Reasons to invest internationally, or not.

[burritoLover]

Are you diversifying to reduce volatility, or diversifying to increase performance?
Can you have both?
Can anyone truly define risk as compensated Vs. whateveryouwanttocallit?

I'm diversifying to diversify. It's an end unto itself. Let me illustrate what I mean with a little story.

A farmer named Santiago and his son, Pedro, lived in a tiny village far up in the mountain ranges of Peru. Farming there was difficult, as you can well imagine; the terrain being so rocky meant it was difficult to find suitable spots to farm. After some years of trial and error, Santiago felt he found the best place to plant his crops, a field that would give him the best bounty among the rest. Having finally found the ideal field, he told his son, "This year we shall plant all our crops there."
"But, father, my friend Alejandro says his father always plants his crops across twenty fields!"
"That's silly!" said Santiago, with a dismissive wave of the hand. "You want to plant in the best field! Best field means best results!"
"Oh, father!," said Pedro. "No! Alejandro's father says crop yields can vary widely from field to field, because of erratic microclimates. He says it's best to spread one's bets, to have your eggs in more than one basket, in order to reduce the risk of starvation!"
"I prefer to place all my eggs in the best basket, thank you very much."
A few months later, Santiago found himself on his hands and knees, digging his fingers into the barren soil of his favorite field, crying to the gods, why, oh, why.
"Because microclimates, father," said Pedro quietly. He clutched at his own thin body, feeling his stomach crying out beneath his flesh.

Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund.

Alright, my beautifully illustrated story about the importance of keeping eggs in more than one basket is officially ruined. I'm gonna cry out "unfair metaphor extension" anyway. If I have $100,000, the size of my field will be the same if it's invested in the US, or globally. So, there. Put that in your burrito and smoke it.

The other 20 fields have their own micro-climates so they represent ex-US countries in your analogy and Santiago's highly productive field obviously represents the US. The $100k is not the size of your field but how much you are going to plant and in what fields not how big the fields are. You need to understand your own analogy lol.

[Robot Monster]

Are you diversifying to reduce volatility, or diversifying to increase performance?
Can you have both?
Can anyone truly define risk as compensated Vs. whateveryouwanttocallit?

I'm diversifying to diversify. It's an end unto itself. Let me illustrate what I mean with a little story.

A farmer named Santiago and his son, Pedro, lived in a tiny village far up in the mountain ranges of Peru. Farming there was difficult, as you can well imagine; the terrain being so rocky meant it was difficult to find suitable spots to farm. After some years of trial and error, Santiago felt he found the best place to plant his crops, a field that would give him the best bounty among the rest. Having finally found the ideal field, he told his son, "This year we shall plant all our crops there."
"But, father, my friend Alejandro says his father always plants his crops across twenty fields!"
"That's silly!" said Santiago, with a dismissive wave of the hand. "You want to plant in the best field! Best field means best results!"
"Oh, father!," said Pedro. "No! Alejandro's father says crop yields can vary widely from field to field, because of erratic microclimates. He says it's best to spread one's bets, to have your eggs in more than one basket, in order to reduce the risk of starvation!"
"I prefer to place all my eggs in the best basket, thank you very much."
A few months later, Santiago found himself on his hands and knees, digging his fingers into the barren soil of his favorite field, crying to the gods, why, oh, why.
"Because microclimates, father," said Pedro quietly. He clutched at his own thin body, feeling his stomach crying out beneath his flesh.

Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund.

Alright, my beautifully illustrated story about the importance of keeping eggs in more than one basket is officially ruined. I'm gonna cry out "unfair metaphor extension" anyway. If I have $100,000, the size of my field will be the same if it's invested in the US, or globally. So, there. Put that in your burrito and smoke it.

The other 20 fields have their own micro-climates so they represent ex-US countries in your analogy and Santiago's highly productive field obviously represents the US. The $100k is not the size of your field but how much you are going to plant and in what fields not how big the fields are. You need to understand your own analogy lol.

I'm gonna buy $100k worth of burritos and dump 'em on your front lawn, along with a couple micro-climates for good measure.

[burritoLover]

I'm diversifying to diversify. It's an end unto itself. Let me illustrate what I mean with a little story.

A farmer named Santiago and his son, Pedro, lived in a tiny village far up in the mountain ranges of Peru. Farming there was difficult, as you can well imagine; the terrain being so rocky meant it was difficult to find suitable spots to farm. After some years of trial and error, Santiago felt he found the best place to plant his crops, a field that would give him the best bounty among the rest. Having finally found the ideal field, he told his son, "This year we shall plant all our crops there."
"But, father, my friend Alejandro says his father always plants his crops across twenty fields!"
"That's silly!" said Santiago, with a dismissive wave of the hand. "You want to plant in the best field! Best field means best results!"
"Oh, father!," said Pedro. "No! Alejandro's father says crop yields can vary widely from field to field, because of erratic microclimates. He says it's best to spread one's bets, to have your eggs in more than one basket, in order to reduce the risk of starvation!"
"I prefer to place all my eggs in the best basket, thank you very much."
A few months later, Santiago found himself on his hands and knees, digging his fingers into the barren soil of his favorite field, crying to the gods, why, oh, why.
"Because microclimates, father," said Pedro quietly. He clutched at his own thin body, feeling his stomach crying out beneath his flesh.

Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund.

Alright, my beautifully illustrated story about the importance of keeping eggs in more than one basket is officially ruined. I'm gonna cry out "unfair metaphor extension" anyway. If I have $100,000, the size of my field will be the same if it's invested in the US, or globally. So, there. Put that in your burrito and smoke it.

The other 20 fields have their own micro-climates so they represent ex-US countries in your analogy and Santiago's highly productive field obviously represents the US. The $100k is not the size of your field but how much you are going to plant and in what fields not how big the fields are. You need to understand your own analogy lol.

I'm gonna buy $100k worth of burritos and dump 'em on your front lawn, along with a couple micro-climates for good measure.

cool.

[softmax]

I think this answer really depends on your age and optimism.

Do you think that international will outperform the US in your life time?
Are you confident that you won't see a war that drastically change the global dynamics?

As a late 20s non-American, I think those factors are highly uncertain and it's best to diversify.

[Call_Me_Op]

Reason is increased diversification.

[Robot Monster]

I think this answer really depends on your age and optimism.

Do you think that international will outperform the US in your life time?
Are you confident that you won't see a war that drastically change the global dynamics?

As a late 20s non-American, I think those factors are highly uncertain and it's best to diversify.

Agreed.

I was contemplating the possibility of an economic war with China, a long lasting, cold war type experience. I don't mean to imply I'm speculating such a thing could happen. I'm saying, who knows. Or, "nobody knows nothing," as we like to say around here.

The way I see it, buying the S&P, or Total Stock Market, is, to use Warren Buffett's words, a "bet on America," but I'd rather not bet. Ergo, I diversify.

[petulant]

The articles are not good, particularly the one in favor of investing domestically. The issues discussed in the pro-home-bias article are ones that can be entirely priced in among all international investors. With a P/E ratio of 22.35 in the U.S. compared to 16.45 in developed ex-US markets, there is some indication this is already the case.

However, there are two entirely rational reasons for home bias that were not mentioned in the article even though they commonly come up in the academic literature: withholding risk and uncompensated currency risk.

The academic literature suggests dividend withholding taxes are a real drain on foreign equity investments. Generally, foreign countries withhold more than 15% of the dividends, the U.S. allows a foreign tax credit claim of 15%, and the investor then has to make a claim in the foreign county for a refund of the remainder above 15%. Most individual U.S. investors never ask for a refund of the excess withholding because it is prohibitively costly, and many of us don't even receive the benefit of the foreign tax credit since we hold the stocks in tax-advantaged accounts like the 401(k). If foreign firms have payout ratios in the range of 40% and withhold 25% as taxes, you have a permanent reduction to earnings of 10%. The price may not reflect the lower earnings to you, though, because other investors do not have this problem, particularly the investors in that foreign country. This is an example where assumptions underlying the market portfolio do not match up to reality in a tangible way, particularly the lack of tax friction and the non-homogeneity of investors.

Currency risk is another factor that is more mixed in the literature but still a concern for many investors. Robot Monster already brought it up. The reality is that currency risk makes foreign investments more volatile for U.S. investors and have also been a key reason the returns of foreign stocks have been lackluster in recent years (try comparing the return of the Japanese TOPIX or German DAX over the last 10 years in yen and euros to the respective country funds at iShares). As far as I can tell as a non-academic, the CAPM-type insights underlying a market portfolio are much more complicated when applied to a multi-currency international system. Academics have built models with conflicting results when they try to correct for issues like the welfare impact of a stronger/weaker home currency, foreign operations of home companies, etc. Needless to say, when currency risk is involved, we have another case of frictions and non-homogeneity of investors.

Finance academics often refer to a "puzzle" about why investors all over the globe don't invest with higher international allocations despite finance seeming to indicate international diversification is a no brainer. With clear legal/tax frictions and academics puzzling over the best way to model currency, the bigger puzzle to me appears to be why finance academics are surprised.

[petulant]

Sometimes I wonder if international-leery folks might take a stab at international if there was a fund like VT, but 1) had a much smaller international allocation, and 2) the international allocation was megacaps, companies whose revenue sources more closely resembled US megacaps'. Just compare Sanofi (a French biopharmaceutical company) with Apple:

Revenue by region

Sanofi
39.7% US
27.55% Europe
32.75 Asia/Latin America/Eurasia/Africa/Middle East/Rest of world

Apple
43.8% US
24% Europe
32% China/Japan/Rest of Asia Pacific

***

Sanofi source
Apple revenue based on total revenue for q1 2019
Source

If I could just get a fund that was total world with a 50% haircut to non-US firms, I would buy it. No need for explicit multinational criteria.

[Robot Monster]

Sometimes I wonder if international-leery folks might take a stab at international if there was a fund like VT, but 1) had a much smaller international allocation, and 2) the international allocation was megacaps, companies whose revenue sources more closely resembled US megacaps'. Just compare Sanofi (a French biopharmaceutical company) with Apple:

Revenue by region

Sanofi
39.7% US
27.55% Europe
32.75 Asia/Latin America/Eurasia/Africa/Middle East/Rest of world

Apple
43.8% US
24% Europe
32% China/Japan/Rest of Asia Pacific

***

Sanofi source
Apple revenue based on total revenue for q1 2019
Source

If I could just get a fund that was total world with a 50% haircut to non-US firms, I would buy it. No need for explicit multinational criteria.

And not explicitly megacap, either? Something like Vanguard Mega Cap, but for international?

[petulant]

Sometimes I wonder if international-leery folks might take a stab at international if there was a fund like VT, but 1) had a much smaller international allocation, and 2) the international allocation was megacaps, companies whose revenue sources more closely resembled US megacaps'. Just compare Sanofi (a French biopharmaceutical company) with Apple:

Revenue by region

Sanofi
39.7% US
27.55% Europe
32.75 Asia/Latin America/Eurasia/Africa/Middle East/Rest of world

Apple
43.8% US
24% Europe
32% China/Japan/Rest of Asia Pacific

***

Sanofi source
Apple revenue based on total revenue for q1 2019
Source

If I could just get a fund that was total world with a 50% haircut to non-US firms, I would buy it. No need for explicit multinational criteria.

And not explicitly megacap, either? Something like Vanguard Mega Cap, but for international?

It would be fine to have a cut-off like MSCI EAFE, but since the largest firms are biggest % of market cap, I don't really care. What would be nice is a single fund with international exposure that isn't market weight or 40% like Vanguard's funds. 20-25% allocation or, better yet, a haircut to the market weight.

[k b]

Very broadly speaking, developed market equities correlate to US equities correlate (major divergence could happen anytime; my own prediction is 2021, when US markets take off) and EM equities correlate to US HY bonds.

That is not what I see on portfoliovisualizer with actual investments for these asset classes:

https://www.portfoliovisualizer.com/ass ... &months=36

I compared VWEAX and VEMAX - EM equity vs DM HY
https://www.portfoliovisualizer.com/ass ... &months=36

Separately, I compared VTSAX and VTGMX
https://www.portfoliovisualizer.com/ass ... &months=36

Looks like the correlations are pretty high - 0.73 and 0.88.
Rolling correlations for 2006 to 2020 shows drop below 0.65 in the EM case in the last couple of years, followed by a serious reversion. In the US to DM case, correlation is consistently above 0.7 other than for a short period in 2015.

Perhaps you expected a higher correlation based on my comments? But my basic point (worth no more than 2c) is that this kind of 'diversification' is not worth the extra effort - UNLESS you time it (esp in the EM case) well due to luck or skill.

Or maybe I am reading the graphs wrong. Happy to be corrected.

First, these are sample correlations calculated from historical samples, not the actual correlations calculated from the joint and individual distributions of return (which are unknown). They are fair estimates, but are susceptible to sample bias from different time periods.

By separating them into separate pairwise sample correlation calculations, you are computing them for different time periods. This introduces even more uncertainty into your interpretation then just the bias of a single sample.

The time period is constrained by when the fund existed or data available to PV. By just computing a single correlation matrix for all of the funds you remove the uncertainty of different time periods.

But there still is enough bias in a single time period that I would not make such a result the primary consideration or primary driver for constructing a portfolio.

I chose to also look at the range of correlations rolling correlations to avoid the bias of a specific time period.

Once again - there might be specific time periods when EM or non-US DM outperforms. But when I factor in volatility (EM) and dependence on the US economy (both EM and non-US DM companies), it feels like a lot work to generate a few extra points (on average). I would rather focus on the US. To me, the US does not represent country risk the way Japan or China or Germany or India does.

Thanks for a good discussion.

[columbia]

Sometimes I wonder if international-leery folks might take a stab at international if there was a fund like VT, but 1) had a much smaller international allocation, and 2) the international allocation was megacaps, companies whose revenue sources more closely resembled US megacaps'. Just compare Sanofi (a French biopharmaceutical company) with Apple:

Revenue by region

Sanofi
39.7% US
27.55% Europe
32.75 Asia/Latin America/Eurasia/Africa/Middle East/Rest of world

Apple
43.8% US
24% Europe
32% China/Japan/Rest of Asia Pacific

***

Sanofi source
Apple revenue based on total revenue for q1 2019
Source

If I could just get a fund that was total world with a 50% haircut to non-US firms, I would buy it. No need for explicit multinational criteria.

Cref Stock is 70/30, but I'm assuming you don't have access to that.

[Bluce]

I read 2 good articles this morning concerning the reasons to invest in foreign markets, or to invest only in the US. Compelling arguments for both are included in the linked articles below.

Happier at Home

Venturing Abroad

[links fixed by admin LadyGeek]

The academics mostly promote International investing. I don't think it will make a big difference either way.

Dan

I held a portion of my equity holdings (25%?) in international for probably 25 years. There is no way to prove which is better -- especially going forward -- so I dumped them about two years ago.

Being old (70) and continuing to de-risk and simplify, I am also dumping my small cap ETF (IJR) once it gets back to its YTD high.

[Stef]

US investors able to invest in US companies get intl exposure via the companies they invest in.

At least in 2016, US revenues are largely domestically driven, with 63% exposure vs:

Revenue from US
Europe -- 20%
Japan -- 14%
EM -- 8%

Source:
https://seekingalpha.com/article/404743 ... -come-from

This means 37% exposure to non-US markets, just by investing in US companies? Sounds like reasonable exposure to me.

Am I reading this wrong?

Nestle has 98% exposure to non-Swiss markets. Should I just buy Nestle now?

[typical.investor]

International and emerging markets will have their day in the sun. But I think US equities will continue to outperform over the long term as advocated in Moberg's article, "Happier at Home" (see op for link). After all, a US only strategy advocated both by Buffet and Bogle must be good.

Berkshire Hathaway Inc. just purchased $6 billion of Japanese equities.

“I am delighted to have Berkshire Hathaway participate in the future of Japan and the five companies we have chosen for investment,” said Mr. Buffett. —Wall Street Journal

[columbia]

It's curious that there are threads dedicated to investing in triple-leveraged funds, yet how much one allocates to ex-US is somehow a point of heated controversy.

[burritoLover]

It's curious that there are threads dedicated to investing in triple-leveraged funds, yet how much one allocates to ex-US is somehow a point of heated controversy.

Haha - so true.

[dwickenh]

The articles are not good, particularly the one in favor of investing domestically. The issues discussed in the pro-home-bias article are ones that can be entirely priced in among all international investors. With a P/E ratio of 22.35 in the U.S. compared to 16.45 in developed ex-US markets, there is some indication this is already the case.

However, there are two entirely rational reasons for home bias that were not mentioned in the article even though they commonly come up in the academic literature: withholding risk and uncompensated currency risk.

The academic literature suggests dividend withholding taxes are a real drain on foreign equity investments. Generally, foreign countries withhold more than 15% of the dividends, the U.S. allows a foreign tax credit claim of 15%, and the investor then has to make a claim in the foreign county for a refund of the remainder above 15%. Most individual U.S. investors never ask for a refund of the excess withholding because it is prohibitively costly, and many of us don't even receive the benefit of the foreign tax credit since we hold the stocks in tax-advantaged accounts like the 401(k). If foreign firms have payout ratios in the range of 40% and withhold 25% as taxes, you have a permanent reduction to earnings of 10%. The price may not reflect the lower earnings to you, though, because other investors do not have this problem, particularly the investors in that foreign country. This is an example where assumptions underlying the market portfolio do not match up to reality in a tangible way, particularly the lack of tax friction and the non-homogeneity of investors.

Currency risk is another factor that is more mixed in the literature but still a concern for many investors. Robot Monster already brought it up. The reality is that currency risk makes foreign investments more volatile for U.S. investors and have also been a key reason the returns of foreign stocks have been lackluster in recent years (try comparing the return of the Japanese TOPIX or German DAX over the last 10 years in yen and euros to the respective country funds at iShares). As far as I can tell as a non-academic, the CAPM-type insights underlying a market portfolio are much more complicated when applied to a multi-currency international system. Academics have built models with conflicting results when they try to correct for issues like the welfare impact of a stronger/weaker home currency, foreign operations of home companies, etc. Needless to say, when currency risk is involved, we have another case of frictions and non-homogeneity of investors.

Finance academics often refer to a "puzzle" about why investors all over the globe don't invest with higher international allocations despite finance seeming to indicate international diversification is a no brainer. With clear legal/tax frictions and academics puzzling over the best way to model currency, the bigger puzzle to me appears to be why finance academics are surprised.

Your points are well taken, but it was an article, not a white paper. He(author) was not trying to discuss every reason to invest or not invest
in international markets. The points given were more about how an average investor might look at the differences.

Dan

[Valuethinker]

It's curious that there are threads dedicated to investing in triple-leveraged funds, yet how much one allocates to ex-US is somehow a point of heated controversy.

Haha - so true.

Partly different people in the different threads.

Recency effect & representativeness effect are huge in this.

The real arguments are around tax drag & foreign exchange risk (against) v diversification (for).

Instead we wind up discussing Chinese and Italian demographics.

[Ramjet]

I've always thought, similar to the timing as to when to add bonds to a portfolio, it's most important to be internationally diversified the closer you are to retirement. If you want to bet on the U.S. before then, go ahead

[whereskyle]

Are you diversifying to reduce volatility, or diversifying to increase performance?
Can you have both?
Can anyone truly define risk as compensated Vs. whateveryouwanttocallit?

I'm diversifying to diversify. It's an end unto itself. Let me illustrate what I mean with a little story.

A farmer named Santiago and his son, Pedro, lived in a tiny village far up in the mountain ranges of Peru. Farming there was difficult, as you can well imagine; the terrain being so rocky meant it was difficult to find suitable spots to farm. After some years of trial and error, Santiago felt he found the best place to plant his crops, a field that would give him the best bounty among the rest. Having finally found the ideal field, he told his son, "This year we shall plant all our crops there."
"But, father, my friend Alejandro says his father always plants his crops across twenty fields!"
"That's silly!" said Santiago, with a dismissive wave of the hand. "You want to plant in the best field! Best field means best results!"
"Oh, father!," said Pedro. "No! Alejandro's father says crop yields can vary widely from field to field, because of erratic microclimates. He says it's best to spread one's bets, to have your eggs in more than one basket, in order to reduce the risk of starvation!"
"I prefer to place all my eggs in the best basket, thank you very much."
A few months later, Santiago found himself on his hands and knees, digging his fingers into the barren soil of his favorite field, crying to the gods, why, oh, why.
"Because microclimates, father," said Pedro quietly. He clutched at his own thin body, feeling his stomach crying out beneath his flesh.

Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund.

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

If ex-US had recently outperformed US with a .8 correlation, no one would be arguing that the correlation is evidence that one does not need US stocks.

As always, investors like better performance. The "logic" wielded to justify that interest in performance is often not very rigorous.

[whereskyle]

I've always thought, similar to the timing as to when to add bonds to a portfolio, it's most important to be internationally diversified the closer you are to retirement. If you want to bet on the U.S. before then, go ahead

I am sympathetic to this view. I think everyone should adopt global market cap in retirement for the greater odds of reducing Sequence of Returns Risk. I used to argue one should just hold bonds in retirement, but I still don't hold bonds and I'm unsure if I ever will.

[burritoLover]

Are you diversifying to reduce volatility, or diversifying to increase performance?
Can you have both?
Can anyone truly define risk as compensated Vs. whateveryouwanttocallit?

I'm diversifying to diversify. It's an end unto itself. Let me illustrate what I mean with a little story.

A farmer named Santiago and his son, Pedro, lived in a tiny village far up in the mountain ranges of Peru. Farming there was difficult, as you can well imagine; the terrain being so rocky meant it was difficult to find suitable spots to farm. After some years of trial and error, Santiago felt he found the best place to plant his crops, a field that would give him the best bounty among the rest. Having finally found the ideal field, he told his son, "This year we shall plant all our crops there."
"But, father, my friend Alejandro says his father always plants his crops across twenty fields!"
"That's silly!" said Santiago, with a dismissive wave of the hand. "You want to plant in the best field! Best field means best results!"
"Oh, father!," said Pedro. "No! Alejandro's father says crop yields can vary widely from field to field, because of erratic microclimates. He says it's best to spread one's bets, to have your eggs in more than one basket, in order to reduce the risk of starvation!"
"I prefer to place all my eggs in the best basket, thank you very much."
A few months later, Santiago found himself on his hands and knees, digging his fingers into the barren soil of his favorite field, crying to the gods, why, oh, why.
"Because microclimates, father," said Pedro quietly. He clutched at his own thin body, feeling his stomach crying out beneath his flesh.

Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund.

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

You can see these patterns in portfolio visualizer going back as far as the ex-us data it has will allow (1986) - so 34 years. $10k invested per year starting in 1986 would have netted you $3.9m if all US, $1.4m if all ex-US. Of course, no guarantee of future performance but is over 3 decades your definition of "very recent past"?

[balbrec2]

US investors able to invest in US companies get intl exposure via the companies they invest in.

At least in 2016, US revenues are largely domestically driven, with 63% exposure vs:

Revenue from US
Europe -- 20%
Japan -- 14%
EM -- 8%

Source:
https://seekingalpha.com/article/404743 ... -come-from

This means 37% exposure to non-US markets, just by investing in US companies? Sounds like reasonable exposure to me.

Am I reading this wrong?

Perfectly reasonable perspective! My own personal perspective is that 63% is still a lot of eggs in a single country-basket.

Should we be concerned where revenue comes from, or where it is going?
A lot of revenues flows to companies overseas that I want a part of.

[Robot Monster]

US investors able to invest in US companies get intl exposure via the companies they invest in.

At least in 2016, US revenues are largely domestically driven, with 63% exposure vs:

Revenue from US
Europe -- 20%
Japan -- 14%
EM -- 8%

Source:
https://seekingalpha.com/article/404743 ... -come-from

This means 37% exposure to non-US markets, just by investing in US companies? Sounds like reasonable exposure to me.

Am I reading this wrong?

Perfectly reasonable perspective! My own personal perspective is that 63% is still a lot of eggs in a single country-basket.

Should we be concerned where revenue comes from, or where it is going?
A lot of revenues flows to companies overseas that I want a part of.

Indeed. And here's a comparison between two companies, one domestic, one international, and where their revenue flows from.

Revenue by region

Sanofi
39.7% US
27.55% Europe
32.75 Asia/Latin America/Eurasia/Africa/Middle East/Rest of world

Apple
43.8% US
24% Europe
32% China/Japan/Rest of Asia Pacific

***

Sanofi source
Apple revenue based on total revenue for q1 2019
Source

[Seasonal]

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

If ex-US had recently outperformed US with a .8 correlation, no one would be arguing that the correlation is evidence that one does not need US stocks.

As always, investors like better performance. The "logic" wielded to justify that interest in performance is often not very rigorous.

There is logic and evidence to support a wide variety of inconsistent investment claims. Long-term followers of this board, its M* predecessor and many other such forums will notice that there is always a plethora of posts in support of whatever has done well recently.

It should be obvious that adding international to US increases diversification. This is true no matter how much of a presence US companies have overseas. Whether that additional diversification ends up being beneficial will only be known in hindsight.

[whereskyle]

Are you diversifying to reduce volatility, or diversifying to increase performance?
Can you have both?
Can anyone truly define risk as compensated Vs. whateveryouwanttocallit?

I'm diversifying to diversify. It's an end unto itself. Let me illustrate what I mean with a little story.

A farmer named Santiago and his son, Pedro, lived in a tiny village far up in the mountain ranges of Peru. Farming there was difficult, as you can well imagine; the terrain being so rocky meant it was difficult to find suitable spots to farm. After some years of trial and error, Santiago felt he found the best place to plant his crops, a field that would give him the best bounty among the rest. Having finally found the ideal field, he told his son, "This year we shall plant all our crops there."
"But, father, my friend Alejandro says his father always plants his crops across twenty fields!"
"That's silly!" said Santiago, with a dismissive wave of the hand. "You want to plant in the best field! Best field means best results!"
"Oh, father!," said Pedro. "No! Alejandro's father says crop yields can vary widely from field to field, because of erratic microclimates. He says it's best to spread one's bets, to have your eggs in more than one basket, in order to reduce the risk of starvation!"
"I prefer to place all my eggs in the best basket, thank you very much."
A few months later, Santiago found himself on his hands and knees, digging his fingers into the barren soil of his favorite field, crying to the gods, why, oh, why.
"Because microclimates, father," said Pedro quietly. He clutched at his own thin body, feeling his stomach crying out beneath his flesh.

Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund.

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

You can see these patterns in portfolio visualizer going back as far as the ex-us data it has will allow (1986) - so 34 years. $10k invested per year starting in 1986 would have netted you $3.9m if all US, $1.4m if all ex-US. Of course, no guarantee of future performance but is over 3 decades your definition of "very recent past"?

Sure. In 2009, the difference in annual return was about 1.5% per year.

Since 2009, the spread has widened to more than 3.5% difference per year.

If what was not clear 11 years ago has become clear 11 years later, then what we should be discussing is how impactful the most recent 11 years have been on our perceptions.

[Robot Monster]

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

If ex-US had recently outperformed US with a .8 correlation, no one would be arguing that the correlation is evidence that one does not need US stocks.

As always, investors like better performance. The "logic" wielded to justify that interest in performance is often not very rigorous.

There is logic and evidence to support a wide variety of inconsistent investment claims. Long-term followers of this board, its M* predecessor and many other such forums will notice that there is always a plethora of posts in support of whatever has done well recently.

It should be obvious that adding international to US increases diversification. This is true no matter how much of a presence US companies have overseas. Whether that additional diversification ends up being beneficial will only be known in hindsight.

Nicely stated.

[burritoLover]

I'm diversifying to diversify. It's an end unto itself. Let me illustrate what I mean with a little story.

A farmer named Santiago and his son, Pedro, lived in a tiny village far up in the mountain ranges of Peru. Farming there was difficult, as you can well imagine; the terrain being so rocky meant it was difficult to find suitable spots to farm. After some years of trial and error, Santiago felt he found the best place to plant his crops, a field that would give him the best bounty among the rest. Having finally found the ideal field, he told his son, "This year we shall plant all our crops there."
"But, father, my friend Alejandro says his father always plants his crops across twenty fields!"
"That's silly!" said Santiago, with a dismissive wave of the hand. "You want to plant in the best field! Best field means best results!"
"Oh, father!," said Pedro. "No! Alejandro's father says crop yields can vary widely from field to field, because of erratic microclimates. He says it's best to spread one's bets, to have your eggs in more than one basket, in order to reduce the risk of starvation!"
"I prefer to place all my eggs in the best basket, thank you very much."
A few months later, Santiago found himself on his hands and knees, digging his fingers into the barren soil of his favorite field, crying to the gods, why, oh, why.
"Because microclimates, father," said Pedro quietly. He clutched at his own thin body, feeling his stomach crying out beneath his flesh.

Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund.

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

You can see these patterns in portfolio visualizer going back as far as the ex-us data it has will allow (1986) - so 34 years. $10k invested per year starting in 1986 would have netted you $3.9m if all US, $1.4m if all ex-US. Of course, no guarantee of future performance but is over 3 decades your definition of "very recent past"?

Sure. In 2009, the difference in annual return was about 1.5% per year.

Since 2009, the spread has widened to more than 3.5% difference per year.

If what was not clear 11 years ago has become clear 11 years later, then what we should be discussing is how impactful the most recent 11 years have been on our perceptions.

Yeah, cause 1.5% per year over 20+ years is trivial.

[whereskyle]

Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund.

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

You can see these patterns in portfolio visualizer going back as far as the ex-us data it has will allow (1986) - so 34 years. $10k invested per year starting in 1986 would have netted you $3.9m if all US, $1.4m if all ex-US. Of course, no guarantee of future performance but is over 3 decades your definition of "very recent past"?

Sure. In 2009, the difference in annual return was about 1.5% per year.

Since 2009, the spread has widened to more than 3.5% difference per year.

If what was not clear 11 years ago has become clear 11 years later, then what we should be discussing is how impactful the most recent 11 years have been on our perceptions.

Yeah, cause 1.5% per year over 20+ years is trivial.

I didn't say that. I said that if you weren't (or wouldn't have been) sure then but you are sure now, then what made you sure was the very recent past.

[burritoLover]

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

You can see these patterns in portfolio visualizer going back as far as the ex-us data it has will allow (1986) - so 34 years. $10k invested per year starting in 1986 would have netted you $3.9m if all US, $1.4m if all ex-US. Of course, no guarantee of future performance but is over 3 decades your definition of "very recent past"?

Sure. In 2009, the difference in annual return was about 1.5% per year.

Since 2009, the spread has widened to more than 3.5% difference per year.

If what was not clear 11 years ago has become clear 11 years later, then what we should be discussing is how impactful the most recent 11 years have been on our perceptions.

Yeah, cause 1.5% per year over 20+ years is trivial.

I didn't say that. I said that if you weren't (or wouldn't have been) sure then but you are sure now, then what made you sure was the very recent past.

Sure about what in 2009? That US trounced ex-US the 20 past years up to that point and with less volatility?

[whereskyle]

You can see these patterns in portfolio visualizer going back as far as the ex-us data it has will allow (1986) - so 34 years. $10k invested per year starting in 1986 would have netted you $3.9m if all US, $1.4m if all ex-US. Of course, no guarantee of future performance but is over 3 decades your definition of "very recent past"?

Sure. In 2009, the difference in annual return was about 1.5% per year.

Since 2009, the spread has widened to more than 3.5% difference per year.

If what was not clear 11 years ago has become clear 11 years later, then what we should be discussing is how impactful the most recent 11 years have been on our perceptions.

Yeah, cause 1.5% per year over 20+ years is trivial.

I didn't say that. I said that if you weren't (or wouldn't have been) sure then but you are sure now, then what made you sure was the very recent past.

Sure about what in 2009? That US trounced ex-US the 20 past years up to that point and with less volatility?

Sure whether you wanted to stick to 100% US or hold some ex-US.

As of 2009, ex-US had trounced US for a decade. I'm uncertain what I would have felt holding only US when, at the time, the most recent 10 years would have told me that I would have done better if I had been holding some ex-US.

[burritoLover]

Sure. In 2009, the difference in annual return was about 1.5% per year.

Since 2009, the spread has widened to more than 3.5% difference per year.

If what was not clear 11 years ago has become clear 11 years later, then what we should be discussing is how impactful the most recent 11 years have been on our perceptions.

Yeah, cause 1.5% per year over 20+ years is trivial.

I didn't say that. I said that if you weren't (or wouldn't have been) sure then but you are sure now, then what made you sure was the very recent past.

Sure about what in 2009? That US trounced ex-US the 20 past years up to that point and with less volatility?

Sure whether you wanted to stick to 100% US or hold some ex-US.

As of 2009, ex-US had trounced US for a decade. I'm uncertain what I would have felt holding only US when, at the time, the most recent 10 years would have told me that I would have done better if I had been holding some ex-US.

That's why you don't look at only the last 10 years - wasn't that your point to begin with?

[Robot Monster]

You can see these patterns in portfolio visualizer going back as far as the ex-us data it has will allow (1986) - so 34 years. $10k invested per year starting in 1986 would have netted you $3.9m if all US, $1.4m if all ex-US. Of course, no guarantee of future performance but is over 3 decades your definition of "very recent past"?

Sure. In 2009, the difference in annual return was about 1.5% per year.

Since 2009, the spread has widened to more than 3.5% difference per year.

If what was not clear 11 years ago has become clear 11 years later, then what we should be discussing is how impactful the most recent 11 years have been on our perceptions.

Yeah, cause 1.5% per year over 20+ years is trivial.

I didn't say that. I said that if you weren't (or wouldn't have been) sure then but you are sure now, then what made you sure was the very recent past.

Sure about what in 2009? That US trounced ex-US the 20 past years up to that point and with less volatility?

For reference, as far as who trounced whom over what periods,



Also, historical CAPE,

[burritoLover]

Sure. In 2009, the difference in annual return was about 1.5% per year.

Since 2009, the spread has widened to more than 3.5% difference per year.

If what was not clear 11 years ago has become clear 11 years later, then what we should be discussing is how impactful the most recent 11 years have been on our perceptions.

Yeah, cause 1.5% per year over 20+ years is trivial.

I didn't say that. I said that if you weren't (or wouldn't have been) sure then but you are sure now, then what made you sure was the very recent past.

Sure about what in 2009? That US trounced ex-US the 20 past years up to that point and with less volatility?

For reference, as far as who trounced whom over what periods,



Also, historical CAPE,

Yep, the US has trounced ex-US for the last 30 years. Excluding the massive Japanese bubble, it was probably a wash before that in the 70's/80's - a very different time globally from today.

[whereskyle]

Yeah, cause 1.5% per year over 20+ years is trivial.

I didn't say that. I said that if you weren't (or wouldn't have been) sure then but you are sure now, then what made you sure was the very recent past.

Sure about what in 2009? That US trounced ex-US the 20 past years up to that point and with less volatility?

Sure whether you wanted to stick to 100% US or hold some ex-US.

As of 2009, ex-US had trounced US for a decade. I'm uncertain what I would have felt holding only US when, at the time, the most recent 10 years would have told me that I would have done better if I had been holding some ex-US.

That's why you don't look at only the last 10 years - wasn't that your point to begin with?

You obviously have a lot more confidence about sticking with a US-only portfolio than I do. I don't know how long you've been investing but I have never had to deal with a seesaw portfolio and I'm unsure how I would feel or what I would do if I were missing out entirely on a part of the global equity market that was clearly outperforming my portfolio for any period of time, let alone a period of 10 years. Now, I can't miss out on anything because I own everything (although I still overweight the US).

You're trying to justify holding less. I'm trying to justify holding more. Because your position requires justifying not holding certain stocks, you logically must believe that the stocks you are not holding will underperform over your investment horizon, and your apparent reason for believing so is the fact that the US has outperformed over the past 34 years. I am more comfortable not having to worry about whether that will happen over the next 30 years.

The only reason I commented on your "when this happens, that happens" comment is because you cast it as a sufficient condition, when in reality you were just describing what happened in the past, not a rule of logic that has predictive force. Since I made that patently correct point about your incorrect use of logic, we have devolved into a typical US v. ex-US argument. The US-only argument obviously has the numbers on its side. I have tried to suggest that there are behavioral risks to such an approach because I don't know how I would have felt in 2009. You have dismissed such concerns. Fair enough.

[asif408]

Yep, the US has trounced ex-US for the last 30 years. Excluding the massive Japanese bubble, it was probably a wash before that in the 70's/80's - a very different time globally from today.

According to Peter Bernstein in Against the Gods, from 1970-1993 EAFE stocks returned 14.3% vs the S&P's 11.7%. Earlier you implied that 1.5% was not a trivial difference. I would assume you would acknowledge 2.5% over 24 years is not "a wash".

[burritoLover]

You obviously have a lot more confidence about sticking with a US-only portfolio than I do. I don't know how long you've been investing but I have never had to deal with a seesaw portfolio and I'm unsure how I would feel or what I would do if I were missing out entirely on a part of the global equity market that was clearly outperforming my portfolio for any period of time, let alone a period of 10 years. Now, I can't miss out on anything because I own everything (although I still overweight the US).

I don't hold a US-only portfolio, I'm about 30% international. And I've advocated something around market weight before and more than the 0-20% that is typically recommended here.

You're trying to justify holding less. I'm trying to justify holding more. Because your position requires justifying not holding certain stocks, you logically must believe that the stocks you are not holding will underperform over your investment horizon, and your apparent reason for believing so is the fact that the US has outperformed over the past 34 years. I am more comfortable not having to worry about whether that will happen over the next 30 years.

I'm not advocating or justifying anything - that's you reading into something that wasn't there (like assuming that I was all-in on US). All from my response to someone's farming analogy.

The only reason I commented on your "when this happens, that happens" comment is because you cast it as a sufficient condition, when in reality you were just describing what happened in the past, not a rule of logic that has predictive force. Since I made that patently correct point about your incorrect use of logic, we have devolved into a typical US v. ex-US argument. The US-only argument obviously has the numbers on its side. I have tried to suggest that there are behavioral risks to such an approach because I don't know how I would have felt in 2009. You have dismissed such concerns. Fair enough.

Where did I claim anything I said had predictive force? Where did I make a claim that US-only was better? You are just making up my side of the conversation at this point.

[burritoLover]

Yep, the US has trounced ex-US for the last 30 years. Excluding the massive Japanese bubble, it was probably a wash before that in the 70's/80's - a very different time globally from today.

According to Peter Bernstein in Against the Gods, from 1970-1993 EAFE stocks returned 14.3% vs the S&P's 11.7%. Earlier you implied that 1.5% was not a trivial difference. I would assume you would acknowledge 2.5% over 24 years is not "a wash".

Excluding the Japanese bubble - please read what I actually said.

[Robot Monster]

For reference, as far as who trounced whom over what periods,



Also, historical CAPE,

Yep, the US has trounced ex-US for the last 30 years.

Mostly, yes, the US has trounced ex-US for the past 30 yrs, with the notable exception being 2003-2007.

In 2003, the US had a higher CAPE than international. Then, US underperformed.

In 2007, international had a higher CAPE. Then, international underperformed.

Today, the US has a much higher CAPE than international.

[asif408]

Yep, the US has trounced ex-US for the last 30 years. Excluding the massive Japanese bubble, it was probably a wash before that in the 70's/80's - a very different time globally from today.

According to Peter Bernstein in Against the Gods, from 1970-1993 EAFE stocks returned 14.3% vs the S&P's 11.7%. Earlier you implied that 1.5% was not a trivial difference. I would assume you would acknowledge 2.5% over 24 years is not "a wash".

Excluding the Japanese bubble - please read what I actually said.

Even excluding Japan nearly every country with a functioning stock market outperformed the US stock market in the 1970s and 1980s. Just check out Brinson and Ibbotson's Global Investing book published in 1993.

You should do a little more reading of history or cite some actual sources, it would help your case instead of saying something probably was a wash.

[burritoLover]

For reference, as far as who trounced whom over what periods,



Also, historical CAPE,

Yep, the US has trounced ex-US for the last 30 years.

Mostly, yes, the US has trounced ex-US for the past 30 yrs, with the notable exception being 2003-2007.

In 2003, the US had a higher CAPE than international. Then, US underperformed.

In 2007, international had a higher CAPE. Then, international underperformed.

Today, the US has a much higher CAPE than international.

Yeah, you probably shouldn't lump sum a $1 million dollar inheritance right now into all-US if you are earmarking that for your entire retirement. If instead, you are periodically investing monthly for your retirement over the next 30 years, then current CAPE is irrelevant. Unless you are suggesting try to market time.

[whereskyle]

You obviously have a lot more confidence about sticking with a US-only portfolio than I do. I don't know how long you've been investing but I have never had to deal with a seesaw portfolio and I'm unsure how I would feel or what I would do if I were missing out entirely on a part of the global equity market that was clearly outperforming my portfolio for any period of time, let alone a period of 10 years. Now, I can't miss out on anything because I own everything (although I still overweight the US).

I don't hold a US-only portfolio, I'm about 30% international. And I've advocated something around market weight before and more than the 0-20% that is typically recommended here.

You're trying to justify holding less. I'm trying to justify holding more. Because your position requires justifying not holding certain stocks, you logically must believe that the stocks you are not holding will underperform over your investment horizon, and your apparent reason for believing so is the fact that the US has outperformed over the past 34 years. I am more comfortable not having to worry about whether that will happen over the next 30 years.

I'm not advocating or justifying anything - that's you reading into something that wasn't there (like assuming that I was all-in on US). All from my response to someone's farming analogy.

The only reason I commented on your "when this happens, that happens" comment is because you cast it as a sufficient condition, when in reality you were just describing what happened in the past, not a rule of logic that has predictive force. Since I made that patently correct point about your incorrect use of logic, we have devolved into a typical US v. ex-US argument. The US-only argument obviously has the numbers on its side. I have tried to suggest that there are behavioral risks to such an approach because I don't know how I would have felt in 2009. You have dismissed such concerns. Fair enough.

Where did I claim anything I said had predictive force? Where did I make a claim that US-only was better? You are just making up my side of the conversation at this point.

"Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund."

This is where our conversation began. You cast past performance as a rule of conditional logic: when this happens, that happens. That is not what past performance tells us, unfortunately for us.

Jack cautioned us about using backtesting to explain pretty much anything apart from what happened. That was the only thing I wanted to point out.

[burritoLover]

Yep, the US has trounced ex-US for the last 30 years. Excluding the massive Japanese bubble, it was probably a wash before that in the 70's/80's - a very different time globally from today.

According to Peter Bernstein in Against the Gods, from 1970-1993 EAFE stocks returned 14.3% vs the S&P's 11.7%. Earlier you implied that 1.5% was not a trivial difference. I would assume you would acknowledge 2.5% over 24 years is not "a wash".

Excluding the Japanese bubble - please read what I actually said.

Even excluding Japan nearly every country with a functioning stock market outperformed the US stock market in the 1970s and 1980s. Just check out Brinson and Ibbotson's Global Investing book published in 1993.

You should do a little more reading of history or cite some actual sources, it would help your case instead of saying something probably was a wash.

I'd be glad to look over specific year-to-year returns (ex-Japan) when you cite them from a reliable source that doesn't involve checking out a book from the library.

[asif408]

I'd be glad to look over specific year-to-year returns (ex-Japan) when you cite them from a reliable source that doesn't involve checking out a book from the library.

This may come as a shock, but sometimes you actually have to put forward (GASP!) effort to find historical information besides clicking on a link to a website. Even checking out a book from the library. The horror!

[burritoLover]

"Except Santiago's field is larger than all the other 20 fields combined and when all fields (including Santiago's) are especially unproductive, the other 20 (as a whole) tend to do worse than Santiago's field. And even when Santiago's field under-produces the other 20, the difference is not nearly as great as when Santiago's field out-produces the other 20. So Santiago really just needs an emergency fund."

This is where our conversation began. You cast past performance as a rule of conditional logic: when this happens, that happens. That is not what past performance tells us, unfortunately for us.

Jack cautioned us about using backtesting to explain pretty much anything apart from what happened. That was the only thing I wanted to point out.

That's interesting since the analogy that I was responding to, Santiago was ruined (and likely to starve) when he went all-in on his "US-only" field. Didn't hear the "conditional logic" strawman from you about his analogy - only my response. Is that because his narrative more closely fit with your own? Had I not responded to that, would have chimed in with the same chastising that you applied to me? Or would you have selectively ignored it?

[marcwd]

All of these observations are improperly cast as conditionals. In reality, you're just describing what has happened in the very recent past.

If ex-US had recently outperformed US with a .8 correlation, no one would be arguing that the correlation is evidence that one does not need US stocks.

As always, investors like better performance. The "logic" wielded to justify that interest in performance is often not very rigorous.

There is logic and evidence to support a wide variety of inconsistent investment claims. Long-term followers of this board, its M* predecessor and many other such forums will notice that there is always a plethora of posts in support of whatever has done well recently.

It should be obvious that adding international to US increases diversification. This is true no matter how much of a presence US companies have overseas. Whether that additional diversification ends up being beneficial will only be known in hindsight.

The correlation of US to Ex-US equities has increased over the years and, further, it tends to spike during market downturns. Thus, I’ve come to believe that the value of adding international for the purpose of increasing diversification has diminished.

[burritoLover]

I'd be glad to look over specific year-to-year returns (ex-Japan) when you cite them from a reliable source that doesn't involve checking out a book from the library.

This may come as a shock, but sometimes you actually have to put forward (GASP!) effort to find historical information besides clicking on a link to a website. Even checking out a book from the library. The horror!

I didn't put forth the information - you did. If you are going put something forth as definitive fact, it is not my responsibility to do all the leg-work to confirm it.

[asif408]

I didn't put forth the information - you did. If you are going put something forth as definitive fact, it is not my responsibility to do all the leg-work to confirm it.

Why not give it a try?

[burritoLover]

I didn't put forth the information - you did. If you are going put something forth as definitive fact, it is not my responsibility to do all the leg-work to confirm it.

Why not give it a try?

I don't have a library card.