Ben Felix: International Diversification.

[Cash is King]

The funds are listed up thread if you want to dig into regions, industries, companies, etc

I have no desire because I don't own any of them. I thought someone who does would want to know before investing their money. I guess the answer is no.

*shrug*

I don’t think about any total stock market index at the granular level

*Geez*
I think you understand the point ,but maybe you don't care. Each to their own.
I think it's a good idea to understand what you own and what industries etc. When one owns funds like you, it's not expected or reasonable to know all 300 plus companies. I do think knowing what companies make up the bulk of the portfolio weight is important. YMMV.
Some people are perfectly happy to follow the advice of folks like Ben without knowing what they own. Again, each to their own.

I can look it up if I’m curious, but it’s mostly irrelevant to me.

The total market is the total market — and it’s thousands of companies.

FWIW, I’ve been investing in total market indexes before Ben had a YouTube channel — a couple of decades now

I appreciate the response. Sounds like it works for you, which is all that counts.

[GRP]

I believe Ben has migrated to the greener pastures of Avantis.

[finite_difference]

I find it funny how people here are obsessed about their tiny (Greater) China allocation when even if you invest 50% into EM China+Taiwan will only make up 24% of your Total Equity Allocation. If it goes to 0 thats a 24% loss which while noticeable is still much less than the 50% loss that people here are trained to expect from Equities and that is assuming a person is investing 50% into EM which most here don't.

Regards,
Anon9001.

A 24% loss in China/Taiwan due to expropriation would be a permanent loss. Whereas your typical 50% market decline is usually temporary.

Okay but in this scenario, global markets including US will tank. They won’t recover either because their markets will have permanently shrunk? Also how do you imagine the ~$2 trillion in China-owned US Tbills/agency bonds/assets will be resolved?

[watchnerd]

I find it funny how people here are obsessed about their tiny (Greater) China allocation when even if you invest 50% into EM China+Taiwan will only make up 24% of your Total Equity Allocation. If it goes to 0 thats a 24% loss which while noticeable is still much less than the 50% loss that people here are trained to expect from Equities and that is assuming a person is investing 50% into EM which most here don't.

Regards,
Anon9001.

A 24% loss in China/Taiwan due to expropriation would be a permanent loss. Whereas your typical 50% market decline is usually temporary.

Okay but in this scenario, global markets including US will tank. They won’t recover either because their markets will have permanently shrunk? Also how do you imagine the ~$2 trillion in China-owned US Tbills/agency bonds/assets will be resolved?

Nouriel Roubini was saying he thinks the US would confiscate Treasures in the event of a conflict

[Apathizer]

I believe Ben has migrated to the greener pastures of Avantis.

Maybe, but I don't think it makes a major difference since both have very similar characteristics and returns.
https://www.portfoliovisualizer.com/bac ... ion5_3=100

[yolointopants]

Nouriel Roubini was saying he thinks the US would confiscate Treasures in the event of a conflict

Perennial permabear sky is falling Nouriel Roubini.

[GRP]

I believe Ben has migrated to the greener pastures of Avantis.

Maybe, but I don't think it makes a major difference since both have very similar characteristics and returns.
https://www.portfoliovisualizer.com/bac ... ion5_3=100

I don't think it does either.

[nedsaid]

So do you just hold a World portfolio of financial assets according to market weights?

Yes, my risk portfolio is global market weight.

For anyone interested in a similar approach, there is good data here, across multiple tabs:

https://docs.google.com/spreadsheets/d/ ... g_/pubhtml#

That is actually not a bad idea.

[unwitting_gulag]

I suggest you review the portion of the video where he discusses the lost decade about 2000-2009. Again I don't have time to review right now, but the average annual returns during that time for US stocks was slightly negative, I believe about -2% while ex-US markets returned about 1.5%.

All the issues you raise are discussed in detail on the video. Perhaps you should just watch it again?

Thanks for the advice. I watched the video multiple times. Ben’s points are intriguing. But ultimately they are contingent on one core assumption: that the US does NOT, in fact, have an overwhelming lasting advantage – an advantage that will persist and in fact flourish, decade after decade, century after century. Ben is assuming that if a time-traveler were to transport to the year 2300, then it would emphatically not be the case, with any probability worth noting seriously, that the US stock market would be crushingly dominant compared to the rest-of-the-world, much more so than it is now.

What if we take the opposite view...that eventually all (or nearly all) public equity investment will migrate to the US? Is this blatantly unreasonable?

[Logan Roy]

I suggest you review the portion of the video where he discusses the lost decade about 2000-2009. Again I don't have time to review right now, but the average annual returns during that time for US stocks was slightly negative, I believe about -2% while ex-US markets returned about 1.5%.

All the issues you raise are discussed in detail on the video. Perhaps you should just watch it again?

Thanks for the advice. I watched the video multiple times. Ben’s points are intriguing. But ultimately they are contingent on one core assumption: that the US does NOT, in fact, have an overwhelming lasting advantage – an advantage that will persist and in fact flourish, decade after decade, century after century. Ben is assuming that if a time-traveler were to transport to the year 2300, then it would emphatically not be the case, with any probability worth noting seriously, that the US stock market would be crushingly dominant compared to the rest-of-the-world, much more so than it is now.

What if we take the opposite view...that eventually all (or nearly all) public equity investment will migrate to the US? Is this blatantly unreasonable?

The assumption could just as well be that the US DOES have a perpetual advantage, and that markets haven't priced it in yet.

I believe Australia's actually had the best stock market returns since 1900, and in third place South Africa. I don't think Australia's got an overwhelming advantage, but it might have solid natural resources and generally reasonable valuations.. I also don't think Ben's making that assumption – he shows that the outperformance of the US drops to 0.4% when we adjust for US stocks simply getting more expensive, and that could be the long-term competitive advantage being priced in. It means your money's buying less US earnings each decade.

[Apathizer]

What if we take the opposite view...that eventually all (or nearly all) public equity investment will migrate to the US? Is this blatantly unreasonable?

Yes, that's blatantly unreasonable since it seems highly improbable. A more likely future seems to be as other countries develop they'll behave more similarly to developed markets like the US, but that doesn't mean nearly all assets will migrate to the US. Even if markets continue to become more correlated, wide dispersion/variance among different markets is likely to persist, so global diversification would still be beneficial.

[srt7]

Is international really a thing post 90s globalization? Can’t I buy Apple and say I’m globally diversified?

He addresses it in the video. Advises to go with sector across countries over country with several sectors.

[srt7]

[Inappropriate comment remoived. Moderator Pops1860]


He's right but didn't make a compelling anything.

I don't really like to hear my voice, but thanks for the feedback otherwise.

Thank you for the excellent video, Ben!

[watchnerd]

I suggest you review the portion of the video where he discusses the lost decade about 2000-2009. Again I don't have time to review right now, but the average annual returns during that time for US stocks was slightly negative, I believe about -2% while ex-US markets returned about 1.5%.

All the issues you raise are discussed in detail on the video. Perhaps you should just watch it again?

Thanks for the advice. I watched the video multiple times. Ben’s points are intriguing. But ultimately they are contingent on one core assumption: that the US does NOT, in fact, have an overwhelming lasting advantage – an advantage that will persist and in fact flourish, decade after decade, century after century. Ben is assuming that if a time-traveler were to transport to the year 2300, then it would emphatically not be the case, with any probability worth noting seriously, that the US stock market would be crushingly dominant compared to the rest-of-the-world, much more so than it is now.

What if we take the opposite view...that eventually all (or nearly all) public equity investment will migrate to the US? Is this blatantly unreasonable?

In the unlikely event that this actually could happen, a global market weight port would still capture it

[Apathizer]

I suggest you review the portion of the video where he discusses the lost decade about 2000-2009. Again I don't have time to review right now, but the average annual returns during that time for US stocks was slightly negative, I believe about -2% while ex-US markets returned about 1.5%.

All the issues you raise are discussed in detail on the video. Perhaps you should just watch it again?

Thanks for the advice. I watched the video multiple times. Ben’s points are intriguing. But ultimately they are contingent on one core assumption: that the US does NOT, in fact, have an overwhelming lasting advantage – an advantage that will persist and in fact flourish, decade after decade, century after century. Ben is assuming that if a time-traveler were to transport to the year 2300, then it would emphatically not be the case, with any probability worth noting seriously, that the US stock market would be crushingly dominant compared to the rest-of-the-world, much more so than it is now.

What if we take the opposite view...that eventually all (or nearly all) public equity investment will migrate to the US? Is this blatantly unreasonable?

In the unlikely event that this actually could happen, a global market weight port would still capture it

!LOL!

Good point! Global MCW means exactly that.

[finite_difference]

I find it funny how people here are obsessed about their tiny (Greater) China allocation when even if you invest 50% into EM China+Taiwan will only make up 24% of your Total Equity Allocation. If it goes to 0 thats a 24% loss which while noticeable is still much less than the 50% loss that people here are trained to expect from Equities and that is assuming a person is investing 50% into EM which most here don't.

Regards,
Anon9001.

A 24% loss in China/Taiwan due to expropriation would be a permanent loss. Whereas your typical 50% market decline is usually temporary.

Okay but in this scenario, global markets including US will tank. They won’t recover either because their markets will have permanently shrunk? Also how do you imagine the ~$2 trillion in China-owned US Tbills/agency bonds/assets will be resolved?

Nouriel Roubini was saying he thinks the US would confiscate Treasures in the event of a conflict

Would that cause their value to go up or down for the rest of us?

Considering the export/import dependencies I think the damage to the US market would nevertheless be catastrophic. Likewise for everyone else of course but I think framing it like a temporary 50% blip is an understatement.

[rushrocker]

What about the costs of holding international and emerging for US investors? Assuming all returns were suddenly equal, wouldn't holding these simply be just more expensive and therefore not optimal?

Eg: it cost 1.01% to hold VWO (emerging markets) and 0.30% to hold VTI (US total market) in 2022.

[Nathan Drake]

What about the costs of holding international and emerging for US investors? Assuming all returns were suddenly equal, wouldn't holding these simply be just more expensive and therefore not optimal?

Eg: it cost 1.01% to hold VWO (emerging markets) and 0.30% to hold VTI (US total market) in 2022.

The costs to hold the two aren't that wide. International is more expensive in terms of costs, but well worth it for the wide potential dispersions across markets that can happen multiple times over a lifecycle of an investing horizon.

[abc132]

I watched the video multiple times. Ben’s points are intriguing. But ultimately they are contingent on one core assumption: that the US does NOT, in fact, have an overwhelming lasting advantage – an advantage that will persist and in fact flourish, decade after decade, century after century. Ben is assuming that if a time-traveler were to transport to the year 2300, then it would emphatically not be the case, with any probability worth noting seriously, that the US stock market would be crushingly dominant compared to the rest-of-the-world, much more so than it is now.

This is not true. Since the US has higher P/E ratio you are paying more for $1 of US earnings than for $1 of international earnings. This higher price can account for increased US productivity. I believe this was addressed directly in the video and even with the higher growth (advantage) the US is still priced a bit higher than that growth would warrant. Maybe this extra price accounts for those that believe there is less chance of risks showing up in the US.

I think it is really difficult to say that one individual knows better than the market which is priced better. We know looking backward, but I don't think we know looking forward.

[Gaston]

Is international really a thing post 90s globalization? Can’t I buy Apple and say I’m globally diversified?

He addresses it in the video. Advises to go with sector across countries over country with several sectors.

To highlight the differences in sector weightings between US and Intl ETFs, I compared Vanguard VOO (S&P 500 index) versus Vanguard VEA (FTSE Developed All Cap ex US Index). As srt7 noted, buying only US firms exposes you to different industry sectors than does a global portfolio.

Sector -- VOO -- VEA
Communication Services -- 8% -- 3%
Consumer Discretionary -- 12% -- 13%
Consumer Staples -- 7% -- 8%
Energy -- 5% -- 7%
Financials -- 11% -- 19%
Health Care -- 15% -- 11%
Industrials -- 8% -- 17%
Information Technology -- 26% -- 8%
Materials -- 3% -- 7%
Real Estate -- 3% -- 4%
Utilities -- 3% -- 3%
Total -- 100% -- 100%

[rushrocker]

What about the costs of holding international and emerging for US investors? Assuming all returns were suddenly equal, wouldn't holding these simply be just more expensive and therefore not optimal?

Eg: it cost 1.01% to hold VWO (emerging markets) and 0.30% to hold VTI (US total market) in 2022.

The costs to hold the two aren't that wide. International is more expensive in terms of costs, but well worth it for the wide potential dispersions across markets that can happen multiple times over a lifecycle of an investing horizon.

These were the actual results of 2022 which I got the information from the spreadsheet that is commonly shared here on the forums:

https://docs.google.com/spreadsheets/d/ ... 1082767652

That being said, last year was a particularly "bad" year for this. Past performance has seen it as low as ~0.20% apart.

Small caps and value both seem to exacerbate this problem of higher expense for some time periods in both US and abroad which makes me question my small cap value holdings. If I'm losing 0.2-0.7% a year on inefficient holdings that really adds up in the long run.

[unwitting_gulag]

What if we take the opposite view...that eventually all (or nearly all) public equity investment will migrate to the US? Is this blatantly unreasonable?

In the unlikely event that this actually could happen, a global market weight port would still capture it

Let's try a numerical example. Suppose that today, the US market is worth 100 units, and foreign markets are also worth 100 units. 200 years later, adjusted for inflation, the US market comes to be worth 2000 units, and the foreign markets, 200 units. To me, this is tantamount to nearly all public equity investment migrating to the US.

So what is our rate of return? A market-based weighting today, would put 50% into the US, and 50% foreign. The US portion grows 20X, while the foreign portion, 2X. If we baseline the portfolio at 100, it goes to 1100. But had the initial portfolio been 100% US and 0% foreign, it would have grown from 100 to 2000.... so, a difference of 2000 vs. 1100. Bit of a difference, no?

[Apathizer]

What about the costs of holding international and emerging for US investors? Assuming all returns were suddenly equal, wouldn't holding these simply be just more expensive and therefore not optimal?

Eg: it cost 1.01% to hold VWO (emerging markets) and 0.30% to hold VTI (US total market) in 2022.

The costs to hold the two aren't that wide. International is more expensive in terms of costs, but well worth it for the wide potential dispersions across markets that can happen multiple times over a lifecycle of an investing horizon.

These were the actual results of 2022 which I got the information from the spreadsheet that is commonly shared here on the forums:

https://docs.google.com/spreadsheets/d/ ... 1082767652

That being said, last year was a particularly "bad" year for this. Past performance has seen it as low as ~0.20% apart.

Small caps and value both seem to exacerbate this problem of higher expense for some time periods in both US and abroad which makes me question my small cap value holdings. If I'm losing 0.2-0.7% a year on inefficient holdings that really adds up in the long run.

Again, you don't if that will be the case. A factor-tilted portfolio ER is about 0.20 higher than MCW. If the tilted portfolio returns, say, 1% higher, which seems reasonable, it's still worthwhile. Even if it doesn't out-perform the additional costs are fairly modest.

[Apathizer]

What if we take the opposite view...that eventually all (or nearly all) public equity investment will migrate to the US? Is this blatantly unreasonable?

In the unlikely event that this actually could happen, a global market weight port would still capture it

Let's try a numerical example. Suppose that today, the US market is worth 100 units, and foreign markets are also worth 100 units. 200 years later, adjusted for inflation, the US market comes to be worth 2000 units, and the foreign markets, 200 units. To me, this is tantamount to nearly all public equity investment migrating to the US.

So what is our rate of return? A market-based weighting today, would put 50% into the US, and 50% foreign. The US portion grows 20X, while the foreign portion, 2X. If we baseline the portfolio at 100, it goes to 1100. But had the initial portfolio been 100% US and 0% foreign, it would have grown from 100 to 2000.... so, a difference of 2000 vs. 1100. Bit of a difference, no?

I don't think you understand the mathematics. We're talking about global market cap weights. A country's share of the global MCW is the total proportion of all investor's allocation. Currently the US is about 60% of the global market cap, but that hasn't always been the case, and this allocation is likely to gradually shift as it always has. If it continues to shift towards the US, a global MCW portfolio will reflect this higher allocation. Conversely If it shifts away from the US, a global MCW portfolio would reduce US allocation proportionately.

I think you took they're statement a little too literally when they were kind of making a joke. If all investment shifts to the US, then the US market would be the same as the global market. If all investment shifts to the US, there would be nowhere else to invest. Literally.

[Nathan Drake]

What about the costs of holding international and emerging for US investors? Assuming all returns were suddenly equal, wouldn't holding these simply be just more expensive and therefore not optimal?

Eg: it cost 1.01% to hold VWO (emerging markets) and 0.30% to hold VTI (US total market) in 2022.

The costs to hold the two aren't that wide. International is more expensive in terms of costs, but well worth it for the wide potential dispersions across markets that can happen multiple times over a lifecycle of an investing horizon.

These were the actual results of 2022 which I got the information from the spreadsheet that is commonly shared here on the forums:

https://docs.google.com/spreadsheets/d/ ... 1082767652

That being said, last year was a particularly "bad" year for this. Past performance has seen it as low as ~0.20% apart.

Small caps and value both seem to exacerbate this problem of higher expense for some time periods in both US and abroad which makes me question my small cap value holdings. If I'm losing 0.2-0.7% a year on inefficient holdings that really adds up in the long run.

Small cap value would have a higher premium.

So you have to weigh the added expense versus diversification benefits vs assets that have higher expected returns

I believe they will easily exceed those costs

[rushrocker]

Again, you don't if that will be the case. A factor-tilted portfolio ER is about 0.20 higher than MCW. If the tilted portfolio returns, say, 1% higher, which seems reasonable, it's still worthwhile. Even if it doesn't out-perform the additional costs are fairly modest.

Yes, I'm with you on hoping this 1% turns up in my lifetime!

Small cap value would have a higher premium.

So you have to weigh the added expense versus diversification benefits vs assets that have higher expected returns

I believe they will easily exceed those costs

Crossing my fingers.

[Fryxell]

I find it funny how people here are obsessed about their tiny (Greater) China allocation when even if you invest 50% into EM China+Taiwan will only make up 24% of your Total Equity Allocation. If it goes to 0 thats a 24% loss which while noticeable is still much less than the 50% loss that people here are trained to expect from Equities and that is assuming a person is investing 50% into EM which most here don't.

Regards,
Anon9001.

A 24% loss in China/Taiwan due to expropriation would be a permanent loss. Whereas your typical 50% market decline is usually temporary.

Okay but in this scenario, global markets including US will tank. They won’t recover either because their markets will have permanently shrunk? Also how do you imagine the ~$2 trillion in China-owned US Tbills/agency bonds/assets will be resolved?

No, it won’t have permanently shrunk. The Chinese economy will still be there and one day US companies might trade with China again. But expropriated equities are a permanent 100% loss.

I don’t see how china owning treasuries is a significant problem. That means the US owes China money. So in case of some total sanction regime, it is china that’s on the losing side. China won’t get its money back.

[Fryxell]

A 24% loss in China/Taiwan due to expropriation would be a permanent loss. Whereas your typical 50% market decline is usually temporary.

I am not sure I understand your definition of "permanent" as after China/Taiwan go to 0 their weightage in the EM Index will be 0% and the other countries in the Index would get higher weightage as a result and if those other countries do well the EM Index would recover this loss after some period of time as a result.

What you are saying makes sense to me only if we assume the EM Index is just composed of these two countries.

Regards,
Anon9001.

It is permanent because that China equity portion goes down forever and will never come back. That’s what expropriation is. Even if China comes back into the index, that will come from funds rebalanced from your equities in other countries. You are never getting that investment back. Just because you are invested in an index with many counties, doesn’t mean your china portion is not gone forever.

[Fryxell]

China represents a very small part of a globally diversified portfolio....

China is currently 8.4% of VG's Total Int'l Stock Index Fund. Investors can decide if they think 8.4% represents "a very small part of" their international equity sleeve and where that fits in their portfolio. Some who post here hold 20% int'l, some 40%, some 50%. (And some with as little as 0%.)

So if we look at two investors, one that owns VT (US and exUS) and the other that owns only VTI (US only), the US only investor has more allocated to single companies (Apple, Microsoft, etc) than the global investor has allocated to an ENTIRE country comprising of many companies within China.

Why are we so concerned about a small allocation to a large country but we aren’t when it comes to a single company?

Emerging markets indexes are usually nearly 50% in China+Taiwan+Hong Kong. A loss due to geopolitical expropriation would be a permanent total loss.

If Apple or Microsoft drop by 50% that is often temporary. Even if these companies went bankrupt, you would probably still recover some partial value as a shareholder.

So this isn’t a good analogy. One is a total loss by political fiat—expropriation. The other is your more typical equity risk of market declines or bankruptcy, which are rarely total losses for large corporations.

I am looking at potentially a total loss in what I had in Russian equities. And the worst thing is it’s my own government imposing the likely expropriation, not the Russian government.

Company bankruptcy is a permanent loss. And it's not entirely uncommon. It's certainly a LOT more common than expropriation, and I would argue that types of expropriation are not necessarily permanent. Russian holdings are marked down to 0%, but are still being held. If the situation changes, they may again have positive value.

Emerging markets in a standard 60% US / 40% exUS portfolio represent roughly 10% in EM, or 5% in "China+Taiwain+Hong Kong". I don't see any reason why a small allocation to these countries is unreasonable, or more risky than holding 5% in a single company. Less than that if the allocation includes bonds.

If you held a standard EM portfolio, your russian equities weren't noticeable. It being marked down to 0 was basically within normal daily volatility given how little exposure there was.

So it's an entirely reasonable analogy.

You are assuming a standard total international fund. I had a specific russia allocation. Many emerging markets funds were 10-15% Russia (like FBDE or EYLD). That’s noticeable.

Even in bankruptcy, shareholders often recover some value. It’s rarely a total loss for the investor if a mega cap like apple were to go bankrupt. It’s unlikely one of those mega caps (big enough to be 4% of index) would go bankrupt and result in a 100% loss. I can’t even think of the last time some mega was a total loss? Closest thing that comes to mind is Enron or MCI Worldcom.

The china thing on the other hand. We can see this coming. It’s a high probability scenario and it will crush emerging markets funds (they are about half in China+Taiwan+Hong Kong). Many people have dedicated emerging markets allocations. It’s common.

[Fryxell]

One thing I have learned is that Russian equities were cheap for a reason. The market was pricing in the risk of expropriation (you can’t recover a total loss, when an investment goes to zero). Chinese equities are also very cheap. It’s probably for a reason. And, unlike Russia, they comprise a massive portion of emerging markets indexes (up to half if you count Taiwan as China).

[watchnerd]

What if we take the opposite view...that eventually all (or nearly all) public equity investment will migrate to the US? Is this blatantly unreasonable?

In the unlikely event that this actually could happen, a global market weight port would still capture it

Let's try a numerical example. Suppose that today, the US market is worth 100 units, and foreign markets are also worth 100 units. 200 years later, adjusted for inflation, the US market comes to be worth 2000 units, and the foreign markets, 200 units. To me, this is tantamount to nearly all public equity investment migrating to the US.

So what is our rate of return? A market-based weighting today, would put 50% into the US, and 50% foreign. The US portion grows 20X, while the foreign portion, 2X. If we baseline the portfolio at 100, it goes to 1100. But had the initial portfolio been 100% US and 0% foreign, it would have grown from 100 to 2000.... so, a difference of 2000 vs. 1100. Bit of a difference, no?

The global market weight port will capture the growth in market cap of whichever region outperforms.

Your hypothesis assumes you can correctly guess which will outperform.

With the GMW port, you don't have to guess, as you will capture whichever one beats the other.

[Nathan Drake]

China is currently 8.4% of VG's Total Int'l Stock Index Fund. Investors can decide if they think 8.4% represents "a very small part of" their international equity sleeve and where that fits in their portfolio. Some who post here hold 20% int'l, some 40%, some 50%. (And some with as little as 0%.)

So if we look at two investors, one that owns VT (US and exUS) and the other that owns only VTI (US only), the US only investor has more allocated to single companies (Apple, Microsoft, etc) than the global investor has allocated to an ENTIRE country comprising of many companies within China.

Why are we so concerned about a small allocation to a large country but we aren’t when it comes to a single company?

Emerging markets indexes are usually nearly 50% in China+Taiwan+Hong Kong. A loss due to geopolitical expropriation would be a permanent total loss.

If Apple or Microsoft drop by 50% that is often temporary. Even if these companies went bankrupt, you would probably still recover some partial value as a shareholder.

So this isn’t a good analogy. One is a total loss by political fiat—expropriation. The other is your more typical equity risk of market declines or bankruptcy, which are rarely total losses for large corporations.

I am looking at potentially a total loss in what I had in Russian equities. And the worst thing is it’s my own government imposing the likely expropriation, not the Russian government.

Company bankruptcy is a permanent loss. And it's not entirely uncommon. It's certainly a LOT more common than expropriation, and I would argue that types of expropriation are not necessarily permanent. Russian holdings are marked down to 0%, but are still being held. If the situation changes, they may again have positive value.

Emerging markets in a standard 60% US / 40% exUS portfolio represent roughly 10% in EM, or 5% in "China+Taiwain+Hong Kong". I don't see any reason why a small allocation to these countries is unreasonable, or more risky than holding 5% in a single company. Less than that if the allocation includes bonds.

If you held a standard EM portfolio, your russian equities weren't noticeable. It being marked down to 0 was basically within normal daily volatility given how little exposure there was.

So it's an entirely reasonable analogy.

You are assuming a standard total international fund. I had a specific russia allocation. Many emerging markets funds were 10-15% Russia (like FBDE or EYLD). That’s noticeable.

Even in bankruptcy, shareholders often recover some value. It’s rarely a total loss for the investor if a mega cap like apple were to go bankrupt. It’s unlikely one of those mega caps (big enough to be 4% of index) would go bankrupt and result in a 100% loss. I can’t even think of the last time some mega was a total loss? Closest thing that comes to mind is Enron or MCI Worldcom.

The china thing on the other hand. We can see this coming. It’s a high probability scenario and it will crush emerging markets funds (they are about half in China+Taiwan+Hong Kong). Many people have dedicated emerging markets allocations. It’s common.

So don’t hold an overly concentrated position in single countries that are not represented largely in MCW?

That’s the lesson, not that EM or China should be avoided entirely.

No, expropriation is NOT a high probability event. Company bankruptcy is much higher, and recovery won’t be much when it happens.

Regardless, it’s not a permanent loss in so much as other EM countries may grow larger as a result over time.

[Logan Roy]

So if we look at two investors, one that owns VT (US and exUS) and the other that owns only VTI (US only), the US only investor has more allocated to single companies (Apple, Microsoft, etc) than the global investor has allocated to an ENTIRE country comprising of many companies within China.

Why are we so concerned about a small allocation to a large country but we aren’t when it comes to a single company?

Emerging markets indexes are usually nearly 50% in China+Taiwan+Hong Kong. A loss due to geopolitical expropriation would be a permanent total loss.

If Apple or Microsoft drop by 50% that is often temporary. Even if these companies went bankrupt, you would probably still recover some partial value as a shareholder.

So this isn’t a good analogy. One is a total loss by political fiat—expropriation. The other is your more typical equity risk of market declines or bankruptcy, which are rarely total losses for large corporations.

I am looking at potentially a total loss in what I had in Russian equities. And the worst thing is it’s my own government imposing the likely expropriation, not the Russian government.

Company bankruptcy is a permanent loss. And it's not entirely uncommon. It's certainly a LOT more common than expropriation, and I would argue that types of expropriation are not necessarily permanent. Russian holdings are marked down to 0%, but are still being held. If the situation changes, they may again have positive value.

Emerging markets in a standard 60% US / 40% exUS portfolio represent roughly 10% in EM, or 5% in "China+Taiwain+Hong Kong". I don't see any reason why a small allocation to these countries is unreasonable, or more risky than holding 5% in a single company. Less than that if the allocation includes bonds.

If you held a standard EM portfolio, your russian equities weren't noticeable. It being marked down to 0 was basically within normal daily volatility given how little exposure there was.

So it's an entirely reasonable analogy.

You are assuming a standard total international fund. I had a specific russia allocation. Many emerging markets funds were 10-15% Russia (like FBDE or EYLD). That’s noticeable.

Even in bankruptcy, shareholders often recover some value. It’s rarely a total loss for the investor if a mega cap like apple were to go bankrupt. It’s unlikely one of those mega caps (big enough to be 4% of index) would go bankrupt and result in a 100% loss. I can’t even think of the last time some mega was a total loss? Closest thing that comes to mind is Enron or MCI Worldcom.

The china thing on the other hand. We can see this coming. It’s a high probability scenario and it will crush emerging markets funds (they are about half in China+Taiwan+Hong Kong). Many people have dedicated emerging markets allocations. It’s common.

So don’t hold an overly concentrated position in single countries that are not represented largely in MCW?

That’s the lesson, not that EM or China should be avoided entirely.

No, expropriation is NOT a high probability event. Company bankruptcy is much higher, and recovery won’t be much when it happens.

Regardless, it’s not a permanent loss in so much as other EM countries may grow larger as a result over time.

Yes – I think these arguments against investing in regions like China altogether could really be extended to not investing in stocks at all. If something happens that forces China to take such drastic measures, and cut itself off from most the world's economy, the impacts of whatever that is on global markets will probably be catastrophic.

Taiwan accounts for 50% of the world's semiconductor industry (afaik), and if China controls that, who know what that would mean for Big Tech, the EV industry, etc. I think a very large part of being invested in stocks over the next half century is the potential that the world will choose diplomatic solutions and prioritise trade. For everything else, there's TIPS and gold, maybe bitcoin.

[Apathizer]

For everything else, there's TIPS and gold, maybe bitcoin.

Bonds seem like a much better diversifier than the last two.

[burritoLover]

Hmm, let's think about US risks that can have an effect on long-term returns:
rapidly accelerating gov't spending and debt-to-GDP ratio
rapidly declining birth rate, increasing age, declining academic scores
rapidly increasing political risks (gulf between both parties, willingness of both parties to put the country at risk for political agendas)
rapidly increasing gov't intervention in markets (QE, stimulus and interest rate manipulation at a the drop of a hat and continuing well after the crisis is adverted, bailouts of companies that should have gone out of business, policies designed to try to keep the stock market happy)
rapidly increasing income inequality
poor immigration policies
high relative stock market valuations

Many of the above may be viewed as excellent outcomes and thus decreasing risk. Just saying.

I don't know about "many", but I assume you are referring to the following:
QE, stimulus and interest rate manipulation at a the drop of a hat and continuing well after the crisis is adverted, bailouts of companies that should have gone out of business, policies designed to try to keep the stock market happy

That is true - they would reduce stock market risk but also stock market returns over the long haul. If it is less risky to hold equities, money will flow into equities, increasing valuations and reducing returns.

[Marseille07]

The global market weight port will capture the growth in market cap of whichever region outperforms.

Your hypothesis assumes you can correctly guess which will outperform.

With the GMW port, you don't have to guess, as you will capture whichever one beats the other.

US-only port doesn't have to guess, either. It's not like we guessed to bet on US-only. It's been our proposition all along regardless of ex-US.

[watchnerd]

US-only port doesn't have to guess, either. It's not like we guessed to bet on US-only. It's been our proposition all along regardless of ex-US.

You lost me on that one.

How is a bet that any single region will outperform all others in the future not a guess?

[Marseille07]

You lost me on that one.

How is a bet that any single region will outperform all others in the future not a guess?

Because your framing doesn't make sense. If a Japanese investor buys Nikkei 225 stocks, are they betting that Nikkei 225 will outperform everyone else? Probably not.

You can call it home country bias but that's different than guessing.

[watchnerd]

You lost me on that one.

How is a bet that any single region will outperform all others in the future not a guess?

Because your framing doesn't make sense. If a Japanese investor buys Nikkei 225 stocks, are they betting that Nikkei 225 will outperform everyone else? Probably not.

You can call it home country bias but that's different than guessing.

Gotcha.

Home country bias might not be a conscious bet or guess from a behavioral POV, but putting all your eggs in one basket is still the same range of potential future outcomes as if one did it with the intention to make a concentrated bet.

[Logan Roy]

For everything else, there's TIPS and gold, maybe bitcoin.

Bonds seem like a much better diversifier than the last two.

I think the big problem with Treasuries is that *most* of the time, their correlation with stocks is positive. It's just when it's positive, and returns are positive, we don't notice the problem (even though it's usually a drag on returns). And over reasonable periods, bond and equity valuations tend to track each other (Bond Equity Earnings-yield Ratio). Which means there doesn't tend to be much/any of a 'rebalancing effect'. Based on past data, I think it's difficult to argue that gold isn't the better diversifier.

I'd say TIPS contain all the diversification benefits of Treasuries, plus guaranteed inflation hedging over the duration of a TIPS. Gold then backs up TIPS because it hedges dollar weakness and potential cracks in the US economy, and what happens if China defaults on a lot of debt. And then crypto is obviously a wildcard, but in the event of a China/US conflict, there'd presumably be a lot of Chinese citizens trying to get their money out of China, and I think gold and crypto would have to be the two most likely routes. So I think crypto is a wildcard for long tail risk.

[watchnerd]

For everything else, there's TIPS and gold, maybe bitcoin.

Bonds seem like a much better diversifier than the last two.

I think the big problem with Treasuries is that *most* of the time, their correlation with stocks is positive. It's just when it's positive, and returns are positive, we don't notice the problem (even though it's usually a drag on returns). And over reasonable periods, bond and equity valuations tend to track each other (Bond Equity Earnings-yield Ratio). Which means there doesn't tend to be much/any of a 'rebalancing effect'. Based on past data, I think it's difficult to argue that gold isn't the better diversifier.

I'd say TIPS contain all the diversification benefits of Treasuries, plus guaranteed inflation hedging over the duration of a TIPS. Gold then backs up TIPS because it hedges dollar weakness and potential cracks in the US economy, and what happens if China defaults on a lot of debt. And then crypto is obviously a wildcard, but in the event of a China/US conflict, there'd presumably be a lot of Chinese citizens trying to get their money out of China, and I think gold and crypto would have to be the two most likely routes. So I think crypto is a wildcard for long tail risk.

I hold both of those long tail assets at their market cap weights relative to stocks / bonds.

[Marseille07]

Gotcha.

Home country bias might not be a conscious bet or guess from a behavioral POV, but putting all your eggs in one basket is still the same range of potential future outcomes as if one did it with the intention to make a concentrated bet.

Spreading your bet doesn't really reduce your overall risk. It does reduce left-tail risk on the US. To some extent, US-only is a bet where we assume the United States to remain the world's only superpower and avoids left-tail risk. This is not to say we're correct, but that's the bet we take on, not guessing outperformance of equities.

[happyisland]

Gotcha.

Home country bias might not be a conscious bet or guess from a behavioral POV, but putting all your eggs in one basket is still the same range of potential future outcomes as if one did it with the intention to make a concentrated bet.

Spreading your bet doesn't really reduce your overall risk. It does reduce left-tail risk on the US. To some extent, US-only is a bet where we assume the United States to remain the world's only superpower and avoids left-tail risk. This is not to say we're correct, but that's the bet we take on, not guessing outperformance of equities.

Wait, so don't "Diversify, Diversify, Diversify"?

[Marseille07]

Wait, so don't "Diversify, Diversify, Diversify"?

As I said, if your goal is to avoid the US left-tail risk then adding international reduces that.

I don't know who said diversify 3 times, but Bogle actually said we don't need international and cap it at 20% at most.

[watchnerd]

Spreading your bet doesn't really reduce your overall risk. It does reduce left-tail risk on the US. To some extent, US-only is a bet where we assume the United States to remain the world's only superpower and avoids left-tail risk. This is not to say we're correct, but that's the bet we take on, not guessing outperformance of equities.

So you prefer concentrated risk to distributed risk?

If that's the case, why not take this to the logical conclusion and only buy the very best stock?

Forget the whole US market, just pick the next Tesla or Amazon.

[Marseille07]

So you prefer concentrated risk to distributed risk??

If that's the case, why not take this to the logical conclusion and only buy the very best stock?

Forget the whole US market, just pick the next Tesla or Amazon.

OK, tell me how to find the next Tesla or Amazon and we have a deal. I'm passively investing in the US because I don't know how to find them.

If you don't know either, please don't suggest something you can't do.

[Nathan Drake]

Wait, so don't "Diversify, Diversify, Diversify"?

As I said, if your goal is to avoid the US left-tail risk then adding international reduces that.

I don't know who said diversify 3 times, but Bogle actually said we don't need international and cap it at 20% at most.

US can have left-tail risk and still be the world's superpower.

Certainly that was the case in the 1960s through early 1990s.

[Marseille07]

US can have left-tail risk and still be the world's superpower.

Certainly that was the case in the 1960s through early 1990s.

I don't know. I will give you that arguably 1965~1975 was. I don't think many people think the "roaring 80s" represents left-tail risk.

[Nathan Drake]

US can have left-tail risk and still be the world's superpower.

Certainly that was the case in the 1960s through early 1990s.

I don't know. I will give you that arguably 1965~1975 was. I don't think many people think the "roaring 80s" represents left-tail risk.

Relative to other investment opportunities, especially for a retiree with sequence risk.

[Marseille07]

Relative to other investment opportunities.

I already clarified above that that's NOT what the US-only people are after.