Know when to hold them and when to fold them......

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Fri Oct 04, 2019 11:39 am

rascott wrote:
Fri Oct 04, 2019 8:44 am
So what is the actual benefit? As its certainly not been in returns or a reduction in volatility since 1970.
For starters, this is simply not true. From 1970 to present, the highest risk/reward (i.e. maximum Sharpe ratio) portfolio for a U.S. investor has been roughly 65% US and 35% international.

Image

The maximum diversification benefit has been at roughly 50-55% US and 45-50% international, and this manifests most clearly in boosting the sustainable portfolio income for investors in retirement.

Take the example of an investor who retired at the end of 1972 with $100k and needed monthly withdrawals of $360. Each of the portfolios is 60% stocks and 40% bonds, Portfolio 1 below shows this retirement for an investor whose stocks were 100% US and 0% international. Portfolio 2 is 70% US and 30% international. Portfolio 3 is 60% US and 40% international.

Image

The 100% US investor was broke in just 27 years (October, 1999). The 30% international investor would have lasted 34 years and the 40% international investor would have lasted over 36 years, or nearly an entire extra decade of funded retirement.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Alaric
Posts: 18
Joined: Tue Feb 05, 2019 1:38 pm

Re: Know when to hold them and when to fold them......

Post by Alaric » Fri Oct 04, 2019 11:44 am

DonIce wrote:
Thu Oct 03, 2019 6:34 pm
rascott wrote:
Thu Oct 03, 2019 5:54 pm
I asked this before,... but the data available from 1970-2018 (so 48 years) straight from the backtesting spreadsheet on this site has shown zero benefit from holding intl equities (EAFE). And I state this as someone who still owns them.
Over the past ~120 years, the US stock market has outperformed the rest of the world by going from 15% of total world stock market cap, to over 53% of total world stock market cap. That is, the US fraction of the total stock world market has more than tripled to generate the outperformance we saw over the past 120 years.

Image

To demonstrate the same outperformance relative to international over the next century, the US share of the total world stock market would have to climb from 53% to ~85%, and the entire rest of the world would have to fall to just 15%. This doesn't seem likely to me.
Returns and stock market size are not well correlated. As the above graph shows, while the US share has grown from 15% of the world's total stock market to 53% over the past century-plus, Australia's share has actually shrunk from 3.5% to 2.5%. Yet Australia has been the single highest-performing market over that time period, beating even the American stock market.

https://www.markettimingaustralia.com.a ... et-history

Similarly South Africa's share of the world stock market has shrunk from 3.3% in 1900 to...some figure not shown on your graph, but it would be less than that. Yet their total return over the last 117 years or so has been just behind the USA's.

On the flip side, Japan's share of the total WSM has grown by a greater ratio that the USA's 255% gain in market share, yet its total return has been considerably less than the USA's.

EddyB
Posts: 1033
Joined: Fri May 24, 2013 3:43 pm

Re: Know when to hold them and when to fold them......

Post by EddyB » Fri Oct 04, 2019 11:47 am

Alaric wrote:
Fri Oct 04, 2019 11:21 am
willthrill81 wrote:
Fri Oct 04, 2019 10:16 am
midareff wrote:
Fri Oct 04, 2019 10:11 am
Taylor Larimore wrote:
Fri Oct 04, 2019 9:41 am
vineviz wrote:
Thu Oct 03, 2019 7:03 pm

Someone with a better grasp of asset allocation than he seems to have.

vineviz:

If you were Mr. Buffett, what would you do differently?

Thank you and best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Deep down, I remain absolutely confident that the vast majority of American families will be well served by owning their equity holding in an all-U.S. stock market index portfolio and holding their bonds in an all U.S. bond market index fund."
It's always a bit funny when someone decides the fellow who is probably the greatest investor of our lifetime doesn't have a grasp on asset allocation, not to mention the fellow who probably did more for the individual investor than anyone on the planet and he too knows nothing about asset allocation.
I do find that interesting as well. There have been so many explanations for both Bogle's and Buffett's disdain for ex-U.S. stock, ranging from 'they were from a different era' to 'their views on this are/were purely irrational' to 'they are/were just plain home-country biased'. It's intriguing to see see such things attributed to these men.
Yes. And a similar rationale can be and has been used to justify any and every departure from Buffett's and Bogle's advice even on a site inspired by Bogle's advice. Bogle may have stumbled upon a good point about low-expense index funds, but he was an old Luddite fuddy duddy who was frightened and confused by cryptocurrencies, so everyone should go against his no-Bitcoin advice. Etc.
I don't feel the need to undermine the speakers, but naked appeals to authority don't mean much to me, either.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Fri Oct 04, 2019 11:59 am

Taylor Larimore wrote:
Fri Oct 04, 2019 9:41 am
If you were Mr. Buffett, what would you do differently?
I'd hopefully refrain from offering asset allocation advice to individual investors, but if I couldn't help myself I hope I'd have enough cognitive capacity left to recommend something more diversified than 90% S&P 500 and 10% cash: some combination of a world stock index fund (e.g. VTWAX, VTI, ACWI, SPGM) and an intermediate- or long-term US Treasury bond fund would be a start.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

rascott
Posts: 982
Joined: Wed Apr 15, 2015 10:53 am

Re: Know when to hold them and when to fold them......

Post by rascott » Fri Oct 04, 2019 1:23 pm

vineviz wrote:
Fri Oct 04, 2019 11:39 am
rascott wrote:
Fri Oct 04, 2019 8:44 am
So what is the actual benefit? As its certainly not been in returns or a reduction in volatility since 1970.
For starters, this is simply not true. From 1970 to present, the highest risk/reward (i.e. maximum Sharpe ratio) portfolio for a U.S. investor has been roughly 65% US and 35% international.
Your data must be different than what I'm looking at. I was only going off the backtesting spreadsheet from here. 100% US had the highest Sharpe ratio using that data.

P1: 100% US Total Market
P2: 65%/35% US/INTL
P3: 55%/45% US/INTL

Image




Now, when I look "under the hood" I see that Int'l was boon to hold during the 70s and 80s.....but then has been more of an anchor since then. So that would jive with your investor that started retirement in the early 70s....clearly a very terrible decade for stocks and bonds. My concern continues to be that the global equity markets have become significantly more correlated in recent decades (since the mid/late 80s). That's both just a anecdotal observation of globalization, as well as the quantitative data available.

I still prefer the idea of diversifying across US based equity asset classes....and then perhaps some emerging markets (or at least small cap Intl). You do bring up a good point about sequence of returns risk for a retiree. As someone in the accumulation phase with 60+ year horizon it's probably less important to me.....as long as one stays the course with it. So I'll keep plugging along with the same relatively low Int'l allocation that I've done for the last 18 years.
Last edited by rascott on Fri Oct 04, 2019 1:43 pm, edited 1 time in total.

User avatar
Taylor Larimore
Advisory Board
Posts: 28755
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Know when to hold them and when to fold them......

Post by Taylor Larimore » Fri Oct 04, 2019 1:42 pm

vineviz wrote:
Fri Oct 04, 2019 11:59 am
Taylor Larimore wrote:
Fri Oct 04, 2019 9:41 am
If you were Mr. Buffett, what would you do differently?
I'd hopefully refrain from offering asset allocation advice to individual investors, but if I couldn't help myself I hope I'd have enough cognitive capacity left to recommend something more diversified than 90% S&P 500 and 10% cash: some combination of a world stock index fund (e.g. VTWAX, VTI, ACWI, SPGM) and an intermediate- or long-term US Treasury bond fund would be a start.
vineviz:

Thank you for a reasonable reply.

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

User avatar
305pelusa
Posts: 889
Joined: Fri Nov 16, 2018 10:20 pm

Re: Know when to hold them and when to fold them......

Post by 305pelusa » Fri Oct 04, 2019 1:45 pm

rascott wrote:
Fri Oct 04, 2019 8:44 am
vineviz wrote:
Thu Oct 03, 2019 6:22 pm
rascott wrote:
Thu Oct 03, 2019 5:54 pm
vineviz wrote:
Thu Oct 03, 2019 5:09 pm
rascott wrote:
Wed Oct 02, 2019 9:41 am

There has been zero actual evidence that intl investing has been helpful for the last 50 years. Maybe the next 50 will be different?
Actually there are literally volumes of such evidence, but of course there are two groups of investors for whom actual evidence is unpersuasive: those who can’t understand it and those who choose not to accept it.

Every investor should pick an asset allocation that suits them, but can we not perpetuate the xenophobic misinformation?

I asked this before,... but the data available from 1970-2018 (so 48 years) straight from the backtesting spreadsheet on this site has shown zero benefit from holding intl equities (EAFE). And I state this as someone who still owns them.
I’m not sure what your question is, but it would be untrue to support there has been no benefit: that’s the evidence to which I referred earlier.

So what is the actual benefit? As its certainly not been in returns or a reduction in volatility since 1970.

Even if you were only to look at 1970-2010.... ignoring the huge outperformance of this decade.... it still provided nothing. Identical returns and volatility.

The last 30 years (1988-2018) have been quite poor for the globally diversified investor, vs the US only investor.


So I stick by my original point that the last 50 years have provided zero benefit (and many cases a penalty) for investing in intl equities. But we don't know if the next 50 will look like the last 50.

The academic work in recent years has shown that international markets become highly correlated with US markets when the US market is struggling..... and then becomes much less correlated when the US is in a bull market. This is basically the opposite of what an investor should want.

On top of that.... as economies have become more interconnected than ever.... the ability to diversify away from US based risk has been falling since the 80s. This played out exactly with the GFC.... when a US based problem caused international equities to drop MORE than US equities.

Everything I look at indicates that the only benefit one might grasp onto is a falling USD$. The surging dollar is one of the main reasons intl returns have been so poor for the last decade.
Something you need to consider is that from 1970-2018, US had a higher Sharpe ratio than Int. It had higher returns with lower risk.

Adding International will and did diversify. It's another holding with a correlation less than 1.0, so it is a mathematical certainty that it had diversification benefits. No doubt about it.

But it's harder to see because US had a higher risk-adjusted return, which is a confounding variable. So any addition of International, while improving diversification, did "dilute" the portfolio with a holding that had a smaller Sharpe ratio.

This really comes down to: If you believe US will produce higher risk-adjusted returns than International (like in the past), then drop International. Diversification can't compete if there's an asset that just has better excess risk-adjusted returns.

But if you DON'T believe that's a certainty and that the US is as likely to have a higher than a lower Sharpe than Int. going forward, then you should diversify Internationally. And should take the past 5 decades of data with a large grain a salt; they contain an assumption that you believe is as likely to occur as it is not.

It really is as simple as that.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Fri Oct 04, 2019 2:00 pm

rascott wrote:
Fri Oct 04, 2019 1:23 pm
Your data must be different than what I'm looking at. I was only going off the backtesting spreadsheet from here. 100% US had the highest Sharpe ratio using that data.
If the "backtesting spreadsheet from here" is the one I think it is, the international returns before 1987 are incorrect (they are systematically understated by about 1%/year) due to the use of the wrong index series.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Fri Oct 04, 2019 2:07 pm

305pelusa wrote:
Fri Oct 04, 2019 1:45 pm
This really comes down to: If you believe US will produce higher risk-adjusted returns than International (like in the past), then drop International. Diversification can't compete if there's an asset that just has better excess risk-adjusted returns.
It's not quite that simple: diversification can (and quite often does) result in a portfolio with a higher Sharpe ratio than that of any individual component. This why combining international stocks with US stocks from 1970 to present produced a portfolio with a higher Sharpe ratio than the US-only portfolio even though international stocks had a lower Sharpe ratio than U.S. stocks in this time period.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

User avatar
Topic Author
midareff
Posts: 6409
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Know when to hold them and when to fold them......

Post by midareff » Fri Oct 04, 2019 2:29 pm

TN_Boy wrote:
Fri Oct 04, 2019 10:36 am
midareff wrote:
Fri Oct 04, 2019 10:06 am

It's not the narrow focus, its the ease of obtaining the data, it was in front of me. Let's look longer term... Morningstar says since October 1, 2009, Total International has gained 52.95% vs. 234.80% for Total US. Your comment on 58% vs. 48% equities reminds me of that short story about the frog that would not wear his butt out hopping if he had been born with wings. That's the famous "What if" story. The impact of additional US equities would be easy to calculate if I was interested, but I'm comfortable where I am.
Doesn't matter if the data is easy or hard to obtain. You are saying, "International has done poorly over the last 10 years, thus I am getting out of the asset class." Which looks an awful lot like performance chasing. It seems a lot like buying high and selling low!

If you'd said I reread Bogle's thoughts on international, pondered the evidence and re-evaluated the need for international, that would make sound it a little better. But you keep emphasizing in the original post and this one the performance difference. If you have multiple asset classes, some of them will do poorly at times, maybe a long time.

Maybe you should reread paragraph 2 in the OP.

Do you really believe the rest of the world will continue to lag the US so much? As someone else pointed out, much of the performance differential is due to the strong dollar. Of course, one risk of international investing is exchange rate fluctuations. But if the dollar weakened, all of a sudden international stocks would look a lot prettier.

As I said before, I think zero international is a defensible position for a US investor. The OP never asked if it was a defensible position.

rascott
Posts: 982
Joined: Wed Apr 15, 2015 10:53 am

Re: Know when to hold them and when to fold them......

Post by rascott » Fri Oct 04, 2019 2:37 pm

vineviz wrote:
Fri Oct 04, 2019 2:00 pm
rascott wrote:
Fri Oct 04, 2019 1:23 pm
Your data must be different than what I'm looking at. I was only going off the backtesting spreadsheet from here. 100% US had the highest Sharpe ratio using that data.
If the "backtesting spreadsheet from here" is the one I think it is, the international returns before 1987 are incorrect (they are systematically understated by about 1%/year) due to the use of the wrong index series.

I used this...

https://www.bogleheads.org/wiki/Simba%2 ... preadsheet

Interesting.

User avatar
305pelusa
Posts: 889
Joined: Fri Nov 16, 2018 10:20 pm

Re: Know when to hold them and when to fold them......

Post by 305pelusa » Fri Oct 04, 2019 2:42 pm

vineviz wrote:
Fri Oct 04, 2019 2:07 pm
305pelusa wrote:
Fri Oct 04, 2019 1:45 pm
This really comes down to: If you believe US will produce higher risk-adjusted returns than International (like in the past), then drop International. Diversification can't compete if there's an asset that just has better excess risk-adjusted returns.
It's not quite that simple: diversification can (and quite often does) result in a portfolio with a higher Sharpe ratio than that of any individual component. This why combining international stocks with US stocks from 1970 to present produced a portfolio with a higher Sharpe ratio than the US-only portfolio even though international stocks had a lower Sharpe ratio than U.S. stocks in this time period.
This obviously comes down to numbers. Adding International, while undoubtedly increasing diversification, CAN decrease the overall Sharpe provided that US has a high enough excess risk-adjusted return. Whether it happened in history or not is irrelevant.

The point I'm trying to make is that I've seen this argument that "diversification into International has barely helped historically". And then data is shown with US having a higher Sharpe. These posters aren't making a fair comparison. Unless they believe that the US will achieve higher excess risk-adjusted returns. At that point, as you said, it becomes more complicated; it'll come down to the numbers.

asif408
Posts: 1805
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Know when to hold them and when to fold them......

Post by asif408 » Fri Oct 04, 2019 3:26 pm

IIRC, I started out 70/30 US/Int'l before I knew anything based on the advice of this board, since I was a bit of a newbie back then. That was back around 2013/2014. Developed ex-US and emerging markets have underperformed US stocks every year since 2013 except for 2017, so like others I have been disappointed with their performance relative to the US. If I just based my US/Int'l allocation on its performance from 2013-2019 and looking at the US vs. International funds since their inception I would have probably reduced or eliminated my international allocation like many here are contemplating now, and it would have been the right decision for these 6 years I've been invested.

However, during that time I also spent several years reading about the history of investing and US vs. International returns historically, going back farther than 1996, which many here cite because it was the year Vanguard's International fund was started. The Global Investing book by Ibbotson and Brinson and well as many of Bill Bernstein's books, and Peter Bernstein's Against the Gods, gave me a new perspective on the US vs. international debate, and I wonder sometimes if many people have actually read and comprehended some of these historical books. All Bogleheads need to do is read any of these books written pre-1995 comparing US vs. International returns and you'll see the opposite conclusion could be drawn to the one that is permeating this board today. That is: in 1994, looking back 20-25 years, US stocks were near the bottom of performance among all countries throughout the world, and it appeared that foreign markets were the darlings of the 1970s and 1980s and the places to invest. 25 years later, the opposite appears to be the case, and many here are ready to throw in the towel on their measly 20% holdings in international stocks.

I see posters here argue vehemently for US stock market exceptionalism and provide a myriad of explanations for why the US has had some of the best returns and why we should continue to expect that. My reading of history says otherwise. I can't find a historic rule of investing that says any individual country deserves to have superior returns, and more often than not the countries that were the worst performers the last decade become next decade's darlings. With some of this historical knowledge in place, I began steadily increasing my international allocation since 2014, and as of late 2016 I am almost 90% in international stocks (over half of that in emerging markets, and tilted toward value, which has also underperformed). I haven't deviated since then except for some minor rebalancing. The outperformance we are currently experiencing in the US stock market is exceptional by almost any historical measures. I don't know how long it will continue for, but I'm willing to bet it won't continue for the duration of my investment lifetime.

So it doesn't bother me that the last 2 years I have underperformed, and other than 2017, most of my shift into international has not payed off. To do better (or worse) than the market you have to be different. In one of Bill Bernstein's book, he made a statement to the effect that you can only be adequately diversified if your portfolio doesn't look like everyone else's. Today that portfolio is US heavy, tilted towards growth and almost any other factor except for value. My portfolio is international heavy, value tilted, and avoids every factor investment strategy except value.

alex_686
Posts: 5097
Joined: Mon Feb 09, 2015 2:39 pm

Re: Know when to hold them and when to fold them......

Post by alex_686 » Fri Oct 04, 2019 4:35 pm

midareff wrote:
Fri Oct 04, 2019 7:08 am
That's simply wrong. Last 5 years Total US 10.36% annually, Total International 3.15% annually. That's better than 7% difference per year.
I think we are almost on the same page. Yes, there has been a difference between domestic and international returns. But why? Is the difference between domestic and international funds driven by domestic/international? Or is it because of some random flip of a coin? Hint: The difference is not because of domestic / international.

Consider a index A that divides companies by headquarters - those that are east of the Mississippi and those west. Consider index B, which divides companies into those starting with letter A-N, and those O-Z. Consider index C, which divides companies by domestic and international. Now, all 3 are going to give different returns. Is this because of some inherent fundamental property or just the luck of the draw?

So, let us take a closer look at the international / domestic divided. Domestic consumer goods have had about the same return as intentional consumer goods. Same for financials. In fact, same for all of the sectors. And domestic value stocks have had about the same return as value intentional equities. And similar sized international companies preform about as well as domestic sized companies. The domestic / international factor does not seem to carry much power.

The trick is that domestic and international indexes have different weights in what is actually driving returns. Sectors, size, or value. If you are unhappy how your international funds have been doing you can't blame the international part. It is because you have invested in a fund full of small sized value stocks in unfavored sectors. That is your problem.

Ferdinand2014
Posts: 756
Joined: Mon Dec 17, 2018 6:49 pm

Re: Know when to hold them and when to fold them......

Post by Ferdinand2014 » Fri Oct 04, 2019 4:56 pm

vineviz wrote:
Fri Oct 04, 2019 11:39 am
rascott wrote:
Fri Oct 04, 2019 8:44 am
So what is the actual benefit? As its certainly not been in returns or a reduction in volatility since 1970.
For starters, this is simply not true. From 1970 to present, the highest risk/reward (i.e. maximum Sharpe ratio) portfolio for a U.S. investor has been roughly 65% US and 35% international.

Image

The maximum diversification benefit has been at roughly 50-55% US and 45-50% international, and this manifests most clearly in boosting the sustainable portfolio income for investors in retirement.

Take the example of an investor who retired at the end of 1972 with $100k and needed monthly withdrawals of $360. Each of the portfolios is 60% stocks and 40% bonds, Portfolio 1 below shows this retirement for an investor whose stocks were 100% US and 0% international. Portfolio 2 is 70% US and 30% international. Portfolio 3 is 60% US and 40% international.

Image

The 100% US investor was broke in just 27 years (October, 1999). The 30% international investor would have lasted 34 years and the 40% international investor would have lasted over 36 years, or nearly an entire extra decade of funded retirement.
To obtain the maximum possible diversification (with the future -most efficient frontier- unknown for international/U.S. mix) would it be better to determine a fixed allocation of say 60/40 U.S/international and rebalance quarterly/yearly/etc, or hold say VT with essentially daily variation based on the market and a variable ratio over time?
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

User avatar
Topic Author
midareff
Posts: 6409
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Know when to hold them and when to fold them......

Post by midareff » Fri Oct 04, 2019 5:18 pm

alex_686 wrote:
Fri Oct 04, 2019 4:35 pm
midareff wrote:
Fri Oct 04, 2019 7:08 am
That's simply wrong. Last 5 years Total US 10.36% annually, Total International 3.15% annually. That's better than 7% difference per year.
I think we are almost on the same page. Yes, there has been a difference between domestic and international returns. But why? Is the difference between domestic and international funds driven by domestic/international? Or is it because of some random flip of a coin? Hint: The difference is not because of domestic / international.

Consider a index A that divides companies by headquarters - those that are east of the Mississippi and those west. Consider index B, which divides companies into those starting with letter A-N, and those O-Z. Consider index C, which divides companies by domestic and international. Now, all 3 are going to give different returns. Is this because of some inherent fundamental property or just the luck of the draw?

So, let us take a closer look at the international / domestic divided. Domestic consumer goods have had about the same return as intentional consumer goods. Same for financials. In fact, same for all of the sectors. And domestic value stocks have had about the same return as value intentional equities. And similar sized international companies preform about as well as domestic sized companies. The domestic / international factor does not seem to carry much power.

The trick is that domestic and international indexes have different weights in what is actually driving returns. Sectors, size, or value. If you are unhappy how your international funds have been doing you can't blame the international part. It is because you have invested in a fund full of small sized value stocks in unfavored sectors. That is your problem.
At this point I think it's crystal clear it's not my problem. As far as your speculation as to the what and the why, that's not my problem either.

User avatar
fishandgolf
Posts: 506
Joined: Fri Nov 25, 2016 2:50 pm

Re: Know when to hold them and when to fold them......

Post by fishandgolf » Fri Oct 04, 2019 6:03 pm

What is it that the moderators always say.............'This thread has run its course'.............. :sharebeer

User avatar
geniekid
Posts: 6
Joined: Tue May 07, 2019 8:37 am

Re: Know when to hold them and when to fold them......

Post by geniekid » Fri Oct 04, 2019 6:45 pm

alex_686 wrote:
Fri Oct 04, 2019 4:35 pm
midareff wrote:
Fri Oct 04, 2019 7:08 am
That's simply wrong. Last 5 years Total US 10.36% annually, Total International 3.15% annually. That's better than 7% difference per year.
I think we are almost on the same page. Yes, there has been a difference between domestic and international returns. But why? Is the difference between domestic and international funds driven by domestic/international? Or is it because of some random flip of a coin? Hint: The difference is not because of domestic / international.

Consider a index A that divides companies by headquarters - those that are east of the Mississippi and those west. Consider index B, which divides companies into those starting with letter A-N, and those O-Z. Consider index C, which divides companies by domestic and international. Now, all 3 are going to give different returns. Is this because of some inherent fundamental property or just the luck of the draw?

So, let us take a closer look at the international / domestic divided. Domestic consumer goods have had about the same return as intentional consumer goods. Same for financials. In fact, same for all of the sectors. And domestic value stocks have had about the same return as value intentional equities. And similar sized international companies preform about as well as domestic sized companies. The domestic / international factor does not seem to carry much power.

The trick is that domestic and international indexes have different weights in what is actually driving returns. Sectors, size, or value. If you are unhappy how your international funds have been doing you can't blame the international part. It is because you have invested in a fund full of small sized value stocks in unfavored sectors. That is your problem.
Interesting. I've never thought about it like that before.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Fri Oct 04, 2019 7:47 pm

alex_686 wrote:
Fri Oct 04, 2019 4:35 pm
midareff wrote:
Fri Oct 04, 2019 7:08 am
That's simply wrong. Last 5 years Total US 10.36% annually, Total International 3.15% annually. That's better than 7% difference per year.
I think we are almost on the same page. Yes, there has been a difference between domestic and international returns. But why? Is the difference between domestic and international funds driven by domestic/international? Or is it because of some random flip of a coin? Hint: The difference is not because of domestic / international.
The only caveat I'd supply here is that the difference between the returns of US stocks and ex-US stocks for a US investor have two components: one is the local return differential, which is arguably mostly about sector composition and related factors; the second is the effect of currency exchange rates.

For the past decade, the strong dollar alone has accounted for maybe 2/3 of the difference between US stocks and ex-US stock returns.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

alex_686
Posts: 5097
Joined: Mon Feb 09, 2015 2:39 pm

Re: Know when to hold them and when to fold them......

Post by alex_686 » Fri Oct 04, 2019 8:14 pm

vineviz wrote:
Fri Oct 04, 2019 7:47 pm
For the past decade, the strong dollar alone has accounted for maybe 2/3 of the difference between US stocks and ex-US stock returns.
Could you please dig a big deeper on this? This feels wrong.

There has been a strengthening of the dollar. However, I would feel that this contribution would be modest. I gut would be to cite that the dollar's strength is bounded by Purchasing Power Parity, and this bounded condition would limit the overall impact.

The next item is the growth of multinational companies in the index weights. US companies have seen a increase in percentage of international revenue from total revenue. International companies have seen a increase (directly and indirectly) in USD revenue as a percentage of total revenue. I would think that this would partly wash out the impact of the strengthening USD.

UpperNwGuy
Posts: 2530
Joined: Sun Oct 08, 2017 7:16 pm

Re: Know when to hold them and when to fold them......

Post by UpperNwGuy » Fri Oct 04, 2019 8:39 pm

International has been a drag on my portfolio, and no amount of theoretical discussions of "buying the haystack" can change that fact. I (reluctantly) hold 20% international, but I consider it the ugly stepchild of my portfolio.

EddyB
Posts: 1033
Joined: Fri May 24, 2013 3:43 pm

Re: Know when to hold them and when to fold them......

Post by EddyB » Fri Oct 04, 2019 8:41 pm

UpperNwGuy wrote:
Fri Oct 04, 2019 8:39 pm
International has been a drag on my portfolio, and no amount of theoretical discussions of "buying the haystack" can change that fact. I (reluctantly) hold 20% international, but I consider it the ugly stepchild of my portfolio.
At any given time, something has been a drag on my portfolio, but until I have my time machine, that has no relevance to what I do in the present.

UpperNwGuy
Posts: 2530
Joined: Sun Oct 08, 2017 7:16 pm

Re: Know when to hold them and when to fold them......

Post by UpperNwGuy » Fri Oct 04, 2019 9:01 pm

EddyB wrote:
Fri Oct 04, 2019 8:41 pm
UpperNwGuy wrote:
Fri Oct 04, 2019 8:39 pm
International has been a drag on my portfolio, and no amount of theoretical discussions of "buying the haystack" can change that fact. I (reluctantly) hold 20% international, but I consider it the ugly stepchild of my portfolio.
At any given time, something has been a drag on my portfolio, but until I have my time machine, that has no relevance to what I do in the present.
Your answer is a classic example of putting theory over reality.

bogledogle87
Posts: 126
Joined: Wed Sep 26, 2018 7:03 pm

Re: Know when to hold them and when to fold them......

Post by bogledogle87 » Fri Oct 04, 2019 9:12 pm

UpperNwGuy wrote:
Fri Oct 04, 2019 8:39 pm
International has been a drag on my portfolio, and no amount of theoretical discussions of "buying the haystack" can change that fact. I (reluctantly) hold 20% international, but I consider it the ugly stepchild of my portfolio.
Out of curiosity, Do you similarly consider a sector such as US Energy an ugly stepchild as well? Assuming you hold it as part of a US index, It’s been far worse and “uglier” than international. I would think this sector has gone largely unnoticed by most investors by way of being grouped under the same ticker as US Tech.
VTWAX and chill

EddyB
Posts: 1033
Joined: Fri May 24, 2013 3:43 pm

Re: Know when to hold them and when to fold them......

Post by EddyB » Fri Oct 04, 2019 9:35 pm

UpperNwGuy wrote:
Fri Oct 04, 2019 9:01 pm
EddyB wrote:
Fri Oct 04, 2019 8:41 pm
UpperNwGuy wrote:
Fri Oct 04, 2019 8:39 pm
International has been a drag on my portfolio, and no amount of theoretical discussions of "buying the haystack" can change that fact. I (reluctantly) hold 20% international, but I consider it the ugly stepchild of my portfolio.
At any given time, something has been a drag on my portfolio, but until I have my time machine, that has no relevance to what I do in the present.
Your answer is a classic example of putting theory over reality.
So you’re saying that past performance is a guarantee of future results? I thought I read that wasn’t so.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Fri Oct 04, 2019 10:15 pm

alex_686 wrote:
Fri Oct 04, 2019 8:14 pm
vineviz wrote:
Fri Oct 04, 2019 7:47 pm
For the past decade, the strong dollar alone has accounted for maybe 2/3 of the difference between US stocks and ex-US stock returns.
Could you please dig a big deeper on this? This feels wrong.
The easiest way to decompose this, I think, is to look at three MSCI indexes:

1) MSCI USA
2) MSCI ACWI ex USA in USD
3) MSCI ACWI ex USA in local currency.

The difference between 1 and 2 is the total return differential for a US investor. The difference between 2 and 3 is the effect of exchange rates, and the difference between 3 and 1 is the difference due to underlying performance (e.g. sector composition, systemic risks, idiosyncratic risk, etc).

From 1988 to present, 1 minus 2 has been roughly 5%/year. 2 minus 3 has been roughly 3.5%/year and 3 minus 1 has been roughly 1.5%. So that's how I got the 2/3 attribution for currency effects.

Now I tend to think that PPP holds over the long run, so expect to see mean reversion in exchange rates.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

bluquark
Posts: 827
Joined: Mon Oct 22, 2018 2:30 pm

Re: Know when to hold them and when to fold them......

Post by bluquark » Fri Oct 04, 2019 11:07 pm

Alaric wrote:
Fri Oct 04, 2019 11:44 am
To demonstrate the same outperformance relative to international over the next century, the US share of the total world stock market would have to climb from 53% to ~85%, and the entire rest of the world would have to fall to just 15%. This doesn't seem likely to me.
Returns and stock market size are not well correlated. As the above graph shows, while the US share has grown from 15% of the world's total stock market to 53% over the past century-plus, Australia's share has actually shrunk from 3.5% to 2.5%. Yet Australia has been the single highest-performing market over that time period, beating even the American stock market.

https://www.markettimingaustralia.com.a ... et-history

Similarly South Africa's share of the world stock market has shrunk from 3.3% in 1900 to...some figure not shown on your graph, but it would be less than that. Yet their total return over the last 117 years or so has been just behind the USA's.
Excellent point, and I especially like your example of South Africa for a particular reason: that country’s legendary level of inequality. If outsize returns do not result from a growing economic pie, then it must be that they result from a higher return to capital than return to labor. This eventually produces major social changes over long periods, which may themselves eventually be a limiting factor to sustained outperfomance of a particular country.

User avatar
JoMoney
Posts: 7655
Joined: Tue Jul 23, 2013 5:31 am

Re: Know when to hold them and when to fold them......

Post by JoMoney » Sat Oct 05, 2019 1:00 am

bluquark wrote:
Fri Oct 04, 2019 11:07 pm
... If outsize returns do not result from a growing economic pie, then it must be that they result from a higher return to capital than return to labor...
The cost of labor is a factor in a companies profits, but I think you're drawing some conclusions about an economy and it's stock market capitalization that aren't necessarily related. It's entirely possible to have to have a growing economy, growing stock market, and a labor force that shares in the equity. It's also possible to have a growing economy and a stock market diluted with poor businesses that neither turn a large profit nor willing or able to pay their labor well.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

bluquark
Posts: 827
Joined: Mon Oct 22, 2018 2:30 pm

Re: Know when to hold them and when to fold them......

Post by bluquark » Sat Oct 05, 2019 1:23 am

Hmm yeah, on second thought, I must have interpreted the South African example wrong. If returns were great but the market cap stagnated, that reminds me of a company with no future that pays out good dividends as its customer base shrinks, instead of making any attempt at investing in its future. In such cases the value is not necessarily coming out of labor but rather future investors...

This is making me curious to find some material about the economic history of the country.

TN_Boy
Posts: 1194
Joined: Sat Jan 17, 2009 12:51 pm

Re: Know when to hold them and when to fold them......

Post by TN_Boy » Sat Oct 05, 2019 8:45 am

midareff wrote:
Fri Oct 04, 2019 2:29 pm

snip

Maybe you should reread paragraph 2 in the OP.

snip
I read the OP. You read a bunch of stuff from various gurus a while and decided upon 40% international. As international underperformed, you kept thinking about the gurus that were not in favor of international.

And after 10 years of clear underperformance, you decided international is bad after all and got out.

The point I was trying to make, perhaps clumsily, is that I didn't see where you looked again at the actual arguments for and against international investing. Just citing the fact that international underperformed seems like a classic case of recency bias.

For example, reading (from a 2000 version of Bogle's Common Sense on Mutual Funds) about international investing, Bogles first caveat around international investing is .... currency risk. Here is one key phrase "In the very long run, because the mechanics of government and international trade should equalize currency values, foreign currency risk relative to the US dollar should be a neutral factor in global markets." As vineviz shows, a very large chunk of the international underperformance has been exactly that, currency risk. Maybe the US dollar will remain strong forever. But maybe not.

So, if you are bowing out of international, is it because you now agree with the specific arguments in Bogle's chapter on Global Investing? Whereas before you did not?

User avatar
Topic Author
midareff
Posts: 6409
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: Know when to hold them and when to fold them......

Post by midareff » Sat Oct 05, 2019 10:42 am

TN_Boy wrote:
Sat Oct 05, 2019 8:45 am
midareff wrote:
Fri Oct 04, 2019 2:29 pm

snip

Maybe you should reread paragraph 2 in the OP.

snip
I read the OP. You read a bunch of stuff from various gurus a while and decided upon 40% international. As international underperformed, you kept thinking about the gurus that were not in favor of international.

Perhaps more accurately.... read a bunch of stuff from various gurus (generally self proclaimed) over perhaps 20+ years and initially established a target allocation for international because the talking heads and authors said or wrote it was the thing to do, Buffet and Bogle and some others excepted.

And after 10 years of clear underperformance, you decided international is bad after all and got out.

Again, perhaps more accurately, after monitoring clear under-performance over the last decade, and unable to make much of a case historically over extended time periods for its inclusion, I decided international was not necessary in my portfolio for it's success, and only added one more unnecessary slice of complexity that was not required. Without getting political, the capitalistic economic engine we have here at home can be expected to outperform lesser business friendly environments elsewhere going forward. That's about all I can say on that keeping politics out of the economic side of the discussion.

The point I was trying to make, perhaps clumsily, is that I didn't see where you looked again at the actual arguments for and against international investing. Just citing the fact that international underperformed seems like a classic case of recency bias.

I believe it was Peter Lynch who said "Know what you own and why you own it". That is a catch phrase I believe in as it pertains to investing. Having been provided a drastic haircut in the 1997 tech wreck I decided I had to increase my education and began reading books on stock picking, success strategies and so forth. After perhaps a dozen books it all sounded like a bunch of Bovine droppings until I happened upon Bill Bernstein's book on Asset Allocation. That would up leading me to Bogle, Bogleheads, Ferri, Swedroe, Swenson, Otar, Graham and several others. At that point in time my portfolio was split between taxable investments and a deferred compensation municipal program with fund availability restrictions. When I retired in 2012 I was able to establish what I thought at that time was a needed portfolio diversification which included international in both my IRA (transferred from deferred compensation and a DROP Program), and taxable. When we look back from here historically international presents far to much of its gains over the last ten years as dividends, vs. LTCG and a much lesser dividend from US. While being in decumulation is being in decumulation, and I take dividends to the bank, I really don't know of anyone who prefers dividends to LTCG, do you?... and let's just take that as an added negative besides the slightly higher cost.

For example, reading (from a 2000 version of Bogle's Common Sense on Mutual Funds) about international investing, Bogles first caveat around international investing is .... currency risk. Here is one key phrase "In the very long run, because the mechanics of government and international trade should equalize currency values, foreign currency risk relative to the US dollar should be a neutral factor in global markets." As vineviz shows, a very large chunk of the international underperformance has been exactly that, currency risk. Maybe the US dollar will remain strong forever. But maybe not.

Currency risk and currency exchange rate changes should not be confused with each other .... and should not be used to contaminate historical progressions by more than they could in actuality. "Maybe the US dollar will remain strong forever." there is that frog story again.

So, if you are bowing out of international, is it because you now agree with the specific arguments in Bogle's chapter on Global Investing? Whereas before you did not?

Are you staying in international because you disagree with the specific arguments in Bogle's chapter on Global Investing?

TN_Boy
Posts: 1194
Joined: Sat Jan 17, 2009 12:51 pm

Re: Know when to hold them and when to fold them......

Post by TN_Boy » Sat Oct 05, 2019 11:51 am

midareff wrote:
Sat Oct 05, 2019 10:42 am
TN_Boy wrote:
Sat Oct 05, 2019 8:45 am
midareff wrote:
Fri Oct 04, 2019 2:29 pm

snip

Maybe you should reread paragraph 2 in the OP.

snip
I read the OP. You read a bunch of stuff from various gurus a while and decided upon 40% international. As international underperformed, you kept thinking about the gurus that were not in favor of international.

Perhaps more accurately.... read a bunch of stuff from various gurus (generally self proclaimed) over perhaps 20+ years and initially established a target allocation for international because the talking heads and authors said or wrote it was the thing to do, Buffet and Bogle and some others excepted.

And after 10 years of clear underperformance, you decided international is bad after all and got out.

Again, perhaps more accurately, after monitoring clear under-performance over the last decade, and unable to make much of a case historically over extended time periods for its inclusion, I decided international was not necessary in my portfolio for it's success, and only added one more unnecessary slice of complexity that was not required. Without getting political, the capitalistic economic engine we have here at home can be expected to outperform lesser business friendly environments elsewhere going forward. That's about all I can say on that keeping politics out of the economic side of the discussion.

The point I was trying to make, perhaps clumsily, is that I didn't see where you looked again at the actual arguments for and against international investing. Just citing the fact that international underperformed seems like a classic case of recency bias.

I believe it was Peter Lynch who said "Know what you own and why you own it". That is a catch phrase I believe in as it pertains to investing. Having been provided a drastic haircut in the 1997 tech wreck I decided I had to increase my education and began reading books on stock picking, success strategies and so forth. After perhaps a dozen books it all sounded like a bunch of Bovine droppings until I happened upon Bill Bernstein's book on Asset Allocation. That would up leading me to Bogle, Bogleheads, Ferri, Swedroe, Swenson, Otar, Graham and several others. At that point in time my portfolio was split between taxable investments and a deferred compensation municipal program with fund availability restrictions. When I retired in 2012 I was able to establish what I thought at that time was a needed portfolio diversification which included international in both my IRA (transferred from deferred compensation and a DROP Program), and taxable. When we look back from here historically international presents far to much of its gains over the last ten years as dividends, vs. LTCG and a much lesser dividend from US. While being in decumulation is being in decumulation, and I take dividends to the bank, I really don't know of anyone who prefers dividends to LTCG, do you?... and let's just take that as an added negative besides the slightly higher cost.

For example, reading (from a 2000 version of Bogle's Common Sense on Mutual Funds) about international investing, Bogles first caveat around international investing is .... currency risk. Here is one key phrase "In the very long run, because the mechanics of government and international trade should equalize currency values, foreign currency risk relative to the US dollar should be a neutral factor in global markets." As vineviz shows, a very large chunk of the international underperformance has been exactly that, currency risk. Maybe the US dollar will remain strong forever. But maybe not.

Currency risk and currency exchange rate changes should not be confused with each other .... and should not be used to contaminate historical progressions by more than they could in actuality. "Maybe the US dollar will remain strong forever." there is that frog story again.

So, if you are bowing out of international, is it because you now agree with the specific arguments in Bogle's chapter on Global Investing? Whereas before you did not?

Are you staying in international because you disagree with the specific arguments in Bogle's chapter on Global Investing?
I don't understand your comment around currency risk and currency exchange rates. I thought they were the same thing in the context of investment returns here. Perhaps you or someone else can enlighten me on the difference.

My answer to your last question is yes. I specifically disagree with some of Bogle's arguments against global investing. A more nuanced answer would be that I am trying to minimize one risk in my portfolio, that risk being an overdependence upon US stock market returns. Do I think the US is a great country and has a generally excellent business environment? Yes. But via diversifying globally, I believe, but do not know, that I am lowering the overall risk of my portfolio. Which is more important to me than maximizing returns, because I do not need "hit the ball out of the park" returns for our retirement to succeed. If I wanted a higher expected return, I would decrease my bond percentage.

I do agree with one part of Bogle's analysis of global investing. In his chapter on reversion to the mean, he notes how reversion to the mean was clearly evident in EAFE versus US stocks during the time period he studied (note that book was published in 2000).

User avatar
willthrill81
Posts: 13504
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Know when to hold them and when to fold them......

Post by willthrill81 » Sat Oct 05, 2019 12:43 pm

TN_Boy wrote:
Sat Oct 05, 2019 11:51 am
I do agree with one part of Bogle's analysis of global investing. In his chapter on reversion to the mean, he notes how reversion to the mean was clearly evident in EAFE versus US stocks during the time period he studied (note that book was published in 2000).
I'm not endorsing either 'side' of this evergreen debate, but the EMH would seem to support a 'tilt toward U.S.' argument. The reason is because it suggests that expected risk-adjusted returns for U.S. equities should be roughly the same in the long-term vs. ex-U.S., in which case taking on currency risk and higher costs (mainly due to taxes) does not make sense. But that is countered by the argument that a specific investor's investment horizon might not see actual risk-adjusted returns being the same for both U.S. and ex-U.S., and when combined with a reduction in country risk, ex-U.S.'s benefits outweigh the risks. And that is in turn countered by the argument that the increasingly global nature of markets may mean that global returns are so closely tied to those of the U.S. that diversification of country risk in the U.S. is not very practical. Etc. etc., ad nauseum.

I honestly see logical arguments on both sides of the issue and have problems when someone argues that those on the other side have no valid reason for being on that side. As such, I appreciate your being even-handed in your post.
“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

columbia
Posts: 1941
Joined: Tue Aug 27, 2013 5:30 am

Re: Know when to hold them and when to fold them......

Post by columbia » Sat Oct 05, 2019 12:52 pm

willthrill81 wrote:
Sat Oct 05, 2019 12:43 pm
TN_Boy wrote:
Sat Oct 05, 2019 11:51 am
I do agree with one part of Bogle's analysis of global investing. In his chapter on reversion to the mean, he notes how reversion to the mean was clearly evident in EAFE versus US stocks during the time period he studied (note that book was published in 2000).
I'm not endorsing either 'side' of this evergreen debate, but the EMH would seem to support a 'tilt toward U.S.' argument. The reason is because it suggests that expected risk-adjusted returns for U.S. equities should be roughly the same in the long-term vs. ex-U.S., in which case taking on currency risk and higher costs (mainly due to taxes) does not make sense. But that is countered by the argument that a specific investor's investment horizon might not see actual risk-adjusted returns being the same for both U.S. and ex-U.S., and when combined with a reduction in country risk, ex-U.S.'s benefits outweigh the risks. And that is in turn countered by the argument that the increasingly global nature of markets may mean that global returns are so closely tied to those of the U.S. that diversification of country risk in the U.S. is not very practical. Etc. etc., ad nauseum.

I honestly see logical arguments on both sides of the issue and have problems when someone argues that those on the other side have no valid reason for being on that side. As such, I appreciate your being even-handed in your post.
Good post. I think it further highlights the idea that the best pick for equities is the one most comfortable for the individual investor.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Sat Oct 05, 2019 1:07 pm

willthrill81 wrote:
Sat Oct 05, 2019 12:43 pm
The reason is because it suggests that expected risk-adjusted returns for U.S. equities should be roughly the same in the long-term vs. ex-U.S., in which case taking on currency risk and higher costs (mainly due to taxes) does not make sense.
Keep in mind that an investor's currency risk is not minimized by holding all portfolio assets in a single currency (e.g. the US dollar).

Instead, the point of minimum currency risk would be a function of both their individual liabilities and of the portfolio effects of exchange rates (e.g. their variance and their correlation with other portfolio assets). So a blanket statement like "taking on currency risk and higher costs ... does not make sense" is not supportable.

The optimal amount of "home bias" then becomes an empirical question rather than a theoretical one. I doubt many investors would, strictly speaking, find that 0% home bias is optimal but even fewer would find that 100% home bias is optimal. And because most asset allocation studies either explicitly or implicitly account for things like currency risk (and sometimes taxes), the central tendency of international allocations (e.g. 25% to 45% of total equities) already reflects the costs you mentioned.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Ferdinand2014
Posts: 756
Joined: Mon Dec 17, 2018 6:49 pm

Re: Know when to hold them and when to fold them......

Post by Ferdinand2014 » Sat Oct 05, 2019 1:41 pm

vineviz wrote:
Sat Oct 05, 2019 1:07 pm
willthrill81 wrote:
Sat Oct 05, 2019 12:43 pm
The reason is because it suggests that expected risk-adjusted returns for U.S. equities should be roughly the same in the long-term vs. ex-U.S., in which case taking on currency risk and higher costs (mainly due to taxes) does not make sense.
Keep in mind that an investor's currency risk is not minimized by holding all portfolio assets in a single currency (e.g. the US dollar).

Instead, the point of minimum currency risk would be a function of both their individual liabilities and of the portfolio effects of exchange rates (e.g. their variance and their correlation with other portfolio assets). So a blanket statement like "taking on currency risk and higher costs ... does not make sense" is not supportable.

The optimal amount of "home bias" then becomes an empirical question rather than a theoretical one. I doubt many investors would, strictly speaking, find that 0% home bias is optimal but even fewer would find that 100% home bias is optimal. And because most asset allocation studies either explicitly or implicitly account for things like currency risk (and sometimes taxes), the central tendency of international allocations (e.g. 25% to 45% of total equities) already reflects the costs you mentioned.
If I were to consider adding an international allocation, based on backtested data, around 40% +/- international portion of equities seemed to be the point of maximal diversification benefit (I assume rebalancing periodically). Going forward, as we do not know the optimal ratio, is it better to simply own a 1 fund total world index such as VT or URTH (iShares MSCI 'World Index' - if I prefer to avoid emerging markets)? Or is it better to have a fixed allocation and rebalance into the poorer returning asset? Put another way, is it better to always be world market cap or is it better to fix the allocation with a tilt towards home bias (as a U.S. investor) in your opinion?
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

alex_686
Posts: 5097
Joined: Mon Feb 09, 2015 2:39 pm

Re: Know when to hold them and when to fold them......

Post by alex_686 » Sat Oct 05, 2019 2:40 pm

TN_Boy wrote:
Sat Oct 05, 2019 11:51 am
I don't understand your comment around currency risk and currency exchange rates. I thought they were the same thing in the context of investment returns here. Perhaps you or someone else can enlighten me on the difference.
I will speak on on this later, but they are different. A better phrase might be "inflation adjusted currency risk". If America's inflation is running at 3% per year, and the Euro Zone is running at 2%, we would expect USD to fall by 1%. However, while the USD is falling it is not getting weaker. This is just a little light inflation which should only be affecting nominal returns. It should not be affecting the real returns of either US or Euro Zone returns, nor should it be affecting the relative performance of a US investor in the Euro Zone or vice versa.

Currency risk is if we have the above inflation but USD does not fall by 1%. If it goes up by 1% or down by 3% that change will affect a investor's return.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Sat Oct 05, 2019 3:27 pm

Ferdinand2014 wrote:
Sat Oct 05, 2019 1:41 pm
If I were to consider adding an international allocation, based on backtested data, around 40% +/- international portion of equities seemed to be the point of maximal diversification benefit (I assume rebalancing periodically). Going forward, as we do not know the optimal ratio, is it better to simply own a 1 fund total world index such as VT or URTH (iShares MSCI 'World Index' - if I prefer to avoid emerging markets)? Or is it better to have a fixed allocation and rebalance into the poorer returning asset? Put another way, is it better to always be world market cap or is it better to fix the allocation with a tilt towards home bias (as a U.S. investor) in your opinion?
A single world index fund has a huge advantage in simplicity, for sure. Although it wouldn’t be optimal in terms of diversification, it wouldn’t be far off.

Setting a fixed ratio and rebalancing has diversification benefits, and the stability of the ratio would be very stable (surprisingly so to many people, I suspect), but unless you were willing to tilt the ratio to favor more diversification (like small cap value and emerging markets) and were in retirement I’m not sure the extra work would be easily justified.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

mariezzz
Posts: 847
Joined: Mon Oct 02, 2017 11:02 pm

Re: Know when to hold them and when to fold them......

Post by mariezzz » Sat Oct 05, 2019 4:10 pm

As has been said by many here, do what allows you to sleep at night.
People can change their mind about their asset allocation. Of course, you want to be thoughtful rather than reacting to a sudden downturn when you do that.
There have been lots of threads about the benefit/lack of benefit of international - and all the different flavors of international.
Certain areas, like emerging markets, are volatile and that risk may make you uncomfortable. It's reasonable to decide to not include those.
I decided international as a whole was not for me. VTSAX (or closest thing to it in my 401k accounts) meets my equity needs, with my portfolio about 70-75% equities. I'm doubtful I'll lose out on anything but if I do, it won't be much.

Ferdinand2014
Posts: 756
Joined: Mon Dec 17, 2018 6:49 pm

Re: Know when to hold them and when to fold them......

Post by Ferdinand2014 » Sat Oct 05, 2019 4:15 pm

vineviz wrote:
Sat Oct 05, 2019 3:27 pm
Ferdinand2014 wrote:
Sat Oct 05, 2019 1:41 pm
If I were to consider adding an international allocation, based on backtested data, around 40% +/- international portion of equities seemed to be the point of maximal diversification benefit (I assume rebalancing periodically). Going forward, as we do not know the optimal ratio, is it better to simply own a 1 fund total world index such as VT or URTH (iShares MSCI 'World Index' - if I prefer to avoid emerging markets)? Or is it better to have a fixed allocation and rebalance into the poorer returning asset? Put another way, is it better to always be world market cap or is it better to fix the allocation with a tilt towards home bias (as a U.S. investor) in your opinion?
A single world index fund has a huge advantage in simplicity, for sure. Although it wouldn’t be optimal in terms of diversification, it wouldn’t be far off.

Setting a fixed ratio and rebalancing has diversification benefits, and the stability of the ratio would be very stable (surprisingly so to many people, I suspect), but unless you were willing to tilt the ratio to favor more diversification (like small cap value and emerging markets) and were in retirement I’m not sure the extra work would be easily justified.
So if I understand your thoughts, in the accumulation phase, holding an S&P 500 index fund vs holding total world developed (given the high correlation with U.S. developed) would not likely provide much extra diversification unless I were willing to include small cap value and/or emerging markets into the mix? Whether at a fixed ratio or all in one fund like URTH (which is MSCI world index - 23 developed including U.S. and Canada at top 85% cap weighting- so mostly large/mid cap)? I know you have described that diversification is significantly more important in the withdrawal stage in other threads. Also, would it be better to hold say 10% emerging markets/90% S&P 500 as equities or cap weighted developed world only equities (URTH) for diversification benefits?.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

TN_Boy
Posts: 1194
Joined: Sat Jan 17, 2009 12:51 pm

Re: Know when to hold them and when to fold them......

Post by TN_Boy » Sat Oct 05, 2019 4:38 pm

alex_686 wrote:
Sat Oct 05, 2019 2:40 pm
TN_Boy wrote:
Sat Oct 05, 2019 11:51 am
I don't understand your comment around currency risk and currency exchange rates. I thought they were the same thing in the context of investment returns here. Perhaps you or someone else can enlighten me on the difference.
I will speak on on this later, but they are different. A better phrase might be "inflation adjusted currency risk". If America's inflation is running at 3% per year, and the Euro Zone is running at 2%, we would expect USD to fall by 1%. However, while the USD is falling it is not getting weaker. This is just a little light inflation which should only be affecting nominal returns. It should not be affecting the real returns of either US or Euro Zone returns, nor should it be affecting the relative performance of a US investor in the Euro Zone or vice versa.

Currency risk is if we have the above inflation but USD does not fall by 1%. If it goes up by 1% or down by 3% that change will affect a investor's return.
Okay, so what was vineviz giving above with the three MSCI indexes?

Returns for international are affected by exchange rate fluctuations. Which I, apparently incorrectly(?), call either exchange rate risk or currency risk. Though I'm not the only one using those terms interchangeably:

https://www.investopedia.com/terms/f/fo ... gerisk.asp

I sorta see what you are getting at, but it seems to be complicating the picture. I'm looking at nominal returns in US dollars and I sorta thought that was what all these intl/US performance comparison were doing that. Separately I might look at US inflation to get real returns.

TN_Boy
Posts: 1194
Joined: Sat Jan 17, 2009 12:51 pm

Re: Know when to hold them and when to fold them......

Post by TN_Boy » Sat Oct 05, 2019 4:43 pm

willthrill81 wrote:
Sat Oct 05, 2019 12:43 pm
TN_Boy wrote:
Sat Oct 05, 2019 11:51 am
I do agree with one part of Bogle's analysis of global investing. In his chapter on reversion to the mean, he notes how reversion to the mean was clearly evident in EAFE versus US stocks during the time period he studied (note that book was published in 2000).
I'm not endorsing either 'side' of this evergreen debate, but the EMH would seem to support a 'tilt toward U.S.' argument. The reason is because it suggests that expected risk-adjusted returns for U.S. equities should be roughly the same in the long-term vs. ex-U.S., in which case taking on currency risk and higher costs (mainly due to taxes) does not make sense. But that is countered by the argument that a specific investor's investment horizon might not see actual risk-adjusted returns being the same for both U.S. and ex-U.S., and when combined with a reduction in country risk, ex-U.S.'s benefits outweigh the risks. And that is in turn countered by the argument that the increasingly global nature of markets may mean that global returns are so closely tied to those of the U.S. that diversification of country risk in the U.S. is not very practical. Etc. etc., ad nauseum.

I honestly see logical arguments on both sides of the issue and have problems when someone argues that those on the other side have no valid reason for being on that side. As such, I appreciate your being even-handed in your post.
At a very high level, I prefer international diversification largely because if the US stock market falters, there may be benefits investing in other countries. The US has had a great economic ride over the 20th century and now into the 21st. But I'd rather hedge my bets, err, investments. And a minor issue, while US corporate governance is still probably among the best in the world, there are certainly things about the way American businesses are run that I find concerning.

rossington
Posts: 245
Joined: Fri Jun 07, 2019 2:00 am
Location: Florida

Re: Know when to hold them and when to fold them......

Post by rossington » Sat Oct 05, 2019 5:15 pm

TN_Boy wrote:
Sat Oct 05, 2019 4:43 pm


At a very high level, I prefer international diversification largely because if the US stock market falters, there may be benefits investing in other countries. The US has had a great economic ride over the 20th century and now into the 21st. But I'd rather hedge my bets, err, investments. And a minor issue, while US corporate governance is still probably among the best in the world, there are certainly things about the way American businesses are run that I find concerning.
But what about the instability of virtually all foreign governments and the global trend of socialism? I don't see pure capitalism ever becoming dominant ex US.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Sat Oct 05, 2019 7:11 pm

Ferdinand2014 wrote:
Sat Oct 05, 2019 4:15 pm

So if I understand your thoughts, in the accumulation phase, holding an S&P 500 index fund vs holding total world developed (given the high correlation with U.S. developed) would not likely provide much extra diversification unless I were willing to include small cap value and/or emerging markets into the mix? Whether at a fixed ratio or all in one fund like URTH (which is MSCI world index - 23 developed including U.S. and Canada at top 85% cap weighting- so mostly large/mid cap)? I know you have described that diversification is significantly more important in the withdrawal stage in other threads. Also, would it be better to hold say 10% emerging markets/90% S&P 500 as equities or cap weighted developed world only equities (URTH) for diversification benefits?.
In accumulation I'd normally suggest holding either a world stock index or a target date fund, not simply a US large cap fund. While diversification is significantly more important in retirement, it still matters in accumulation and a global market cap weighted equity portfolio is so easy and cheap to access that there's no reason (IMHO) not to do that at the very least.

I'd use a true world fund (e.g. VT or SPGM) as the core holding, not just developed markets. Adding 20% to small cap value US stocks and 20% to emerging markets stocks to VT or SPGM would turn up the diversification a notch, but I see no reason to use URTH or an S&P 500 fund as part of the mix.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

TN_Boy
Posts: 1194
Joined: Sat Jan 17, 2009 12:51 pm

Re: Know when to hold them and when to fold them......

Post by TN_Boy » Sat Oct 05, 2019 9:24 pm

rossington wrote:
Sat Oct 05, 2019 5:15 pm
TN_Boy wrote:
Sat Oct 05, 2019 4:43 pm


At a very high level, I prefer international diversification largely because if the US stock market falters, there may be benefits investing in other countries. The US has had a great economic ride over the 20th century and now into the 21st. But I'd rather hedge my bets, err, investments. And a minor issue, while US corporate governance is still probably among the best in the world, there are certainly things about the way American businesses are run that I find concerning.
But what about the instability of virtually all foreign governments and the global trend of socialism? I don't see pure capitalism ever becoming dominant ex US.
We shouldn't go too far into politics ..... I wouldn't agree that virtually all foreign governments are unstable.

But I'm not any better at predicting political developments than I am stock market moves. For example, I wouldn't have guessed the folks in the UK would vote to leave the EU. But heck, neither did David Cameron. And Brexit is certainly causing uncertainty in Europe (give a point to the "no international" folks). Domestically, the current US administration views global trade somewhat differently than most recent administrations. Where will that lead? (Note, let's not agree or disagree with my specific interpretations here ... it doesn't matter if I'm right or wrong on the details, I'm just making the point that "stuff happens" in all countries, including the US).

shess
Posts: 236
Joined: Wed May 17, 2017 12:02 am

Re: Know when to hold them and when to fold them......

Post by shess » Mon Oct 07, 2019 3:39 pm

elainet7 wrote:
Thu Oct 03, 2019 6:58 pm
Buffett has told his wife to invest 90% of their money in the sp500 index fund
Who better to listen to
Given a billion dollars, I'm betting it's actually hard to find an asset where 90% of it would NOT generate sufficient returns to see you through retirement. Though I'm sure it's possible if you work at it.

alex_686
Posts: 5097
Joined: Mon Feb 09, 2015 2:39 pm

Re: Know when to hold them and when to fold them......

Post by alex_686 » Tue Oct 08, 2019 4:09 pm

TN_Boy wrote:
Sat Oct 05, 2019 4:38 pm
Returns for international are affected by exchange rate fluctuations. Which I, apparently incorrectly(?), call either exchange rate risk or currency risk. Though I'm not the only one using those terms interchangeably: ...
I sorta see what you are getting at, but it seems to be complicating the picture. I'm looking at nominal returns in US dollars and I sorta thought that was what all these intl/US performance comparison were doing that. Separately I might look at US inflation to get real returns.
First, I misread your post I though you were confligating FX movements with FX risk. You were not and I apologize.

Second, it does not complicate the big picture, rather the opposite.

In theory...
We care about real returns, not nominal returns. Thus we should disregard the inflation component of returns.
Equities tend to be a good hedge against inflation.
FX rate movement = Change in interest rates + change in relative strength of the currency
Most FX movement is tied to inflation.
Thus FX risk is low.

This holds pretty well in practice. Over the past 100 years the annualized volatility of Inflation Adjusted FX Risk is 1%. As Vineviz points out, FX risk is bounded by Purchasing Power Parity and thus means revert - one of the few risks that actually does. That means the longer you hold intentional stock, the lower the risk. If you hold intentional stock for 10 years FX risk tends to become noise. There may be one exception, which has been the last 10 years, where the USD has gone from a historically weak position a historically strong position. I would really like to see some decent work here.
vineviz wrote:
Fri Oct 04, 2019 10:15 pm
The easiest way to decompose this, I think, is to look at three MSCI indexes:

1) MSCI USA
2) MSCI ACWI ex USA in USD
3) MSCI ACWI ex USA in local currency.

The difference between 1 and 2 is the total return differential for a US investor. The difference between 2 and 3 is the effect of exchange rates, and the difference between 3 and 1 is the difference due to underlying performance (e.g. sector composition, systemic risks, idiosyncratic risk, etc).

From 1988 to present, 1 minus 2 has been roughly 5%/year. 2 minus 3 has been roughly 3.5%/year and 3 minus 1 has been roughly 1.5%. So that's how I got the 2/3 attribution for currency effects.

Now I tend to think that PPP holds over the long run, so expect to see mean reversion in exchange rates.
Vineviz, I really respect you and I think you get things right more often than I but you are off base here. There is a difference between FX movement and FX risk. I believe that America has had higher inflation over the past 30 years and that we can ignore. I think this is where the bulk of the difference is coming from. Where FX risk comes in is the unexpected relative strengthening / weakening of the dollar. This is low (1% volatility) and bounded (PPP). I just have a hard time that a bounded mean reverting risk parameter

Next, I think you are off on " 3 and 1 is the difference due to underlying performance (e.g. sector composition, systemic risks, idiosyncratic risk, etc)." "MSCI ACWI ex USA in local currency" is in the multiple local currencies so it would also included all FX changes.

I have read far and wide on this, but I will point to the MSCI index calculations whitepaper which uses FX rate changes and does not try to account for the relative change in power of a currency. Plus Financial Market History: Reflections on the Past for Investors Today by David Chambers et. al. Plus The Economist reporting on its Big Mac Index. And a key article in the Financial Analysts Journal.

That being said, I know this is a tough nut to crack. We are talking about relative changes between FX rates, so there are no external or absolute points of reference. While PPP and CPI are the best measurements we have, they are still pretty rough measures. I would be appreciative if you could point to any solid articles out there.

User avatar
Taylor Larimore
Advisory Board
Posts: 28755
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

It is impossible to know when to hold them and when to fold them.

Post by Taylor Larimore » Tue Oct 08, 2019 5:00 pm

Bogleheads:

No one can predict the U.S. or International stock market returns. It is a mistake and waste of time to try. These experts agree:

Market Timing

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "I do not know of anybody who has done market timing successfully. I don't even know anybody who knows anybody who has done it successfully and consistently."
"Simplicity is the master key to financial success." -- Jack Bogle

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Know when to hold them and when to fold them......

Post by vineviz » Tue Oct 08, 2019 5:39 pm

alex_686 wrote:
Tue Oct 08, 2019 4:09 pm
Vineviz, I really respect you and I think you get things right more often than I but you are off base here. There is a difference between FX movement and FX risk. I believe that America has had higher inflation over the past 30 years and that we can ignore. I think this is where the bulk of the difference is coming from. Where FX risk comes in is the unexpected relative strengthening / weakening of the dollar. This is low (1% volatility) and bounded (PPP). I just have a hard time that a bounded mean reverting risk parameter.
I can only really speak to the field I know best, having studied it formally and worked in it for decades, which is portfolio management. In that context, currency risk refers to the risk that the return of an asset when denominated in its local currency will differ from the return of that asset when denominated in the investor's home currency (USD in this case).

E.g. from Celebuski, Hill & Kilgannon (1990)
The owner of a portfolio denominated in foreign currencies must consider two types of risk—(1) the contribution of each asset to the portfolio's risk in local-currency terms and (2) the contribution of the currency risk associated with the asset to the portfolio's volatility.
An equity portfolio manager would say that currency risk is the risk that the currency return is not zero. This is the context used by asset mangers like Vanguard and WisdomTree, and it is the context that I use.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Post Reply