Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

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PersianCapitalist
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Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by PersianCapitalist »

I like the 60/40 portfolio, and I have a question about it:

Why do I only read about the American version of this asset allocation?

I rarely never see Swiss people talking about 60% Swiss equities and 40% Swiss bonds.

Nor do I see a Dutch, Brazilian, or Chinese version.

Why is that? Would it work similarly or is there something special about US equities and bonds that lends itself well for this asset allocation?

Maybe I’m missing something obvious. Feel free to educate me. Thanks.
Valuethinker
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by Valuethinker »

PersianCapitalist wrote: Thu Sep 22, 2022 6:45 am I like the 60/40 portfolio, and I have a question about it:

Why do I only read about the American version of this asset allocation?

I rarely never see Swiss people talking about 60% Swiss equities and 40% Swiss bonds.

Nor do I see a Dutch, Brazilian, or Chinese version.

Why is that? Would it work similarly or is there something special about US equities and bonds that lends itself well for this asset allocation?

Maybe I’m missing something obvious. Feel free to educate me. Thanks.
If you don't live in the USA (c 60% of world stock markets by capitalisation) then you are crazy to cut your portfolio diversification by not holding global stock weighting.

Exception might be taxation and in particular dividend franking in the Australian tax system. Posters here have suggested that the evidence is the Australian stock prices adjust for that, however.

In the case of both Australia and Canada, c. 80% of stock value was 2 sectors (natural resources + finance). So right there you can see the mistake if a Canadian investor has a strong home country bias (ie more than about 5% of a stock portfolio).

There's also a currency question. Probably the optimal Canadian portfolio is global equities (unhedged) but Canadian bonds. Canada has low credit risk and a large domestic bond market. Generally posters here accept hedging for their bond investments & there's good reasons to do that.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by vineviz »

PersianCapitalist wrote: Thu Sep 22, 2022 6:45 am I like the 60/40 portfolio, and I have a question about it:

Why do I only read about the American version of this asset allocation?

I rarely never see Swiss people talking about 60% Swiss equities and 40% Swiss bonds.

Nor do I see a Dutch, Brazilian, or Chinese version.

Why is that? Would it work similarly or is there something special about US equities and bonds that lends itself well for this asset allocation?

Maybe I’m missing something obvious. Feel free to educate me. Thanks.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by ScubaHogg »

PersianCapitalist wrote: Thu Sep 22, 2022 6:45 am I like the 60/40 portfolio, and I have a question about it:

Why do I only read about the American version of this asset allocation?

I rarely never see Swiss people talking about 60% Swiss equities and 40% Swiss bonds.

Nor do I see a Dutch, Brazilian, or Chinese version.

Why is that? Would it work similarly or is there something special about US equities and bonds that lends itself well for this asset allocation?

Maybe I’m missing something obvious. Feel free to educate me. Thanks.
Well one reason might be, to use your example, that someone who invested all their equity exposure in a very small market like Switzerland isn’t very diversified. I don’t feel like looking it up, but I’m guessing Switzerland represents <2% of the world market cap.

The US equity market is somewhat unique because it’s so large, ~60% of the world market cap. A US resident can choose to ignore international companies and still be quite diversified.

Also I don’t feel we get many mainland China posters on here
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Lou354
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by Lou354 »

The expression “60/40” doesn’t generally imply that all of the equities are US. Instead it refers to the ratio of equities to fixed income, regardless of country. Therefore an asset allocation of 60/40 may have 0% or 50% (or anything in between) of the equity portion in ex-US stocks.

I don’t know why anyone would want to own no US equities at all.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by PersianCapitalist »

Lou354 wrote: Thu Sep 22, 2022 8:18 am The expression “60/40” doesn’t generally imply that all of the equities are US. Instead it refers to the ratio of equities to fixed income, regardless of country.
Yep, but be honest, have you ever seen anyone do a localized version? So instead of S&P 500, use MSCI <another country> ETF?
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by Lou354 »

PersianCapitalist wrote: Thu Sep 22, 2022 8:48 am
Lou354 wrote: Thu Sep 22, 2022 8:18 am The expression “60/40” doesn’t generally imply that all of the equities are US. Instead it refers to the ratio of equities to fixed income, regardless of country.
Yep, but be honest, have you ever seen anyone do a localized version? So instead of S&P 500, use MSCI <another country> ETF?
No, I haven’t. My previous post was responding to your initial question “Why do I only read about the American version of this asset allocation?” I was trying to make the point that you have actually read about globally diversified versions of the 60/40 asset allocation and not just the 100% American version.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by JackoC »

PersianCapitalist wrote: Thu Sep 22, 2022 6:45 am I like the 60/40 portfolio, and I have a question about it:

Why do I only read about the American version of this asset allocation?

I rarely never see Swiss people talking about 60% Swiss equities and 40% Swiss bonds.

Nor do I see a Dutch, Brazilian, or Chinese version.

Why is that? Would it work similarly or is there something special about US equities and bonds that lends itself well for this asset allocation?

Maybe I’m missing something obvious. Feel free to educate me. Thanks.
I believe a USD based investor is significantly under-diversified by just holding US stocks on the stock side, but it's not implausible to say the US TSM index is all the risk asset diversification you need: it's a reasonably debatable topic. It would not be reasonably debatable to say the Swiss or Dutch stock indexes give you all the risk asset diversification you need, and in the Dutch case you can buy other EUR denominated indexes. Investors in small countries almost always realize this. Again one could debate whether 'US-only' is US investors missing something basic about diversification or whether it's actually a good answer (it's debated endlessly here :happy ) but for small country investors 'own country only' is more obviously the wrong answer for stocks, from a BH/indexing POV anyway. To answer directly the factually special thing about US index is it's so big, you own something like 60% of the 'investable' global market by owning it. That's what makes it arguably plausible for US investors to limit themselves to US stock index, though I believe it's hard to support that decision in any rigorous way (which doesn't include 'hey look how well US stocks did in recent years!').

On 'bond' side, especially broadening it to 'safe' (govt gteed bank deposits, perhaps for term, called CD's in the US) I'd guess you find many investors in many countries heavily tilt that toward their own currency (or one effectively pegged to it). Because currency of denomination has a much more direct effect on bonds than stocks. A conventional CHF govt bond is a promise to pay fixed number of CHF on specified dates. There's no direct currency risk in that for the CHF based investor, there is for them buy a US treasury unhedged. Nestle stock OTOH is not directly comparable. The revenue and expenses of the company in a multitude of currencies are converted to CHF for the company's financial statements and investors bid and offer in CHF to trade the shares on the home exchange, but only something like 5% of the company's sales are in Switzerland. The actual cashflows which determine the company's value are predominantly not CHF. That's a quite different currency risk proposition either for a CHF or USD based investor. Nestle still has currency risk for the CHF investor, and for that matter the S&P has some for the US investor too. Currency risk on stocks is ambiguous, tends to depend on the particular stock/index/currency combination and varies over time, much less cut and dried than buying a promise to pay a specified amount of foreign currency to meet a future liability in your own currency.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by AlwaysLearningMore »

vineviz wrote: Thu Sep 22, 2022 6:53 am
PersianCapitalist wrote: Thu Sep 22, 2022 6:45 am I like the 60/40 portfolio, and I have a question about it:

Why do I only read about the American version of this asset allocation?

I rarely never see Swiss people talking about 60% Swiss equities and 40% Swiss bonds.

Nor do I see a Dutch, Brazilian, or Chinese version.

Why is that? Would it work similarly or is there something special about US equities and bonds that lends itself well for this asset allocation?

Maybe I’m missing something obvious. Feel free to educate me. Thanks.
Maybe US investors are unusually egocentric?
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Last edited by AlwaysLearningMore on Thu Sep 22, 2022 10:04 am, edited 1 time in total.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by the_wiki »

PersianCapitalist wrote: Thu Sep 22, 2022 6:45 am I like the 60/40 portfolio, and I have a question about it:

Why do I only read about the American version of this asset allocation?

I rarely never see Swiss people talking about 60% Swiss equities and 40% Swiss bonds.

Nor do I see a Dutch, Brazilian, or Chinese version.

Why is that? Would it work similarly or is there something special about US equities and bonds that lends itself well for this asset allocation?

Maybe I’m missing something obvious. Feel free to educate me. Thanks.
Are you reading Swiss or Dutch financial advice sources? Are you talking with Brazilian and Chinese retirees? Where would you be hearing about these?

Most of us only hear American-centric financial advice and portfolio suggestions because we live in the US and consume US media and websites.


But, also, the US stock market is different. It makes up 60% of global market cap. Investing in only one country and getting 60% market coverage is a lot different than investing in only Brazil and getting 1%
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by PersianCapitalist »

the_wiki wrote: Thu Sep 22, 2022 9:59 am
PersianCapitalist wrote: Thu Sep 22, 2022 6:45 am I like the 60/40 portfolio, and I have a question about it:

Why do I only read about the American version of this asset allocation?

I rarely never see Swiss people talking about 60% Swiss equities and 40% Swiss bonds.

Nor do I see a Dutch, Brazilian, or Chinese version.

Why is that? Would it work similarly or is there something special about US equities and bonds that lends itself well for this asset allocation?

Maybe I’m missing something obvious. Feel free to educate me. Thanks.
Are you reading Swiss or Dutch financial advice sources? Are you talking with Brazilian and Chinese retirees? Where would you be hearing about these?
I speak three languages and read a lot on Dutch and European sources on investments. I’ve never seen a localized country-specific (or even European-continent version) of the 60/40 portfolio.

I do think the US version of S&P 500 and US bonds is popular because of the other reasons: US market is superior for a variety of reasons, and the US Dollar dominance is also a great benefit.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by djm2001 »

William Sharpe proposed a very logical portfolio that he calls the World Bond Stock Portfolio. It consists of global stocks and global bonds -- e.g., VT + BNDW -- each held at market weight. It turns out that this is almost exactly 60/40 currently. And it has been holding at 60/40 for quite a while.

The world, in aggregate, holds 60/40.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by Valuethinker »

vineviz wrote: Thu Sep 22, 2022 6:53 am

Maybe US investors are unusually egocentric?
That's a great way of describing home country bias ;-). :?

The costs of under-diversification for a US investor pursuing 60-40 are much lower than for an investor in any other country. Canada and UK have pretty high correlations with the S&P500 but "correlation ain't everything" -- given their very small tech sectors, they underperformed for quite a long time.

For a US investor it's at least arguable that they don't need international stocks. That's not an argument anyone else (who does not face taxation or foreign asset restrictions) can sensibly make.

Probably most investors don't take currency risk on their bond side. So they are de facto 40% home country currency.

(In my case, because of the very long duration of gilt indices, I settled on international bonds hedged into GBP).
bling
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by bling »

the US by itself is 60% of the world market cap right now. the next biggest country? japan at 6%.

non-US investors don't have the luxury of home country bias when that means missing out on 94+% of returns.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by BitTooAggressive »

I have probably around 40% international because I want the diversification. I can’t imagine I could sleep at night if was French holding an all French portfolio. :mrgreen:
Johnathon Livingston
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by Johnathon Livingston »

I don’t do an ex-US 60/40 because I like making money. 😂
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by visualguy »

Johnathon Livingston wrote: Fri Sep 23, 2022 8:02 am I don’t do an ex-US 60/40 because I like making money. 😂
You mean your car dealer doesn't yet accept "diversification" as payment? :wink:
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by vineviz »

visualguy wrote: Fri Sep 23, 2022 8:12 am
Johnathon Livingston wrote: Fri Sep 23, 2022 8:02 am I don’t do an ex-US 60/40 because I like making money. 😂
You mean your car dealer doesn't yet accept "diversification" as payment? :wink:
It's a good thing that US-only investors aren't gullible enough to make the mistake of chasing recent outperformance, huh?
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by swilgu1 »

Johnathon Livingston wrote: Fri Sep 23, 2022 8:02 am I don’t do an ex-US 60/40 because I like making money. 😂
If ex-US outperforms over the next, say, 10 years, are you planning to switch to ex-US because you like making money?
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by visualguy »

vineviz wrote: Fri Sep 23, 2022 8:15 am
visualguy wrote: Fri Sep 23, 2022 8:12 am
Johnathon Livingston wrote: Fri Sep 23, 2022 8:02 am I don’t do an ex-US 60/40 because I like making money. 😂
You mean your car dealer doesn't yet accept "diversification" as payment? :wink:
.

It's a good thing that US-only investors aren't gullible enough to make the mistake of chasing recent outperformance, huh?
120 years is recency only in the lives of geologic formations.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by vineviz »

visualguy wrote: Fri Sep 23, 2022 8:25 am
vineviz wrote: Fri Sep 23, 2022 8:15 am
visualguy wrote: Fri Sep 23, 2022 8:12 am
Johnathon Livingston wrote: Fri Sep 23, 2022 8:02 am I don’t do an ex-US 60/40 because I like making money. 😂
You mean your car dealer doesn't yet accept "diversification" as payment? :wink:
.

It's a good thing that US-only investors aren't gullible enough to make the mistake of chasing recent outperformance, huh?
120 years is recency only in the lives of geologic formations.
Anyone who thinks that US-only investors are not putting a lot more weight on the last 10 years than on the 50 years that came before is only fooling themselves.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by cheezit »

US investors have about the least home-country bias of any national set of investors, despite seeing the least benefit from international diversification, per Vanguard's paper on the subject - is there a point to this side discussion, or it is merely an opportunity to dunk on folks that certain posters dislike for reasons that have nothing to do with asset allocation or portfolio construction?
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by cheezit »

PersianCapitalist wrote: Thu Sep 22, 2022 6:27 pm I speak three languages and read a lot on Dutch and European sources on investments. I’ve never seen a localized country-specific (or even European-continent version) of the 60/40 portfolio.

I do think the US version of S&P 500 and US bonds is popular because of the other reasons: US market is superior for a variety of reasons, and the US Dollar dominance is also a great benefit.
60/40 isn't a portfolio, but rather an asset allocation (as you noted in your OP).

The portfolio you are likely referring to is a two-fund portfolio consisting of:
- a no-load, low-fee total domestic stock market index fund
- a no-load, low-fee total domestic bond market index fund

This is indeed a reasonably common portfolio for US investors. It might be more popular that this site's current flagship three-fund portfolio, which adds an un-currency-hedged total international (ex-US) stock market index fund. I don't think it's ideal for most people, but it is dead simple and it is certainly a dramatically better portfolio than what many investors have.


What style of portfolio do you see on Dutch or other international investing forums instead of these? What benefits or drawbacks do you think they have?

Personally, if I were an investor living in some smallish European market, I would probably have something like a three-fund portfolio, though with a different bond fund (I'd go with a bond fund that held government debt securities denominated in my home currency only, with a duration matched as best I could manage to my investment horizon). Currency risk/worldwide equity diversification would be controlled by adjusting the proportions of the domestic and international equity funds - unhedged international bond funds provide currency risk/diversification but not as well as unhedged international equities (and they don't provide exposure/diversification for international markets), and hedged international bond funds don't seem to move the needle from the research that's so far available.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by ScubaHogg »

cheezit wrote: Fri Sep 23, 2022 10:11 am US investors have about the least home-country bias of any national set of investors, despite seeing the least benefit from international diversification, per Vanguard's paper on the subject - is there a point to this side discussion, or it is merely an opportunity to dunk on folks that certain posters dislike for reasons that have nothing to do with asset allocation or portfolio construction?
This is a great point. US investors seem to have less, not more, home country bias than other nations.

https://intl.assets.vgdynamic.info/intl ... -brief.pdf
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by abc132 »

Other countries may be pooled into less than 1% of the world stock market where US-only investors are pooled into 60% of the world stock market.

If you ran equivalent numbers for diversification (capturing 60% of the world market), other countries would need a lot more percentage of (US or non home country) - on the order of 40-60% of their stocks.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by Lawrence of Suburbia »

I did consider Global Wellington at one time ...
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by Poe22 »

cheezit wrote: Fri Sep 23, 2022 10:30 am ...and hedged international bond funds don't seem to move the needle from the research that's so far available.
Why's that? You'd at least get some more bond issuer diversification if you add hedged international bond funds, wouldn't you? I wouldn't feel comfortable assuming my country could never go broke.
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Re: Why isn’t anyone doing 60/40 but with non-us stocks and bonds?

Post by homebuyer6426 »

Check out a 60/40 where the 60 is consumer staples. It has a better worst-year than even a 100% bond portfolio.
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