equity, let me restate in those terms.

As a percent of my equity allocation, I'm usually about 42% international, but have been about 49% international since January, so I've been 'tilted' 7% all year vs my base AA.

If instead of comparing to my base AA, I compared to the market weight figure you mention, I'm just a shade over market weight. I could see going to 60% or so, give or take, but not 100% international.
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Re: Should you own only non-U.S. stocks?

Post by jhfenton » Sun Nov 12, 2017 6:27 pm

Portfolio7 wrote:
Sun Nov 12, 2017 5:50 pm
pascalwager wrote:
Sat Nov 11, 2017 8:31 pm
Portfolio7 wrote:
Fri Nov 10, 2017 3:33 pm
Are you a betting man (or woman)?

I am ok with a tilt towards Int'l, but only with about 10-15% of my portfolio. S&P is also up 15% this year.
You're not tilting towards int'l, you're tilting away from int'l and strongly towards US. (Today, int'l is 47.6% of world market.)
Sorry to confuse you, I could have said that more clearly. The 10-15% tilt would be in excess of one's base AA. Since you are talking percent of equity, let me restate in those terms.
Ah. Thanks for the clarification. That confused me too.

I share your philosophy. I'm currently tilted to 55% international (% of equities) from 50% base. I made the adjustment in early December after the big post-election jump in my small-cap value tilted U.S. equities, in a bit of over-rebalancing.

But I couldn't see going more than 60 or 65% international, even if international lagged again while the U.S. went tech bubble 2.0.

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Re: Should you own only non-U.S. stocks?

Post by HomerJ » Sun Nov 12, 2017 6:44 pm

TheNightsToCome wrote:
Sun Nov 12, 2017 12:44 pm

The current dividend yield is 1.95% (Barrons.com). The mean PE10 since 1881 is about 16.8. The current PE10 is about 31.33 (Robert Shiller's website).

Shiller reported (in recent interview) that real earnings growth from 1881 until the present is about 1.8% (better than Siegel's reported 1.25%).

Starting with a 1.95% dividend, and assuming the historical growth rate (Shiller's higher number) of 1.8%, we should expect a long-term S&P 500 return of 3.75%--if the valuation never falls. This is way below the historical average of 6.8%, but this estimate is derived from the historical record. It simply makes better use of the data in the historical record than the simplistic use of the overall average return. Starting conditions matter.
Shiller himself, based on valuations, and his work that you reference, predicted a 0% ten-year real return in 1996. Instead we got 6% real over ten years. We've gotten about 6.5% real over 21 years... Fairly close to the historical record.

Valuations, at the time, were near the highest in history.

Based on valuations, experts, PhDs, using Shiller's work, predicted 4.5% 10-year real returns in 2010 and 2011. Instead, we've gotten 12% real a year so far in the past 7 years.

Maybe we've gotten lucky. Or maybe there's more variables involved here than just price and earnings and dividends.

If we have three 1-in-a-hundred year floods over 15 years, it's certainly possible that we got very unlucky.

It's also reasonable to wonder if the model is wrong.
US stocks have almost never been more expensive (i.e., expected returns so low). To the extent that I own equities, I prefer to invest elsewhere.
Here's the thing. Expected returns are for 10-year periods, not forever. You are in your 30s, and have plenty of time to invest. Even if you bought U.S. stocks, and the 10-year returns were low, you'd be building up a nest egg, and the FOLLOWING ten-years might be quite lucrative.

The long-term historical record of the U.S. stock market INCLUDES the crashes. Read that again. You didn't have to get out and get back in at the right times to get a decent return. Sure, you'd make MORE if you were able to get in at the good times, and get out at the bad times, but that's a lot harder than you apparently think.

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Re: Should you own only non-U.S. stocks?

Post by nedsaid » Sun Nov 12, 2017 7:23 pm

HomerJ wrote:
Sun Nov 12, 2017 12:19 am
According to Rob Arnott's group, Research Affiliates
What did they predict in the past? Were they correct?

I just did a quick google search and I'm not finding a lot of their old predictions.

I did see something where Rob Arnott was part of a group that predicted a lower equity premium going forward for the U.S. About 6.5% nominal total return was the prediction.

Instead, we've gotten 14% nominal a year for the past 6 years.

Does it sound like his models are accurate? Should one really be making all-in 100% in one direction bets based on what some random group on the Internet says?
We got the 14% growth because of P/E expansion, the speculative return that Mr. Bogle talks about. Stock prices ultimately will reflect actual economic growth and actual corporate earnings growth. Historically, corporate earnings grow probably more like 6% a year on a sustainable basis. Trees do not grow to the sky nor do stocks.

When I saw P/E ratios of future estimated earnings at 18 for the US Market, I wrote that US equity valuations were stretched. Now they are almost 21. P/E ratios for historical earnings are probably more like 27 P/E. For P/E ratios to keep expanding, we need rosier and rosier future scenarios to keep that going. I don't believe in planning my life around optimum scenarios which rarely happen in real life.

So I am not putting a "sell" on the US market or anything like that. I am saying that caution is warranted. Stocks look expensive but they always do in a bull market. What I will say is that forward P/E ratios got up to about 32 before things crashed in the year 2000. We are at 21 now, so we are still a long ways away from the late 1990's high tech and internet bubble. Not a reason to panic but at least enough to raise an eyebrow.
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Re: Should you own only non-U.S. stocks?

Post by MnD » Sun Nov 12, 2017 7:42 pm

I'd be OK with that (100% ex-US on equities).
The ability for other entities to bankroll my work income, home equity value, fixed income interest payments, pension and social security is highly correlated to the health of the US economy, markets and government. But I'm a chicken so I'm global market cap on equities per the Boglehead philosophy to own the whole haystack instead of trying to find needles in it or "make bets". i certainly wouldn't ever tilt to the US on equities given the strong reliance on team USA for everything else financial.

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Re: Should you own only non-U.S. stocks?

Post by HomerJ » Sun Nov 12, 2017 8:51 pm

nedsaid wrote:
Sun Nov 12, 2017 7:23 pm
We got the 14% growth because of P/E expansion, the speculative return that Mr. Bogle talks about. Stock prices ultimately will reflect actual economic growth and actual corporate earnings growth. Historically, corporate earnings grow probably more like 6% a year on a sustainable basis. Trees do not grow to the sky nor do stocks.
But rebalancing back to 50/50 (something I think you do too) means I captured most of those gains, and put my risk back to low.

My point is that no one knows enough to predict anything accurately. I hold 50/50 stocks/bonds regardless of valuations, and rebalance occasionally.

If I listened to the experts, I would have a lot less money.

A crash will indeed happen. But no one knows when. Valuations do not appear to tell the whole story.

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Re: Should you own only non-U.S. stocks?

Post by asset_chaos » Sun Nov 12, 2017 10:57 pm

HomerJ wrote:
Sun Nov 12, 2017 12:19 am
According to Rob Arnott's group, Research Affiliates
What did they predict in the past? Were they correct?

I just did a quick google search and I'm not finding a lot of their old predictions.
They run a market timing---excuse me, tactical allocation---fund for PIMCO, PAUPX. M*'s fund front page says their 10 year record with the fund is good compared to the category averge for market timing---excuse me, tactical allocation---funds, whatever that's worth, but poor compared to M*'s moderate target risk benchmark, again for whatever that's worth. Clearly their valuation driven market timing---excuse me, tactical allocation---methods have not had sufficient time for the market to recognize, correct, and reward investment in the partiular undervalued assets they favor. And who knows, maybe the market never will.
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Re: Should you own only non-U.S. stocks?

Post by Taylor Larimore » Sun Nov 12, 2017 11:19 pm

Today’s diversified portfolio does not invest in US equities at all.
Bogleheads:

A good example of an "oxymoron."

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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TD2626
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Re: Should you own only non-U.S. stocks?

Post by TD2626 » Mon Nov 13, 2017 12:39 am

TheNightsToCome wrote:
Sun Nov 12, 2017 12:44 pm
TD2626 wrote:
Sun Nov 12, 2017 11:55 am
TheNightsToCome wrote:
Sun Nov 12, 2017 11:29 am
TD2626 wrote:
Sun Nov 12, 2017 11:00 am
nisiprius wrote:
Sat Nov 11, 2017 6:24 pm
I used to say "just tell me how much of your stock allocation you want to be invested internationally, from 0 to 50%, and I can find you an expert who recommends that allocation." Now I can take out that reservation and just say, unconditionally, "just tell me how much of your stock allocation you want to be invested internationally and I can find you an expert who recommends that allocation."
A fairly cynical but very reasonable rule of thumb is this: in any field, you can find an well-credentialed expert, or a formal academic paper, advocating almost anything. Sure, virtually all experts may say tobacco is bad for health... but you can probably find one oddball M.D. who says otherwise. Sure, even though there's (as far as I can tell) an overwhelming consensus among investment experts that it is not just reasonable but necessary to hold US stocks, you can always find one naysayer.

Note that a lot of times the naysayers are speaking to a different audience. Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors. Someone suggesting tobacco isn't bad for health (despite the overwhelming consensus) is probably speaking to or for their (tobacco co.) employer.

So it's a matter of finding what the consensus is in a given field. That is harder than simply reading one peer reviewed paper. One needs to read a lot of papers, and a lot of meta-analyses and white papers. There's no authoritative source for what the "consensus" is. In investing, though, looking at what Vanguard and Fidelity default to using in target date funds could be helpful. Also, sources like the Bogleheads wiki and articles by Morningstar or similar sources could provide additional sources. While the consensus in my opinion represents what is thought to be the best way to invest by the most people, it is imperfectly defined and could be wrong.
"Someone saying "get out of US stocks" is speaking to short-term market timers, not long-term buy and hold investors."

Valuing the market is not timing the market.

Short-term market timers buy because they think a price is going to go up (for whatever reason, often simply because it has been rising recently) over the short term. They pay no attention to valuation.

Valuation is a strong predictor of long-term market returns, but it predicts very little about short-term returns. Investors who use valuations to guide decisions are not market-timers. Value investors often buy securities that have been falling in price with the intention of holding them for the long term. They (value investors) are the antithesis of market timers.

This misconception that valuing an asset is "market-timing" is repeated frequently on this forum.
Maybe there's a misconception over what we are each thinking when we say "long term" and "short term".

To me, investors who invest in stocks in their 20s and plan to have at least some positions in stocks until their mid 90s have a time horizon of 70 years. Thus, 7 decades is "long term" in that view. Relative to that, anything less than about 20-30 years is short-term in my opinion.

For speculative professional traders/arbitrageurs making millisecond-based trades, making second-by-second trades is long-term relative to that.

An individual investor is much closer to the 70 year time horizon scenario. That is why I consider definitions of "long-term" and "short-term" to be on the order of decades. Thus, trading in and out over timescales of 3-5 years is short term speculative market timing, in my opinion.
"Thus, trading in and out over timescales of 3-5 years is short term speculative market timing, in my opinion."

I agree. The point is the same.

From Siegel's Stocks for the Long Run, the total real return between 1871 and 2001 was 6.8%. This return was provided by a 4.6% dividend yield and 2.1% real capital appreciation. (See Table 1-1 on page 13 in the Third Edition.) Real capital appreciation is composed of real earnings growth and valuation change. The real earnings growth was 1.25% (Table 6-1, page 94, same book). Therefore, the rest of the 2.1% capital appreciation was a rise in valuation.

The current dividend yield is 1.95% (Barrons.com). The mean PE10 since 1881 is about 16.8. The current PE10 is about 31.33 (Robert Shiller's website).

Shiller reported (in recent interview) that real earnings growth from 1881 until the present is about 1.8% (better than Siegel's reported 1.25%).

Starting with a 1.95% dividend, and assuming the historical growth rate (Shiller's higher number) of 1.8%, we should expect a long-term S&P 500 return of 3.75%--if the valuation never falls. This is way below the historical average of 6.8%, but this estimate is derived from the historical record. It simply makes better use of the data in the historical record than the simplistic use of the overall average return. Starting conditions matter.

This framework is the basis for one of the methods published by Research Affiliates. A 3-5 year horizon is so short that this method, or any other method, is unlikely to be useful except by chance. However, if long-term future growth is similar to past growth, then it will be much more accurate than using the average 6.8% historical return.

The method above ignores valuation. The change in valuation matters less and less as the horizon increases, but it still matters a lot at 30 years, which is a very important length of time relative to the investing lives of most of us. Historically, valuations have reverted to the mean in 12 years or less. The effect of valuation change is the dominate determinant of returns at 10-12 years.

Research Affiliates uses a second method identical to the above, except it projects that valuations fall only halfway to the long-term mean over a 10 year horizon. (GMO uses a 7-year horizon for a full reversion to its estimate of the future mean, which is higher than the historical mean, i.e., PE10 of 21-22. John Hussman uses a 10-12 year horizon for reversion to the historical mean. These horizons are based on examinations of the historical record.)

If the valuation (PE10) falls toward 16.8 from 31.3, then it will provide a haircut to the 3.75% estimate above. This is why Bogle estimates a 10-year nominal return of 4% (which might be a real return of about 2%) instead of 6%.

My horizon is 30+ years (knock on wood). I think I will probably have an opportunity to buy foreign equities at lower prices. That is, I expect to lose money between now and the next major bear market. However, I could be wrong about that, and foreign equities appear to offer a relatively attractive long-term real return. That's why I own them, not because I expect higher prices over the short-term; I don't.

US stocks have almost never been more expensive (i.e., expected returns so low). To the extent that I own equities, I prefer to invest elsewhere.
I don't feel that valuation matters that much for investment over 30 year timescales. The efficient market hypothesis suggests that securities are fairly priced. Tilting slightly away from domestic while still maintaining substantial investment in both domestic and international would not be expected to highly negative results in a foreseeable manner in my opinion. It is tactical asset allocation, ultimately, which in my opinion involves high levels of speculation and market timing as well as short-termism.


Taylor Larimore wrote:
Sun Nov 12, 2017 11:19 pm
Today’s diversified portfolio does not invest in US equities at all.
Bogleheads:

A good example of an "oxymoron."

Best wishes.
Taylor
Good point - no matter what one thinks about valuations, or relative strengths of economies, or currency risk, or whatever - the lack of diversification is such that in my opinion (barring unique circumstances) someone with 0% or 100% international is likely making a serious mistake. International stock is needed to diversify among economies. Domestic stock is needed because that is literally the default place that historically people put their long term money. For a long term, buy and hold investor, having no domestic stocks is as odd in my view as having no checking accounts.

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Re: Should you own only non-U.S. stocks?

Post by Caduceus » Mon Nov 13, 2017 8:07 am

I think that would be silly. No one should bet against the U.S. Look at the nature of the top companies by market cap in the U.S., and then those in Europe, for instance. The top companies in Europe by market cap are predominantly oil companies (Shell, BP, Total) and healthcare stocks. You can take a look at the portfolio holdings of Vanguard's Europe fund to get a sense. Then look at the top companies in the U.S. - Apple, Amazon, Facebook, Alphabet, Berkshire Hathaway, etc.

Which country do you think has accounted for the bulk of genuine business innovation in the last decade? Which do you think will account for the bulk of genuine business innovation going forward?

I happen to think the U.S. markets are overvalued relative to the European markets right now, but it's not difficult to see why investors are putting a premium on U.S. stocks. Companies like Apple and Facebook earn huge (HUGE) returns without the need for high capital expenditures. Meanwhile, Shell needs to spend more than its depreciation cost every year just to maintain its reserves.

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Re: Should you own only non-U.S. stocks?

Post by Portfolio7 » Mon Nov 13, 2017 12:04 pm

Caduceus wrote:
Mon Nov 13, 2017 8:07 am
I think that would be silly. No one should bet against the U.S.

Which country do you think has accounted for the bulk of genuine business innovation in the last decade? Which do you think will account for the bulk of genuine business innovation going forward?
+1
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Re: Should you own only non-U.S. stocks?

Post by CULater » Mon Nov 13, 2017 4:14 pm

Portfolio7 wrote:
Mon Nov 13, 2017 12:04 pm
Caduceus wrote:
Mon Nov 13, 2017 8:07 am
I think that would be silly. No one should bet against the U.S.

Which country do you think has accounted for the bulk of genuine business innovation in the last decade? Which do you think will account for the bulk of genuine business innovation going forward?
+1
If I take this statement to mean anything, it would be the bell that they ring at the top. I'm old enough to remember when they were saying this about Japan, and U.S. companies were falling all over themselves to implement Japanese organizational management principles such as Quality Circles and all that. And the Japanese were so successful they were buying up expensive real estate all over the world, like Pebble Beach. That was just before the fit hit the shan.
May you have the hindsight to know where you've been, The foresight to know where you're going, And the insight to know when you've gone too far. ~ Irish Blessing

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Re: Should you own only non-U.S. stocks?

Post by nedsaid » Mon Nov 13, 2017 8:54 pm

HomerJ wrote:
Sun Nov 12, 2017 8:51 pm
nedsaid wrote:
Sun Nov 12, 2017 7:23 pm
We got the 14% growth because of P/E expansion, the speculative return that Mr. Bogle talks about. Stock prices ultimately will reflect actual economic growth and actual corporate earnings growth. Historically, corporate earnings grow probably more like 6% a year on a sustainable basis. Trees do not grow to the sky nor do stocks.
But rebalancing back to 50/50 (something I think you do too) means I captured most of those gains, and put my risk back to low.

My point is that no one knows enough to predict anything accurately. I hold 50/50 stocks/bonds regardless of valuations, and rebalance occasionally.

If I listened to the experts, I would have a lot less money.

A crash will indeed happen. But no one knows when. Valuations do not appear to tell the whole story.
What would you say if forward P/E ratios were at 32 rather than 21 as they are today. Is there a point at which you would start listening to experts? What am I bid?
A fool and his money are good for business.

garlandwhizzer
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Re: Should you own only non-U.S. stocks?

Post by garlandwhizzer » Mon Nov 13, 2017 9:24 pm

Should you own only non-U.S. stocks? NO!

Garland Whizzer

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HomerJ
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Re: Should you own only non-U.S. stocks?

Post by HomerJ » Tue Nov 14, 2017 9:51 am

nedsaid wrote:
Mon Nov 13, 2017 8:54 pm
HomerJ wrote:
Sun Nov 12, 2017 8:51 pm
nedsaid wrote:
Sun Nov 12, 2017 7:23 pm
We got the 14% growth because of P/E expansion, the speculative return that Mr. Bogle talks about. Stock prices ultimately will reflect actual economic growth and actual corporate earnings growth. Historically, corporate earnings grow probably more like 6% a year on a sustainable basis. Trees do not grow to the sky nor do stocks.
But rebalancing back to 50/50 (something I think you do too) means I captured most of those gains, and put my risk back to low.

My point is that no one knows enough to predict anything accurately. I hold 50/50 stocks/bonds regardless of valuations, and rebalance occasionally.

If I listened to the experts, I would have a lot less money.

A crash will indeed happen. But no one knows when. Valuations do not appear to tell the whole story.
What would you say if forward P/E ratios were at 32 rather than 21 as they are today. Is there a point at which you would start listening to experts? What am I bid?
There is no point where I would listen to predictions from the "experts". In fact, that's how I know when someone is NOT an expert, when they predict something, using "models".

I listen to the experts who say "You can't predict the markets, and here's how you handle investing, with that assumption in mind".

Caduceus
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Re: Should you own only non-U.S. stocks?

Post by Caduceus » Tue Nov 14, 2017 10:38 am

nedsaid wrote:
Mon Nov 13, 2017 8:54 pm

What would you say if forward P/E ratios were at 32 rather than 21 as they are today. Is there a point at which you would start listening to experts? What am I bid?
One of the problems with assessing what a normalized P/E should be for an entire universe of stocks for a given country over time is that we aren't dealing with an apples-to-apples comparison. That happens for many reasons. One of which is that fundamental accounting changes influence all stocks in that relevant universe, so the "E" can be artificially manipulated across the entire country. There was a time when US GAAP insisted on amortization of goodwill, which resulted in non-cash charges against earnings even if true economic goodwill was much higher. There was a time when US GAAP did not consider options an expense (!). In a truly efficient market, the normalized P/E for a US market that did not consider options an accounting expense ought to be lower than a US market that did expense options. Those two P/Es would reference the exact same level of economic earnings.

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HomerJ
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Re: Should you own only non-U.S. stocks?

Post by HomerJ » Tue Nov 14, 2017 10:58 am

Caduceus wrote:
Tue Nov 14, 2017 10:38 am
One of the problems with assessing what a normalized P/E should be for an entire universe of stocks for a given country over time is that we aren't dealing with an apples-to-apples comparison. That happens for many reasons. One of which is that fundamental accounting changes influence all stocks in that relevant universe, so the "E" can be artificially manipulated across the entire country. There was a time when US GAAP insisted on amortization of goodwill, which resulted in non-cash charges against earnings even if true economic goodwill was much higher. There was a time when US GAAP did not consider options an expense (!). In a truly efficient market, the normalized P/E for a US market that did not consider options an accounting expense ought to be lower than a US market that did expense options. Those two P/Es would reference the exact same level of economic earnings.
Good post. Accounting changes alone have made the "historical average P/E" mean less. Because the Earnings from 1970 (let alone 1930 or 1890!) don't match today's Earnings.

Some people claim models, like valuations, are useful because it helps you tilt the odds in your favor, like counting cards in blackjack. It doesn't mean you can predict the next card, but you can figure out that the odds of a face card coming up are higher next hand.

My problem with this analogy is that the rules of blackjack are well-known and documented. The variables are known and limited.

A better analogy would be a PhD who has no understanding of blackjack gets to see the results of 100 hands, and then has to devise a model that will let people bet successfully on the next 20 hands.

You might think that's actually possible (but remember, he's told nothing - he doesn't know that face cards are 10, he doesn't know that over 21 busts, he doesn't know that Aces can be 1 or 11, all he sees is results like king-9-7 loses to queen-6-2; he doesn't even know how many cards are in the deck to start with)

But let's throw in one more twist. The rules can change occasionally. Like the accounting rules changed in the 1990s. Good luck, Mr. PhD.

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Portfolio7
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Re: Should you own only non-U.S. stocks?

Post by Portfolio7 » Tue Nov 14, 2017 2:31 pm

CULater wrote:
Mon Nov 13, 2017 4:14 pm
Portfolio7 wrote:
Mon Nov 13, 2017 12:04 pm
Caduceus wrote:
Mon Nov 13, 2017 8:07 am
I think that would be silly. No one should bet against the U.S.

Which country do you think has accounted for the bulk of genuine business innovation in the last decade? Which do you think will account for the bulk of genuine business innovation going forward?
+1
If I take this statement to mean anything, it would be the bell that they ring at the top. I'm old enough to remember when they were saying this about Japan, and U.S. companies were falling all over themselves to implement Japanese organizational management principles such as Quality Circles and all that. And the Japanese were so successful they were buying up expensive real estate all over the world, like Pebble Beach. That was just before the fit hit the shan.
Japan was a case that was limited in scope to ten or fifteen years. The US has been a monster for a long time, and there are well known reasons for that. Those reasons are less in favor of the US than they used to be (more regulation etc) but the US is still a great place to do business. The history of innovation in the US goes a lot longer than a decade or so. I'll side with Buffett on this one, re: betting against the US. I'm not saying the US will always have the best returns, but I think it's reasonable to expect the US to remain a key economic presence in the world.
An investment in knowledge pays the best interest.

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nedsaid
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Re: Should you own only non-U.S. stocks?

Post by nedsaid » Tue Nov 14, 2017 9:00 pm

Caduceus wrote:
Tue Nov 14, 2017 10:38 am
nedsaid wrote:
Mon Nov 13, 2017 8:54 pm

What would you say if forward P/E ratios were at 32 rather than 21 as they are today. Is there a point at which you would start listening to experts? What am I bid?
One of the problems with assessing what a normalized P/E should be for an entire universe of stocks for a given country over time is that we aren't dealing with an apples-to-apples comparison. That happens for many reasons. One of which is that fundamental accounting changes influence all stocks in that relevant universe, so the "E" can be artificially manipulated across the entire country. There was a time when US GAAP insisted on amortization of goodwill, which resulted in non-cash charges against earnings even if true economic goodwill was much higher. There was a time when US GAAP did not consider options an expense (!). In a truly efficient market, the normalized P/E for a US market that did not consider options an accounting expense ought to be lower than a US market that did expense options. Those two P/Es would reference the exact same level of economic earnings.
Yes, GAAP has changed over the years and the definition of earnings is more conservative than it used to be. Larry Swedroe estimated that this could change the "P" in the P/E ratio by four additional dollars. So a P/E of 17 in 1970 might equate to a P/E today of 21. This is one reason I am not panicking. Not putting a "sell" on the market but just saying it might be a good time to: rebalance, maybe take a little off the top, and look at the market with more caution. Forward P/E's are 21 and my recollection is that trailing P/E's are at 27.

Good points about Goodwill and expensed stock options. Those were two big GAAP changes. Had stock options been expensed during the 1990's, tech company earnings would have looked less impressive.

Another reason for P/E expansion is optimism about the economy. GDP growth is looking now more like 3% rather than the "new normal" 2%. Investors are starting to feel those animal spirits.

I just think it is foolish to say that valuations don't matter, they clearly do. None of this is exact, we can sustain high stock returns if P/E ratios keep expanding. But they won't keep expanding into infinity. At some point, there will be a reversion to the mean. At some point if this keeps us, we will have to admit that stocks are getting mighty expensive and stop blaming the accountants.
A fool and his money are good for business.

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nedsaid
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Re: Should you own only non-U.S. stocks?

Post by nedsaid » Tue Nov 14, 2017 9:20 pm

HomerJ wrote:
Tue Nov 14, 2017 9:51 am
nedsaid wrote:
Mon Nov 13, 2017 8:54 pm
HomerJ wrote:
Sun Nov 12, 2017 8:51 pm
nedsaid wrote:
Sun Nov 12, 2017 7:23 pm
We got the 14% growth because of P/E expansion, the speculative return that Mr. Bogle talks about. Stock prices ultimately will reflect actual economic growth and actual corporate earnings growth. Historically, corporate earnings grow probably more like 6% a year on a sustainable basis. Trees do not grow to the sky nor do stocks.
But rebalancing back to 50/50 (something I think you do too) means I captured most of those gains, and put my risk back to low.

My point is that no one knows enough to predict anything accurately. I hold 50/50 stocks/bonds regardless of valuations, and rebalance occasionally.

If I listened to the experts, I would have a lot less money.

A crash will indeed happen. But no one knows when. Valuations do not appear to tell the whole story.
What would you say if forward P/E ratios were at 32 rather than 21 as they are today. Is there a point at which you would start listening to experts? What am I bid?
There is no point where I would listen to predictions from the "experts". In fact, that's how I know when someone is NOT an expert, when they predict something, using "models".

I listen to the experts who say "You can't predict the markets, and here's how you handle investing, with that assumption in mind".
I just think this is very flawed thinking. John Bogle in the very late 1990's calculated the future expected returns of stocks and thought stock investors were taking a whole lot of risk for a 2% future expected return over the next 10 years. Bonds were yielding about 6% and had far less risk. 6% for a low risk asset vs. 2% for a very risky asset has to give an investor some pause. He said at that time that bonds were the steal of the century. Bogle's prediction was eerily accurate. The 2000's were flat for US Stocks.

Bogle, as I recall, was at 70% stocks and talked about going to 30% stocks. He also was experiencing health issues at that time. What he actually did was go to 50% stocks and he reduced his stake over a couple of years. So his bark was a lot worse than his bite. He saw such extreme valuations in stocks that even he sat up and noticed. Larry Swedroe made a switch to Value stocks, I think about 1998 if I remember right.

The reason markets can't be predicted is that we can't predict human emotion. That is we pretty much know what economic return will be but we can't predict speculative return. At some point where speculative return gets to ridiculous levels, a bell ought to ring that this is unsustainable. Fortunately, we aren't seeing anything like the late 1990's euphoria. So this bull run probably has more to go.

There is a reversion to the mean. As P/E ratios and other valuation measurements go higher and higher, at some point you have to stand back and at least ponder this. Trees don't grow to the sky and neither do stocks.

I just think sticking fingers in your ears and saying la, la, la, I can't hear you just doesn't seem like a reasoned approach to investing.
A fool and his money are good for business.

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