Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

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visualguy
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by visualguy » Sat Jan 12, 2019 10:27 pm

J G Bankerton wrote:
Sat Jan 12, 2019 7:48 pm
Typ997S wrote:
Fri Jan 11, 2019 5:49 pm
At the other extreme, some argue that an international allocation is unnecessary.
Mr. Bogle was very frank in his reasoning to avoid foreign stocks.
He certainly knew what he was talking about on this one among many other things. Smart man.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by samsdad » Sat Jan 12, 2019 11:37 pm

TropikThunder wrote:
Sat Jan 12, 2019 7:22 pm
samsdad wrote:
Fri Jan 11, 2019 10:01 pm
Or are we okay with choosing 50 or so favorites and acting like we’re invested in “the world”? Why? Beause it’s representative of the world as a whole? Really? You don’t think there would be a corruption performance drag if we included the other 145ish countries? Any cost drag to include them?
There are 193 member states in the UN, not counting The Vatican and Palestine or the 11 "other states" whose sovereignty is disputed in some way (like Kosovo and Taiwan). Of the 193, MSCI classifies 23 Developed Markets, 24 Emerging Markets, 24 Frontier Markets, and 11 Standalone Markets for a total of 82 investable markets. According to MSCI, this
provide(s) detailed equity market coverage for more than 80 countries across developed, emerging and frontier markets, representing 99% of these investable opportunity sets.
https://www.msci.com/market-cap-weighted-indexes
Limiting to DM and EM, the MSCI ACWI covers 85% of the investable world. The cost to include FM and stand-alone indexes is likely prohibitive in the same way that extending the a Total US Index all the way down to microcaps and pink sheets has been cost-prohibitive. I don't hear people complain about not including microcaps or pink sheets since including them at market weight wouldn't measurably affect returns.

[actually, Taiwan and Palestine are investable markets per MSCI but not Member States in the UN, so the investable world per MSCI encompasses 82 out of 195 states]
Well, the Vanguard total international fund only invests in 50ish countries out of 195ish. What happened to the other 145 or so? To get “the rest of the story,” as Paul Harvey would say, you then have to invest in primary emerging markets, secondary emerging markets, and frontier markets, cause we’re not “country picking,” right? I’d wager that even after investing in those markets you’d still be short some countries, which you’d likely have to make up with individual country ETFs. I’m going to look for the North Korea ETF after I post this.
How does a fund invest in a country that does not have a stock market?

With all due respect, your opposition to all things international is noted, but there are legitimate reasons to not include international equities in one's portfolio, there are irrational reasons, and then there's just plain silly.
If you would have quoted the poster I was responding to:
Country picking is therefore equivalent to stock picking. If we agree with the logic that indexing the entire U.S. market is the best choice, then we must also agree that indexing the world is the best choice. Because all the same passive investing arguments we have for index funds apply to all of the world's countries.
...it was he/she that discussed "all" countries. I was making the point that there is very much country picking/company picking going on, esp. in the Vanguard total international fund. Note that this is certainly not the reason why I personally don't invest in international funds. In other words, it's not that I think that "every country" needs to be included to be a "true total international fund." I was arguing the absurd because imho, the other poster was being a bit facetious in their argument. Note that I agreed with his/her point just as I agree with yours. Yes, I was being "silly," but as a rhetorical device, that's allowed, and was used purposely.

Note that the total stock market fund, which follows the CRSP index claims that it tracks
Nearly 4,000 constituents across mega, large, small and micro capitalizations, representing nearly 100% of the U.S. investable equity market, comprise the CRSP US Total Market Index.
I suppose it doesn't include the pink sheets, no. But it is cheap, and good.
Last edited by samsdad on Sun Jan 13, 2019 12:04 am, edited 1 time in total.

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unclescrooge
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by unclescrooge » Sat Jan 12, 2019 11:42 pm

l1am wrote:
Fri Jan 11, 2019 6:19 pm
Past performance is not an indicator to future results - but how far do you take this?

US vs INTL

Image
Plot in a log scale and consider mean reversion.

And then rebalance into international stocks.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Willmunny » Sat Jan 12, 2019 11:51 pm

Put me in the camp of owning equities at the global market cap, which is not far from what Vanguard is saying. I suspect that many members of advisory firms agree, but the firms, Vanguard included, seem reluctant to stick out their necks just a bit more on this issue for fear of the U.S. continuing to outperform as it has in the past few years and investors blaming them.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Northern Flicker » Sun Jan 13, 2019 12:27 am

J G Bankerton wrote:
Sat Jan 12, 2019 7:48 pm
Typ997S wrote:
Fri Jan 11, 2019 5:49 pm
At the other extreme, some argue that an international allocation is unnecessary.
Mr. Bogle was very frank in his reasoning to avoid foreign stocks.
I’ve listened to recordings of Mr. Bogle speaking about it. In one, he has said that Vanguard started offering non-US equity products in the 1990’s and from what he had seen, there is some give and take, but overall not enough difference in performance over time to matter, so why take the currency risk?

I don’t think it is advisable to disagree casually with Mr. Bogle because his positions are well thought out, and based on great experience and clear thinking. But this is an area where I disagree with him. If you look back further in time, international equities would have been very helpful for US investors in the period 1969-1982 (though not easily available to US investors at the time). A fairly significant tilt to small-cap value also would have protected investors from inflation during the time if they held on long enough. And liquity of SCV was also low at the time, so also not so easy to achieve.

That this dynamic has played out in other countries that experienced robust inflation leads me to believe that international diversification is important to reduce inflation risk. But I think too much international diversification takes unnecessary currency risk for investors in or near retirement.

US investors who avoid non-US equities may want to consider including a healthy allocation to TIPS in their bond allocations.
Taking a break from Bogleheads.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Munir » Sun Jan 13, 2019 1:34 am

As an emigrant to the US, I remain totally in US securities. Wall street is not an angel, but foreign security markets are worse. I cannot quote facts and numbers but just my life experience in living overseas during the first 25 years of my life showed me how unreliable/unethical foreign business communities and governments can be. Investing in the US stock market is stressful enough, so why add another unreliable variable just to diversify?

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by unclescrooge » Sun Jan 13, 2019 2:14 am

visualguy wrote:
Sat Jan 12, 2019 10:27 pm
J G Bankerton wrote:
Sat Jan 12, 2019 7:48 pm
Typ997S wrote:
Fri Jan 11, 2019 5:49 pm
At the other extreme, some argue that an international allocation is unnecessary.
Mr. Bogle was very frank in his reasoning to avoid foreign stocks.
He certainly knew what he was talking about on this one among many other things. Smart man.
Just because someone is brilliant doesn't mean they can't be wrong about something.

I've had 40% exposure to international markets for a year. They are too cheap to ignore.

Time will tell how this pans out.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Call_Me_Op » Sun Jan 13, 2019 7:49 am

l1am wrote:
Fri Jan 11, 2019 6:19 pm
Past performance is not an indicator to future results - but how far do you take this?

US vs INTL

Image
Suggests to me a higher likelihood of international out-performance over the next decade.

BTW, I have been 50-50 and plan to stay the course. I chose 50-50 because it is simple and close to market cap.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by cegibbs » Sun Jan 13, 2019 7:59 am

I hold less than 5% international. There is really no need to hold international because U.S. multinational companies provide plenty of international exposure. International has a lower value as compared to U.S. firms because they are riskier. Why take on unnecessary risk when you aren’t properly compensated.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by welderwannabe » Sun Jan 13, 2019 8:03 am

arengarajsug88 wrote:
Fri Jan 11, 2019 5:43 pm
What are your thoughts on this? Is it a legitimate prediction by Vanguard that international funds would outperform US funds? Which international fund(s) would you pick? I do not have a good international funds option in my 401K, so if I were to use all my roth IRA ($6k) to pick one international fund, which should it be?
I am 70% US and 30% international and regret having that much international daily :)
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Watty » Sun Jan 13, 2019 8:18 am

s8r wrote:
Fri Jan 11, 2019 9:26 pm
GRP wrote:
Fri Jan 11, 2019 6:44 pm
One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
My thoughts exactly. I am an engineer and I apply engineering logic also in my financial decisions. :D
Indexing does not always mean a capitalization-weighted index so it is a lot more complicated.

A couple of things;

1) As already mentioned a reasonable case can be made to overweight your country because of currency risk.

2) A reasonable case can be made for underweighting or totally avoiding countries that to not have reasonable shareholder legal protections or where corruption is widespread.

3) A reasonable case can be made to underweight countries that heavily tax foreign investment, or have currency controls that make getting money out of the country difficult.

4) Some countries limit foreign investment so it might not be possible to invest there.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by ruralavalon » Sun Jan 13, 2019 10:47 am

GRP wrote:
Sat Jan 12, 2019 4:25 pm
ruralavalon wrote:
Sat Jan 12, 2019 3:45 pm
s8r wrote:
Fri Jan 11, 2019 9:26 pm
GRP wrote:
Fri Jan 11, 2019 6:44 pm
One cannot logically subscribe to the theory of indexing domestically but not globally without being self-contradictory.
My thoughts exactly. I am an engineer and I apply engineering logic also in my financial decisions. :D
In investing sometimes actual observed facts and logical consistency lead to different ideas of what is better. Investing is not governed by principles of physics.

Historically there has been no diversification benefit to going higher than 40% of stocks in international stocks.

Historically 30% of stocks in international stocks would have captured about 99% of the diversification benefit, and 20% of stocks in international stocks would have captured about 85% of the maximum diversification benefit.

Please see the Vanguard paper "Considerations for Investing in non-U.S. Equities", p.6.
Indeed, Vanguard has been fairly vocal on this. With all due to respect to Vanguard, the threshold of 40% being the maximum benefit for international diversification is nothing more than a historical accident. The numbers could just as easily have gone another way.

Either way, the global market cap weighting must win in the long run. For the same reasons that the total U.S. market cap index will beat U.S. active managers in the long run. . . . . .
Indexing "must win" over active managment because of the substantially lower costs to the investor, in other words because of the "relentless rules of humble arithmetic".

Another benefit to indexing over active management is broader diversification, which can decrease risk.

Use of indexing is not based on and does not require belief in the Efficient Market Hypothesis.

Also, efficient and wise are different things.


The global index will hold the market with the least amount of movement and frictional costs. Targeting a set percentage of international (say 20%) will engender frictional costs from rebalancing over the years and must lose over time, especially because the continued outperformance of the U.S. is not guaranteed. Just like how an active manager that bet on a certain sector cannot outperform indefinitely, and his buying and selling causes frictional cost. Markets don't allow persistent free lunches either.
There is a high correlation between domestic and international stocks, so rebalancing is very infrequent.

Currently the correlation between Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund is 80 (100 being a perfect correlation).

I use 5% bands for rebalancing, and cannot remember ever hitting the band for rebalancing domestic/international stocks. So the frictional cost has been zero, or nearly so (if my memory is wrong).


Again, I could take the argument you have posited about international and apply it to the U.S. I could say something like:

"Historically there has been no diversification benefit to going higher than 40% in health care stocks."

Historically 30% of stocks in health care would have captured about 99% of the diversification benefit, and 20% of stocks in health care would have captured about 85% of the maximum diversification benefit.

Please see the Vanguard paper "Considerations for Investing in health care equities", p.6."

Nobody would accept that argument. . . . .
I was not arguing I was paraphrasing (amost quoting) the Vanguard paper at page 6, which reported historical fact.

What you suggested after "something like" is just fiction.


. . . . .The past is not prologue, and past performance is not a guarantee of future returns. The same applies to international in my humble opinion.
The past is not guaranteed to repeat itself.

But if we want to use actual data, facts, we can only look at the past. About the future we only have opinions or theories.
Last edited by ruralavalon on Sun Jan 13, 2019 11:22 am, edited 6 times in total.
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by alex_686 » Sun Jan 13, 2019 11:04 am

l1am wrote:
Fri Jan 11, 2019 6:19 pm
Past performance is not an indicator to future results - but how far do you take this?

US vs INTL
Sectors have about twice the explanatiory power as country. So i would say you are running your chart on the wrong parameters,

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Sun Jan 13, 2019 11:13 am

Again, over or underweighting international due to its performance characteristics is exactly the same thing as over or underweighting a sector within the U.S. due to its performance characteristics. The logic is 100% exactly the same. If you agree that indexing the U.S. is best, you must necessarily agree that indexing the world is the best.

If you don’t, then you’d have to agree that over or underweighting certain sectors within the U.S. is sensible due to recent performance characteristics. Either way, indexing the U.S. but not the world cannot be the logical conclusion.

Any argument that U.S. centric indexers levee against stock pickers and active investors is exactly the same argument that I, as a global indexer, can levee against U.S. centric indexers. The arguments have near perfect transitivity.

The only refuge that home biased indexers may have is a foreign tax argument. However, just like M&M’s theory of dividends, it doesn’t stop the idea of global indexing being the correct one in principle.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by s8r » Sun Jan 13, 2019 12:10 pm

I am not an economist, but are there any widely accepted theories of economics that support a significant US-overweight?

I don't expect the "bet on historical winners" theory to get anyone a Nobel Prize anytime soon.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Sun Jan 13, 2019 12:46 pm

s8r wrote:
Sun Jan 13, 2019 12:10 pm
I am not an economist, but are there any widely accepted theories of economics that support a significant US-overweight?

I don't expect the "bet on historical winners" theory to get anyone a Nobel Prize anytime soon.
I am of similar mind. As far as I’m concerned it’s just a combination of home bias and recency bias.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by lostdog » Sun Jan 13, 2019 2:34 pm

GRP wrote:
Sun Jan 13, 2019 12:46 pm
s8r wrote:
Sun Jan 13, 2019 12:10 pm
I am not an economist, but are there any widely accepted theories of economics that support a significant US-overweight?

I don't expect the "bet on historical winners" theory to get anyone a Nobel Prize anytime soon.
I am of similar mind. As far as I’m concerned it’s just a combination of home bias and recency bias.
+1

There is more to that but I won't say it because it might get deleted.
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by lostdog » Sun Jan 13, 2019 2:38 pm

GRP wrote:
Sun Jan 13, 2019 11:13 am
Again, over or underweighting international due to its performance characteristics is exactly the same thing as over or underweighting a sector within the U.S. due to its performance characteristics. The logic is 100% exactly the same. If you agree that indexing the U.S. is best, you must necessarily agree that indexing the world is the best.

If you don’t, then you’d have to agree that over or underweighting certain sectors within the U.S. is sensible due to recent performance characteristics. Either way, indexing the U.S. but not the world cannot be the logical conclusion.

Any argument that U.S. centric indexers levee against stock pickers and active investors is exactly the same argument that I, as a global indexer, can levee against U.S. centric indexers. The arguments have near perfect transitivity.

The only refuge that home biased indexers may have is a foreign tax argument. However, just like M&M’s theory of dividends, it doesn’t stop the idea of global indexing being the correct one in principle.
Well said.
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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by AlbertEinstein » Sun Jan 13, 2019 3:21 pm

I personally agree with Cliff Asness' reasoning that countries can be viewed basically as large companies. Countries where the entire market is selling at a low P/B ratio tend to outperform countries where their entire market is selling at a high P/B ratio. Countries are very much like large firms.
In that case, why not invest in North Korea? Countries may be viewed as large companies, but to paraphrase Shakespeare, calling a $#!t-hole country a country with rule of law and free markets doesn't make it any less of a $#!t-hole country. To be certain, one must be able to recognize that Country X is an Enron and not an Apple, but at the extremes (especially the lower extreme) that's not always difficult.

As Asness will agree, value plays may pay off in the long run, but "the long run" is very often much longer than what most investors think of a long. As Keynes noted, "In the long run we are all dead." It would be interesting to compare Cliff's value "picks" inside his international multi-style AQR fund versus some long standing foreign value funds (like Dodge & Cox). We do know that is Intl multi style fund - like many of his other funds - has underperformed its benchmark index (as well as underperforming many active managers).

Sometimes companies and countries sell at low valuation ratios for a reason. As Asness et al have pointed out, size matters....if you control your junk.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by AlbertEinstein » Sun Jan 13, 2019 3:37 pm

Munir wrote:
Sun Jan 13, 2019 1:34 am
As an emigrant to the US, I remain totally in US securities. Wall street is not an angel, but foreign security markets are worse. I cannot quote facts and numbers but just my life experience in living overseas during the first 25 years of my life showed me how unreliable/unethical foreign business communities and governments can be. Investing in the US stock market is stressful enough, so why add another unreliable variable just to diversify?
With all due respect to your heritage and family abroad, you have hit the nail on the head. Like him or not, Trump was 100% correct (not in a political sense) when he said that there are some $#!t hole countries out there, i.e. countries where rule of law and a free market have either never existed or were dismissed long ago. This latter category would include much of Europe (hopefully they have not crossed their Rubicon).

I think Mr. Bogle and others have pointed out that you can effectively diversify with two asset classes (stocks and bonds). If you like, throw in a little real estate. Diversifying between US and foreign stocks is great theoretically and it worked in the past, but like they say "past performance is no guarantee of future results."

The other oft touted reason for diversifying into non-correlated asset classes, e.g. foreign vs US stocks, is that rebalancing can add to your returns. I suspect that in practice, it detracts from most people's returns (for many reasons). https://www.evansonasset.com/rebalancing-3.htm

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by Ged » Sun Jan 13, 2019 3:42 pm

I do not think it is Boglehead orthodoxy to claim rebalancing augments returns. The primary purpose is to reduce volatility, which for many makes it easier to 'stay the course'.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by visualguy » Sun Jan 13, 2019 4:48 pm

s8r wrote:
Sun Jan 13, 2019 12:10 pm
I am not an economist, but are there any widely accepted theories of economics that support a significant US-overweight?

I don't expect the "bet on historical winners" theory to get anyone a Nobel Prize anytime soon.
You have to look at what's in the ex-US index. It's mostly Europe and Japan. We know the history of those stock markets, the current problems there, and the lack of change for the better. If anything, things are getting worse in the EU, and Japan's demographic problem is just getting more serious (to the degree that homes need to be given away free in some areas). China of course doesn't have a US-style economy or a public stock market that enables you to invest effectively in their economy, and neither does India.

Unless you think these things are going to change in your limited lifetime, it's best to stay away. For example, I don't have enough years left for such changes to happen. People here often say that this is priced in. Sure, it is to some degree, but that doesn't lead to an acceptable return as we've seen in the past. "Priced in" doesn't mean being able to match the returns of the US, and a lower P/E ratio than the US doesn't mean a bargain. As a stock market indexer, I wish this wasn't the case, but no other major economy in the world quite resembles the US. Add the currency and tax aspects to the picture, and ex-US indexing is even less appealing.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by GRP » Sun Jan 13, 2019 8:05 pm

A country's equity market is just a collection of individual sectors. Sectors are just collections of individual stocks.

If you believe it is a good idea to overweight a country (the U.S. in this case) due to historical outperformance, you must also believe it is a good idea to overweight sectors due to historical outperformance. If you believe it's a good idea to overweight sectors due to historical outperformance, you must also believe it is a good idea to overweight individual stocks due to historical outperformance.

If, on the other hand, you don't believe it is a good idea to overweight individual stocks (most Bogleheads), you must also believe it is not a good idea to overweight individual sectors. If you don't believe it is a good idea to overweight individual sectors, you must also believe it is a bad idea to overweight individual countries.

These are, after all, all just collections of stocks. Global market cap indexing is the logical choice.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by jainn » Sun Jan 13, 2019 9:41 pm

GRP wrote:
Sun Jan 13, 2019 8:05 pm
A country's equity market is just a collection of individual sectors. Sectors are just collections of individual stocks.

These are, after all, all just collections of stocks. Global market cap indexing is the logical choice.
Agree - although we feel more comfortable at 70% US and 30% INTL.

https://www.schwab.com/resource-center/ ... -expensive

Key Points
  • Although world stock market valuations are above average, similar valuations have produced double-digit gains over the following 12 months during the past 50 years.
  • Relative valuations do not currently favor one country or region's stock market over another.
  • Valuations support a globally diversified portfolio offering the best diversification benefits in 20 years.
Image

The U.S. tends to behave like the global tech sector, as you can see in the chart below. So it isn't surprising that the MSCI USA Index is valued like the MSCI World Information Technology Index, with a similar PE of 25. Strictly speaking, the U.S. stock market is composed of only about 20% tech stocks. So, in theory, the incredibly tight correlation of 0.99 between those two blue lines shouldn’t exist. But, in reality, it does. A bottom up weighting of the PEs of the stocks that make up the U.S. index misses the point of how the U.S. stock market actually behaves, and therefore, is valued.

The Eurozone is composed of 19 European countries and tends to perform like—and is valued just like—a combination of three different world sectors: financials, telecommunications and materials. The MSCI Euro Index behaves like a mixture of .41x MSCI World Financials Index; .34x MSCI World Materials Index and .33x MSCI World Telecommunications Index. The weighted PE of those global sectors is 18, the same as the Euro index.

Let’s now look at Japan. The consumer discretionary sector is the largest sector of Japan’s stock market, which includes globally-recognized companies like Toyota and Sony. But the influence of financial conditions on all types of Japanese companies is evident in their performance which tracks the financial sector closely. Japan’s stock market is valued similarly to the MSCI World Financial Index at a PE of 15.

PEs are all above average, but they are similarly valued relative to their 15 year histories. Each sector PE falls between 65% and 78% of that sector’s 15 year high.

All this suggests relative valuations do not currently favor one country or region's stock market over another when seeking value. We favor asset allocations across borders in line with their strategic weightings in U.S. and international stock markets which mirror the weights in the broad indexes.

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Re: Vanguards recommends investors to increase international (non-US) stock holdings to 40% ?

Post by visualguy » Sun Jan 13, 2019 11:09 pm

jainn wrote:
Sun Jan 13, 2019 9:41 pm
PEs are all above average, but they are similarly valued relative to their 15 year histories. Each sector PE falls between 65% and 78% of that sector’s 15 year high.
Right, but that's highly disturbing because even though these stock markets have gone almost nowhere over the last couple of decades, they still have above-average P/Es, so aren't cheap. Basically, it's a long-term lack of earnings growth.

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