Reasons to invest internationally, or not.

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Ciel
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Re: Reasons to invest internationally, or not.

Post by Ciel »

petulant wrote: Wed Sep 16, 2020 5:59 am
LTCM wrote: Tue Sep 15, 2020 9:50 pm
petulant wrote: Mon Sep 14, 2020 4:23 pm 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%.
I found this argument persuasive. I'm just starting out and had planned to go 20/40/40 Bond/US-stock/International-stock. I have plenty of space in tax free & tax deferred accounts so am I right in thinking this additional tax withholding drag applies to me even more? If that's the case and the "standard" expense ratio on an international stock mutual fund is 0.1% what is the "effective" expense ratio if I'm not able to claim back those foreign taxes? 0.15%? 0.11%? 0.101%? What order of magnitude am I dealing with here?
The iShares MSCI EAFE ETF shows a dividend yield of 2.15% and a P/E of 16.44. The earnings yield from that P/E is 6.08%. Assuming the dividend payout ratio includes average withholding of 15% (some countries withhold more, a couple have 0% treaties), the 2.15% may reflect an actual pre-withholding dividend of 2.53%. The dividend payout ratio may be around 40% in that case. If the market-cap-weighted average withholding is just 15%, then earnings are reduced by .15*.40=.06, and drag would be .15*2.53=.38%. So if you start with an expense ratio of 10 bps, the real expense ratio could be 48 bps. Do if investors from those countries don't have these problems and the stocks are prices fairly, we're overpaying 6% and getting a lower return if the EAFE is the benchmark.

The problem to me is that this is an average and does not reflect specific countries. I also spitballed the average. Some countries, potentially many, are withholding higher percentages, so we're supposed to file for refunds to get those back. One paper I saw said that Germany withholds an effective 23%. If enough countries are doing that, and there is some indication they are, then 38 bps drag estimate is a bit low.

To be clear, the lower return because of withholding taxes doesn't necessarily militate in favor of no international allocation. There would still be diversification benefits and a positive expected return. It would probably indicate a reduced or haircut allocation.
So, how much do people believe this haircut allocation to be, especially if one invests mostly in tax-advantaged? It seems that withholding tax drag is not an insignificant amount. Is it simply the price one should pay for global diversification at cap weight?
petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

Ciel wrote: Wed Sep 16, 2020 12:27 pm
petulant wrote: Wed Sep 16, 2020 5:59 am
LTCM wrote: Tue Sep 15, 2020 9:50 pm
petulant wrote: Mon Sep 14, 2020 4:23 pm 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%.
I found this argument persuasive. I'm just starting out and had planned to go 20/40/40 Bond/US-stock/International-stock. I have plenty of space in tax free & tax deferred accounts so am I right in thinking this additional tax withholding drag applies to me even more? If that's the case and the "standard" expense ratio on an international stock mutual fund is 0.1% what is the "effective" expense ratio if I'm not able to claim back those foreign taxes? 0.15%? 0.11%? 0.101%? What order of magnitude am I dealing with here?
The iShares MSCI EAFE ETF shows a dividend yield of 2.15% and a P/E of 16.44. The earnings yield from that P/E is 6.08%. Assuming the dividend payout ratio includes average withholding of 15% (some countries withhold more, a couple have 0% treaties), the 2.15% may reflect an actual pre-withholding dividend of 2.53%. The dividend payout ratio may be around 40% in that case. If the market-cap-weighted average withholding is just 15%, then earnings are reduced by .15*.40=.06, and drag would be .15*2.53=.38%. So if you start with an expense ratio of 10 bps, the real expense ratio could be 48 bps. Do if investors from those countries don't have these problems and the stocks are prices fairly, we're overpaying 6% and getting a lower return if the EAFE is the benchmark.

The problem to me is that this is an average and does not reflect specific countries. I also spitballed the average. Some countries, potentially many, are withholding higher percentages, so we're supposed to file for refunds to get those back. One paper I saw said that Germany withholds an effective 23%. If enough countries are doing that, and there is some indication they are, then 38 bps drag estimate is a bit low.

To be clear, the lower return because of withholding taxes doesn't necessarily militate in favor of no international allocation. There would still be diversification benefits and a positive expected return. It would probably indicate a reduced or haircut allocation.
So, how much do people believe this haircut allocation to be, especially if one invests mostly in tax-advantaged? It seems that withholding tax drag is not an insignificant amount. Is it simply the price one should pay for global diversification at cap weight?
You shouldn't rely on my opinion for the answer to that question. Personally we are at 20% international and 80% domestic, and I like the idea of a 50% haircut. But that's arbitrary and not an opinion based on quantitative evidence.
finite_difference
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Re: Reasons to invest internationally, or not.

Post by finite_difference »

:!:
k b wrote: Sat Sep 12, 2020 12:55 pm
Robot Monster wrote: Sat Sep 12, 2020 12:39 pm
k b wrote: Sat Sep 12, 2020 12:23 pm
Robot Monster wrote: Sat Sep 12, 2020 10:48 am
k b wrote: Sat Sep 12, 2020 10:35 am 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.
IMHO, the issue of 'single-country' basket is relevant to every country in the world - except for the one that constitutes approx 25% of the world's GDP.
So you’re planning to move your single basket to China in 2030-2040? What will you do if the US drops to 20 or 15% of the world GDP?
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Stef
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Re: Reasons to invest internationally, or not.

Post by Stef »

k b wrote: Sat Sep 12, 2020 12:55 pmIMHO, the issue of 'single-country' basket is relevant to every country in the world - except for the one that constitutes approx 25% of the world's GDP.
GDP / stock market

USA: 25% / 58%
EU: 21% / 14%
China: 15% / 4.8%

So how is GDP relevant?
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LTCM
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Re: Reasons to invest internationally, or not.

Post by LTCM »

petulant wrote: Wed Sep 16, 2020 5:59 am The problem to me is that this is an average and does not reflect specific countries. I also spitballed the average. Some countries, potentially many, are withholding higher percentages, so we're supposed to file for refunds to get those back. One paper I saw said that Germany withholds an effective 23%. If enough countries are doing that, and there is some indication they are, then 38 bps drag estimate is a bit low.
FYI

https://tax.kpmg.us/content/dam/tax/en/ ... e-kpmg.pdf
petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

LTCM wrote: Fri Sep 18, 2020 3:24 am
petulant wrote: Wed Sep 16, 2020 5:59 am The problem to me is that this is an average and does not reflect specific countries. I also spitballed the average. Some countries, potentially many, are withholding higher percentages, so we're supposed to file for refunds to get those back. One paper I saw said that Germany withholds an effective 23%. If enough countries are doing that, and there is some indication they are, then 38 bps drag estimate is a bit low.
FYI

https://tax.kpmg.us/content/dam/tax/en/ ... e-kpmg.pdf
So, for example, it's got Japan with a 15% treaty rate and a 33% general rate. It's not clear to me whether they collect 33% and require a refund to get the difference. UK has a 0% withholding across the board, and China appears to have 10%. So one would need to dig deeper on the collection/refund issue for some, then a calculation could be done by market weight in a fund like VXUS (total international). Good find.
petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

LTCM wrote: Fri Sep 18, 2020 3:24 am
petulant wrote: Wed Sep 16, 2020 5:59 am The problem to me is that this is an average and does not reflect specific countries. I also spitballed the average. Some countries, potentially many, are withholding higher percentages, so we're supposed to file for refunds to get those back. One paper I saw said that Germany withholds an effective 23%. If enough countries are doing that, and there is some indication they are, then 38 bps drag estimate is a bit low.
FYI

https://tax.kpmg.us/content/dam/tax/en/ ... e-kpmg.pdf
Okay, what I did was take the top countries in the VXUS fund until I hit 90% of total portfolio weight. I then checked the iShares MSCI for the dividend rate for each one, correcting to add back the expense ratio. I then checked this KPMG guide for a "best case" and "worst case" for each country depending whether, say, the 15% applies or they withhold the full amount (like 33% for Japan), expecting us to ask for a refund. The KPMG guide only says Switzerland explicitly requires asking for a refund, but other materials I have read indicate other countries do the same thing.

Based on that, I calculated a best case dividend weight and worst case dividend weight for each country, multiplied that by withholding, and added it all up, extrapolating upward to assume the same average applies for the remaining 10% of market cap weight countries I didn't check.

The best case dividend withholding drag in a tax-advantaged account for a U.S. investor is 23 bps, which is not bad. The worst case scenario is 49 bps, which is where all foreign countries withhold at one rate and expect us to claim a refund down to the treaty rate.

The mid-point of these two is 36 bps, which is close to the 38 bps number.

Interestingly, UK has the highest dividend payout and the best withholding rate, a hard 0% withholding whether treaty or no, apparently.
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LTCM
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Re: Reasons to invest internationally, or not.

Post by LTCM »

I'm not clear on the treaty issue but my basic understanding from coming to this blind and reading it for the first time is that the [international law] treaty gets the withholding tax down to 10% (In China's case) and then the US [domestic law] allows an investor to claim a maximum 15% tax credit which in this case would be 10% to those citizens/residents who do not hold the foreign companies/ETF in a tax advantaged account.

https://www.pwlcapital.com/wp-content/u ... linked.pdf
Investigates the issue from a Canadian perspective but since in many cases they're looking at US based ETFs it's still informative. Case C & F in particular.
petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

LTCM wrote: Fri Sep 18, 2020 9:19 pm I'm not clear on the treaty issue but my basic understanding from coming to this blind and reading it for the first time is that the [international law] treaty gets the withholding tax down to 10% (In China's case) and then the US [domestic law] allows an investor to claim a maximum 15% tax credit which in this case would be 10% to those citizens/residents who do not hold the foreign companies/ETF in a tax advantaged account.

https://www.pwlcapital.com/wp-content/u ... linked.pdf
Investigates the issue from a Canadian perspective but since in many cases they're looking at US based ETFs it's still informative. Case C & F in particular.
Yes. In the case of China that's easy. But look at the Swiss entry. It shows a 35% general withholding rate and 15% treaty withholding rate. The KPMG report says that you have to get a refund from Switzerland for the difference between 35% and 15%. So it works like this. Nestle pays $1 in dividends. Swiss government withholds $.35. U.S. taxable account investor receives $.65. Investor claims $.15 credit on tax return, now at $.80. Investor has to go get a refund from Swiss government for the other $.20.

The KPMG report only mentions Switzerland as having this problem, but the following paper indicates to me it is much more widespread.
https://papers.ssrn.com/sol3/papers.cfm ... id=3564149
k b
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Re: Reasons to invest internationally, or not.

Post by k b »

Stef wrote: Thu Sep 17, 2020 12:48 am
k b wrote: Sat Sep 12, 2020 12:55 pmIMHO, the issue of 'single-country' basket is relevant to every country in the world - except for the one that constitutes approx 25% of the world's GDP.
GDP / stock market

USA: 25% / 58%
EU: 21% / 14%
China: 15% / 4.8%

So how is GDP relevant?
If you are not happy with GDP, you could use investable funds, capital or whatever measure you are comfortable with. Point is US is not single country risk the way China or Japan or Brazil or Germany is. This is not going to change in the near future.
Robot Monster
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Re: Reasons to invest internationally, or not.

Post by Robot Monster »

k b wrote: Sat Sep 19, 2020 2:02 pm
Stef wrote: Thu Sep 17, 2020 12:48 am
k b wrote: Sat Sep 12, 2020 12:55 pmIMHO, the issue of 'single-country' basket is relevant to every country in the world - except for the one that constitutes approx 25% of the world's GDP.
GDP / stock market

USA: 25% / 58%
EU: 21% / 14%
China: 15% / 4.8%

So how is GDP relevant?
If you are not happy with GDP, you could use investable funds, capital or whatever measure you are comfortable with. Point is US is not single country risk the way China or Japan or Brazil or Germany is. This is not going to change in the near future.
Coincidentally, what you're saying appears to be what Lars Kroijer is said to have said in another thread: "Now he does say that investors in USA can get away with home country bias with 100% in VTI because US is more diversified but for a Canadian or UK investor he recommends to stick with VT."
"Happiness comes from being connected in the right ways to: other people, your work, something larger than yourself."
k b
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Re: Reasons to invest internationally, or not.

Post by k b »

Robot Monster wrote: Sat Sep 19, 2020 2:18 pm
k b wrote: Sat Sep 19, 2020 2:02 pm
Stef wrote: Thu Sep 17, 2020 12:48 am
k b wrote: Sat Sep 12, 2020 12:55 pmIMHO, the issue of 'single-country' basket is relevant to every country in the world - except for the one that constitutes approx 25% of the world's GDP.
GDP / stock market

USA: 25% / 58%
EU: 21% / 14%
China: 15% / 4.8%

So how is GDP relevant?
If you are not happy with GDP, you could use investable funds, capital or whatever measure you are comfortable with. Point is US is not single country risk the way China or Japan or Brazil or Germany is. This is not going to change in the near future.
Coincidentally, what you're saying appears to be what Lars Kroijer is said to have said in another thread: "Now he does say that investors in USA can get away with home country bias with 100% in VTI because US is more diversified but for a Canadian or UK investor he recommends to stick with VT."
Flattered!

Seriously - I really don't think US-based BH-type investors need intl exposure for a BH portfolio. The US stock / bond market is deep enough and wide enough for those needs. Any exposure one desires to the 'international economy' (as different from intl capital markets) could be achieved through a selection of US markets that have intl markets. One could argue that this happens almost naturally if you own the S&P 500. Exposure to intl (esp EM) stocks is speculation. Nothing wrong with that, but FWIW, I wouldn't recommend more 5-10% exposure to them.
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siamond
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Re: Reasons to invest internationally, or not.

Post by siamond »

petulant wrote: Mon Sep 14, 2020 4:23 pmThe 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.
I am squarely in the 'invest in the world' camp. My AA is 50/50 domestic/international (I would use worldwide market weights if not for historical reasons in my taxable account). I came to slowly understand the point you just explained though. My savings are split between taxable and tax-deferred and I ended up (mostly for rebalancing reasons) with some Int'l exposure in tax-deferred, hence no tax credit as you described. In taxable, I am locked in a never-ending loop of not getting all the tax credits I am owed, the rest being postponed and expiring after 10 years. I didn't fully quantify the reduction to earnings this thing causes me, but it is certainly VERY frustrating. This won't make me change my AA, I am staunchly in the camp of hedging my bets as much as I can, but I can see that it could make some people hesitate for a very valid reason.

Petulant, could you please elaborate on the sentence I emphasized in bold though? How would one do that when investing in a fund like Vanguard VTMGX/VEA?
AlwaysLearningMore
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Re: Reasons to invest internationally, or not.

Post by AlwaysLearningMore »

lostdog wrote: Wed Sep 16, 2020 7:45 am
hisdudeness wrote: Wed Sep 16, 2020 7:42 am
lostdog wrote: Tue Sep 15, 2020 8:53 pm I sleep well at night holding world market cap. I never have to worry about US vs International. I have both and will ride both up and down.

If I was all US, I sure as hell would worry. I can't imagine how I would have handled the lost decade for the US index.
We get it.
Your portfolio is superior.
Everyone should invest like you.
You're beating off a dead horse at this point.
Thanks. :sharebeer :moneybag

Beating a dead horse? Not even close.

Here to save novice investors from people like you.

Supposedly buying the haystack is a hard concept for the human brain to grasp.
Some haystacks are better, more stable and safer to be around than others. Ask any farmer.

Image
burritoLover
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Re: Reasons to invest internationally, or not.

Post by burritoLover »

AlwaysLearningMore wrote: Sat Sep 19, 2020 3:37 pm Some haystacks are better, more stable and safer to be around than others. Ask any farmer.

Image
They probably aren't very stable when they are abnormally large.
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
AlwaysLearningMore
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Re: Reasons to invest internationally, or not.

Post by AlwaysLearningMore »

burritoLover wrote: Sat Sep 19, 2020 3:46 pm
AlwaysLearningMore wrote: Sat Sep 19, 2020 3:37 pm Some haystacks are better, more stable and safer to be around than others. Ask any farmer.

Image
They probably aren't very stable when they are abnormally large.
Something tells me you haven't lived on many farms.
burritoLover
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Re: Reasons to invest internationally, or not.

Post by burritoLover »

AlwaysLearningMore wrote: Sat Sep 19, 2020 3:53 pm
burritoLover wrote: Sat Sep 19, 2020 3:46 pm
AlwaysLearningMore wrote: Sat Sep 19, 2020 3:37 pm Some haystacks are better, more stable and safer to be around than others. Ask any farmer.

Image
They probably aren't very stable when they are abnormally large.
Something tells me you haven't lived on many farms.
How about abnormally large only on one side?
"Your money is like a bar of soap. The more you handle it, the less you’ll have." - Gene Fama
rascott
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Re: Reasons to invest internationally, or not.

Post by rascott »

petulant wrote: Sat Sep 19, 2020 7:11 am
LTCM wrote: Fri Sep 18, 2020 9:19 pm I'm not clear on the treaty issue but my basic understanding from coming to this blind and reading it for the first time is that the [international law] treaty gets the withholding tax down to 10% (In China's case) and then the US [domestic law] allows an investor to claim a maximum 15% tax credit which in this case would be 10% to those citizens/residents who do not hold the foreign companies/ETF in a tax advantaged account.

https://www.pwlcapital.com/wp-content/u ... linked.pdf
Investigates the issue from a Canadian perspective but since in many cases they're looking at US based ETFs it's still informative. Case C & F in particular.
Yes. In the case of China that's easy. But look at the Swiss entry. It shows a 35% general withholding rate and 15% treaty withholding rate. The KPMG report says that you have to get a refund from Switzerland for the difference between 35% and 15%. So it works like this. Nestle pays $1 in dividends. Swiss government withholds $.35. U.S. taxable account investor receives $.65. Investor claims $.15 credit on tax return, now at $.80. Investor has to go get a refund from Swiss government for the other $.20.

The KPMG report only mentions Switzerland as having this problem, but the following paper indicates to me it is much more widespread.
https://papers.ssrn.com/sol3/papers.cfm ... id=3564149

More reason than ever....as if I needed anymore.... to generally avoid international equity investing.
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siamond
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Re: Reasons to invest internationally, or not.

Post by siamond »

Ciel wrote: Tue Sep 15, 2020 10:45 pmEdit: According to a poster in this thread viewtopic.php?t=299607 the average amount withheld in VTIAX by foreign governments is about 7%. If the average dividend yield over the past decade is about 3.2% and that approximate 7% figure is correct, then the drag from foreign taxes only would be about 0.22%. Does that sound right?
I just checked my own numbers. I hold a quite sizable position with VTMGX/VEA (Vanguard Developed Markets).
a) E*Trade gives me dividends and corresponding foreign taxes in the 1099-DIV tax form. Foreign taxes have been indeed around 7.0% of the dividends for several years.
b) then I checked the historical returns of VTMGX over the 2000-2019 time periods (it was launched in August 1999), checking the total-return vs. the price-return. The former is a paltry 3.46% per annum (CAGR), the latter an even paltrier 0.84%. Computing the geometric difference leads me to 2.60% dividends. In the past few years, it was indeed more like 3% or so, but those things vary.
c) 7% times 2.6% = 0.18%.

So... holding such fund in tax-sheltered appears to lead to an 'extra ER' of 0.18%. Holding such fund in taxable would be less troublesome, but the foreign tax credit formula is full of pitfalls and personally I get one-third of it at most. Hence an 'extra ER' of 0.12%. Say 0.1% to 0.2% to round things up. I'd venture to guess that most people would get a better tax credit than me, though.

Again, personally, this kind of math would NOT make me change my mind about my desire to maximally diversify (with the world) and hedge my bets, but I do have to acknowledge that 0.1% to 0.2% is a rather significant number. :annoyed
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LTCM
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Re: Reasons to invest internationally, or not.

Post by LTCM »

petulant wrote: Sat Sep 19, 2020 7:11 amBut look at the Swiss entry. It shows a 35% general withholding rate and 15% treaty withholding rate. The KPMG report says that you have to get a refund from Switzerland for the difference between 35% and 15%. So it works like this. Nestle pays $1 in dividends. Swiss government withholds $.35. U.S. taxable account investor receives $.65. Investor claims $.15 credit on tax return, now at $.80. Investor has to go get a refund from Swiss government for the other $.20.

The KPMG report only mentions Switzerland as having this problem, but the following paper indicates to me it is much more widespread.
https://papers.ssrn.com/sol3/papers.cfm ... id=3564149
I didn't dive as deep as you but my understanding would be that Switzerland generally withholds 35% of dividends except to those countries it has a tax treaty with (such as the US) and in those cases it only withholds 15%. The US investor can then claim back that 15% with a tax credit in a taxable account and can't get it back at all with a tax advantaged account.

https://www.barrons.com/articles/overse ... 1443243689
Consider an investor subject to the 20% U.S. dividend-tax rate, who buys the Zurich-listed shares of, say, Switzerland’s Nestlé. The Swiss dividend withholding-tax rate is 35%, so when the investor is paid $1,000 in dividends, $350 is withheld. But Switzerland separately has a tax treaty with the U.S. that lowers the dividend tax withholding to 15%. Yet it will withhold the treaty rate only if the investor’s wealth managers or accountants have applied for it in advance of receiving their dividends.
I would hope Vanguard apply in advance so it should only be the 15%.
Ciel
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Re: Reasons to invest internationally, or not.

Post by Ciel »

siamond wrote: Sat Sep 19, 2020 9:38 pm
Ciel wrote: Tue Sep 15, 2020 10:45 pmEdit: According to a poster in this thread viewtopic.php?t=299607 the average amount withheld in VTIAX by foreign governments is about 7%. If the average dividend yield over the past decade is about 3.2% and that approximate 7% figure is correct, then the drag from foreign taxes only would be about 0.22%. Does that sound right?
I just checked my own numbers. I hold a quite sizable position with VTMGX/VEA (Vanguard Developed Markets).
a) E*Trade gives me dividends and corresponding foreign taxes in the 1099-DIV tax form. Foreign taxes have been indeed around 7.0% of the dividends for several years.
b) then I checked the historical returns of VTMGX over the 2000-2019 time periods (it was launched in August 1999), checking the total-return vs. the price-return. The former is a paltry 3.46% per annum (CAGR), the latter an even paltrier 0.84%. Computing the geometric difference leads me to 2.60% dividends. In the past few years, it was indeed more like 3% or so, but those things vary.
c) 7% times 2.6% = 0.18%.

So... holding such fund in tax-sheltered appears to lead to an 'extra ER' of 0.18%. Holding such fund in taxable would be less troublesome, but the foreign tax credit formula is full of pitfalls and personally I get one-third of it at most. Hence an 'extra ER' of 0.12%. Say 0.1% to 0.2% to round things up. I'd venture to guess that most people would get a better tax credit than me, though.

Again, personally, this kind of math would NOT make me change my mind about my desire to maximally diversify (with the world) and hedge my bets, but I do have to acknowledge that 0.1% to 0.2% is a rather significant number. :annoyed
Thanks for checking that. I think for me personally a 0.2% loss isn't enough to deviate from global market cap. But if that number really is closer to 0.4% like another poster suggested it might be, that seems uncomfortably high.
ChrisBenn
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Re: Reasons to invest internationally, or not.

Post by ChrisBenn »

Ciel wrote: Sun Sep 20, 2020 1:38 am
siamond wrote: Sat Sep 19, 2020 9:38 pm
Ciel wrote: Tue Sep 15, 2020 10:45 pmEdit: According to a poster in this thread viewtopic.php?t=299607 the average amount withheld in VTIAX by foreign governments is about 7%. If the average dividend yield over the past decade is about 3.2% and that approximate 7% figure is correct, then the drag from foreign taxes only would be about 0.22%. Does that sound right?
I just checked my own numbers. I hold a quite sizable position with VTMGX/VEA (Vanguard Developed Markets).
a) E*Trade gives me dividends and corresponding foreign taxes in the 1099-DIV tax form. Foreign taxes have been indeed around 7.0% of the dividends for several years.
b) then I checked the historical returns of VTMGX over the 2000-2019 time periods (it was launched in August 1999), checking the total-return vs. the price-return. The former is a paltry 3.46% per annum (CAGR), the latter an even paltrier 0.84%. Computing the geometric difference leads me to 2.60% dividends. In the past few years, it was indeed more like 3% or so, but those things vary.
c) 7% times 2.6% = 0.18%.

So... holding such fund in tax-sheltered appears to lead to an 'extra ER' of 0.18%. Holding such fund in taxable would be less troublesome, but the foreign tax credit formula is full of pitfalls and personally I get one-third of it at most. Hence an 'extra ER' of 0.12%. Say 0.1% to 0.2% to round things up. I'd venture to guess that most people would get a better tax credit than me, though.

Again, personally, this kind of math would NOT make me change my mind about my desire to maximally diversify (with the world) and hedge my bets, but I do have to acknowledge that 0.1% to 0.2% is a rather significant number. :annoyed
Thanks for checking that. I think for me personally a 0.2% loss isn't enough to deviate from global market cap. But if that number really is closer to 0.4% like another poster suggested it might be, that seems uncomfortably high.

Why not let the market derive a solution for what the impacts of all the differing regulatory environments, socio-political situations, etc? We can use US treasury data and see US domiciled investors hold ~70/30 us/international (73/27 as of may).

orig methodology: viewtopic.php?p=3946197#p3946197

Isn't deviating away from that (to global market cap allocations, for instance) an implicit assertion that you can price things better than the market?

If each day you might randomly (with a global market cap weight) be subject to a different regulatory environment / living in another country then global market cap makes sense. But if you expect to continue to be us domiciled why not feed that information in to your allocation determiniation?
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Re: Reasons to invest internationally, or not.

Post by petulant »

LTCM wrote: Sat Sep 19, 2020 11:01 pm
petulant wrote: Sat Sep 19, 2020 7:11 amBut look at the Swiss entry. It shows a 35% general withholding rate and 15% treaty withholding rate. The KPMG report says that you have to get a refund from Switzerland for the difference between 35% and 15%. So it works like this. Nestle pays $1 in dividends. Swiss government withholds $.35. U.S. taxable account investor receives $.65. Investor claims $.15 credit on tax return, now at $.80. Investor has to go get a refund from Swiss government for the other $.20.

The KPMG report only mentions Switzerland as having this problem, but the following paper indicates to me it is much more widespread.
https://papers.ssrn.com/sol3/papers.cfm ... id=3564149
I didn't dive as deep as you but my understanding would be that Switzerland generally withholds 35% of dividends except to those countries it has a tax treaty with (such as the US) and in those cases it only withholds 15%. The US investor can then claim back that 15% with a tax credit in a taxable account and can't get it back at all with a tax advantaged account.

https://www.barrons.com/articles/overse ... 1443243689
Consider an investor subject to the 20% U.S. dividend-tax rate, who buys the Zurich-listed shares of, say, Switzerland’s Nestlé. The Swiss dividend withholding-tax rate is 35%, so when the investor is paid $1,000 in dividends, $350 is withheld. But Switzerland separately has a tax treaty with the U.S. that lowers the dividend tax withholding to 15%. Yet it will withhold the treaty rate only if the investor’s wealth managers or accountants have applied for it in advance of receiving their dividends.
I would hope Vanguard apply in advance so it should only be the 15%.
They don't because the ultimate beneficial owner has to be linked to the paperwork. There is no evidence I have found anywhere that major asset managers for mutual funds do this.
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Re: Reasons to invest internationally, or not.

Post by vineviz »

ChrisBenn wrote: Sun Sep 20, 2020 7:34 am
Isn't deviating away from that (to global market cap allocations, for instance) an implicit assertion that you can price things better than the market?
No. At most it’s as assertion that you know your own financial situation better than a stranger does.

“The market” is merely a collection of other people each choosing a portfolio to suit their own circumstances: age, wealth, income, mix of account types, political views, education, consumption patterns, etc

A hypothetical representative agent who reflects the “average” of all those factors is incredibly unlikely to look like you.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Reasons to invest internationally, or not.

Post by petulant »

siamond wrote: Sat Sep 19, 2020 9:38 pm
Ciel wrote: Tue Sep 15, 2020 10:45 pmEdit: According to a poster in this thread viewtopic.php?t=299607 the average amount withheld in VTIAX by foreign governments is about 7%. If the average dividend yield over the past decade is about 3.2% and that approximate 7% figure is correct, then the drag from foreign taxes only would be about 0.22%. Does that sound right?
I just checked my own numbers. I hold a quite sizable position with VTMGX/VEA (Vanguard Developed Markets).
a) E*Trade gives me dividends and corresponding foreign taxes in the 1099-DIV tax form. Foreign taxes have been indeed around 7.0% of the dividends for several years.
b) then I checked the historical returns of VTMGX over the 2000-2019 time periods (it was launched in August 1999), checking the total-return vs. the price-return. The former is a paltry 3.46% per annum (CAGR), the latter an even paltrier 0.84%. Computing the geometric difference leads me to 2.60% dividends. In the past few years, it was indeed more like 3% or so, but those things vary.
c) 7% times 2.6% = 0.18%.

So... holding such fund in tax-sheltered appears to lead to an 'extra ER' of 0.18%. Holding such fund in taxable would be less troublesome, but the foreign tax credit formula is full of pitfalls and personally I get one-third of it at most. Hence an 'extra ER' of 0.12%. Say 0.1% to 0.2% to round things up. I'd venture to guess that most people would get a better tax credit than me, though.

Again, personally, this kind of math would NOT make me change my mind about my desire to maximally diversify (with the world) and hedge my bets, but I do have to acknowledge that 0.1% to 0.2% is a rather significant number. :annoyed
.18% is close to the .22% I calculated using dividend withholding rates and dividend yields for the top 90% of market cap in VXUS (total international), extrapolated to cover 100% of VXUS.

However, this does not include any withheld amounts in excess of the treaty rates, which are what would potentially double the amount or more.
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Re: Reasons to invest internationally, or not.

Post by petulant »

siamond wrote: Sat Sep 19, 2020 2:35 pm
petulant wrote: Mon Sep 14, 2020 4:23 pmThe 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.
I am squarely in the 'invest in the world' camp. My AA is 50/50 domestic/international (I would use worldwide market weights if not for historical reasons in my taxable account). I came to slowly understand the point you just explained though. My savings are split between taxable and tax-deferred and I ended up (mostly for rebalancing reasons) with some Int'l exposure in tax-deferred, hence no tax credit as you described. In taxable, I am locked in a never-ending loop of not getting all the tax credits I am owed, the rest being postponed and expiring after 10 years. I didn't fully quantify the reduction to earnings this thing causes me, but it is certainly VERY frustrating. This won't make me change my AA, I am staunchly in the camp of hedging my bets as much as I can, but I can see that it could make some people hesitate for a very valid reason.

Petulant, could you please elaborate on the sentence I emphasized in bold though? How would one do that when investing in a fund like Vanguard VTMGX/VEA?
siamond, I don't really know what the process would look like. I think one would need to retain an accountant of some kind to make sure one filed the appropriate paperwork. I suspect one's holdings in VTMGX/VEA would have to be quite large for the compliance costs to be worth it. No single country has a huge drag; it's the aggregate that creates an issue. For example, Switzerland alone contributes 5 bps of tax drag to VXUS based on my worst case spreadsheet. If VEA cuts out 20% of market cap, then .05/.8 = .0625 or 6.25 bps from Switzerland alone.
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Re: Reasons to invest internationally, or not.

Post by ChrisBenn »

vineviz wrote: Sun Sep 20, 2020 8:30 am
ChrisBenn wrote: Sun Sep 20, 2020 7:34 am
Isn't deviating away from that (to global market cap allocations, for instance) an implicit assertion that you can price things better than the market?
No. At most it’s as assertion that you know your own financial situation better than a stranger does.

“The market” is merely a collection of other people each choosing a portfolio to suit their own circumstances: age, wealth, income, mix of account types, political views, education, consumption patterns, etc

A hypothetical representative agent who reflects the “average” of all those factors is incredibly unlikely to look like you.
Sure, but I think it's more than saying one knows ones financial situation; it's also saying with respect to one's financial situation one can determine determine future expected valuations better than the set of investors collectively under a similar citizenship/investment domicile. After all that individual is making a conscious decision to deviate from the collective market of one's peers, no? So presumably it is because one knows better than them.

As long as the population of the subset of the market is still of a large enough size, isn't making that subset more representative of you better? I don't know the exact function/tradeoffs for "large enough", but I do believe the market of US domiciled investors qualifies.

All in all though I guess my question is why wouldn't a US investor prefer to hold the US investors market cap domestic/international AA as opposed to the global one? The former seems like an elegant way of letting the market price the risks associated with international investing (for a US domiciled investor)?
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Re: Reasons to invest internationally, or not.

Post by petulant »

Ciel wrote: Sun Sep 20, 2020 1:38 am
siamond wrote: Sat Sep 19, 2020 9:38 pm
Ciel wrote: Tue Sep 15, 2020 10:45 pmEdit: According to a poster in this thread viewtopic.php?t=299607 the average amount withheld in VTIAX by foreign governments is about 7%. If the average dividend yield over the past decade is about 3.2% and that approximate 7% figure is correct, then the drag from foreign taxes only would be about 0.22%. Does that sound right?
I just checked my own numbers. I hold a quite sizable position with VTMGX/VEA (Vanguard Developed Markets).
a) E*Trade gives me dividends and corresponding foreign taxes in the 1099-DIV tax form. Foreign taxes have been indeed around 7.0% of the dividends for several years.
b) then I checked the historical returns of VTMGX over the 2000-2019 time periods (it was launched in August 1999), checking the total-return vs. the price-return. The former is a paltry 3.46% per annum (CAGR), the latter an even paltrier 0.84%. Computing the geometric difference leads me to 2.60% dividends. In the past few years, it was indeed more like 3% or so, but those things vary.
c) 7% times 2.6% = 0.18%.

So... holding such fund in tax-sheltered appears to lead to an 'extra ER' of 0.18%. Holding such fund in taxable would be less troublesome, but the foreign tax credit formula is full of pitfalls and personally I get one-third of it at most. Hence an 'extra ER' of 0.12%. Say 0.1% to 0.2% to round things up. I'd venture to guess that most people would get a better tax credit than me, though.

Again, personally, this kind of math would NOT make me change my mind about my desire to maximally diversify (with the world) and hedge my bets, but I do have to acknowledge that 0.1% to 0.2% is a rather significant number. :annoyed
Thanks for checking that. I think for me personally a 0.2% loss isn't enough to deviate from global market cap. But if that number really is closer to 0.4% like another poster suggested it might be, that seems uncomfortably high.
The idea that the dividend drag itself might not change the decision has some logic. I used Portfoliovisualizer's efficient frontier tool to see what outcome different expected returns could have. The nice thing about this tool is that you can change the expected returns, but it still pulls historical volatility and correlation information. So it should be a mostly fair estimate of how a reduction in return would affect diversification given a stable set of other factors relevant for diversification. I used 10 vs 9.99, 10 vs 9.8, 10 vs 9.5, then 8 vs 7.99, 8 vs. 7.8, 8 vs. 7.5, 6 vs 5.99, 6 vs. 5.8, 6 vs. 5.5 returns for US and international. Every time, the model returned something extremely close to 75/25 as the efficient frontier. I don't take that to be an argument for a reduced allocation; what I mean is that the model didn't change its view of the optimum allocation because of the reduction in return.

(Interestingly, almost every mixed portfolio barely changes the expected return and expected volatility of a US portfolio. Using a 6% expected return for US and 5.5% expected return for international, PV shows expected volatility of 15.36% for US and 17.85% for international, with almost all mixed portfolios having an expected return 5.8-5.9% and volatility around 15.03-15.15%.)
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Re: Reasons to invest internationally, or not.

Post by Robot Monster »

Regarding the discussion of foreign tax withholding:
Foreign companies withhold some of the cash owed to U.S. investors to pay taxes on those dividends. And these tax rates can be rather punitive. Countries like Germany, Switzerland, and Australia can levy institutional tax rates on dividends of 30% or more.

Fortunately, the U.S. has tax treaties in place with many foreign governments, reducing the tax rate for U.S. investors. However, fund providers must actively pursue the difference between the withholding (1) and treaty (2) rates, as foreign governments aren't anxious to part with tax revenue...
Image

I didn't want to copy and paste too much. Here is the article itself:
Unraveling Foreign Dividends
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petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

ChrisBenn wrote: Sun Sep 20, 2020 8:57 am
vineviz wrote: Sun Sep 20, 2020 8:30 am
ChrisBenn wrote: Sun Sep 20, 2020 7:34 am
Isn't deviating away from that (to global market cap allocations, for instance) an implicit assertion that you can price things better than the market?
No. At most it’s as assertion that you know your own financial situation better than a stranger does.

“The market” is merely a collection of other people each choosing a portfolio to suit their own circumstances: age, wealth, income, mix of account types, political views, education, consumption patterns, etc

A hypothetical representative agent who reflects the “average” of all those factors is incredibly unlikely to look like you.
Sure, but I think it's more than saying one knows ones financial situation; it's also saying with respect to one's financial situation one can determine determine future expected valuations better than the set of investors collectively under a similar citizenship/investment domicile. After all that individual is making a conscious decision to deviate from the collective market of one's peers, no? So presumably it is because one knows better than them.

As long as the population of the subset of the market is still of a large enough size, isn't making that subset more representative of you better? I don't know the exact function/tradeoffs for "large enough", but I do believe the market of US domiciled investors qualifies.

All in all though I guess my question is why wouldn't a US investor prefer to hold the US investors market cap domestic/international AA as opposed to the global one? The former seems like an elegant way of letting the market price the risks associated with international investing (for a US domiciled investor)?
No. The theory underlying the market portfolio being an efficient choice requires homogenous investors and, really, frictionless investing, like no legal or tax impediments. Here's a thought experiment to get at what vineviz was saying to you.

Imagine investors in two countries that can freely invest in each others' stocks. However, imagine that in country A, they tax all income earned from stocks of country B at a very high %. Country B has no such taxation on either country A or country B stocks. In this scenario, assume that an investor A in country A and an investor B in country B are extremely smart and know everything and price the stocks the same way objectively. Investor A will still hold stocks weighted almost entirely to country A stocks and investor B will hold almost entirely country B stocks.

Why? It has nothing to do with different opinions about valuation. It's because investor A doesn't want to hold any country B stocks due to his country's unique tax, and if investor B tried to buy country A stocks to diversify, the price would end up higher than the right valuation since investor A has very inelastic demand for the country A stocks. Investor B will mostly settle for the country B stocks.

This is an example of having heterogenous investors. It can apply to legal, tax, risk preference, currency of consumption, etc.
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Re: Reasons to invest internationally, or not.

Post by ChrisBenn »

petulant wrote: Sun Sep 20, 2020 9:07 am
ChrisBenn wrote: Sun Sep 20, 2020 8:57 am
vineviz wrote: Sun Sep 20, 2020 8:30 am
ChrisBenn wrote: Sun Sep 20, 2020 7:34 am
Isn't deviating away from that (to global market cap allocations, for instance) an implicit assertion that you can price things better than the market?
No. At most it’s as assertion that you know your own financial situation better than a stranger does.

“The market” is merely a collection of other people each choosing a portfolio to suit their own circumstances: age, wealth, income, mix of account types, political views, education, consumption patterns, etc

A hypothetical representative agent who reflects the “average” of all those factors is incredibly unlikely to look like you.
Sure, but I think it's more than saying one knows ones financial situation; it's also saying with respect to one's financial situation one can determine determine future expected valuations better than the set of investors collectively under a similar citizenship/investment domicile. After all that individual is making a conscious decision to deviate from the collective market of one's peers, no? So presumably it is because one knows better than them.

As long as the population of the subset of the market is still of a large enough size, isn't making that subset more representative of you better? I don't know the exact function/tradeoffs for "large enough", but I do believe the market of US domiciled investors qualifies.

All in all though I guess my question is why wouldn't a US investor prefer to hold the US investors market cap domestic/international AA as opposed to the global one? The former seems like an elegant way of letting the market price the risks associated with international investing (for a US domiciled investor)?
No. The theory underlying the market portfolio being an efficient choice requires homogenous investors and, really, frictionless investing, like no legal or tax impediments. Here's a thought experiment to get at what vineviz was saying to you.

Imagine investors in two countries that can freely invest in each others' stocks. However, imagine that in country A, they tax all income earned from stocks of country B at a very high %. Country B has no such taxation on either country A or country B stocks. In this scenario, assume that an investor A in country A and an investor B in country B are extremely smart and know everything and price the stocks the same way objectively. Investor A will still hold stocks weighted almost entirely to country A stocks and investor B will hold almost entirely country B stocks.

Why? It has nothing to do with different opinions about valuation. It's because investor A doesn't want to hold any country B stocks due to his country's unique tax, and if investor B tried to buy country A stocks to diversify, the price would end up higher than the right valuation since investor A has very inelastic demand for the country A stocks. Investor B will mostly settle for the country B stocks.

This is an example of having heterogenous investors. It can apply to legal, tax, risk preference, currency of consumption, etc.
I'm happy to cede the argument on valuations, as me being imprecise/incorrectly using terms has I think conveyed a point I didn't intend.

Using your example, the "net total return" to investor A from a country B stock is obviously different than the average net total return for the collective set of investors from country B. I'm fine not calling that "net total return" valuation.

But to my original question wouldn't it make sense for investor A to say (for the purposes of determining their AA) "what is the A/B cap weighed allocation for all country A investors" as opposed to "what is the A/B allocation for all country A and B investors"?

The former seems to be a way to solicit a market opinion in those unique tax constraints without having to be an expert, or even aware of them?
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Re: Reasons to invest internationally, or not.

Post by petulant »

ChrisBenn wrote: Sun Sep 20, 2020 9:26 am
petulant wrote: Sun Sep 20, 2020 9:07 am
ChrisBenn wrote: Sun Sep 20, 2020 8:57 am
vineviz wrote: Sun Sep 20, 2020 8:30 am
ChrisBenn wrote: Sun Sep 20, 2020 7:34 am
Isn't deviating away from that (to global market cap allocations, for instance) an implicit assertion that you can price things better than the market?
No. At most it’s as assertion that you know your own financial situation better than a stranger does.

“The market” is merely a collection of other people each choosing a portfolio to suit their own circumstances: age, wealth, income, mix of account types, political views, education, consumption patterns, etc

A hypothetical representative agent who reflects the “average” of all those factors is incredibly unlikely to look like you.
Sure, but I think it's more than saying one knows ones financial situation; it's also saying with respect to one's financial situation one can determine determine future expected valuations better than the set of investors collectively under a similar citizenship/investment domicile. After all that individual is making a conscious decision to deviate from the collective market of one's peers, no? So presumably it is because one knows better than them.

As long as the population of the subset of the market is still of a large enough size, isn't making that subset more representative of you better? I don't know the exact function/tradeoffs for "large enough", but I do believe the market of US domiciled investors qualifies.

All in all though I guess my question is why wouldn't a US investor prefer to hold the US investors market cap domestic/international AA as opposed to the global one? The former seems like an elegant way of letting the market price the risks associated with international investing (for a US domiciled investor)?
No. The theory underlying the market portfolio being an efficient choice requires homogenous investors and, really, frictionless investing, like no legal or tax impediments. Here's a thought experiment to get at what vineviz was saying to you.

Imagine investors in two countries that can freely invest in each others' stocks. However, imagine that in country A, they tax all income earned from stocks of country B at a very high %. Country B has no such taxation on either country A or country B stocks. In this scenario, assume that an investor A in country A and an investor B in country B are extremely smart and know everything and price the stocks the same way objectively. Investor A will still hold stocks weighted almost entirely to country A stocks and investor B will hold almost entirely country B stocks.

Why? It has nothing to do with different opinions about valuation. It's because investor A doesn't want to hold any country B stocks due to his country's unique tax, and if investor B tried to buy country A stocks to diversify, the price would end up higher than the right valuation since investor A has very inelastic demand for the country A stocks. Investor B will mostly settle for the country B stocks.

This is an example of having heterogenous investors. It can apply to legal, tax, risk preference, currency of consumption, etc.
I'm happy to cede the argument on valuations, as me being imprecise/incorrectly using terms has I think conveyed a point I didn't intend.

Using your example, the "net total return" to investor A from a country B stock is obviously different than the average net total return for the collective set of investors from country B. I'm fine not calling that "net total return" valuation.

But to my original question wouldn't it make sense for investor A to say (for the purposes of determining their AA) "what is the A/B cap weighed allocation for all country A investors" as opposed to "what is the A/B allocation for all country A and B investors"?

The former seems to be a way to solicit a market opinion in those unique tax constraints without having to be an expert, or even aware of them?
Could you explain what you mean by "A/B cap weighted allocation for all country A investors"? Do you just mean that, on average, country A investors might be 80% country A and 20% country B, even though the overall market caps might be the same at 50% each?

One could do that, but understand it's still not going to be that helpful for you. The average will include people who for political/non-investing reasons prefer to invest entirely at home, as well as investors who have special mechanisms to invest abroad due to wealth, like direct foreign ownership of real estate, trusts in foreign countries, even ties to home countries for immigrants.
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Re: Reasons to invest internationally, or not.

Post by vineviz »

ChrisBenn wrote: Sun Sep 20, 2020 9:26 am But to my original question wouldn't it make sense for investor A to say (for the purposes of determining their AA) "what is the A/B cap weighed allocation for all country A investors" as opposed to "what is the A/B allocation for all country A and B investors"?

The former seems to be a way to solicit a market opinion in those unique tax constraints without having to be an expert, or even aware of them?
Still “no”, because the investors within each country are also heterogeneous.

Only investors who have no ability to identify any ways in which their personal preferences might differ from the “average” investor should choose the market (or aggregate) portfolio.

Not because such a portfolio is somehow “efficient” but merely because the investor is completely without relevant information.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Reasons to invest internationally, or not.

Post by ChrisBenn »

petulant wrote: Sun Sep 20, 2020 9:32 am (...)
Could you explain what you mean by "A/B cap weighted allocation for all country A investors"? Do you just mean that, on average, country A investors might be 80% country A and 20% country B, even though the overall market caps might be the same at 50% each?

One could do that, but understand it's still not going to be that helpful for you. The average will include people who for political/non-investing reasons prefer to invest entirely at home, as well as investors who have special mechanisms to invest abroad due to wealth, like direct foreign ownership of real estate, trusts in foreign countries, even ties to home countries for immigrants.
Yep, exactly what you supposed.

The reason you give for it not being helpful I'd like to explore a bit more. I concur, it's absolutely not optimal for each individual - but can a person reasonably do better? If there's something highly binary - "all country A investors with the last name Doe which invest in country B will have those assets seized by country B" sure.

But really it's commonly much more nuanced "how does one price the geopolitical tensions between country A/B". I guess I believe the market of my fellow country A investors will do a better job of it than I will. Take the fact that domestic market cap is a mix of people betting on 0DTE options as well as people still holding what's left over from nifty 50 - in the end I still hold that (domestic market cap) as I don't believe I can reliably determine a better equity holding weight.

I think a key point here is that I'm not saying looking at the domestic/international AA (for the set of domestic investors) is optimal, just that's it's better (for a domestic investor) than holding the global market AA (for domestic / international)
Last edited by ChrisBenn on Sun Sep 20, 2020 10:39 am, edited 1 time in total.
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Re: Reasons to invest internationally, or not.

Post by ChrisBenn »

vineviz wrote: Sun Sep 20, 2020 9:36 am
ChrisBenn wrote: Sun Sep 20, 2020 9:26 am But to my original question wouldn't it make sense for investor A to say (for the purposes of determining their AA) "what is the A/B cap weighed allocation for all country A investors" as opposed to "what is the A/B allocation for all country A and B investors"?

The former seems to be a way to solicit a market opinion in those unique tax constraints without having to be an expert, or even aware of them?
Still “no”, because the investors within each country are also heterogeneous.

Only investors who have no ability to identify any ways in which their personal preferences might differ from the “average” investor should choose the market (or aggregate) portfolio.

Not because such a portfolio is somehow “efficient” but merely because the investor is completely without relevant information.
I think I agree with your condition: Only investors who have no ability to identify any ways in which their personal preferences might differ from the “average” investor should choose the market (or aggregate) portfolio. - in fact I think it's the premise for my original assertion. (to be clear I am extending "personal preferences" to include "personal circumstances" (regulatory domain, etc.), and if that's incorrect apologies, not intending to put words in your mouth)

Working with that, and saying "I know nothing", for equity allocation wouldn't the default be to hold a global market cap weight? (since this person can't assert reliably how they are different than the average investor)

Now next step. If that investor who "knows nothing" can now confidently know "I'm going to live in country A for the rest of my life" we now have a bit of information that differentiates them from the global average. Should the new default aggregate portfolio be that of their fellow countrymen (asserting they know nothing else but that they are a member of that population)? (This can apply to many things, but I'm specifically focusing on domestic/international AA of the portfolio to keep the scope narrow).

So I'm not saying that domestic/international portfolio (aggregate of all fellow domestic investors) is optimal for an individual (it's almost assuredly not), but it is much more likely to be better than the global allocation, since it incorporates extra information?

Apologies if this feels circular, it's not intentional. I think I completely agree with your assertion on average investor / personal preference (circumstances) (at least as I am currently understanding it), and it just seems to me based on that the global market cap AA (domestic/international) would almost always be wrong (as you assuredly have more information).

If I could get more nuanced market information (where the average of the market was completely representative of all my preferences and circumstances, and was still large enough to benefit from the EMH (all information priced in)), then I would. I just haven't been able to find domestic/international AA for anything more faceted than domestic US investors.

By faceting the market I'm trying to avoid having to make an expert judgement on the effects of geopolitical tensions, tax laws, etc. between country A/B and instead let the market decide. (Just like domestically I would hold the total market index instead of a sector bet, etc.)

Anyway, I do appreciate the feedback as this has been bugging me for awhile, but haven't been able to get into an dialogue about it.
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vineviz
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Re: Reasons to invest internationally, or not.

Post by vineviz »

ChrisBenn wrote: Sun Sep 20, 2020 10:34 am Now next step. If that investor who "knows nothing" can now confidently know "I'm going to live in country A for the rest of my life" we now have a bit of information that differentiates them from the global average. Should the new default aggregate portfolio be that of their fellow countrymen (asserting they know nothing else but that they are a member of that population)? (This can apply to many things, but I'm specifically focusing on domestic/international AA of the portfolio to keep the scope narrow).
I think the only simple answer is "maybe".

If the investor does, as you posit, know "I'm going to live in country A for the rest of my life" that does differentiate them from the "global average" but it doesn't necessarily tell them HOW (i.e. in which direction) it differentiates them.

Perhaps the individual investor is young, well educated, and cosmopolitan whereas the average investor in country A is old, poorly educated, and xenophobic. If the average investor in country B is young, well educated, and cosmopolitan then our hypothetical investor must perform an evaluation about whether their similarity to fellow residents of country A (which is entirely geographic) is more or less important than their similarity to residents of country B (which in this example is entirely demographic and personality-oriented).

In other words, it is not a safe assumption that the ONE thing the investor knows in your example (that they live in country A) is sufficient to distinguish between the global market cap weight or domestic aggregate holding weight more closely matching their own situation. We just don't know.

In practice, the difference between the two portfolios (thankfully) isn't that great.

Besides we ALSO have a great tool for discovering a much better naive allocation than simply taking the national aggregate portfolio. There is a group of well-trained and intelligent people who have spent decades and millions of dollars researching the characteristics of individual investors like us (including our nationality, age, income level, wealth, consumption pattern, longevity, and so on). The result of this research is a suite of highly segmented target retirement date funds, each of which contains a pool of investors that look more like each other than any other group I can imagine. Millions of other investors that are similar to us in age, income, nationality, expected longevity and more have collectively decided to participate in a target date fund that corresponds to our expected retirement date.

If we're making an argument to rely on collective wisdom for domestic/international asset allocation, it's hard to imagine a better default allocation than the average TDF for workers that match your age.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
petulant
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Re: Reasons to invest internationally, or not.

Post by petulant »

ChrisBenn wrote: Sun Sep 20, 2020 10:18 am
petulant wrote: Sun Sep 20, 2020 9:32 am (...)
Could you explain what you mean by "A/B cap weighted allocation for all country A investors"? Do you just mean that, on average, country A investors might be 80% country A and 20% country B, even though the overall market caps might be the same at 50% each?

One could do that, but understand it's still not going to be that helpful for you. The average will include people who for political/non-investing reasons prefer to invest entirely at home, as well as investors who have special mechanisms to invest abroad due to wealth, like direct foreign ownership of real estate, trusts in foreign countries, even ties to home countries for immigrants.
Yep, exactly what you supposed.

The reason you give for it not being helpful I'd like to explore a bit more. I concur, it's absolutely not optimal for each individual - but can a person reasonably do better? If there's something highly binary - "all country A investors with the last name Doe which invest in country B will have those assets seized by country B" sure.

But really it's commonly much more nuanced "how does one price the geopolitical tensions between country A/B". I guess I believe the market of my fellow country A investors will do a better job of it than I will. Take the fact that domestic market cap is a mix of people betting on 0DTE options as well as people still holding what's left over from nifty 50 - in the end I still hold that (domestic market cap) as I don't believe I can reliably determine a better equity holding weight.

I think a key point here is that I'm not saying looking at the domestic/international AA (for the set of domestic investors) is optimal, just that's it's better (for a domestic investor) than holding the global market AA (for domestic / international)
vineviz has responded really well. I would say one problem with your response here is that you keep going back to pricing. Pricing is not the issue. If enough investors from a county have a strong aversion or preference for a group of stocks, then the investors from other countries can respond and keep the price roughly efficient. In other words, as country A dumps the stock, it would be undervalued, but country B investors know the right value, so they will bid the price back up. It is entirely possible to have a market equilibrium where all of the prices are reasonable, efficient prices but the portfolios among groups of investors are wildly different because of heterogenous characteristics and preferences.

I don't think you can say the average allocation of your home country's investors is a better allocation in an actionable way than the global market average, by itself, since you have no idea what their preferences, characteristics, or education are. Note, I'm not saying that it's irrelevant to any conversation; I'm just saying that the fact that it's the average allocation of other home country investors does not by itself give strong enough evidence to take any specific action.
Ciel
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Re: Reasons to invest internationally, or not.

Post by Ciel »

Robot Monster wrote: Sun Sep 20, 2020 9:02 am Regarding the discussion of foreign tax withholding:
Foreign companies withhold some of the cash owed to U.S. investors to pay taxes on those dividends. And these tax rates can be rather punitive. Countries like Germany, Switzerland, and Australia can levy institutional tax rates on dividends of 30% or more.

Fortunately, the U.S. has tax treaties in place with many foreign governments, reducing the tax rate for U.S. investors. However, fund providers must actively pursue the difference between the withholding (1) and treaty (2) rates, as foreign governments aren't anxious to part with tax revenue...
Image

I didn't want to copy and paste too much. Here is the article itself:
Unraveling Foreign Dividends
Fortunately, the U.S. has tax treaties in place with many foreign governments, reducing the tax rate for U.S. investors. However, fund providers must actively pursue the difference between the withholding (1) and treaty (2) rates, as foreign governments aren't anxious to part with tax revenue. The time required to reclaim these taxes can vary by jurisdiction and circumstances. In some cases, it can take years before a fund is able to claw back the cash it is owed. In these situations, the amount that is reclaimed gets distributed to shareholders after it is received.
So this suggests that fund providers like Vanguard would do the legwork to get the treaty rates. I wonder how this plays out in reality? I'm guessing Vanguard would pursue the money based on the percent of assets held by US investors in the fund?
TedSwippet
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Re: Reasons to invest internationally, or not.

Post by TedSwippet »

Robot Monster wrote: Sun Sep 20, 2020 9:02 am Regarding the discussion of foreign tax withholding:
Foreign companies withhold some of the cash owed to U.S. investors to pay taxes on those dividends. And these tax rates can be rather punitive. Countries like Germany, Switzerland, and Australia can levy institutional tax rates on dividends of 30% or more. ...
Symmetrically, the US tax withholding rate on dividends paid to non-US parties in countries without a US tax treaty is also a "rather punitive" 30%. See page 69 of KPMG's Global Withholding Taxes Guide.
dml130
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Re: Reasons to invest internationally, or not.

Post by dml130 »

I'm not sure if this information is available, but in case anybody knows, did global diversification provide any downside protection during the Great Depression? I realize it was a global event, but I'm curious if it hit the stock markets of some countries (Switzerland or Australia?) less severely than others.
columbia
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Re: Reasons to invest internationally, or not.

Post by columbia »

asif408 wrote: Tue Sep 15, 2020 3:07 pm
columbia wrote: Tue Sep 15, 2020 12:09 pm I've never seen a single human claim that one country would have the best individual stock performance.
You must not come here very often, then.
Who has said that the US will perform better than every single country? You're engaging in rank trolling.
asif408
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Re: Reasons to invest internationally, or not.

Post by asif408 »

columbia wrote: Sun Sep 20, 2020 7:34 pm
asif408 wrote: Tue Sep 15, 2020 3:07 pm
columbia wrote: Tue Sep 15, 2020 12:09 pm I've never seen a single human claim that one country would have the best individual stock performance.
You must not come here very often, then.
Who has said that the US will perform better than every single country? You're engaging in rank trolling.
Not trolling, simply an observation. When a significant number of posters own only US stocks, that implicitly says a significant portion of them believe the US will perform better than every single country. There are even a handful that explicitly state that, and they have increased in numbers in the past few years. I have yet to see anything even close to the number of posts from investors of another country who only own stocks in their home country.

Now there are some individual investors who might just be more comfortable with only US stocks for whatever reasons separate from outperformance. But that is certainly not the majority.
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