What would investors ever choose arbitrary allocation of US/nonUS stocks?

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lazyday
Posts: 3359
Joined: Wed Mar 14, 2007 10:27 pm

Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by lazyday » Tue Aug 13, 2019 2:07 pm

HomerJ wrote:
Tue Aug 13, 2019 12:20 pm
kfitz1313 wrote:
Tue Aug 13, 2019 11:06 am
HomerJ wrote:
Tue Aug 13, 2019 9:35 am
Vision wrote:
Mon Aug 12, 2019 4:43 am
You'll also likely hear that overseas reporting for companies are not as strict and therefore riskier to buy into.
This does make sense, for example, China probably faking data, but...isn't that already priced in?
No it's not priced in. Certainly not to the full extent. If you don't know how much they are lying, you can't possibly price it correctly.
I don't know how much Apple is lying either.
False equivalency. But you are welcome to believe they are the same thing, if that makes you feel better.
“No it's not priced in. Certainly not to the full extent.”

Some of us think we know which stocks are too expensive. Some of us are even certain about it.

That’s an example of what I meant in my earlier post when I said “many of us do not always follow Boglehead principles”.

TomCat96
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Joined: Sun Oct 18, 2015 12:18 pm

Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by TomCat96 » Tue Aug 13, 2019 8:31 pm

Vision wrote:
Mon Aug 12, 2019 3:56 am
If we assume we are not able to time market.

If we assume we are not able to pick stocks.

If we assume we are not able to pick certain sectors.

Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?

I'm talking about people who suggest buying US and non US stocks for your portfolio.

Why wouldn't we make it way simpler, by for example, choosing VT over VTI and VXUS?

Sure we can rebalance annually, but there isn't really a rebalancing bonus for this and it just adds extra friction, so what is the advantage of this separation? Slightly higher expense ratio? I calculated and the difference is peanuts, sometimes the trading fees can be higher.

To be it seems way logical to have 2 fund portfolio: World stock total index vs World bond total index. That is it.

Any input on this would be much appreciated.
Your rationales cut to the heart of what I see in this debate--it becomes an issue of ideological purity.

I am not here to be a purist. I am not here to propound boglehead dogma. I am not a missionary to spread the word.
I got here, like many others, because the evidence converges with what Bogleheads advocate.

I like doing research, I like empirical evidence, and I like to dig deeply. The idea where I must say "well we simply don't know" out of some loyalty to ideology in investing in completely asinine. I don't much care for that fact that simple people require simple dogma to prevent their emotions from running them wild into making stupid financial decisions for themselves. For me there is no value in being called a "true boglehead"

I'm not here to join a club. I am not here to shame others who don't toe the official line of the club.

And here is what I know from my experiences. Yes the markets are hard to time. Hard to know. But not impossible. There is simply no such thing as a totally efficient market. There can be no such thing. We live in a world of finite limitations. That immediately undercuts all the assumptions.
It's the difference between someone like myself saying that what is written about the markets being efficient is 99% true, but not 100%.

That 1% makes all the difference in the world. It means that 99% of the time, I will sit in the market because I cannot outperform the market.
But to assume that the market is this all knowing entity which works regardless of government, regardless of trade barriers, regardless of regulation, regardless of tax regime, regardless of corruption, is just crazy and it's wrong.

The market does not guarantee your performance. There is no guarantee that an investment in Soviet Russia in the 80s would have been properly priced so that the compensation for undertaking risky investments there would be rewarded over less risky investments elsewhere. The market is not there to guarantee your performance.

Not all additional risk assumed is compensated for.

I cannot invest in Venezeula and say, "the market must adequately compensate me for extra risk I am assuming by investing in this place. To suggest otherwise is to suggest the market is inefficient." Yes the markets are inefficient. Yes yes yes.

In an efficient market, investors would look at Venezuela and think, my god, I'm not buying stock here. It's too risky.
By not buying stock, Venezuelan securities should drop in price in response to the low demand. They should keep dropping until risk is adequately compensated for. Basic Econ.

Can you think of anything wrong with that? It's simple. Regimes are not companies. They can and will protect themselves. They can and will protect themselves in ways that the market cannot correct for. If am Venezuela I might find it in my interest to prop up my own securities. I can prop it up more than the lack of external demand can cause it to fall. How can I do that? Because the market is not efficient. Yes yes yes.

The markets power to adequately price is not infinite. The market isn't infinite. If the market was infinitely efficient, then even sovereign Venezuela would NOT have the power to unilaterally move the price of its own securities.

So the assumptions are immediately wrong.
This framing "Why do we assume we are suddenly capable and knowledgeable enough to pick right ratios geographically?" can be answered simply.

It's because we can see fire where there is smoke. We can see where we're being taken for a ride. If a country, say Japan decides to print tons of money and purchase its own securities in the Nikkei 225, that raises a flag. No the market cannot correct for this. The International investors may not own enough securities to even sell.

Some of you conflate this argument by arguing the United States isn't perfect. That argument assumes a little corruption is equivalent to any amount of corruption. Once again, this goes to the heart of me saying the market is 99% efficient---efficient enough I don't try to trade in and out of US stocks on a daily basis, but NO the market is NOT efficient enough to handle rampant extreme corruption where information is stifled.


Poor information flow = inefficient markets.

There are legitimate reasons for investing in International Stocks. Structural diversification being the most compelling to me. Another one is the potential for long term economic stagnation in one's home country.

But ideological purity is not one of them. The arguments I see propounded for International stocks make no sense. They attack those who dare to know the market is not efficient. Count me as one of those who dare.

"Not being a true boglehead" is NOT a legitimate reason to invest in international stocks.

A final word on Ideological purity.

Those who advocate for the market weight in international stocks, quickly withdraw those market weight arguments when it comes to the full ambit of global valuations of all global assets. 50/50 for US -International is quickly withdrawn when it comes to adding in derivatives, bitcoin, commodities, real estate, and the global weight of bonds relative to stocks.

That strikes me as very impure ideologically. Portfolios are not evaluated based on piecemeal analysis. They must be evaluated as whole. You cannot actually derive the benefit of the "wisdom of the market" without actually taking into account the "wisdom of the market", i.e. the global allocation of all assets in view of each other.

bluquark
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by bluquark » Tue Aug 13, 2019 9:34 pm

TomCat96 wrote:
Tue Aug 13, 2019 8:31 pm
I cannot invest in Venezeula and say, "the market must adequately compensate me for extra risk I am assuming by investing in this place. To suggest otherwise is to suggest the market is inefficient." Yes the markets are inefficient. Yes yes yes.

In an efficient market, investors would look at Venezuela and think, my god, I'm not buying stock here. It's too risky.
That's pretty much what is happening. As far as I can find, there exists no ETF that provides direct exposure to Venezuela. Not only stocks, but even sovereign bonds are left out of the EM bond ETFs (there exists an index containing venezuela bonds, but without any fund tracking it). I realize you're trying to use extreme examples to clarify your point, but it undermines your argument about market inefficiency. In fact, the markets available to a small-time US investor are efficient enough that they agree with you on the severe regulatory issues and stay away from Venezuela.

There are vastly different tiers of regulatory issues between Developed, Emerging, Frontier, and "not investible at all unless you go there and hand somebody a wad of cash". Boglehead arguments sometimes talk about international stocks as though they were mostly on the sketchy end, even though almost 90% of a typical ex-US index fund consists of Developed Large-Cap, and none of it is Frontier or lower.

lazyday
Posts: 3359
Joined: Wed Mar 14, 2007 10:27 pm

Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by lazyday » Wed Aug 14, 2019 6:27 am

(1) Ideological Purity
TomCat96 wrote:
Tue Aug 13, 2019 8:31 pm
I am not here to be a purist.
I think it’s important to admit to ourselves when we are making bets with our money.

I’m a US investor with 90% of my equity outside of the US. This is a bet. I don’t just tell a story and pretend that I’m following principles of diversification. I am not following those principles. By avoiding the largest equity market, I am taking on concentration risk. This could turn out badly. I’ve put some thought into how this can affect my portfolio and my life.

Human nature is such that most people who make investing bets are worse off than if they just owned the market. I believe that my bet is an exception. Just like everyone else who makes bets believes.
I don't much care for that fact that simple people require simple dogma to prevent their emotions from running them wild into making stupid financial decisions for themselves.
I believe that the dogma and even groupthink on this forum have saved many investors from themselves, preventing financial loss and heartache.

You don’t need to be simple to make behavioral errors. Brilliant people are still people, and make huge mistakes.

lazyday
Posts: 3359
Joined: Wed Mar 14, 2007 10:27 pm

Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by lazyday » Wed Aug 14, 2019 6:31 am

(2) Investable Asset Classes
TomCat96 wrote:
Tue Aug 13, 2019 8:31 pm
Not all additional risk assumed is compensated for.

I cannot invest in Venezeula and say, "the market must adequately compensate me for extra risk I am assuming by investing in this place….”
Not all assets should be included in the portfolio. If there were a Venezuela fund, that might be an example.

Some people believe that EM is not an investable asset class. While I think they’re likely making a mistake, I might understand how they have that opinion.
The arguments I see propounded for International stocks make no sense. They attack those who dare to know the market is not efficient.
Some people won’t even invest in developed markets other than the US. I can’t see any reasonable financial reason to do this. It’s a huge bet, and with today’s valuations, one that might be very costly.

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HomerJ
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Re: What would investors ever choose arbitrary allocation of US/nonUS stocks?

Post by HomerJ » Wed Aug 14, 2019 2:56 pm

lazyday wrote:
Wed Aug 14, 2019 6:27 am
You don’t need to be simple to make behavioral errors. Brilliant people are still people, and make huge mistakes.
Heh, look at Isaac Newton... Lost $3 million (in 2003 dollars) in the South Sea Company.
Isaac Newton was one of the smartest people to ever live.
But there's a big difference between being a smart physicist and smart investor.

And, unfortunately for him, Newton learned that the hard way.

In an updated and annotated text of Benjamin Graham's classic " The Intelligent Investor," WSJ's Jason Zweig included a small anecdote about Newton's adventures with investing the South Sea Company:

"Back in the spring of 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he ' could calculate the motions of the heavenly bodies, but not the madness of the people.' Newton dumped his South Sea shares, pocketing a 100% profit totaling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in [2002-2003's] money. For the rest of his life, he forbade anyone to speak the words 'South Sea' in his presence."
The J stands for Jay

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