Larry Swedroe: The Historical Imperative For International Diversification

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
JoMoney
Posts: 7142
Joined: Tue Jul 23, 2013 5:31 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by JoMoney » Tue Jul 09, 2019 8:17 am

bgf wrote:
Tue Jul 09, 2019 7:57 am
visualguy wrote:
Mon Jul 08, 2019 10:50 pm
bgf wrote:
Mon Jul 08, 2019 6:50 pm
keep posting stuff like that and you might actually explode someone's brain. i feel like its taken as a given these days that US outperforms because it just does.
As I pointed out in another thread, this study is misleading because it ignores the fact that these 3 portfolios would have a different end-of-accumulation/start-of-withdrawal balance. Starting them all at $300K at the beginning of withdrawal distorts how they would behave in reality if you adopted these portfolios throughout your investment period.
it doesn't distort anything. what if the person inherited their money? the chart doesn't make any assumptions about what happened before or after the 30 year period. if you want to rationalize to keep your brain from exploding thats up to you.
Whether or not it's a "distortion" isn't really relevant, but finding a particular time period where a particular asset performed better isn't "mind blowing" especially when the full record (from where it currently sits) shows this as a less than typical event. If it were a Efficient Market factor advocate arguing against international, they would be trying to claim there was some sort of "risk premium" to tilt towards the U.S. ... there is always something you can find that was better, especially if you're going to cherry pick certain periods... Gold did pretty well during that period as well... at the end of the day you're going to have to make your "bet" on something. There's nothing too far out there about owning a U.S. market fund, it's already more than 50% of what the "Global Market" for stocks is by weight, and U.S. investors have the opportunity to own a pretty well diversified portfolio without needing to get involved with the various risks (and costs) of owning an international portfolio.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

bgf
Posts: 959
Joined: Fri Nov 10, 2017 9:35 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by bgf » Tue Jul 09, 2019 8:33 am

JoMoney wrote:
Tue Jul 09, 2019 8:17 am
bgf wrote:
Tue Jul 09, 2019 7:57 am
visualguy wrote:
Mon Jul 08, 2019 10:50 pm
bgf wrote:
Mon Jul 08, 2019 6:50 pm
keep posting stuff like that and you might actually explode someone's brain. i feel like its taken as a given these days that US outperforms because it just does.
As I pointed out in another thread, this study is misleading because it ignores the fact that these 3 portfolios would have a different end-of-accumulation/start-of-withdrawal balance. Starting them all at $300K at the beginning of withdrawal distorts how they would behave in reality if you adopted these portfolios throughout your investment period.
it doesn't distort anything. what if the person inherited their money? the chart doesn't make any assumptions about what happened before or after the 30 year period. if you want to rationalize to keep your brain from exploding thats up to you.
Whether or not it's a "distortion" isn't really relevant, but finding a particular time period where a particular asset performed better isn't "mind blowing" especially when the full record (from where it currently sits) shows this as a less than typical event. If it were a Efficient Market factor advocate arguing against international, they would be trying to claim there was some sort of "risk premium" to tilt towards the U.S. ... there is always something you can find that was better, especially if you're going to cherry pick certain periods... Gold did pretty well during that period as well... at the end of the day you're going to have to make your "bet" on something. There's nothing too far out there about owning a U.S. market fund, it's already more than 50% of what the "Global Market" for stocks is by weight, and U.S. investors have the opportunity to own a pretty well diversified portfolio without needing to get involved with the various risks (and costs) of owning an international portfolio.
1) of course its relevant. he literally accused vineviz of distorting data to mislead others about a certain historical outcome.

2) i totally agree with you that a period showing asset outperformance by international over US shouldn't be mind blowing.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

columbia
Posts: 1654
Joined: Tue Aug 27, 2013 5:30 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by columbia » Tue Jul 09, 2019 9:29 am

I would like to see 25 years of accumulating and 24 years of withdrawals on that same data.

That’s not possible?

Pigeye Brewster
Posts: 368
Joined: Thu Oct 05, 2017 7:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Pigeye Brewster » Tue Jul 09, 2019 9:48 am

politely wrote:
Tue Jul 09, 2019 12:47 am
For example, the S&P 500, which according to S&P Global, as of the end of 2017, (a) "captures approximately 82% of the total U.S. equity market value" and (b) "nearly 71% of S&P 500 revenues came from the U.S., while the remaining came from foreign markets. Internationally, the largest individual countries by total revenue percentage included China (4.3%), Japan (2.6%), and the UK (2.5%)." And according to a Seeking Alpha article (referencing the S&P FactSet, December 2017), the S&P 500 has 6% exposure to the euro, six "currencies with a total exposure of 1% or more, and 19 currencies coming in at a minimum of 0.25%". And according to a 2015 MarketWatch article, revenue for the S&P 500 in 2015 was: US 52.2%, Asia 14.3%, Europe 13.9%, Africa 7.7%, Canada 6.9%, South America 4.1%, Mexico 0.4%, and Australia 0.2%.

Do we consider owning the S&P 500 a 100% US investment or is it a 71% US investment and 29% international, or something else? Does it somehow insufficiently represent other countries to count as "international" exposure?
This is one of the reasons why Jack Bogle didn't believe international exposure is necessary. Was/is he "right"? If anything, this thread shows that opinions vary.

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by vineviz » Tue Jul 09, 2019 9:55 am

JoMoney wrote:
Tue Jul 09, 2019 8:17 am
There's nothing too far out there about owning a U.S. market fund, it's already more than 50% of what the "Global Market" for stocks is by weight, and U.S. investors have the opportunity to own a pretty well diversified portfolio without needing to get involved with the various risks (and costs) of owning an international portfolio.
It's true: most retirement cohorts (about 70%, in fact) would have been just fine betting their retirement exclusively on bonds and large cap US stocks.

The problem, of course, is that each retiree doesn't get the average outcome: they get one single outcome. As a result, having a 70% chance of being "fine" is cold comfort if you happen to retire during one of the 30% of years in which such a concentrated bet didn't turn out to be "fine". And since you don't know which group you're in until after the decision to retire is made, diversification is especially important for retirees IMHO. This is generally not well understood.

And it's not as if diversification has generally been painful: historically, having a diversified equity portfolio in retirement has helped about 90% of the time and hurt only 10% of the time. And the few retirement cohorts in that 10% still had excellent outcomes: over 7% SWR on average.

On the other hand, being diversified (e.g. some allocation to international and to SCV) cut the odds of having a SWR of 4.5% or less from one-in-four to one-in-thirty.

Image

As Buffet said, "diversification is protection against ignorance". Retirees are, by definition, ignorant about which assets will do best in their particular future. The only control they can exert is to choose their asset allocation wisely, and holding a well-diversified equity allocation is cheap insurance against uncertainty.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Whakamole
Posts: 986
Joined: Wed Jan 13, 2016 9:59 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Whakamole » Tue Jul 09, 2019 10:10 am

vineviz wrote:
Mon Jul 08, 2019 6:29 pm
willthrill81 wrote:
Mon Jul 08, 2019 10:56 am
Honestly, I think that anywhere from 0% ex-U.S. to 50% is within the realm of 'plausible' for a U.S. investor, although I really doubt that a 20% or smaller allocation to it is going to be very helpful.
There are certainly examples of times when even a token attempt at diversification was helpful. I've posted this scenario before, but here's a look at three hypothetical 1966 retirees:

Portfolio 1 is 40% intermediate bonds and 60% US stocks.
Portfolio 2 is 40% intermediate bonds, 52.5% US stocks, and 7.5% international stocks.
Portfolio 3 is 40% intermediate bonds, 45% US stocks, and 15% international stocks.

Portfolios 2 and 3 allocate 12.5% and 25% of equities to international, respectively, so they bracket the 20% figure you mentioned.

Each investor started with $300k and withdrew an inflation-adjusted $1k/month. They had very different outcomes, illustrating that if retirees can see through the FUD enough to hold even a fraction of the recommended allocation to ex-US stocks it might make enough difference to keep them from scrounging through dumpsters at age 90.

Image
If I'm not mistaken, the 1966 cohort is the one who saw bad outcomes per the Trinity Study. So the one case where the "4% rule" failed could be mitigated by owning international funds.

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by vineviz » Tue Jul 09, 2019 10:15 am

Whakamole wrote:
Tue Jul 09, 2019 10:10 am
If I'm not mistaken, the 1966 cohort is the one who saw bad outcomes per the Trinity Study. So the one case where the "4% rule" failed could be mitigated by owning international funds.
Indeed, that's one reason I picked this cohort as an example (though surrounding cohorts also benefited quite a bit from being diversified).

It seems to have become accepted wisdom that nothing an investor does matters in the face of a 1970s-like event, but I think it's valuable to notice that even modest efforts towards diversification would have yielded significant rewards.

That may provide enough of a nudge for diversified investors to stay the course during a period like the one we've experienced, in which large cap US stocks have recently performed unusually well. It's not always like this.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
CULater
Posts: 2058
Joined: Sun Nov 13, 2016 10:59 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by CULater » Tue Jul 09, 2019 11:02 am

To be clear, just what risks are we trying to manage by owning international equities, as U.S. investors? I can certainly understand investors in much smaller countries and economies wanting to diversify, but what about U.S. investors? It seems to me that the rationale generally offered is based on Bernstein's notion of Deep Risk. There are 3 types of deep risk that he discusses: (1) Deflation Risk, (2) Confiscation Risk, and (3) Devastation Risk. The way to "hedge" these risks involves owning certain kinds of assets and the location of those assets; it's not just a matter of determining efficiency.

The "Japan" argument refers to Deflation Risk -- the notion that U.S. equites could have poor returns compared to international equities. One hedge for that is to own foreign equities -- but there are others. What is the likelihood and possible magnitude of that potential risk to U.S. investors; and what steps should be taken to hedge that risk -- is owning foreign stocks the best and only thing to do?

Regarding Confiscation Risk, the thing to do here is to locate some of one's financial assets outside the U.S. Should we do that too? It does seem odd that we would own foreign assets to hedge against one type of Deep Risk (Deflation Risk) but hold those assets in U.S. financial institutions which does not protect use from another type of deep risk (Confiscation Risk). Seems to me the discussion of owning foreign equities usually doesn't embrace the notion of Deep Risk discussed by Dr. Bernstein, and only looks at one slice of a broader issue.
On the internet, nobody knows you're a dog.

User avatar
Gort
Posts: 488
Joined: Sat Mar 17, 2007 5:07 pm
Location: Idaho

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Gort » Tue Jul 09, 2019 11:40 am

Chief_Engineer wrote:
Mon Jul 08, 2019 6:10 pm
Que1999 wrote:
Mon Jul 08, 2019 11:38 am
Every time I read these threads I find good arguments on both sides of the coin.

All they do honestly is serve to confuse me. I've bounced around a couple times from US-only to global cap-weighting... And I'm honestly probably back at square one.

I don't know what to do.... Maybe I'll just pay off my mortgage first and worry about it later... :D
This article helped me find a middle ground. It suggests an equity allocation of 25% domestic to 75% world (note world and not international). For a US based investor this boils down to 65% US and 35% Int. It's not market cap, but it's still large enough to make a difference. I'm convinced some international is necessary. If the US outperforms indefinitely, then the US would become the entire world market. That doesn't seem plausible to me.
Excellent post!

User avatar
HomerJ
Posts: 13034
Joined: Fri Jun 06, 2008 12:50 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by HomerJ » Tue Jul 09, 2019 12:04 pm

vineviz wrote:
Tue Jul 09, 2019 9:55 am
JoMoney wrote:
Tue Jul 09, 2019 8:17 am
There's nothing too far out there about owning a U.S. market fund, it's already more than 50% of what the "Global Market" for stocks is by weight, and U.S. investors have the opportunity to own a pretty well diversified portfolio without needing to get involved with the various risks (and costs) of owning an international portfolio.
It's true: most retirement cohorts (about 70%, in fact) would have been just fine betting their retirement exclusively on bonds and large cap US stocks.

The problem, of course, is that each retiree doesn't get the average outcome: they get one single outcome. As a result, having a 70% chance of being "fine" is cold comfort if you happen to retire during one of the 30% of years in which such a concentrated bet didn't turn out to be "fine".
This is why we use the 4% "rule" for withdrawals.

Then it's not your example of 70% turn out fine, 30% in trouble.

It's actually 30% turn out fine, 70% end up richer than expected, and can spend more (AFTER the money shows up).

Investing really isn't that tough... I know we have ten thousand threads on these boards, but the truth is, the old adages do work pretty well.

4% SWR, Age in bonds, Total Stock and Total Bond Index Funds.

That right there is 90% of the battle.
Last edited by HomerJ on Tue Jul 09, 2019 12:06 pm, edited 1 time in total.
The J stands for Jay

kfitz1313
Posts: 79
Joined: Sun May 19, 2019 3:20 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by kfitz1313 » Tue Jul 09, 2019 12:05 pm

Vulcan wrote:
Mon Jul 08, 2019 7:00 pm
kfitz1313 wrote:
Mon Jul 08, 2019 9:23 am
If we are talking about one currency, then sure, there is no currency risk, but that isn't what Vulcan meant. It appears obvious to me that he means that using only dollars has an implicit connection to other currencies in the world. If the dollar gets weaker or stronger, then certain products for consumption will be more or less expensive.

This is about purchasing power of the dollar and the US dollar does not exist in a vacuum, so your point about "risks arising from changes in relative currency values" still holds with Vulcan's use of currency risk. When used this way, foreign assets don't really matter because he isn't talking about ownership of foreign assets but consumption via a given currency which is affected by relative currency values as we can consume more or less of the world's products depending on the strength of the currency. He's not talking about a closed system and that is simply not even a real option today.
That is precisely right, thank you, kfitz1313.
:beer Glad I got your sentiment correct in your view.

User avatar
Vulcan
Posts: 853
Joined: Sat Apr 05, 2014 11:43 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by Vulcan » Tue Jul 09, 2019 12:37 pm

Schwab market commentary posted yesterday
Valuations suggest international stocks may produce above average, double-digit annualized total returns over the next 10 years, in contrast to below average, mid-single digit returns for U.S. stocks.
...
International stocks could provide stronger returns in the decade ahead, earning their place in the portfolios of long-term investors.
https://www.schwab.com/resource-center/ ... -investors

Not that I would change my global market cap allocation if they said anything different, but nevertheless.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

petulant
Posts: 576
Joined: Thu Sep 22, 2016 1:09 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by petulant » Tue Jul 09, 2019 1:16 pm

CULater wrote:
Tue Jul 09, 2019 11:02 am
To be clear, just what risks are we trying to manage by owning international equities, as U.S. investors? I can certainly understand investors in much smaller countries and economies wanting to diversify, but what about U.S. investors? It seems to me that the rationale generally offered is based on Bernstein's notion of Deep Risk. There are 3 types of deep risk that he discusses: (1) Deflation Risk, (2) Confiscation Risk, and (3) Devastation Risk. The way to "hedge" these risks involves owning certain kinds of assets and the location of those assets; it's not just a matter of determining efficiency.

The "Japan" argument refers to Deflation Risk -- the notion that U.S. equites could have poor returns compared to international equities. One hedge for that is to own foreign equities -- but there are others. What is the likelihood and possible magnitude of that potential risk to U.S. investors; and what steps should be taken to hedge that risk -- is owning foreign stocks the best and only thing to do?

Regarding Confiscation Risk, the thing to do here is to locate some of one's financial assets outside the U.S. Should we do that too? It does seem odd that we would own foreign assets to hedge against one type of Deep Risk (Deflation Risk) but hold those assets in U.S. financial institutions which does not protect use from another type of deep risk (Confiscation Risk). Seems to me the discussion of owning foreign equities usually doesn't embrace the notion of Deep Risk discussed by Dr. Bernstein, and only looks at one slice of a broader issue.
Thank you, these are just the kinds of things I'm thinking about! Can you share a book or set of articles where he discusses a bit more?

RandomWord
Posts: 18
Joined: Tue Jun 18, 2019 1:12 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by RandomWord » Tue Jul 09, 2019 1:38 pm

schooner wrote:
Mon Jul 08, 2019 4:23 pm
Broken Man 1999 wrote:
Mon Jul 08, 2019 3:47 pm
fortyofforty wrote:
Mon Jul 08, 2019 2:43 pm
Was it not Warren Buffett who recommended for his wife to be invested at 100% in an S&P 500 index fund, when he passes?
I'm not all that sure that what Warren Buffett does is all that relevant to what the 99.999% of the rest of us do/should do.

Mind you, for him, I'm sure he is doing what is relevant to his specific situation.

Broken Man 1999
Buffett and Bogle were both stubborn on on the matter: just invest in a low-cost S&P 500 index fund. Add in bonds according to your time-horizon and risk tolerance. Pretty simple advice for ordinary investors. No factor strategies or endless white papers required.

Maybe they were both wrong. Maybe you're right. But they have something that everyone else posting on these threads don't have - results.
One big difference between Bogle/Buffett and the rest of us is that they're not just smart, they are/were Famous Rich Guys who got to speak privately to a lot of other Famous Rich Guys. They got to see how the sausage is made from the inside, not just how it works in financial theory. I wonder if this influenced their opinions on the matter.

For example, when the US Treasury invested $50 billion to bail out GM, was that an efficient market at work? Of course not, that was a political decision to help out a very famous and influential US corporation. I doubt they'd do the same for small-cap stock. Likewise, the US government seems very interested in helping US tech companies defend their patents internationally, not so much for non-US companies. It doesn't even matter where their revenue comes from, it entirely depends on what flag flies outside their headquarters.

This isn't to say you *shouldn't* invest internationally, I just don't think it's as simple as "it's an efficient market, therefore allocate by market weight."

User avatar
CULater
Posts: 2058
Joined: Sun Nov 13, 2016 10:59 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by CULater » Tue Jul 09, 2019 3:28 pm

petulant wrote:
Tue Jul 09, 2019 1:16 pm
CULater wrote:
Tue Jul 09, 2019 11:02 am
To be clear, just what risks are we trying to manage by owning international equities, as U.S. investors? I can certainly understand investors in much smaller countries and economies wanting to diversify, but what about U.S. investors? It seems to me that the rationale generally offered is based on Bernstein's notion of Deep Risk. There are 3 types of deep risk that he discusses: (1) Deflation Risk, (2) Confiscation Risk, and (3) Devastation Risk. The way to "hedge" these risks involves owning certain kinds of assets and the location of those assets; it's not just a matter of determining efficiency.

The "Japan" argument refers to Deflation Risk -- the notion that U.S. equites could have poor returns compared to international equities. One hedge for that is to own foreign equities -- but there are others. What is the likelihood and possible magnitude of that potential risk to U.S. investors; and what steps should be taken to hedge that risk -- is owning foreign stocks the best and only thing to do?

Regarding Confiscation Risk, the thing to do here is to locate some of one's financial assets outside the U.S. Should we do that too? It does seem odd that we would own foreign assets to hedge against one type of Deep Risk (Deflation Risk) but hold those assets in U.S. financial institutions which does not protect use from another type of deep risk (Confiscation Risk). Seems to me the discussion of owning foreign equities usually doesn't embrace the notion of Deep Risk discussed by Dr. Bernstein, and only looks at one slice of a broader issue.
Thank you, these are just the kinds of things I'm thinking about! Can you share a book or set of articles where he discusses a bit more?
I would read Dr. Bernstein's book "Deep Risk - How History Informs Portfolio Design". A very worthwhile read.
On the internet, nobody knows you're a dog.

asif408
Posts: 1700
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by asif408 » Tue Jul 09, 2019 4:05 pm

CULater wrote:
Tue Jul 09, 2019 3:28 pm
petulant wrote:
Tue Jul 09, 2019 1:16 pm
CULater wrote:
Tue Jul 09, 2019 11:02 am
To be clear, just what risks are we trying to manage by owning international equities, as U.S. investors? I can certainly understand investors in much smaller countries and economies wanting to diversify, but what about U.S. investors? It seems to me that the rationale generally offered is based on Bernstein's notion of Deep Risk. There are 3 types of deep risk that he discusses: (1) Deflation Risk, (2) Confiscation Risk, and (3) Devastation Risk. The way to "hedge" these risks involves owning certain kinds of assets and the location of those assets; it's not just a matter of determining efficiency.

The "Japan" argument refers to Deflation Risk -- the notion that U.S. equites could have poor returns compared to international equities. One hedge for that is to own foreign equities -- but there are others. What is the likelihood and possible magnitude of that potential risk to U.S. investors; and what steps should be taken to hedge that risk -- is owning foreign stocks the best and only thing to do?

Regarding Confiscation Risk, the thing to do here is to locate some of one's financial assets outside the U.S. Should we do that too? It does seem odd that we would own foreign assets to hedge against one type of Deep Risk (Deflation Risk) but hold those assets in U.S. financial institutions which does not protect use from another type of deep risk (Confiscation Risk). Seems to me the discussion of owning foreign equities usually doesn't embrace the notion of Deep Risk discussed by Dr. Bernstein, and only looks at one slice of a broader issue.
Thank you, these are just the kinds of things I'm thinking about! Can you share a book or set of articles where he discusses a bit more?
I would read Dr. Bernstein's book "Deep Risk - How History Informs Portfolio Design". A very worthwhile read.
CULater,

Not sure you read the book completely, but there were 4 types of deep risk in that book. The one you failed to mention was inflation. It was also the one he suggested was most likely and the one that was easiest to protect against: With international diversification, a tilt to value stocks, owning some of the stocks of commodity producers, and having a fixed rate mortgage.

skeptical
Posts: 88
Joined: Fri Jul 18, 2014 12:24 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by skeptical » Tue Jul 09, 2019 4:34 pm

Hi Vineviz,

Could you provide a link to the source for this graph ?

The best I could reproduce in PV will only go back to 1986 due to lack of data for INTL. What I see from 1986 to 1996 does not show the rapid decline, even with a much higher withdrawal rate (to simulate inflation). It will not show the runnup in INTL (pre 1986), but neither does it show the severe decline in the domestic portfolio post 1986

Thx

https://www.portfoliovisualizer.com/bac ... 0&total3=0


vineviz wrote:
Mon Jul 08, 2019 6:29 pm
willthrill81 wrote:
Mon Jul 08, 2019 10:56 am
Honestly, I think that anywhere from 0% ex-U.S. to 50% is within the realm of 'plausible' for a U.S. investor, although I really doubt that a 20% or smaller allocation to it is going to be very helpful.
There are certainly examples of times when even a token attempt at diversification was helpful. I've posted this scenario before, but here's a look at three hypothetical 1966 retirees:

Portfolio 1 is 40% intermediate bonds and 60% US stocks.
Portfolio 2 is 40% intermediate bonds, 52.5% US stocks, and 7.5% international stocks.
Portfolio 3 is 40% intermediate bonds, 45% US stocks, and 15% international stocks.

Portfolios 2 and 3 allocate 12.5% and 25% of equities to international, respectively, so they bracket the 20% figure you mentioned.

Each investor started with $300k and withdrew an inflation-adjusted $1k/month. They had very different outcomes, illustrating that if retirees can see through the FUD enough to hold even a fraction of the recommended allocation to ex-US stocks it might make enough difference to keep them from scrounging through dumpsters at age 90.

Image

User avatar
CULater
Posts: 2058
Joined: Sun Nov 13, 2016 10:59 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by CULater » Tue Jul 09, 2019 4:50 pm

asif408 wrote:
Tue Jul 09, 2019 4:05 pm
CULater wrote:
Tue Jul 09, 2019 3:28 pm
petulant wrote:
Tue Jul 09, 2019 1:16 pm
CULater wrote:
Tue Jul 09, 2019 11:02 am
To be clear, just what risks are we trying to manage by owning international equities, as U.S. investors? I can certainly understand investors in much smaller countries and economies wanting to diversify, but what about U.S. investors? It seems to me that the rationale generally offered is based on Bernstein's notion of Deep Risk. There are 3 types of deep risk that he discusses: (1) Deflation Risk, (2) Confiscation Risk, and (3) Devastation Risk. The way to "hedge" these risks involves owning certain kinds of assets and the location of those assets; it's not just a matter of determining efficiency.

The "Japan" argument refers to Deflation Risk -- the notion that U.S. equites could have poor returns compared to international equities. One hedge for that is to own foreign equities -- but there are others. What is the likelihood and possible magnitude of that potential risk to U.S. investors; and what steps should be taken to hedge that risk -- is owning foreign stocks the best and only thing to do?

Regarding Confiscation Risk, the thing to do here is to locate some of one's financial assets outside the U.S. Should we do that too? It does seem odd that we would own foreign assets to hedge against one type of Deep Risk (Deflation Risk) but hold those assets in U.S. financial institutions which does not protect use from another type of deep risk (Confiscation Risk). Seems to me the discussion of owning foreign equities usually doesn't embrace the notion of Deep Risk discussed by Dr. Bernstein, and only looks at one slice of a broader issue.
Thank you, these are just the kinds of things I'm thinking about! Can you share a book or set of articles where he discusses a bit more?
I would read Dr. Bernstein's book "Deep Risk - How History Informs Portfolio Design". A very worthwhile read.
CULater,

Not sure you read the book completely, but there were 4 types of deep risk in that book. The one you failed to mention was inflation. It was also the one he suggested was most likely and the one that was easiest to protect against: With international diversification, a tilt to value stocks, owning some of the stocks of commodity producers, and having a fixed rate mortgage.
Yes, you're correct. As I re-read the book, I noted that Dr. Bernstein recommends globally diversified value equities as one asset to protect against both deflationary and inflationary risk. Along with TIPS, resource equities, etc.
On the internet, nobody knows you're a dog.

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by vineviz » Tue Jul 09, 2019 5:17 pm

skeptical wrote:
Tue Jul 09, 2019 4:34 pm
Could you provide a link to the source for this graph ?
I can't, unfortunately. I uploaded custom data series to my PortfolioVisualizer account, but they are only visible when logged in as me.

You could replicate the findings pretty well using Simba's backtesting spreadsheet though. The numbers might vary a little because of different data sources and different calendar intervals, but the basic result will be the same.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

politely
Posts: 33
Joined: Thu Jun 09, 2016 11:20 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by politely » Wed Jul 10, 2019 1:05 am

vineviz wrote:
Tue Jul 09, 2019 7:15 am
"Domicile more important than revenue" because it more completely captures the benefits of diversification. For one thing, the value of a company lies not in its revenues but in its profits (i.e. revenues minus expenses): focusing on geographic dispersion of revenues captures only half of this equation, whereas domicile captures both half more robustly. In other words, you can capture some of the benefits of diversification by focusing on revenue distribution but you can capture more of the benefits by paying attention to domicile.
Again, I'm not sure how to evaluate this, since multinationals may be domiciled in one country, but are likely to have locally based subsidiaries, and there hasn't been any claim that profit isn't related to revenue. But, if true, how would we translate into calculating international exposure in a portfolio, ie, how much international "credit" would apply to the S&P 500's 29% international revenue - is it just half (so, by owning the S&P 500 we say we have 14.5% international exposure)? And, similarly, how much of a discount (for purposes of calculating international exposure) should we apply to the US generated income of international funds?

Personally, I don't believe some of the historical data that's been expressed in this thread are necessarily relevant given the accelerated pace of internationalization. To be fair, I don't have any data, but my sense is that companies in the 1950s or 1960s were much more concentrated in their country of domicile than today. For example, outsourcing, global supply chain management, corporate inversions, and, even, the confusion around the "Made in America" label. My sense is that the large companies that dominate the various stock markets around the world today are likely to have significant multinational exposure.

vineviz wrote:
Tue Jul 09, 2019 7:15 am
Most companies do generally hedge their operational cash flows, but they are likely to hedge back to their home currency. For US companies, this means hedging back to the US dollar. As a result, investors who restrict themselves to US-domiciled companies are missing an important benefit by ineffectually diversifying their currency risk.
I don't really understand this either. The effect of diversifying internationally seems like one way to hedge currency risk, and if US companies are doing it themselves, not sure how much that differs. Referencing the Vanguard article, Larry mentioned that "currency risk had very little impact on long-term performance, whether it was hedged or not."

Pigeye Brewster wrote:
Tue Jul 09, 2019 9:48 am
politely wrote:
Tue Jul 09, 2019 12:47 am

Do we consider owning the S&P 500 a 100% US investment or is it a 71% US investment and 29% international, or something else? Does it somehow insufficiently represent other countries to count as "international" exposure?
This is one of the reasons why Jack Bogle didn't believe international exposure is necessary. Was/is he "right"? If anything, this thread shows that opinions vary.
Actually, I thought this was the prevalent view here, and I am surprised that more people are not advocating this view.

I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.

User avatar
fortyofforty
Posts: 1524
Joined: Wed Mar 31, 2010 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by fortyofforty » Wed Jul 10, 2019 6:37 am

politely wrote:
Wed Jul 10, 2019 1:05 am
I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.
Part of the issue, I believe, is how much diversification all those extra companies actually provides. The top ten companies make up over ten percent of the global index by weight, currently. The top 500 would likely make all the rest fade into relative insignificance. It's not until you get to the tenth company that you have an international corporation (Nestle). Diversification is often said to be a "free lunch" but if it causes returns to suffer, it might not be truly free.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

kfitz1313
Posts: 79
Joined: Sun May 19, 2019 3:20 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by kfitz1313 » Wed Jul 10, 2019 7:09 am

fortyofforty wrote:
Wed Jul 10, 2019 6:37 am
politely wrote:
Wed Jul 10, 2019 1:05 am
I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.
Part of the issue, I believe, is how much diversification all those extra companies actually provides. The top ten companies make up over ten percent of the global index by weight, currently. The top 500 would likely make all the rest fade into relative insignificance. It's not until you get to the tenth company that you have an international corporation (Nestle). Diversification is often said to be a "free lunch" but if it causes returns to suffer, it might not be truly free.
Is there anything preventing the top ten companies from being international companies? It's not that hard to imagine the top ten changing over time. What if it were the case that the top nine were international and it weren't until you reached number ten that you got a US company?

asif408
Posts: 1700
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by asif408 » Wed Jul 10, 2019 7:19 am

kfitz1313 wrote:
Wed Jul 10, 2019 7:09 am
fortyofforty wrote:
Wed Jul 10, 2019 6:37 am
politely wrote:
Wed Jul 10, 2019 1:05 am
I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.
Part of the issue, I believe, is how much diversification all those extra companies actually provides. The top ten companies make up over ten percent of the global index by weight, currently. The top 500 would likely make all the rest fade into relative insignificance. It's not until you get to the tenth company that you have an international corporation (Nestle). Diversification is often said to be a "free lunch" but if it causes returns to suffer, it might not be truly free.
Is there anything preventing the top ten companies from being international companies? It's not that hard to imagine the top ten changing over time. What if it were the case that the top nine were international and it weren't until you reached number ten that you got a US company?
That was the case in 1990: https://twitter.com/charliebilello/stat ... 2443927553, when Japan had 9 of the top 10 companies in the world by market cap.

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by vineviz » Wed Jul 10, 2019 7:23 am

politely wrote:
Wed Jul 10, 2019 1:05 am
Again, I'm not sure how to evaluate this, since multinationals may be domiciled in one country, but are likely to have locally based subsidiaries, and there hasn't been any claim that profit isn't related to revenue. But, if true, how would we translate into calculating international exposure in a portfolio, ie, how much international "credit" would apply to the S&P 500's 29% international revenue - is it just half (so, by owning the S&P 500 we say we have 14.5% international exposure)? And, similarly, how much of a discount (for purposes of calculating international exposure) should we apply to the US generated income of international funds?
I'm not sure what kind of evaluation you are driving towards. It's possible to directly estimate the diversification benefits of different assets by looking at the correlations and variances, but most people don't want to go to the trouble of doing that so they use domicile as a proxy. There's plenty of evidence that this works okay, and less evidence that using revenue works as well.

The benefit of using direct calculation is that you don't need to care about estimating that 29% of revenue exposure: it's already in there. The annual correlation of the US index with the EAFE index, for instance, has been 0.66 since 1970: that alone tells you there owning both will provide additional diversification over owning just one or the other.
politely wrote:
Wed Jul 10, 2019 1:05 am
To be fair, I don't have any data, but my sense is that companies in the 1950s or 1960s were much more concentrated in their country of domicile than today.
That's undoubtedly true, though the correlations of US with international stock indexes has not followed a linear path. Correlations actually declined through the 1970s, 1980s, and early 1990s. They increase through the 2000s, only to drift lower again in the 2010s. But even if correlations remain higher than they were in the distant past, there are still diversification benefits to be had.

politely wrote:
Wed Jul 10, 2019 1:05 am
I don't really understand this either. The effect of diversifying internationally seems like one way to hedge currency risk, and if US companies are doing it themselves, not sure how much that differs.
When US companies hedge their profits back the USD, they are actually increasing the currency risk exposure of USD investors: they are basically un-diversifying you. The terminology is confusing, I know, but the gist of it is that most investors should have exposure to multiple currencies. If you own only US stocks and bonds, your portfolio basically only has exposure to one currency: the US dollar.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
CULater
Posts: 2058
Joined: Sun Nov 13, 2016 10:59 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by CULater » Wed Jul 10, 2019 7:39 am

As far as currency diversification goes, there's evidence that it increases portfolio volatility but it's as likely to decrease returns as it is to increase returns. It's uncompensated risk, and we're told to avoid uncompensated risk. All the "foreign stocks and foreign currency" arguments seem to rest primarily on an "insurance" rationale -- these assets might help "insure" one against home country "deep risk" issues, such as the possibility of the Japan Syndrome. As with much insurance, the premium payments are not necessarily recouped unless the deep risk materializes. But having insurance might still be a good idea -- or not.
On the internet, nobody knows you're a dog.

larryswedroe
Posts: 15945
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by larryswedroe » Wed Jul 10, 2019 7:43 am

CULATER
Yes currency risk on stocks increases volatililty some but hedging it increases correlation, reducing diversification benefits,
Larry

User avatar
9-5 Suited
Posts: 315
Joined: Thu Jun 23, 2016 12:14 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by 9-5 Suited » Wed Jul 10, 2019 8:19 am

willthrill81 wrote:
Sun Jul 07, 2019 6:24 pm
jhawktx wrote:
Sun Jul 07, 2019 1:45 pm
For those in the "diversification is my nirvana" camp, are you global market cap weighted in bitcoin, gold, Venezuela bonds, commodities, etc.? If not, why not?
I've asked a similar question of others before, and the answer is usually "I'm only interested in ownership in publicly traded companies." But that seems a lot like defining the question to fit the desired answer.
Will, are you thinking of one of these cases most specifically? In general, the choice to diversify within an asset class is different than the choice to include an asset class in a portfolio. To take the easy example, I don’t include Bitcoin because I don’t believe in “investing” in asset classes that have no internal rate of return. I don’t think that makes me intellectually inconsistent when I say I want to diversify my equities because it’s a strong asset class but one where a few winners drive the returns and I can’t pick the winners.

Other asset classes may have high investment costs that undo any diversification benefit or have risk characteristics that limit the value of diversification (government bonds).

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by vineviz » Wed Jul 10, 2019 8:22 am

CULater wrote:
Wed Jul 10, 2019 7:39 am
As far as currency diversification goes, there's evidence that it increases portfolio volatility but it's as likely to decrease returns as it is to increase returns. It's uncompensated risk, and we're told to avoid uncompensated risk. All the "foreign stocks and foreign currency" arguments seem to rest primarily on an "insurance" rationale -- these assets might help "insure" one against home country "deep risk" issues, such as the possibility of the Japan Syndrome. As with much insurance, the premium payments are not necessarily recouped unless the deep risk materializes. But having insurance might still be a good idea -- or not.
The difference between most insurance and currency diversification is that the former has a cost whereas the latter does not: the expected long-term real return from currency is zero.

Free insurance? Yes, please.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
305pelusa
Posts: 295
Joined: Fri Nov 16, 2018 10:20 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by 305pelusa » Wed Jul 10, 2019 8:38 am

CULater wrote:
Wed Jul 10, 2019 7:39 am
As far as currency diversification goes, there's evidence that it increases portfolio volatility but it's as likely to decrease returns as it is to increase returns. It's uncompensated risk, and we're told to avoid uncompensated risk. All the "foreign stocks and foreign currency" arguments seem to rest primarily on an "insurance" rationale -- these assets might help "insure" one against home country "deep risk" issues, such as the possibility of the Japan Syndrome. As with much insurance, the premium payments are not necessarily recouped unless the deep risk materializes. But having insurance might still be a good idea -- or not.
I think you have it backwards. No one compensates you for having exposure only to the dollar (just like you're not compensated for buying only AAPL). Hence, exposing yourself to different currencies with the same returns provides diversification (just like buying the TSM diversifies you).

Put another way: Yes, you can think of it as insurance. But it's FREE insurance because, theoretically, I don't sacrifice (nor gain) returns for it. Insurance is a no-brainer when the premiums are free.

User avatar
willthrill81
Posts: 11032
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by willthrill81 » Wed Jul 10, 2019 8:46 am

9-5 Suited wrote:
Wed Jul 10, 2019 8:19 am
willthrill81 wrote:
Sun Jul 07, 2019 6:24 pm
jhawktx wrote:
Sun Jul 07, 2019 1:45 pm
For those in the "diversification is my nirvana" camp, are you global market cap weighted in bitcoin, gold, Venezuela bonds, commodities, etc.? If not, why not?
I've asked a similar question of others before, and the answer is usually "I'm only interested in ownership in publicly traded companies." But that seems a lot like defining the question to fit the desired answer.
Will, are you thinking of one of these cases most specifically? In general, the choice to diversify within an asset class is different than the choice to include an asset class in a portfolio. To take the easy example, I don’t include Bitcoin because I don’t believe in “investing” in asset classes that have no internal rate of return. I don’t think that makes me intellectually inconsistent when I say I want to diversify my equities because it’s a strong asset class but one where a few winners drive the returns and I can’t pick the winners.

Other asset classes may have high investment costs that undo any diversification benefit or have risk characteristics that limit the value of diversification (government bonds).
The differences between owning shares in a company are argued by some to be so different between at least some countries as to make it questionable that they belong in the same asset class.
“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

User avatar
CULater
Posts: 2058
Joined: Sun Nov 13, 2016 10:59 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by CULater » Wed Jul 10, 2019 9:39 am

vineviz wrote:
Wed Jul 10, 2019 8:22 am
CULater wrote:
Wed Jul 10, 2019 7:39 am
As far as currency diversification goes, there's evidence that it increases portfolio volatility but it's as likely to decrease returns as it is to increase returns. It's uncompensated risk, and we're told to avoid uncompensated risk. All the "foreign stocks and foreign currency" arguments seem to rest primarily on an "insurance" rationale -- these assets might help "insure" one against home country "deep risk" issues, such as the possibility of the Japan Syndrome. As with much insurance, the premium payments are not necessarily recouped unless the deep risk materializes. But having insurance might still be a good idea -- or not.
The difference between most insurance and currency diversification is that the former has a cost whereas the latter does not: the expected long-term real return from currency is zero.

Free insurance? Yes, please.
The cost of currency diversification insurance is the added currency risk taken on. No free lunch is being served.
On the internet, nobody knows you're a dog.

User avatar
CULater
Posts: 2058
Joined: Sun Nov 13, 2016 10:59 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by CULater » Wed Jul 10, 2019 10:10 am

I think we might conclude, as per William Bernstein's thinking, that skating toward the "investing in foreign equities" puck has not been profitable lately nor seems likely to be a great idea for managing short term, or shallow, risk -- i.e, it might not improve your absolute or risk-adjusted returns over the next 10-20 years, but maybe it will let you sleep better in the arms of the diversification fairy.

In my mind, perhaps the best rationale for foreign stocks is to protect against long term, or deep, risk -- stuff like inflation, deflation, dollar collapse, the "Japan" story, etc. that do their damaging work over the longer run. My take is that if you have a long investing horizon (> 15-20 years) investing in foreign equities makes a lot more sense than if you don't. As a retiree with no urgent need to pass an estate as a bequest, I think I'll probably mostly pass. You young whipper-snappers and oldsters who are passing on an estate to your heirs can go for it.
On the internet, nobody knows you're a dog.

asif408
Posts: 1700
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by asif408 » Wed Jul 10, 2019 10:42 am

CULater wrote:
Wed Jul 10, 2019 10:10 am
I think we might conclude, as per William Bernstein's thinking, that skating toward the "investing in foreign equities" puck has not been profitable lately nor seems likely to be a great idea for managing short term, or shallow, risk -- i.e, it might not improve your absolute or risk-adjusted returns over the next 10-20 years, but maybe it will let you sleep better in the arms of the diversification fairy.

Perhaps the best rationale is to protect against long term, or deep, risk -- stuff like inflation, deflation, dollar collapse, the "Japan" story, etc. that do their damaging work over the longer run. My take is that if you have a long investing horizon (> 15-20 years) investing in foreign equities makes a lot more sense than if you don't. As a retiree with no urgent need to pass an estate as a bequest, I think I'll probably mostly pass. You young whipper-snappers and oldsters who are passing on an estate to your heirs can go for it.
If you've read any of Dr. Bernstein's books and writing in depth, he emphasizes that the prime directive of diversification is that your portfolio should not look like everyone else's. 8-10 years ago that was the BRICs, gold, and value stocks. Today, that would be heavy in US stocks (particularly growth) and bonds and light in developed ex-US and emerging markets, particularly on the value side, as well as gold. By leaving out foreign equities now, you are "skating where the puck was".

User avatar
nedsaid
Posts: 11898
Joined: Fri Nov 23, 2012 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by nedsaid » Wed Jul 10, 2019 11:50 am

fortyofforty wrote:
Wed Jul 10, 2019 6:37 am
politely wrote:
Wed Jul 10, 2019 1:05 am
I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.
Part of the issue, I believe, is how much diversification all those extra companies actually provides. The top ten companies make up over ten percent of the global index by weight, currently. The top 500 would likely make all the rest fade into relative insignificance. It's not until you get to the tenth company that you have an international corporation (Nestle). Diversification is often said to be a "free lunch" but if it causes returns to suffer, it might not be truly free.
Yep, diversification is a big drag on returns. Just think how much richer I would be today if I put all my money into Google when it became public. Microsoft went public in 1986, not long after I started my career, what would have happened if all my money was in that? I would be long retired, that's what. What could be more simple than having all your money in just one stock?

Bonds are another big drag on returns, at least they are right now. 2% to 3% interest rates don't get you much in return.

Being a bit sarcastic here, but why bother with 500 companies when all you needed was one? We all know the answer, or we should. I am so old that I remember way back in 2007 when I was told that International Stocks returned MORE than US stocks with limited correlation to the US Stock Market. You could have your cake and eat it too, increase returns a bit and reduce volatility a bit at the same time. Similar story to REITs and Small Value.

What happened to International Stocks since 2008-2009 was the world-wide financial crisis, the bear market, and a near depression. The United States was regarded as a safe haven or at least the least dirtiest shirt in the laundry hamper. The Dollar has been strong since then and coupled with the flight to quality has boosted US Stocks relative to International Stocks. Don't think this scenario will play out forever.
A fool and his money are good for business.

RandomWord
Posts: 18
Joined: Tue Jun 18, 2019 1:12 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by RandomWord » Wed Jul 10, 2019 12:17 pm

asif408 wrote:
Wed Jul 10, 2019 7:19 am
kfitz1313 wrote:
Wed Jul 10, 2019 7:09 am
fortyofforty wrote:
Wed Jul 10, 2019 6:37 am
politely wrote:
Wed Jul 10, 2019 1:05 am
I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.
Part of the issue, I believe, is how much diversification all those extra companies actually provides. The top ten companies make up over ten percent of the global index by weight, currently. The top 500 would likely make all the rest fade into relative insignificance. It's not until you get to the tenth company that you have an international corporation (Nestle). Diversification is often said to be a "free lunch" but if it causes returns to suffer, it might not be truly free.
Is there anything preventing the top ten companies from being international companies? It's not that hard to imagine the top ten changing over time. What if it were the case that the top nine were international and it weren't until you reached number ten that you got a US company?
That was the case in 1990: https://twitter.com/charliebilello/stat ... 2443927553, when Japan had 9 of the top 10 companies in the world by market cap.
Good illustration of just how crazy the bubble in Japan was. Ridiculous that 9 out of the 10 largest companies were in Japan, and 6 out of 10 were all banks. Utterly insane market values.

It's not just a funny anecdote either- an awful lot of the historical data in favor of international investing is heavily driven by the Japan bubble. Maybe another country will see a similar bubble in our lifetimes, but it does seem that the investing community has gotten a bit smarter in doing diligence on international investing.

User avatar
fortyofforty
Posts: 1524
Joined: Wed Mar 31, 2010 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by fortyofforty » Wed Jul 10, 2019 1:13 pm

nedsaid wrote:
Wed Jul 10, 2019 11:50 am
fortyofforty wrote:
Wed Jul 10, 2019 6:37 am
politely wrote:
Wed Jul 10, 2019 1:05 am
I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.
Part of the issue, I believe, is how much diversification all those extra companies actually provides. The top ten companies make up over ten percent of the global index by weight, currently. The top 500 would likely make all the rest fade into relative insignificance. It's not until you get to the tenth company that you have an international corporation (Nestle). Diversification is often said to be a "free lunch" but if it causes returns to suffer, it might not be truly free.
Yep, diversification is a big drag on returns. Just think how much richer I would be today if I put all my money into Google when it became public. Microsoft went public in 1986, not long after I started my career, what would have happened if all my money was in that? I would be long retired, that's what. What could be more simple than having all your money in just one stock?

Bonds are another big drag on returns, at least they are right now. 2% to 3% interest rates don't get you much in return.

Being a bit sarcastic here, but why bother with 500 companies when all you needed was one? We all know the answer, or we should. I am so old that I remember way back in 2007 when I was told that International Stocks returned MORE than US stocks with limited correlation to the US Stock Market. You could have your cake and eat it too, increase returns a bit and reduce volatility a bit at the same time. Similar story to REITs and Small Value.

What happened to International Stocks since 2008-2009 was the world-wide financial crisis, the bear market, and a near depression. The United States was regarded as a safe haven or at least the least dirtiest shirt in the laundry hamper. The Dollar has been strong since then and coupled with the flight to quality has boosted US Stocks relative to International Stocks. Don't think this scenario will play out forever.
So did being "diversified" cost you money when you bought companies outside the S&P 500? I know it cost me, although I do it any way. I also made less than I would have otherwise by investing overseas. I do it anyway.

But the "free lunch" cost me money. We all know why we do it. We all also should know that sometimes it doesn't pay off. Sometimes.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

asif408
Posts: 1700
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by asif408 » Wed Jul 10, 2019 1:29 pm

fortyofforty wrote:
Wed Jul 10, 2019 1:13 pm
So did being "diversified" cost you money when you bought companies outside the S&P 500? I know it cost me, although I do it any way. I also made less than I would have otherwise by investing overseas. I do it anyway.

But the "free lunch" cost me money. We all know why we do it. We all also should know that sometimes it doesn't pay off. Sometimes.
But the key is in the highlighted point above. You didn't lose money, you just made less. One of the key points of international diversification (bringing this back to the original post) is that by investing in many different countries, you reduce the risk of losing a large amount of money. Of course, you also reduce the risk of having really great performance (which the US stock market has had since 2009).

But that's precisely the trade-off. It's no different that comparing a sector's performance vs. the total market, or an individual stock to its sector performance. The more concentrated you are the better chance of really good (or really bad) performance.

garlandwhizzer
Posts: 2334
Joined: Fri Aug 06, 2010 3:42 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by garlandwhizzer » Wed Jul 10, 2019 1:47 pm

IMO the bad news is that we cannot predict with reliability whether US will outperform INTL going forward (history in recent decades suggests yes) or whether INTL will outperform (relative valuations suggest yes). Which is right? There clearly is some diversification benefit from including INTL but whether or not risk/adjusted performance will be improved long term is merely IMO a guess. The good news is that over the past several decades both US only and US/INTL diversified equity portfolios have performed very well and are very likely to do so going forward. Personally I choose a 50% US/50% INTL equity portfolio, basically cap weight, with 100% US bonds. I believe in equity valuations as having some degree of future predictive power, although certainly imperfect. I also believe in periodic long term market trend reversals with alternating cycles of outperformance which I belief at present favors long suffering INTL. I realize that it's only my guess based on my own particular opinions and circumstances. It's sort of like cap weight versus factors arguments. Both are long term winners for those who hold on to their strategy. It's very fortunate that we investors have a game to play where in the long run no one loses. As long as the US doesn't turn into Japan, which I view as near zero probability, just keep on keeping on and you'll be happy about it decades from now whichever side you choose.

Garland Whizzer

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by vineviz » Wed Jul 10, 2019 2:23 pm

garlandwhizzer wrote:
Wed Jul 10, 2019 1:47 pm
IMO the bad news is that we cannot predict with reliability whether US will outperform INTL going forward (history in recent decades suggests yes) or whether INTL will outperform (relative valuations suggest yes).
How is this news at all, much less bad news? What outcome in investing can we "predict with reliability"?

The only certainty is that the future is uncertain, and diversification is the only rational protection from uncertainty.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

randomguy
Posts: 7836
Joined: Wed Sep 17, 2014 9:00 am

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by randomguy » Wed Jul 10, 2019 2:34 pm

asif408 wrote:
Wed Jul 10, 2019 1:29 pm
fortyofforty wrote:
Wed Jul 10, 2019 1:13 pm
So did being "diversified" cost you money when you bought companies outside the S&P 500? I know it cost me, although I do it any way. I also made less than I would have otherwise by investing overseas. I do it anyway.

But the "free lunch" cost me money. We all know why we do it. We all also should know that sometimes it doesn't pay off. Sometimes.
But the key is in the highlighted point above. You didn't lose money, you just made less. One of the key points of international diversification (bringing this back to the original post) is that by investing in many different countries, you reduce the risk of losing a large amount of money. Of course, you also reduce the risk of having really great performance (which the US stock market has had since 2009).

But that's precisely the trade-off. It's no different that comparing a sector's performance vs. the total market, or an individual stock to its sector performance. The more concentrated you are the better chance of really good (or really bad) performance.
Since it needs to be said: Why buy the poor performing S&P 500? Over the past 34 years it has had 1/3 less return and twice the draw down of just holding Vanguard health Care? Why should I invest in a sectors of poor returns and fraud (remember Enron, world com, and those financial sector stocks) when I can buy those safe health care ones. After all the demographics definitely are in favor of it:) Obviously most people don't feel comfortable drawnign that line. Tough ever time I look at vanguard returns, I wonder why I not am invest there:)


Drawing the line between US/International feels a lot easier to make. But you make simiiar bets. You are betting the US split of industries is better than global (want to say we are overweight in tech, health care and financials and underweight in materials and manufacturing). But you also get weird things when owning a company is OK when it is US owned but if a german company buys it, you decide it isn't worth owning. If you were happy owning Monsanto in 2017, why wouldn't you want to own it in 2019? Granted in that case it was probably the right move:)

https://www.portfoliovisualizer.com/bac ... 0&total3=0

User avatar
nedsaid
Posts: 11898
Joined: Fri Nov 23, 2012 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by nedsaid » Wed Jul 10, 2019 3:55 pm

fortyofforty wrote:
Wed Jul 10, 2019 1:13 pm
nedsaid wrote:
Wed Jul 10, 2019 11:50 am
fortyofforty wrote:
Wed Jul 10, 2019 6:37 am
politely wrote:
Wed Jul 10, 2019 1:05 am
I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.
Part of the issue, I believe, is how much diversification all those extra companies actually provides. The top ten companies make up over ten percent of the global index by weight, currently. The top 500 would likely make all the rest fade into relative insignificance. It's not until you get to the tenth company that you have an international corporation (Nestle). Diversification is often said to be a "free lunch" but if it causes returns to suffer, it might not be truly free.
Yep, diversification is a big drag on returns. Just think how much richer I would be today if I put all my money into Google when it became public. Microsoft went public in 1986, not long after I started my career, what would have happened if all my money was in that? I would be long retired, that's what. What could be more simple than having all your money in just one stock?

Bonds are another big drag on returns, at least they are right now. 2% to 3% interest rates don't get you much in return.

Being a bit sarcastic here, but why bother with 500 companies when all you needed was one? We all know the answer, or we should. I am so old that I remember way back in 2007 when I was told that International Stocks returned MORE than US stocks with limited correlation to the US Stock Market. You could have your cake and eat it too, increase returns a bit and reduce volatility a bit at the same time. Similar story to REITs and Small Value.

What happened to International Stocks since 2008-2009 was the world-wide financial crisis, the bear market, and a near depression. The United States was regarded as a safe haven or at least the least dirtiest shirt in the laundry hamper. The Dollar has been strong since then and coupled with the flight to quality has boosted US Stocks relative to International Stocks. Don't think this scenario will play out forever.
So did being "diversified" cost you money when you bought companies outside the S&P 500? I know it cost me, although I do it any way. I also made less than I would have otherwise by investing overseas. I do it anyway.

But the "free lunch" cost me money. We all know why we do it. We all also should know that sometimes it doesn't pay off. Sometimes.
I knew that you understood diversification, I was having a bit of fun with this and trying to make a point. There are some questions here to which there are not 100% clear answers and there is room for disagreement.

First, what is diversification exactly? I have discussed this other places but I have defined it for myself as diversification across asset classes, geography, and factors. Others might have somewhat different definitions.

Second, what is it we are trying to diversify against? It goes to the definition of risk. Lots of folks see risk as volatility, what Bill Bernstein calls shallow risk. I focus more upon the risk of loss of purchasing power over time caused by inflation, Bernstein calls this deep risk. Other risks I can think of are political risk, single country risk, and single stock risk. There are other definitions of risk as well. So how we invest depends upon what risks that we perceive.

I was being a bit facetious here, I would never advocate putting all my money in one stock and neither would you. You and I are probably in agreement on bonds, despite their low level of interest rates, bonds are a tool for both generating income and reducing volatility in a portfolio. I have bonds in my portfolio because I cannot tolerate the volatility of a 100% stock portfolio.

The question here is about international diversification. To me it boils down to this: as long as the United States maintains certain competitive advantages in the world, it will probably make little difference if one invests internationally or not. I am one who doesn't take those competitive advantages for granted, one being the US Dollar's status as the world's reserve currency. Nothing lasts forever. Wasn't too many years ago that the British Pound had that status and indeed the sun now sets on the British Empire, whatever is left of it. So it depends upon one's faith in the United States. I am hedging my bets. Also I have an investing philosophy that favors wide diversification over narrow diversification. But over our lifetimes, narrower diversification might work just fine.

In actual practice, I am a mostly U.S. investor. 72% of my stocks are US based and probably over 90% of my bonds. I believe that 30% International stocks in a stock portfolio is the "sweet spot", from what I have seen there seems little difference between 20% and 50%. So I am at 28% International for my stocks and probably 8% to 10% in my bonds as even my "domestic" bond funds hold International Bonds denominated in US Dollars. My "domestic" active stock funds have a slice of International Stocks in them. So to a degree, I will get a bit of International diversification whether I want it or not. And of course, the large US companies derive significant revenues from overseas as Mr. Bogle pointed out.

Finally, I have pointed out as you have above that there are times that diversification doesn't seem to work. I sacrifice some return with diversified investments so that I can sleep at night and you probably have that reason too.
A fool and his money are good for business.

User avatar
fortyofforty
Posts: 1524
Joined: Wed Mar 31, 2010 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by fortyofforty » Wed Jul 10, 2019 6:14 pm

asif408 wrote:
Wed Jul 10, 2019 1:29 pm
fortyofforty wrote:
Wed Jul 10, 2019 1:13 pm
So did being "diversified" cost you money when you bought companies outside the S&P 500? I know it cost me, although I do it any way. I also made less than I would have otherwise by investing overseas. I do it anyway.

But the "free lunch" cost me money. We all know why we do it. We all also should know that sometimes it doesn't pay off. Sometimes.
But the key is in the highlighted point above. You didn't lose money, you just made less. One of the key points of international diversification (bringing this back to the original post) is that by investing in many different countries, you reduce the risk of losing a large amount of money. Of course, you also reduce the risk of having really great performance (which the US stock market has had since 2009).

But that's precisely the trade-off. It's no different that comparing a sector's performance vs. the total market, or an individual stock to its sector performance. The more concentrated you are the better chance of really good (or really bad) performance.
Actually, depending on the time period, I may indeed have lost money. You don't know and can't make a blanket statement like the one you highlighted above. In many cases, international equity funds lost money while domestic equity funds grew.

As I wrote, we all know why we do it. Sometimes it costs us money.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

User avatar
fortyofforty
Posts: 1524
Joined: Wed Mar 31, 2010 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by fortyofforty » Wed Jul 10, 2019 6:18 pm

nedsaid wrote:
Wed Jul 10, 2019 3:55 pm
fortyofforty wrote:
Wed Jul 10, 2019 1:13 pm
nedsaid wrote:
Wed Jul 10, 2019 11:50 am
fortyofforty wrote:
Wed Jul 10, 2019 6:37 am
politely wrote:
Wed Jul 10, 2019 1:05 am
I think Larry's article about international exposure seems conceptually right, particularly if viewed simply as more companies = more diversification rather than in terms of international diversification, but to me, it's not very helpful practically without understanding how to actually measure or achieve this diversification.
Part of the issue, I believe, is how much diversification all those extra companies actually provides. The top ten companies make up over ten percent of the global index by weight, currently. The top 500 would likely make all the rest fade into relative insignificance. It's not until you get to the tenth company that you have an international corporation (Nestle). Diversification is often said to be a "free lunch" but if it causes returns to suffer, it might not be truly free.
Yep, diversification is a big drag on returns. Just think how much richer I would be today if I put all my money into Google when it became public. Microsoft went public in 1986, not long after I started my career, what would have happened if all my money was in that? I would be long retired, that's what. What could be more simple than having all your money in just one stock?

Bonds are another big drag on returns, at least they are right now. 2% to 3% interest rates don't get you much in return.

Being a bit sarcastic here, but why bother with 500 companies when all you needed was one? We all know the answer, or we should. I am so old that I remember way back in 2007 when I was told that International Stocks returned MORE than US stocks with limited correlation to the US Stock Market. You could have your cake and eat it too, increase returns a bit and reduce volatility a bit at the same time. Similar story to REITs and Small Value.

What happened to International Stocks since 2008-2009 was the world-wide financial crisis, the bear market, and a near depression. The United States was regarded as a safe haven or at least the least dirtiest shirt in the laundry hamper. The Dollar has been strong since then and coupled with the flight to quality has boosted US Stocks relative to International Stocks. Don't think this scenario will play out forever.
So did being "diversified" cost you money when you bought companies outside the S&P 500? I know it cost me, although I do it any way. I also made less than I would have otherwise by investing overseas. I do it anyway.

But the "free lunch" cost me money. We all know why we do it. We all also should know that sometimes it doesn't pay off. Sometimes.
I knew that you understood diversification, I was having a bit of fun with this and trying to make a point. There are some questions here to which there are not 100% clear answers and there is room for disagreement.

First, what is diversification exactly? I have discussed this other places but I have defined it for myself as diversification across asset classes, geography, and factors. Others might have somewhat different definitions.

Second, what is it we are trying to diversify against? It goes to the definition of risk. Lots of folks see risk as volatility, what Bill Bernstein calls shallow risk. I focus more upon the risk of loss of purchasing power over time caused by inflation, Bernstein calls this deep risk. Other risks I can think of are political risk, single country risk, and single stock risk. There are other definitions of risk as well. So how we invest depends upon what risks that we perceive.

I was being a bit facetious here, I would never advocate putting all my money in one stock and neither would you. You and I are probably in agreement on bonds, despite their low level of interest rates, bonds are a tool for both generating income and reducing volatility in a portfolio. I have bonds in my portfolio because I cannot tolerate the volatility of a 100% stock portfolio.

The question here is about international diversification. To me it boils down to this: as long as the United States maintains certain competitive advantages in the world, it will probably make little difference if one invests internationally or not. I am one who doesn't take those competitive advantages for granted, one being the US Dollar's status as the world's reserve currency. Nothing lasts forever. Wasn't too many years ago that the British Pound had that status and indeed the sun now sets on the British Empire, whatever is left of it. So it depends upon one's faith in the United States. I am hedging my bets. Also I have an investing philosophy that favors wide diversification over narrow diversification. But over our lifetimes, narrower diversification might work just fine.

In actual practice, I am a mostly U.S. investor. 72% of my stocks are US based and probably over 90% of my bonds. I believe that 30% International stocks in a stock portfolio is the "sweet spot", from what I have seen there seems little difference between 20% and 50%. So I am at 28% International for my stocks and probably 8% to 10% in my bonds as even my "domestic" bond funds hold International Bonds denominated in US Dollars. My "domestic" active stock funds have a slice of International Stocks in them. So to a degree, I will get a bit of International diversification whether I want it or not. And of course, the large US companies derive significant revenues from overseas as Mr. Bogle pointed out.

Finally, I have pointed out as you have above that there are times that diversification doesn't seem to work. I sacrifice some return with diversified investments so that I can sleep at night and you probably have that reason too.
I forget, as these thread grow and grow. Do you follow your advice in the realm of global bonds?
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

User avatar
nedsaid
Posts: 11898
Joined: Fri Nov 23, 2012 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by nedsaid » Wed Jul 10, 2019 6:39 pm

fortyofforty wrote:
Wed Jul 10, 2019 6:18 pm

I forget, as these thread grow and grow. Do you follow your advice in the realm of global bonds?
I own two International Bond products. One is American Century International Bond, which used to be a very good fund but which has been horrible in recent years. It is not currency hedged. The other is iShares International Aggregate Bond ETF (IAGG) and it is currency hedged like the Vanguard International Bond Index. I have been pleased with the iShares product and displeased with the American Century product. I used to own Templeton Global Bond through a workplace savings plan but sold when I rolled into a rollover IRA, I did like that fund but it took some pretty risky bets. It had a big bet on Ukrainian Bonds. Templeton Global Bond was not currency hedged.

My take on International Bonds is that they can't hurt but might help a little. I own them simply because I want International diversification in my bonds and they are the largest asset class in the world. But they are entirely optional for an investor in my view as the diversification benefit is very mild.

My guess is that about 8% of my bonds are international.
A fool and his money are good for business.

User avatar
vineviz
Posts: 4431
Joined: Tue May 15, 2018 1:55 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by vineviz » Wed Jul 10, 2019 6:46 pm

fortyofforty wrote:
Wed Jul 10, 2019 6:14 pm
Actually, depending on the time period, I may indeed have lost money. You don't know and can't make a blanket statement like the one you highlighted above.
It's hard to see how this could possibly be true, even if you added international diversification at the WORST possible time you'd still be in positive territory.

Image
fortyofforty wrote:
Wed Jul 10, 2019 6:14 pm
In many cases, international equity funds lost money while domestic equity funds grew.
I'm not sure I'd say "many", but there definitely have been times when this was the case. Of course the opposite has been MORE common: the EAFE index has been up in months when the US index was down about 20% more often than the converse scenario.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
fortyofforty
Posts: 1524
Joined: Wed Mar 31, 2010 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by fortyofforty » Wed Jul 10, 2019 7:06 pm

vineviz wrote:
Wed Jul 10, 2019 6:46 pm
fortyofforty wrote:
Wed Jul 10, 2019 6:14 pm
Actually, depending on the time period, I may indeed have lost money. You don't know and can't make a blanket statement like the one you highlighted above.
It's hard to see how this could possibly be true, even if you added international diversification at the WORST possible time you'd still be in positive territory.

Image
fortyofforty wrote:
Wed Jul 10, 2019 6:14 pm
In many cases, international equity funds lost money while domestic equity funds grew.
I'm not sure I'd say "many", but there definitely have been times when this was the case. Of course the opposite has been MORE common: the EAFE index has been up in months when the US index was down about 20% more often than the converse scenario.
Investing is not a "dump X dollars in one time and watch it grow" event, at least for most people. They invest what they can, when they can. As an example, I recently (early 2017) invested similar amounts in a domestic and international equity fund. The domestic fund grew, while the international fund shrank. Only recently (within the past couple of months) has it moved slightly into the black in terms of my cost basis. The domestic equity fund is solidly in the black, and has been for most of the time period I've held it. As I wrote, it can happen, based on the time period evaluated.

ETA: I see where you're coming from. In my overall portfolio, investing internationally did not cost me money as if I had zero dollars left because of it. From your perspective, if I invest in two mutual funds, one with a fee of 2.05% and one with a fee of 0.05%, with the same pre-fee returns, I might still end up making money in both funds. So, as you say, I didn't "lose" money in that case. However, from my perspective, I lost money since I do not have the amount I would have had by avoiding the higher fee fund. Think of it as opportunity cost, if you prefer.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

User avatar
willthrill81
Posts: 11032
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by willthrill81 » Wed Jul 10, 2019 9:21 pm

fortyofforty wrote:
Wed Jul 10, 2019 7:06 pm
However, from my perspective, I lost money since I do not have the amount I would have had by avoiding the higher fee fund. Think of it as opportunity cost, if you prefer.
Diversification, by its very nature, is fraught with opportunity cost because you will never have the top performing asset; the best you can hope for is to have the top asset class. Those very happy with their U.S. TSM funds over the last decade, for instance, had a huge opportunity cost by not shoving it all in Amazon or, even better, Bitcoin, especially if sold in Dec., 2017.

Those truly seeking to maximize their returns should most definitely not diversify. But, of course, such a journey is fraught with other risks.
“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

User avatar
fortyofforty
Posts: 1524
Joined: Wed Mar 31, 2010 12:33 pm

Re: Larry Swedroe: The Historical Imperative For International Diversification

Post by fortyofforty » Thu Jul 11, 2019 7:10 am

willthrill81 wrote:
Wed Jul 10, 2019 9:21 pm
fortyofforty wrote:
Wed Jul 10, 2019 7:06 pm
However, from my perspective, I lost money since I do not have the amount I would have had by avoiding the higher fee fund. Think of it as opportunity cost, if you prefer.
Diversification, by its very nature, is fraught with opportunity cost because you will never have the top performing asset; the best you can hope for is to have the top asset class. Those very happy with their U.S. TSM funds over the last decade, for instance, had a huge opportunity cost by not shoving it all in Amazon or, even better, Bitcoin, especially if sold in Dec., 2017.

Those truly seeking to maximize their returns should most definitely not diversify. But, of course, such a journey is fraught with other risks.
But if one of their funds in their portfolio lost money, then they lost money. We can't always simply assume that both U.S. and international go up, but one just goes up more and the other goes up, too, but less. Both can go up. Both can go down. One can go up and the other down. Rebalancing into a falling asset compounds the loss, at least until (we hope) it rebounds.

If one of their funds pulled down the value of their entire portfolio, then they really lost money. Those seeking to diversify maximally need to diversify in fixed income, unless they are willing to admit that there are declining limits to the benefits of diversification and nobody knows where it's best to draw the line. As has been pointed out many times here, the main choice is asset class, and subdividing each asset class into additional components is of secondary importance in determining future returns.

In the interest of diversification, in 1980, or 1990, an investor could have set a target of 25% in Japanese equities. Then, once a year, rebalanced to 25%. I wonder how much that portfolio would be worth today, versus someone who went 100% S&P 500. When adding new money, the investor who included Japanese stocks to 25% would have certainly bought a lot more shares in Japan over the years, as Japanese stocks languished. They'd be sitting on a nice pile of Nikkei shares, but could still have lost money.

In the interest of diversification, an investor could insist on including gold and other precious metals, collectibles, cryptocurrencies, real estate, and commodities. I choose not to be diversified to that level. I believe you also choose not to be diversified. Few here truly are diversified.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | Diligentia. Vis. Celeritas. - Jeff Cooper | Original Vanguard Diehard

Post Reply