3-fund portfolio: Home (Domestic) Bias?

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brutzel1
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Joined: Mon Jun 10, 2019 2:52 pm

3-fund portfolio: Home (Domestic) Bias?

Post by brutzel1 » Wed Jun 12, 2019 12:41 pm

As a European living in the US and seeing how both my friends here and in Europe typically invest, I can't help but notice that in the US most investors prefer to be very heavy on the domestic funds like vtsax. Even with the 3-fund portfolio, the suggestion is to stay between 20-40% intl (e.g. vtiax) - with people like John Bogle preferring an even heavier emphasis towards just US funds.

When I compare that to friends in Europe, they often are heavily diversified worldwide. If we take the 3-fund portfolio, it would almost be the other way around: 20-40% US, the rest Intl. to have a much greater spread across worldwide markets.

I'm sure this has been discussed here in part but as I am in the process of deciding how my asset allocation will look like, I wonder what the general reasons for the differences in investment strategy is? There are so many Pros and Cons to both strategies I'm sure but wondering if other have observed the same and what the main reasons are for sticking the majority of all funds in US funds like vtsax.

thanks guys,

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willthrill81
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Re: 3-fund portfolio: Home (Domestic) Bias?

Post by willthrill81 » Wed Jun 12, 2019 1:46 pm

This is a highly contentious topic, but there are some good objective reasons for investors to have a home country bias. Tyler at Portfolio Charts has a post on his site that does a fantastic job of illustrating how differences in inflation and exchange rates can be significant drivers in one's safe withdrawal rate.
With inflation differences and exchange rate variations both affecting the results by double-digit percentages, it’s no wonder that simply buying US funds is insufficient to match US withdrawal rates for global investors. You can diversify your investments across assets and borders, but you can only live in one country at a time. And the inflation and currency in that home country matters a great deal to your financial security.

In fact, I would suggest that the data provides a good argument for investing (at least partially) in your home country. Not only will that bypass the effect of exchange rates, but it arguably also helps with inflation. Local stocks and bonds are not perfectly correlated to local inflation by any means, but local inflation is far more related to the local economy than to one halfway around the world. Completely detaching the engine of your returns from the inflation it needs to account for may have negative consequences for your portfolio that you did not anticipate.
emphasis added
https://portfoliocharts.com/2017/06/09/ ... awal-rate/
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

asif408
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Re: 3-fund portfolio: Home (Domestic) Bias?

Post by asif408 » Wed Jun 12, 2019 2:11 pm

Reasons listed I've seen include, but are not limited to:

- The US is much safer and has better rules and laws that almost any other country and will for the foreseeable future :?:
- Currency risk (as we all know the dollar has never and will never significantly depreciate for any period of time against the basket of currencies in the international index)
- Higher expenses ( almost 3 times more at Vanguard, 0.11% vs. 0.04%, gasp!)
- Loss of foreign tax credit in tax advantaged accounts
- The US is a majority of world market cap, so it's justified to keep more of your money in the country with the highest world market cap (just like it was in Japan in 1989 and 1990 when it was the world's largest country by market cap)
- Since inception in 1996, Vanguard's US Total Market Index fund has outperformed its Total International Index fund with less volatility (starting and ending points don't matter, but past performance over a select 23 year period does)
- Because Jack and Warren said so

You'll have to decide for yourself if any of these justifications seem reasonable.

columbia
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Re: 3-fund portfolio: Home (Domestic) Bias?

Post by columbia » Wed Jun 12, 2019 6:46 pm

The US is one of the few places in the world, where folks are lucky enough to be able to get away with it.

I own some international, but ex-US will have to more than *double* the returns of US in the next 23 years (total time I’ve been investing) for international to pull even for a 50/50 portfolio over 46 years.

I’m willing to guess that won’t happen. I’ll still be perfectly ok if it does happen.

Ferdinand2014
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Re: 3-fund portfolio: Home (Domestic) Bias?

Post by Ferdinand2014 » Wed Jun 12, 2019 7:17 pm

brutzel1 wrote:
Wed Jun 12, 2019 12:41 pm
As a European living in the US and seeing how both my friends here and in Europe typically invest, I can't help but notice that in the US most investors prefer to be very heavy on the domestic funds like vtsax. Even with the 3-fund portfolio, the suggestion is to stay between 20-40% intl (e.g. vtiax) - with people like John Bogle preferring an even heavier emphasis towards just US funds.

When I compare that to friends in Europe, they often are heavily diversified worldwide. If we take the 3-fund portfolio, it would almost be the other way around: 20-40% US, the rest Intl. to have a much greater spread across worldwide markets.

I'm sure this has been discussed here in part but as I am in the process of deciding how my asset allocation will look like, I wonder what the general reasons for the differences in investment strategy is? There are so many Pros and Cons to both strategies I'm sure but wondering if other have observed the same and what the main reasons are for sticking the majority of all funds in US funds like vtsax.

thanks guys,
The U.S is unique in the sense that the depth and breadth of sectors, industries, size and number of stocks available well exceeds virtually all individual countries with the exception of Japan. Many individual countries have 1 or 2 companies that comprise nearly 50% of the total market cap. This is not to say that you should or should not invest globally, only that in my opinion, the U.S. is unique in terms of diversification that it is appropriate to have a home country bias for the U.S. investor only.

https://awealthofcommonsense.com/2018/0 ... is-unique/

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asset_chaos
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Re: 3-fund portfolio: Home (Domestic) Bias?

Post by asset_chaos » Thu Jun 13, 2019 1:15 am

brutzel1 wrote:
Wed Jun 12, 2019 12:41 pm
When I compare that to friends in Europe, they often are heavily diversified worldwide. If we take the 3-fund portfolio, it would almost be the other way around: 20-40% US, the rest Intl. to have a much greater spread across worldwide markets.
Your friends are either atypical investors, or they have more home market bias than they think, e.g. if only 30% in US, then overweighting something. Home bias is dominant everywhere in the world. From a Vanguard report
Australia: Australian shares accounted for just 2.4 per cent of the global share market in December 2014 yet Australians collectively held 66.5 per cent of their portfolios in Australian shares.

Canada: Canadian shares made up 3.4 per of the global share market yet Canadians collectively held 59 per cent of their portfolios in Canadian shares.

Japan: Japanese shares accounted for 7.2 per cent of the global share market yet Japanese investors collectively held 55.2 per cent of their share portfolios in Japanese shares.

UK: While UK shares made up 7.2 per cent of the global share market, its investors collectively held 26.3 per cent of their portfolios in UK shares.

US: While US shares accounted for 50.9 per cent of the global share market, American investors collectively held 79.1 per cent of their portfolios in US shares.
The typical Australian has a 30 times overweight to home country, while the typical American only has a 55% home country overweight. Surprisingly Europe is not on that list, but even if we define a European stock market as all the euro countries, that still only pushes European stocks to about 10% of global market weight. If your friends have 70% in a total international type index fund, then maybe 30-40% in Europe for a large dose of home bias.

I would bet that proper research would find that all these non-Americans have marked home bias for exactly the same reasons that most Americans, who can give a reason, have home bias: some version of, they think it's safer. Since all of them cannot be right, I suspect all of them are confusing the familiar with the safe.

But what's right, or comfortable, or just done without thought by others has no necessary bearing on how you should invest. Global stock index funds are now available. Use that. It's easier, if for no other reason than you don't have to think about questions such as, what should my foreign-domestic stock split be.

There's one other point about home bias that's almost never discussed. Home bias is almost always discussed in terms of stocks, but, like most investing questions, shouldn't the question be asked at the portfolio level? Home bias is possibly better practiced by having your bonds be denominated in or hedged to your home country. If you only think about stocks, you may be missing the fact that your bonds are probably already tilting your portfolio sufficiently towards home anyway.
Regards, | | Guy

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