The value of international stocks, in pictures

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siamond
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Re: The value of international stocks, in pictures

Post by siamond »

Valuethinker wrote: Fri Jul 13, 2018 4:19 pmAre the Vanguard numbers per cent of total portfolio or just of equities?

30 per cent of 60 per cent equities would be 18 per cent of total portfolio. If the 40 per cent is in US bonds then overall currency risk would probably be bearable.
Vanguard's advice is 20% to 40% of equities. As to currency risk, don't forget it goes both ways...
jeffh19
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Re: The value of international stocks, in pictures

Post by jeffh19 »

So lets say I want to get to say 20ish percent, and I'm about 11% now. I auto invest a bunch every month as I said at 75/25 for VTSAX/VTIAX

I'm always preaching nobody has a freaking clue what the market is going to do and I know this BUT considering how the US maybe a little high, certainly due for a correction/crash at some point and many predictions of not the strongest next few years, and maybe the International stuff has just been ok lately, and maybe more of a value......should I maybe do 50/50 us/international auto investments until I get closer to around an 80/20 portfolio?

There's no perfect or right or wrong, nobody knows the future....but I'd love to hear people's thoughts on this :)
drk
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Re: The value of international stocks, in pictures

Post by drk »

jeffh19 wrote: Fri Jul 13, 2018 7:12 pm So lets say I want to get to say 20ish percent, and I'm about 11% now. I auto invest a bunch every month as I said at 75/25 for VTSAX/VTIAX

I'm always preaching nobody has a freaking clue what the market is going to do and I know this BUT considering how the US maybe a little high, certainly due for a correction/crash at some point and many predictions of not the strongest next few years, and maybe the International stuff has just been ok lately, and maybe more of a value......should I maybe do 50/50 us/international auto investments until I get closer to around an 80/20 portfolio?

There's no perfect or right or wrong, nobody knows the future....but I'd love to hear people's thoughts on this :)
That seems like a perfectly reasonable plan, although mentally I would base it on trying to get to your target allocations rather than on relative performance.
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unclescrooge
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Re: The value of international stocks, in pictures

Post by unclescrooge »

fennewaldaj wrote: Wed Jul 11, 2018 10:41 pm
siamond wrote: Wed Jul 11, 2018 10:20 pm
SimpleGift wrote: Wed Jul 11, 2018 10:07 am To my mind, the dissection of past returns in this case has only limited information value about possible futures. About all we can say is that international and domestic stocks behaved differently in the past. Future returns are unknown.

Instead of the "past returns" argument, I'd like to highlight another one: "buy the haystack." The chart below shows the growth in the number of listed companies worldwide since 1975. While listed companies in the U.S. have been shrinking (in blue), the number of listed companies outside the U.S. has exploded in recent decades, especially in East Asia (in red).
[...]
But if one is investing for the future, say the next 30-50 years, it might pay to notice where it is in the world today that entrepreneurial dynamism is greatest. The haystack is only growing larger beyond the shores of the United States.
Exactly. Forget backtesting in this case, it doesn't help. Therefore hedge your bets for the future. Why is that complicated to understand? Beats me.
Yeah it seems like there is a divide between those of us with the attitude that we can't know the future and therefore should invest with a split kinda close to market weight and those that use look at the not huge difference in returns and say it doesn't matter. To me it seem like the burden of proof is should be on the side that tries to justify not having significant international holdings. There is a significant contingent here who take the opposite position that the burden of proof should be on international to justify itself. So of course we look at the same data and come to opposite conclusions.
Non-US markets account for 48% of the world's stocks.

Is you're going to ignore this significant portion, at least admit you're an ACTIVE INVESTOR, and not a passive one.
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unclescrooge
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Re: The value of international stocks, in pictures

Post by unclescrooge »

jhawktx wrote: Thu Jul 12, 2018 1:24 am
JoMoney wrote: Wed Jul 11, 2018 7:14 pm International stocks...
Higher volatility
More explicit risks, in terms of sovereignty issues, currency risk etc..
Higher costs and tax implications
For better or worse, it isn't going to track with U.S. benchmark
If you recognize all that, and feel compelled that you need some allocation to it for the sake of "diversification"... go for it.
+1. You are paying more for the diversity you seek.
... Said everyone who owned more than one stock. 😁
airelleofmusic
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Re: The value of international stocks, in pictures

Post by airelleofmusic »

Don't you think that we can "exploit" these different 10-year working periods between US and World ex-US by allocating only US or only ex-US (based on 12 month momentum performance for example) ?
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Valuethinker
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Re: The value of international stocks, in pictures

Post by Valuethinker »

siamond wrote: Fri Jul 13, 2018 4:30 pm
Valuethinker wrote: Fri Jul 13, 2018 4:19 pmAre the Vanguard numbers per cent of total portfolio or just of equities?

30 per cent of 60 per cent equities would be 18 per cent of total portfolio. If the 40 per cent is in US bonds then overall currency risk would probably be bearable.
Vanguard's advice is 20% to 40% of equities. As to currency risk, don't forget it goes both ways...
Thank you.

To be very precise I should have said volatility not risk. For a US investor, given the US is relatively less trade dependent than other large economic blocs, USD volatility is probably to be avoided, generally.

Taking that 20 to 40 then 12 to 24 per cent foreign equity exposure for a 60 40 portfolio. If that is the only foreign currency exposure that's probably not too much volatility to undertake due to currency. The equity return volatility will dominate.
asif408
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Re: The value of international stocks, in pictures

Post by asif408 »

airelleofmusic wrote: Sat Jul 14, 2018 5:32 am Don't you think that we can "exploit" these different 10-year working periods between US and World ex-US by allocating only US or only ex-US (based on 12 month momentum performance for example) ?
Possibly, but how many people have the patience and emotional makeup to do that? And what if the underperformance lasts longer, or the outperformance is shorter? We are probably in a period of longer term international outperformance, yet they have underperformed for 6 months, and there are already posts questioning international diversification. And how many pension plan and institutional investors would be able to implement a strategy that may underperform for several years before it outperforms? They would likely be fired or replaced.

So in theory, yes you could, but in practice, it typically doesn't work. Just look at fund flows out of EM now. Human behavior hasn't changed much, most investing is focused on short horizons and prone to large swings in emotion. So if you have the patience and emotional makeup you might be able to....
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Re: The value of international stocks, in pictures

Post by PaulF »

airelleofmusic wrote: Sat Jul 14, 2018 5:32 am Don't you think that we can "exploit" these different 10-year working periods between US and World ex-US by allocating only US or only ex-US (based on 12 month momentum performance for example) ?
I am honestly trying to judge: Is that meant to be satire?

If it is a real question, I would suggest that, no, we cannot use trends to help us in the way you suggest.
CurlyDave
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Re: The value of international stocks, in pictures

Post by CurlyDave »

PaulF wrote: Sat Jul 14, 2018 10:47 pm
airelleofmusic wrote: Sat Jul 14, 2018 5:32 am Don't you think that we can "exploit" these different 10-year working periods between US and World ex-US by allocating only US or only ex-US (based on 12 month momentum performance for example) ?
I am honestly trying to judge: Is that meant to be satire?

If it is a real question, I would suggest that, no, we cannot use trends to help us in the way you suggest.
I don't know about that. I am not one to believe that if something hasn't been done before it can't be done.

Certainly it would seem that if the periodicity of the outperformance cycle is several times longer than an observation period, one might be able to exploit the difference. There is probably a lot of data on this, but if it really provides an advantage it is very closely held data.
Answering a question is easy -- asking the right question is the hard part.
Northern Flicker
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Re: The value of international stocks, in pictures

Post by Northern Flicker »

As to currency risk, don't forget it goes both ways...
That is a specious argument actually. By definition any risk can go both ways. A "risk" that could not cut both ways is called a liability, not a risk.

The question is whether the risk either is rewarded or diversifies other risks. The long-term expected return of currency exposure is zero. By itself, currency risk is not rewarded. However, currency exposure diversifies inflation risk. I'm not sure there is any reason to believe the world market portfolio is (or for that matter isn't) the optimal mix to minimize the combined exposure to currency and inflation. Hence discussions about the optimal mix of US and non-US equities for US investors usually go in circles.
fortyofforty
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Re: The value of international stocks, in pictures

Post by fortyofforty »

I'm curious as to why a logarithmic scale would be more beneficial than a linear one (unless nisi was making a joke, which is possible). It seems that it would only magnify the appearance of variance, while the actual difference might be slight.
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siamond
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Re: The value of international stocks, in pictures

Post by siamond »

jalbert wrote: Sun Jul 15, 2018 12:59 am
As to currency risk, don't forget it goes both ways...
By definition any risk can go both ways. A "risk" that could not cut both ways is called a liability, not a risk.
You are absolutely right. And this was PRECISELY the point I was trying to make. Currency risk is not a liability. Sometimes it goes in your favor, sometimes it does not.
jalbert wrote: Sun Jul 15, 2018 12:59 am The question is whether the risk either is rewarded or diversifies other risks. The long-term expected return of currency exposure is zero. By itself, currency risk is not rewarded.
Your point is valid when looking at a specific asset class (e.g. an international fund vs. a domestic fund). But the essence of diversification is at the portfolio level. Whether the diversity comes from currency fluctuations or distinct economic trajectory or local inflation or whatever is not that important, it's the combination of diverse asset trajectories that makes for a successful portfolio.
jalbert wrote: Sun Jul 15, 2018 12:59 amHowever, currency exposure diversifies inflation risk. I'm not sure there is any reason to believe the world market portfolio is (or for that matter isn't) the optimal mix to minimize the combined exposure to currency and inflation. Hence discussions about the optimal mix of US and non-US equities for US investors usually go in circles.
Yup, that I tend to agree. It is one of those cases where no hard data can help decide. Hence we all fall back to a bunch of preconceived biases... Heck, me too. :shock:
InvestInLife
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Re: The value of international stocks, in pictures

Post by InvestInLife »

Thanks. I was just reviewing my AA thinking "Global Ex-US SUCKS. Why do I even have this? I'd do better in bonds."
I guess I'll maintain my 10% allocation. I just bought at the new year after last year's 25% climb, so I seriously don't think I'll see gains for years.
Portfolio visualizer has CAGR of Global ex-US in the 7's since 1986 (as far back as it goes), vs. TSM US in the 10's, SCV in the 12's.
Last edited by InvestInLife on Wed Aug 22, 2018 10:25 pm, edited 1 time in total.
bgf
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Re: The value of international stocks, in pictures

Post by bgf »

JoMoney wrote: Wed Jul 11, 2018 7:14 pm International stocks...
Higher volatility
More explicit risks, in terms of sovereignty issues, currency risk etc..
Higher costs and tax implications
For better or worse, it isn't going to track with U.S. benchmark
If you recognize all that, and feel compelled that you need some allocation to it for the sake of "diversification"... go for it.
Looks like a list of weak points to me.
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GoneOnTilt
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Re: The value of international stocks, in pictures

Post by GoneOnTilt »

vineviz wrote: Tue Jul 10, 2018 9:52 pm I suspect that the unusually strong recent performance of the U.S. stock market relative to international stocks might lead to investors misremembering the diversification benefits of international stocks. Symptoms may include the beliefs that international stocks always underperform and that international stocks aren't necessary because "U.S. companies are global".

I thought a stroll down memory lane might be helpful. In my scrapbook I found these images from the 1970s, 1980s, 1990s, and 2000s showing the MSCI(ex. US) index and Ibbotson's large cap US stock index growing during each of those decades.

Enjoy.

Image
Just wanted to share that I found this post about six months ago and have been going back to it many, many times to remind myself that I need to avoid recency bias and home bias, and stay the course with my international stock allocation.
Ferdinand2014
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Re: The value of international stocks, in pictures

Post by Ferdinand2014 »

vineviz wrote: Tue Jul 10, 2018 9:52 pm I suspect that the unusually strong recent performance of the U.S. stock market relative to international stocks might lead to investors misremembering the diversification benefits of international stocks. Symptoms may include the beliefs that international stocks always underperform and that international stocks aren't necessary because "U.S. companies are global".

I thought a stroll down memory lane might be helpful. In my scrapbook I found these images from the 1970s, 1980s, 1990s, and 2000s showing the MSCI(ex. US) index and Ibbotson's large cap US stock index growing during each of those decades.

Enjoy.

Image
If one were to dip their toe into international and start small to reduce behavioral tendencies, in your opinion would it be better to add say 5-10 EM instead of say 20-25 MSCI-EAFE since the idea being the correlation is lower then to the S&P 500 and in many experts opinion EM is where the future is? Put another way, with higher volatility and lower correlation, would a lower X% EM vs MSCI-EAFE offer equal diversification benefits? This question comes from someone who has avoided many of my behavioral mistakes by owning the most simple portfolio of short term T-bills and the S&P 500. With this portfolio I have avoided trading and I have done very well staying the course - even through 2008-09.
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nedsaid
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Re: The value of international stocks, in pictures

Post by nedsaid »

Thank you Vineviz, when it comes to diversification we need a good strategery, as one can see from the charts, International stocks are misunderestimated. :wink:
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lazyday
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Re: The value of international stocks, in pictures

Post by lazyday »

Ferdinand2014 wrote: Fri Aug 16, 2019 1:49 pmIf one were to dip their toe into international and start small to reduce behavioral tendencies, in your opinion would it be better to add say 5-10 EM instead of say 20-25 MSCI-EAFE since the idea being the correlation .... [snip]
This question comes from someone who has avoided many of my behavioral mistakes by owning the most simple portfolio of short term T-bills and the S&P 500. With this portfolio I have avoided trading and I have done very well staying the course - even through 2008-09.
If that’s your main concern, then couldn’t it make sense to slowly move towards another simple portfolio?

Both EM and Developed ex-US have diversification benefits according to, for example, Swensen’s Unconventional Success. Even if EM offers more benefit, if you start with EM now, would you eventually also want to own Developed someday?

If you have capital gains in the S&P 500 fund, then you might move towards your equity being just S&P 500 + Total International, such as (eventually) 50/50 or 60/40. Rather than buying EM now and someday Developed ex-US.

Or if this is a tax advantaged account, it would be even simpler to move towards just owning bills and the Total World Stock Index Fund.
Alchemist
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Re: The value of international stocks, in pictures

Post by Alchemist »

vineviz wrote: Wed Jul 11, 2018 9:22 am
Many investors may be either too young or too old to remember the period from 1971 to 1988 (nearly two full decades) during which a globally diversified equity portfolio complex completely dominated a US-only equity portfolio.
I find it a bit disingenuous to include a 17 year time period that includes the massive run up of the Japanese stock bubble but excludes the enormous crash that would be included if you used the entire two decade time period instead of "nearly two full decades" when U.S. only would pull ahead (with lower volatility!).

There are good arguments for international diversification, this is not one of them.
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Re: The value of international stocks, in pictures

Post by MoneyMarathon »

Alchemist wrote: Fri Aug 16, 2019 10:58 pm
vineviz wrote: Wed Jul 11, 2018 9:22 am
Many investors may be either too young or too old to remember the period from 1971 to 1988 (nearly two full decades) during which a globally diversified equity portfolio complex completely dominated a US-only equity portfolio.
I find it a bit disingenuous to include a 17 year time period that includes the massive run up of the Japanese stock bubble but excludes the enormous crash that would be included if you used the entire two decade time period instead of "nearly two full decades" when U.S. only would pull ahead (with lower volatility!).

There are good arguments for international diversification, this is not one of them.
I believe that you could pick any 20 year time period between 1955 and 1990 and get the same relative comparison (partly because you'd have to run it through the fifteen year inflationary gauntlet of 1966-1981 for US, including the 1973-1974 crash, partly because international was dirt cheap as it was rebuilding from WW2 devastation, partly because international was still buzzing in the 70s and 80s, partly because the US stock market deemed that it was time to reward modern investors very richly in the 1990s... but mostly because these things go back and forth and the outcome can be known only in hindsight).

Unfortunately it's difficult to get proper international index data before 1970. There are some funds that could be a rough proxy for relative performance purposes. For example, Templeton's international fund achieved over 14% CAGR for 1959-1979, when the S&P 500 had about 6% CAGR.
fortyofforty
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Re: The value of international stocks, in pictures

Post by fortyofforty »

These are all historical, backwards-looking results that have limited predictive value. As has been said before, the rear view mirror is much clearer than the windshield. I still invest internationally, despite recent performance, in the belief that more diversification will pay off in the long run. Hopefully, I'm still around to enjoy the fruits of this belief. I am, however, now beginning to doubt the advice that global equity diversification is the prudent course for all investors.
columbia
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Re: The value of international stocks, in pictures

Post by columbia »

fortyofforty wrote: Sat Aug 17, 2019 6:17 am These are all historical, backwards-looking results that have limited predictive value. As has been said before, the rear view mirror is much clearer than the windshield. I still invest internationally, despite recent performance, in the belief that more diversification will pay off in the long run. Hopefully, I'm still around to enjoy the fruits of this belief. I am, however, now beginning to doubt the advice that global equity diversification is the prudent course for all investors.
This has nothing to do with one’s preference in equities, but there’s also a bit a false time machine aspect. Your average investor using a target date fund likely had significantly limited access to even investing in the old days. Sure Wellington existed in 1950 (and obviously back to 1929), but your average person had no concept of or ability to tap into broad market returns. Investing today does not resemble the past. Beware of backtesting too far in the past.
Zosima
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Re: The value of international stocks, in pictures

Post by Zosima »

fortyofforty wrote: Sat Aug 17, 2019 6:17 am These are all historical, backwards-looking results that have limited predictive value. As has been said before, the rear view mirror is much clearer than the windshield. I still invest internationally, despite recent performance, in the belief that more diversification will pay off in the long run. Hopefully, I'm still around to enjoy the fruits of this belief. I am, however, now beginning to doubt the advice that global equity diversification is the prudent course for all investors.
I agree that historical results have limited predictive value. However, current valuations do have meaningful predictive value.

Vanguard Total Stock Market Index (VTI)
Yield: 1.80%
P/E Ratio: 20.3x
Earnings Growth: 10.73%

Vanguard International Stock Index (VXUS)
Yield: 3.14%
P/E Ratio: 14.4x
Earnings Growth: 9.45%

Vanguard Total Bond Index (BND)
Yield: 2.37%

Vanguard Total International Bond (BNDX)
Yield: 0.43%

In addition to the current valuations described above, many studies argue that the U.S. dollar is overvalued, including the IMF and the Economist's whimsical Big Mac Index. In this environment, I believe it is imprudent to underweight international equities.

https://markets.businessinsider.com/new ... 1028364276

https://www.marketwatch.com/story/big-m ... 2019-01-10
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permport
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Re: The value of international stocks, in pictures

Post by permport »

Another take, via Ray Dalio, why U.S. centric investors perhaps should reconsider their stance.

Image
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pokebowl
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Re: The value of international stocks, in pictures

Post by pokebowl »

With us now into 2020, perhaps we can update this thread with the latest decade trends which ended up originally cutting off ~2017-2018. 8-)

Especially since there is another recent discussion also using decade style look backs for U.S./World inclusion.
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Re: The value of international stocks, in pictures

Post by tealeaves »

vineviz wrote: Wed Jul 11, 2018 9:22 am

Many investors may be either too young or too old to remember the period from 1971 to 1988 (nearly two full decades) during which a globally diversified equity portfolio complex completely dominated a US-only equity portfolio.
LOL
alex123711
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Re: The value of international stocks, in pictures

Post by alex123711 »

nisiprius wrote: Wed Jul 11, 2018 8:49 am
azanon wrote: Wed Jul 11, 2018 7:13 am Are we comparing all S&P 500 vs. S&P 500/EAFE mix, or all S&P 500 vs. S&P 500/xUS stock (which would of course include emerging markets)?

linear to log graphs, now a complete axing of 20% of international stocks - the most uncorrelated to US stock group i might add. It's hard to keep up with the changes.

>Aside thought, if I found nisipirus' argument convincing, I certainly would pick right now to dump my international and go all US! Now if one has been all US stock since 09, i guess no big deal there because one has banked years and years of gains with every rebalance.
To be clear: my comparison was between 1) 60% S&P 500, 40% intermediate-term Treasuries, and 2) 30% S&P 500, 30% EAFE, 40% intermediate-term Treasuries.

Also, to be clear: I agree fully with (one of) vineviz's points, that there have been big differences in the decade-to-decade relative performance of US and international, and thus there will be important differences in the decade-to-decade returns of portfolios with and without international exposure. That's as close to a fact as anything can be, and I don't think it depends on details like which index was used.

EAFE goes back to 1969. It doesn't include emerging markets, because the term emerging markets hadn't even been coined then. The MSCI Emerging Markets index only goes back to IIRC 1988. We could include emerging markets but then we'd be throwing about 40% of the available data time period--and furthermore, it was a period of international outperformance. Look at vineviz's first chart. So the question is which is worse, throwing out 40% of available history or throwing out "20%" of international stocks.

However, if we want to use a global index, we can use PortfolioVisualizer. I used "backtested portfolio asset class" and chose asset classes similar to the ones I used for my chart. In order to make the colors match up with the chart I posted above, and with vineviz's charts, I chose to make the US-only portfolio "portfolio 2." "Portfolio 1" is the internationalized portfolio. The international index is:
Global ex-US Stock Market
AQR Global ex US MKT Factor (AQR Data Sets) 1986-1996
Vanguard Total International Stock Index Fund (VGTSX) 1997+
VGTSX definitely includes emerging markets. I can't actually find the AQR data set referenced; I assume it includes emerging markets.

As you see, during this thirty-year time period, the benefits of international exposure failed to overcome the handicaps.

Portfolio 2 (red)
Asset Class Allocation
US Large Cap 60.00%
Intermediate Term Treasury 40.00%

Portfolio 1 (blue)
Asset Class Allocation
US Large Cap 30.00%
Global ex-US Stock Market 30.00%
Intermediate Term Treasury 40.00%

Source
Image

What about a market cap weighted allocation like a total world index instead of 50/50, is there any way to see the historical performance of that? E.g right now U.S is around 70% total market, but this changes, and would be different in 1965, 1985 etc.
james22
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Re: The value of international stocks, in pictures

Post by james22 »

nisiprius wrote: Wed Jul 11, 2018 6:37 amThe following curious table suggests some fragility of the benefit. It is taken from a book published in 2010, and it is part of a section that seeks to show incremental improvement, starting from a simple 60/40 portfolio and progressively layering on factor-based diversification. The author states that "the most important diversification on the equity side is to add an international exposure." Having stated that, he displays a comparison between portfolio 1, US only, and portfolio 2, with international exposure added. The table speaks for itself.

Image
No, the table doesn't speak to the diversification from 500 to 1,415 companies.
3funder
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Re: The value of international stocks, in pictures

Post by 3funder »

I figure that even though the long-term results have been similar, it makes sense to own a meaningful slug of both since they have periodically traded off leadership.
Global stocks, US bonds, and time.
Blue456
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Re: The value of international stocks, in pictures

Post by Blue456 »

alex123711 wrote: Fri Jun 12, 2020 9:14 pm
What about a market cap weighted allocation like a total world index instead of 50/50, is there any way to see the historical performance of that? E.g right now U.S is around 70% total market, but this changes, and would be different in 1965, 1985 etc.
+1. This is what I would like to see as well. Another note that currently VT is closer to 60/40 instead of 50/50.
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siamond
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Re: The value of international stocks, in pictures

Post by siamond »

Blue456 wrote: Sat Jun 13, 2020 12:47 pm
alex123711 wrote: Fri Jun 12, 2020 9:14 pm What about a market cap weighted allocation like a total world index instead of 50/50, is there any way to see the historical performance of that? E.g right now U.S is around 70% total market, but this changes, and would be different in 1965, 1985 etc.
+1. This is what I would like to see as well. Another note that currently VT is closer to 60/40 instead of 50/50.
The MSCI World index tracked exactly that since end of 1969. Note that this only includes developed markets, as emerging markets weren't tracked until 1988.

To see corresponding numbers (and much more), check this blog article.
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