Does international really buy you diversification?

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m@ver1ck
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Does international really buy you diversification?

Post by m@ver1ck » Thu Oct 11, 2018 9:31 pm

I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?

International bonds, on the other hand, might be a good diversification play - different sovereign risk - and currency risk...

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Re: Does international really buy you diversification?

Post by livesoft » Thu Oct 11, 2018 9:40 pm

The difference in total return so far in 2018 is so different that it is your answer. You got diversification in return, so you bought diversification. And currency risk happens with equities, too.
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Re: Does international really buy you diversification?

Post by AlexisAtEasternState » Thu Oct 11, 2018 9:53 pm

International diversification requires a longer term view. Bogle's arguments against holding any international stocks seem like they could apply to a Japanese investor in 1987:
  • Japanese companies sell products to many countries, so you have exposure
  • Domestic has the highest returns, so why bother with international diversification? Just buy 100% domestic [Japanese stocks]
Post hoc everyone knows how that one worked out.
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Re: Does international really buy you diversification?

Post by MotoTrojan » Thu Oct 11, 2018 10:12 pm

m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?

International bonds, on the other hand, might be a good diversification play - different sovereign risk - and currency risk...
US & Ex-US equities have pretty high correlation (when one moves, the other follows in direction) but relative magnitudes vary between these daily moves and create much larger discrepancies in long-term return. Check out US vs. Ex-US in the 2000 decade. I'm not sweating my 25% International holding.

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Re: Does international really buy you diversification?

Post by Ron Scott » Thu Oct 11, 2018 10:18 pm

I see no reason to diversify further than the THOUSANDS of US stocks and bonds I own.
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Re: Does international really buy you diversification?

Post by watchnerd » Thu Oct 11, 2018 11:52 pm

m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm

International bonds, on the other hand, might be a good diversification play - different sovereign risk - and currency risk...
Ugh, totally disagree.

I see benefit to owning foreign equities in terms of valuation of developed markets, EM, and the complicated web of multinational corps where the semi-random home-country domicile isn't necessarily indicative of revenue stream (e.g. Toyota, >50% revenue from outside of Japan, its listing domicile).

But on the flip side, US Treasuries are the risk free asset for US investors. Foreign treasuries do not improve this risk profile; if the US defaults, the economic apocalypse would be a weapon of mass destruction so bad that diversification won't help.
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heyyou
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Re: Does international really buy you diversification?

Post by heyyou » Fri Oct 12, 2018 12:23 am

a fall in us stocks leads to a fall in European stocks the next day
My foreign stocks include European, and developed Asian, and Emerging Markets stocks.

As mentioned, since foreign stocks have not kept up with the domestic market, that is diversification, just not the direction that we wanted. My Callan Periodic Table shows that the separate equity sub-asset classes may have some correlation, but not enough to be forecast/profitable, and whatever has done well will soon take a break from out-performing.

When the Japanese stocks crashed, ours probably did too, but then ours recovered.

My domestic returns have been so good, that my portfolio has grown enough, even with the foreign laggards. I tend to lose more when I get greedy.

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Re: Does international really buy you diversification?

Post by Dead Man Walking » Fri Oct 12, 2018 1:13 am

Many large cap foreign stocks participate in the global economy; therefore, an investment in them allows an investor to have a global presence that may provide diversification outside the US. Globalization may have minimized the diversification of international investments, but probably hasn't eliminated the diversification. International small and mid caps may provide greater diversification.

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Re: Does international really buy you diversification?

Post by randomizer » Fri Oct 12, 2018 2:42 am

It buys you a slice of the profits of the world's publicly traded companies. That's why I hold it, cap weighted.
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Re: Does international really buy you diversification?

Post by balbrec2 » Fri Oct 12, 2018 9:54 am

Within the realm of equity investing , yes!
Consider that some of the best run, most profitable companies in the
world are located outside the US. Why would you not want to own them?
As part of a total AA, not so much! Still I want to own some internationals.

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SquawkIdent
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Re: Does international really buy you diversification?

Post by SquawkIdent » Fri Oct 12, 2018 10:13 am

I'm not sure. But I do it anyway. :sharebeer

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Re: Does international really buy you diversification?

Post by nisiprius » Fri Oct 12, 2018 10:30 am

My opinion is that so far, historically, it has bought a slight amount of diversification, as well as some slight drag in the form of slight uncompensated risk and slightly higher expenses, and--as these threads show over and over again--it is anybody's guess whether the slight advantages outweigh the slight disadvantages. I have kept 20-25% of my equities in international for about fifteen years now and simply don't have any feelings about it one way or the other. That's not any kind of recommendation or advice, I'm just saying for the record that it's what I do. I stick to it on the principle of "staying the course."

At the end of the "lost decade" for US stocks, 2000-2009 inclusive, portfolios with often-recommended amounts of international stocks managed to eke out a small positive return above inflation (although still less than US Series I Savings Bonds returned.) The international supporters were pretty smug at that time. It's kind of hard to judge whether the faint pleasure of making a little money during the "lost decade" outweighs the mild tension headache of 2010-date.

"But what about the future," people say, and my answer is "I don't do predictions." I'm think some people are doing a certain amount of posturing and let their political and economic forecasts influence their investing. To put it plainly, if you believe that the US is destined to go in the toilet, you talk about a high international allocation, and if you believe that "For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs*," you talk about a low international allocation. And if you believe we live in a pretty well globalized economic world, than the difference between 3,656 stocks and 8,109 stocks might not amount to much.

*Warren Buffett's choice of words. An unfortunate choice, I think, given that Variety's headline for October 30th, 1929 was "Wall Street Lays an Egg."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Does international really buy you diversification?

Post by Ron Scott » Fri Oct 12, 2018 11:56 am

nisiprius wrote:
Fri Oct 12, 2018 10:30 am
"But what about the future," people say, and my answer is "I don't do predictions." I'm think some people are doing a certain amount of posturing and let their political and economic forecasts influence their investing. To put it plainly, if you believe that the US is destined to go in the toilet, you talk about a high international allocation, and if you believe that "For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs*," you talk about a low international allocation. And if you believe we live in a pretty well globalized economic world, than the difference between 3,656 stocks and 8,109 stocks might not amount to much.

*Warren Buffett
I don't do predictions either. In fact I think it's foolish to play with Firecalc and various Monte Carlo sims that use historical data to sooth our nerves. But I do believe like Warren does and see no reason for Americans to invest in international companies. Whether those golden goose eggs drive stock prices a lot higher would just be guessing...
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: Does international really buy you diversification?

Post by lukestuckenhymer » Fri Oct 12, 2018 12:17 pm

AlexisAtEasternState wrote:
Thu Oct 11, 2018 9:53 pm
Counter graph from "How To Avoid A Shark Attack" - Schwab
Image
Source: https://www.schwab.com/resource-center/ ... ark-attack
Great article. Should be front and center in the Int'l allocation debate.

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Re: Does international really buy you diversification?

Post by MJW » Fri Oct 12, 2018 1:11 pm

AlexisAtEasternState wrote:
Thu Oct 11, 2018 9:53 pm
International diversification requires a longer term view. Bogle's arguments against holding any international stocks seem like they could apply to a Japanese investor in 1987:
  • Japanese companies sell products to many countries, so you have exposure
  • Domestic has the highest returns, so why bother with international diversification? Just buy 100% domestic [Japanese stocks]
Post hoc everyone knows how that one worked out.
Yes, the Japanese investor should have been 100% US as well. :wink:

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Re: Does international really buy you diversification?

Post by Robert T » Fri Oct 12, 2018 1:34 pm

.
Just had a quick look at my returns over past 15 years (2003-2017)

Returns on international stock allocation > returns on US sock allocation in 8 of the years

Returns on US stock allocation > returns on international stock allocation in 7 of the years

Buying the "haystack" to me includes international stocks, not half the haystack i.e. just US stocks.

Robert
.

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Re: Does international really buy you diversification?

Post by heyyou » Fri Oct 12, 2018 2:32 pm

Standard reply about foreign diversification:
In the early 1990's, the America Abroad mutual fund bought only those S&P500 businesses that had more foreign revenues, trying to clone foreign exposure but with American accounting regulations. The returns were identical to the 500 index since all of those selected companies were priced on domestic stock exchanges. There was no extra reward/diversifying without actually taking the risk of owning shares of foreign businesses in a mutual fund.

The recent decade of flat returns for foreign stocks versus good returns for domestic stocks does show diversification, it's just the wrong direction from what was desired. Someday those two distinct return levels will probably be switched to the opposite sides of our (political comment) border Wall for a noticeable period.

Note that if you are satisfied with your allocation, either one is sufficient. Saving more is truly the easiest path to a larger portfolio.

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Re: Does international really buy you diversification?

Post by columbia » Fri Oct 12, 2018 5:54 pm

As correlations grow higher (compared to say 20 years ago), it seems obvious that the diversification benefit would lessen. If you want high octane equity diversification for the next 30 years, I’d turn your gaze to EM funds.

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Re: Does international really buy you diversification?

Post by Taylor Larimore » Fri Oct 12, 2018 6:48 pm

m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?

International bonds, on the other hand, might be a good diversification play - different sovereign risk - and currency risk...
m@verick:

You may find this post helpful:

How Much International Stocks? A Suggestion.

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

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Re: Does international really buy you diversification?

Post by bloom2708 » Fri Oct 12, 2018 7:12 pm

I own ~3,600 US Stocks (Total US).

I own ~6,700 non-US stocks (Total International).

Owning more good companies is a form of diversification.
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staythecourse
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Re: Does international really buy you diversification?

Post by staythecourse » Fri Oct 12, 2018 7:36 pm

I think the whole problem is what is your definition of diversification. Diversification is not just MPT of "something zigs while something else zags".

When you add Amazon stock to a portfolio of holding just Neflix stock it may not smoothen the ride and/ or improve efficiency (risk adjusted return), but help diversify by decreasing single company risk. Same as adding another 20-40 stocks as it finally minimizes single company risk to negligible factor.

By adding international it may not (most likely not) improve returns, risk, or risk adjusted return, but still has a purpose. It reduces geographical risk. It diversifies currency and political risk as well. Mr. Siegel well documents in his excellent book "Stocks for the Long Run" that U.S. vs. International which is better argument comes down to if the U.S. dollar is strong or weak compared to other currencies. If dollar is strong U.S. does better and if not international does better.

So even if international does not add return, decrease risk, or improve efficiency to an all U.S. equity portfolio does not mean it does not diversify. It diversifies currency, geography, etc...

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

staythecourse
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Re: Does international really buy you diversification?

Post by staythecourse » Fri Oct 12, 2018 7:36 pm

I think the whole problem is what is your definition of diversification. Diversification is not just MPT of "something zigs while something else zags".

When you add Amazon stock to a portfolio of holding just Neflix stock it may not smoothen the ride and/ or improve efficiency (risk adjusted return), but help diversify by decreasing single company risk. Same as adding another 20-40 stocks as it finally minimizes single company risk to negligible factor.

By adding international it may not (most likely not) improve returns, risk, or risk adjusted return, but still has a purpose. It reduces geographical risk. It diversifies currency and political risk as well. Mr. Siegel well documents in his excellent book "Stocks for the Long Run" that U.S. vs. International which is better argument comes down to if the U.S. dollar is strong or weak compared to other currencies. If dollar is strong U.S. does better and if not international does better.

So even if international does not add return, decrease risk, or improve efficiency to an all U.S. equity portfolio does not mean it does not diversify. It diversifies currency, geography, etc...

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Does international really buy you diversification?

Post by yousha » Fri Oct 12, 2018 7:41 pm

Putting bluntly, I believe International while meeting the roll of diversification does not add with any significance an added increase in one's portfolio balance. To this end, I agree with Mr. Bogle and stay away from these equities.

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Re: Does international really buy you diversification?

Post by AlohaJoe » Fri Oct 12, 2018 7:58 pm

m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?
If international doesn't offer diversification then that's the same thing as saying valuations don't matter. And if valuations don't matter then maybe we can get people to stop saying "the stock market is over-valued" and "future returns will be dramatically reduced".

I don't really see how the two things can both be true: either international -- with its dramatically different valuation -- will offer a different set of returns or current valuations have no impact on returns over the next 10-20 years.

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Re: Does international really buy you diversification?

Post by DartThrower » Sat Oct 13, 2018 8:14 am

AlohaJoe wrote:
Fri Oct 12, 2018 7:58 pm
m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?
If international doesn't offer diversification then that's the same thing as saying valuations don't matter. And if valuations don't matter then maybe we can get people to stop saying "the stock market is over-valued" and "future returns will be dramatically reduced".

I don't really see how the two things can both be true: either international -- with its dramatically different valuation -- will offer a different set of returns or current valuations have no impact on returns over the next 10-20 years.
Thanks AlohaJoe. That's a perspective I haven't thought of before. I'm in the camp of having a significant percentage international stocks (about 40% of equities). And when I look back 20 years from now, I think I will be mildly pleased to have made the decision. Valuations at the extremes start to matter. I don't really think we're there but global diversification certainly wouldn't hurt if we develop another tech bubble or become Japan-like some day.

Bogle and Shiller and even Seigel have spoken words of caution recently so some international diversification is helping me disersify risk slightly without abandoning equities, and therefore stick to my IPS.
A Boglehead can stay the course longer than the market can stay irrational.

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Re: Does international really buy you diversification?

Post by watchnerd » Sat Oct 13, 2018 9:46 am

If international had recently outperformed domestic nobody would be asking this topic's question.

Bogleheads are not immune to performance chasing behaviors.

I'm having recollections to all the REIT discussions 'back in the day'.

Or commodities.
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m@ver1ck
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Re: Does international really buy you diversification?

Post by m@ver1ck » Sat Oct 13, 2018 9:54 am

Thank you for the excellent discussion.

Something else that I need to understand.

Say the Dollar declines against other currencies by 20%. All other things remaining equal (which they won't - but that's another discussion), would we expect to see international stocks go up by ~20%?

I'm just wondering how much of the flatness of Total international stock funds is due to the dollar's strength in recent times against EUR, AUS etc.

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Re: Does international really buy you diversification?

Post by watchnerd » Sat Oct 13, 2018 10:02 am

m@ver1ck wrote:
Sat Oct 13, 2018 9:54 am


Say the Dollar declines against other currencies by 20%. All other things remaining equal (which they won't - but that's another discussion), would we expect to see international stocks go up by ~20%?
If the international fund is unhedged, yes.

And of course that gets reversed when currencies swing the other way.
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m@ver1ck
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Re: Does international really buy you diversification?

Post by m@ver1ck » Sat Oct 13, 2018 10:19 pm

watchnerd wrote:
Sat Oct 13, 2018 10:02 am
m@ver1ck wrote:
Sat Oct 13, 2018 9:54 am


Say the Dollar declines against other currencies by 20%. All other things remaining equal (which they won't - but that's another discussion), would we expect to see international stocks go up by ~20%?
If the international fund is unhedged, yes.

And of course that gets reversed when currencies swing the other way.
So - the dollar getting stronger over the past couple of years - could that explain why international hasn't done so well in the us?

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Re: Does international really buy you diversification?

Post by unclescrooge » Sun Oct 14, 2018 3:27 am

AlohaJoe wrote:
Fri Oct 12, 2018 7:58 pm
m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?
If international doesn't offer diversification then that's the same thing as saying valuations don't matter. And if valuations don't matter then maybe we can get people to stop saying "the stock market is over-valued" and "future returns will be dramatically reduced".

I don't really see how the two things can both be true: either international -- with its dramatically different valuation -- will offer a different set of returns or current valuations have no impact on returns over the next 10-20 years.
+1

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Re: Does international really buy you diversification?

Post by Valuethinker » Sun Oct 14, 2018 6:28 am

m@ver1ck wrote:
Sat Oct 13, 2018 10:19 pm
watchnerd wrote:
Sat Oct 13, 2018 10:02 am
m@ver1ck wrote:
Sat Oct 13, 2018 9:54 am


Say the Dollar declines against other currencies by 20%. All other things remaining equal (which they won't - but that's another discussion), would we expect to see international stocks go up by ~20%?
If the international fund is unhedged, yes.

And of course that gets reversed when currencies swing the other way.
So - the dollar getting stronger over the past couple of years - could that explain why international hasn't done so well in the us?
Not fully.

I don't have the breakdown but it's say only 10 per cent against other major currencies.

The real reason seems to be the stronger US economy which has been good for consumer stocks. Plus the better performance of the US financial stocks than the European ones.

And the biggest factor is the FAANG + Microsoft ie the US internet stocks.

The tech sector is far more important in USA market than any other except Taiwan where it is just one stock (Taiwan Semiconductor). And China where Alibaba plus Tencent plus Baidu (Plus Naspers ?) Is quite a bit of the index.

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Re: Does international really buy you diversification?

Post by Valuethinker » Sun Oct 14, 2018 6:57 am

AlohaJoe wrote:
Fri Oct 12, 2018 7:58 pm
m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?
If international doesn't offer diversification then that's the same thing as saying valuations don't matter. And if valuations don't matter then maybe we can get people to stop saying "the stock market is over-valued" and "future returns will be dramatically reduced".

I don't really see how the two things can both be true: either international -- with its dramatically different valuation -- will offer a different set of returns or current valuations have no impact on returns over the next 10-20 years.
Valuations do matter (I think) but we are in one of those times of discontinuity in corporate and economic history. Even Microsoft is not yet 50 years old and the internet stocks have become dominant parts of the index. Really since the last 10 years or so ex the TMT bubble.

The valuations of those stocks do far have been met by rising earnings. Even Amazon's crazy PE is, if you strip out the new investments, not do crazy. AWS makes a lot of money.

At some point the earnings growth of these things slows down and then we will say "they were overvalued".

But that will be 20 20 hindsight.

Until now the valuations of US stocks and particularly tech stocks and financial s has been sustained by the earnings growth.

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Re: Does international really buy you diversification?

Post by slowbutsteady » Sun Oct 14, 2018 6:57 pm

watchnerd wrote:
Sat Oct 13, 2018 9:46 am
If international had recently outperformed domestic nobody would be asking this topic's question.

Bogleheads are not immune to performance chasing behaviors.

I'm having recollections to all the REIT discussions 'back in the day'.

Or commodities.
+1

Quite a surprise. Shows we are all human. Rationalization is a universal force.

I have always had 35% of our portfolio in international. And will continue to keep it that way. My initial reason for the mix remains the same and is not changed by recent performance trends.
The tortoise wins every time I read that story.

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Re: Does international really buy you diversification?

Post by 2015 » Sun Oct 14, 2018 7:23 pm

Valuethinker wrote:
Sun Oct 14, 2018 6:57 am
AlohaJoe wrote:
Fri Oct 12, 2018 7:58 pm
m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?
If international doesn't offer diversification then that's the same thing as saying valuations don't matter. And if valuations don't matter then maybe we can get people to stop saying "the stock market is over-valued" and "future returns will be dramatically reduced".

I don't really see how the two things can both be true: either international -- with its dramatically different valuation -- will offer a different set of returns or current valuations have no impact on returns over the next 10-20 years.
Valuations do matter (I think) but we are in one of those times of discontinuity in corporate and economic history. Even Microsoft is not yet 50 years old and the internet stocks have become dominant parts of the index. Really since the last 10 years or so ex the TMT bubble.

The valuations of those stocks do far have been met by rising earnings. Even Amazon's crazy PE is, if you strip out the new investments, not do crazy. AWS makes a lot of money.

At some point the earnings growth of these things slows down and then we will say "they were overvalued".

But that will be 20 20 hindsight.

Until now the valuations of US stocks and particularly tech stocks and financial s has been sustained by the earnings growth.
Have I missed something? Hasn't every discharge coming out of every pundit stated that US stocks are overvalued? I seem to recall etf.com used to have post on it about every other week. Hasn't everyone and their second cousin including Bogle himself been warning to prepare for lower returns in the future due to current valuations? And now suddenly US stocks are not overvalued because valuations "have been sustained by the earnings growth." This smacks of narrative fallacy and "this time it's different."

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Re: Does international really buy you diversification?

Post by rnitz » Sun Oct 14, 2018 7:36 pm

I think the real issue is diversification to what? What phenomenon are you trying to diversify against? If it's the short term random noise of stock movements then there isn't much diversification, as the international correlation to US equities have increased over the years (although less recently). Also not much difference between 4,000 stocks and 10,000 stocks.

However, there are many other phenomena to diversify against. Against varying countries' economic growth? It should already be factored into prices, and economic growth doesn't usually positively correlate to stock performance. Against currency degradation? Yes, if the dollar should be debased (1970s anyone?) then international should diversify. Sector correction (Valuethinker's salient point of the US equity dominance in the FAANG stocks), yes. Japan situation (or the St. Petersburg market in 1905, Austrian market of 1930, etc.) situation, yes. Something I don't know, and can't think of? Yes.

I think the statistical correlation reasons for diversification (or lack thereof) are misleading. You are diversifying for uncertain, unknown, "black swans".

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Re: Does international really buy you diversification?

Post by whodidntante » Sun Oct 14, 2018 7:40 pm

"U.S. Stocks Have Been an Anomaly in Global Markets. Not Anymore."
https://www.wsj.com/articles/u-s-stocks ... _lead_pos2
“We have seen a rapid shakeout of very crowded and over-owned U.S. assets,” said Chris Weston, head of research at Pepperstone Group Limited in Melbourne. “Statistically, it feels as though convergence is due,” he said, between equities in the U.S. and the rest of the world.
Does anyone know what statistics feel like?

petulant
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Re: Does international really buy you diversification?

Post by petulant » Sun Oct 14, 2018 7:50 pm

AlohaJoe wrote:
Fri Oct 12, 2018 7:58 pm
m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?
If international doesn't offer diversification then that's the same thing as saying valuations don't matter. And if valuations don't matter then maybe we can get people to stop saying "the stock market is over-valued" and "future returns will be dramatically reduced".

I don't really see how the two things can both be true: either international -- with its dramatically different valuation -- will offer a different set of returns or current valuations have no impact on returns over the next 10-20 years.
Here's how international can offer no helpful diversification while the higher U.S. valuations won't reduce returns--it could be that U.S. stocks are expected to grow their earnings more quickly than ex-U.S. developed market stocks. This could occur for a variety of reasons, including U.S. stocks' greater exposure to technology/communications and the U.S.'s demographic growth compared to other developed markets.

To be clear, I do have a significant international allocation. I'm just pointing out how it can be consistent that international stocks don't provide diversification while high valuations may not impact U.S. returns negatively.

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nedsaid
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Re: Does international really buy you diversification?

Post by nedsaid » Sun Oct 14, 2018 7:57 pm

m@ver1ck wrote:
Thu Oct 11, 2018 9:31 pm
I see this as a recurring theme over tye past 20years or so - a fall in us stocks leads to a fall in European stocks the next day.if these walk so much hand under hand, are we really getting any diversification by investubg in international stocks?

International bonds, on the other hand, might be a good diversification play - different sovereign risk - and currency risk...
You just never know. The way in which different asset classes interact with each other does change over time. Asset classes don't have to act in the way we think they should, particularly in times of crisis. Sometimes, International and US Stocks correlate with each other and sometimes they don't.

In another thread, the relationship between stocks and bonds was discussed. It seems that much of the time that bonds rise when stocks fall in a crisis but it isn't always true. Sometimes stocks and bonds rise at the same time and sometimes they fall at the same time, the saving grace is that bonds won't fall as much as stocks.

So sometimes you wonder if the concept of diversification even works. My conclusion is that no matter how carefully your portfolio is designed to minimize volatility, your portfolio may be volatile anyway. The best solution to volatility quite often is just to ride it out.
A fool and his money are good for business.

MJW
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Re: Does international really buy you diversification?

Post by MJW » Sun Oct 14, 2018 8:49 pm

whodidntante wrote:
Sun Oct 14, 2018 7:40 pm
Does anyone know what statistics feel like?
Sort of a warm, tingling feeling.

Elysium
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Re: Does international really buy you diversification?

Post by Elysium » Sun Oct 14, 2018 9:08 pm

Part of the slight international outperformance in the lost decade over US was due to weakening dollar against the euro. Since most international holdings were currency unhedged this benefited them to boost the returns. We now have a reversal with USD strengthening against euro and other currencies. We really need to see equity returns in isolation without currency to see whether they are doing as well as US stocks or not. If we are diversifying for currency, then it works both ways, and in the end should zero out over time. Once you take that out, is there really any benefit is a big question mark.

stan1
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Re: Does international really buy you diversification?

Post by stan1 » Sun Oct 14, 2018 9:33 pm

Elysium wrote:
Sun Oct 14, 2018 9:08 pm
Once you take that out, is there really any benefit is a big question mark.
At least with large cap multi-nationals choosing GM, Ford, Apple, Bank of America, Pfizer, and Exxon over Toyota, BMW, Samsung, HSBC, Roche, and Shell seems like an active stock picking play. Looking back 50 years ago I would have wanted to invest in Sony. LG, and Samsung and not just Magnavox and RCA (had I been able to do so affordably).

Elysium
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Re: Does international really buy you diversification?

Post by Elysium » Sun Oct 14, 2018 9:53 pm

stan1 wrote:
Sun Oct 14, 2018 9:33 pm
Elysium wrote:
Sun Oct 14, 2018 9:08 pm
Once you take that out, is there really any benefit is a big question mark.
At least with large cap multi-nationals choosing GM, Ford, Apple, Bank of America, Pfizer, and Exxon over Toyota, BMW, Samsung, HSBC, Roche, and Shell seems like an active stock picking play. Looking back 50 years ago I would have wanted to invest in Sony. LG, and Samsung and not just Magnavox and RCA (had I been able to do so affordably).
That's a good point, however currency drag is something to be considered. All the research I have read says currency risk will even out over period of time, this may be true if your time is infinite, but if you are near retirement or in retirement and you are concered the currency drag on your international funds will outlast you need for funds, then that is of little consolation knowing academics are all on your side. Practicality comes into the picture then. See this chart of currency hedged and unhedged versions of same fund, this is active managed fund so the returns aren't indicative of any passive index returns, but it shows the currency effect since they are essentially same fund with currency being the return differentiator.

http://quotes.morningstar.com/chart/fun ... 2%3A955%7D

Blue line is currency hedged version of the fund, and yellow line is currency unhedged. See the disparity in returns from currency, this is the risk with international we are taking, and it looks good when USD is weak against Euro as in early part of this millenium, but not when the reverse it happening.

Here is another chart, short history of HEFA vs. EFA for passive index fund using MSCI hedged vs unhedged EAFE indexes.
http://quotes.morningstar.com/chart/etf ... 2%3A955%7D

In the last 3 years, nearly 2% difference due to currency risk. If we take out the currency risk then international is much easier to hold.

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watchnerd
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Re: Does international really buy you diversification?

Post by watchnerd » Sun Oct 14, 2018 10:57 pm

MJW wrote:
Sun Oct 14, 2018 8:49 pm
whodidntante wrote:
Sun Oct 14, 2018 7:40 pm
Does anyone know what statistics feel like?
Sort of a warm, tingling feeling.
Kind of scratchy, is my experience.
Tax Sheltered: 35% US Stock | 35% ex-US Stock | 30% TTM || Taxable: 35% US Stock | 35% ex-US Stock | 15% TTM | 15% Munis

MJW
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Re: Does international really buy you diversification?

Post by MJW » Sun Oct 14, 2018 11:40 pm

watchnerd wrote:
Sun Oct 14, 2018 10:57 pm
MJW wrote:
Sun Oct 14, 2018 8:49 pm
whodidntante wrote:
Sun Oct 14, 2018 7:40 pm
Does anyone know what statistics feel like?
Sort of a warm, tingling feeling.
Kind of scratchy, is my experience.
Hmm. You might need to be checked for homogeneity of variance.

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