How much International allocation is good insurance?

[Nathan Drake]

Australia is pretty big, I’m not an expert in geography like Peter Zeihan but last I checked it was only slightly smaller than the United States

Hm, the US market cap is some 20 times that of Australia, and the population is more than 10 times that of Australia. So no, Australia is not "slightly smaller than the United States". I hope you're not investing by square miles, then Russia may be a better pick.

‘Twas a joke

[Marseille07]

Does the 50 years of investing in the world series of articles by Siamond help? 50 years of stock & bond data analyzed from the perspective of 16 different countries (analyzing real returns in the local currency).

https://www.bogleheads.org/blog/2020/03 ... ld-part-1/
Parts 2 & 3 are linked from there.

I'll just pull out one of the graphs from part 2:

100% local stock market vs 100% global cap weight, real returns vs max drawdown, in the local currency. E.g., an Australian investor investing 100% in Australian equities vs investing in 100% global cap weight equities. Note that the differences in returns & drawdown in the right hand side should be solely due to local currency performance differences.

I have nothing against real historical data. The synthetic data comment referred to the paper Ben Felix cited, which Nathan Drake quoted, which I believe is this paper: https://papers.ssrn.com/sol3/papers.cfm ... id=4227132

This paper doesn't automatically determine that single-country SWR goes necessarily lower than a mix of local + foreign stocks.

[Marseille07]

History has made me pretty distrustful of stock markets in general, and that's the reason I invest about half of my portfolio in direct real estate.

Why distrustful? While RE is safer, I think it is commonly believed that the markets go up more than RE. Or, should we see a slowdown of equities then RE might also slow down.

[Nathan Drake]

Does the 50 years of investing in the world series of articles by Siamond help? 50 years of stock & bond data analyzed from the perspective of 16 different countries (analyzing real returns in the local currency).

https://www.bogleheads.org/blog/2020/03 ... ld-part-1/
Parts 2 & 3 are linked from there.

I'll just pull out one of the graphs from part 2:

100% local stock market vs 100% global cap weight, real returns vs max drawdown, in the local currency. E.g., an Australian investor investing 100% in Australian equities vs investing in 100% global cap weight equities. Note that the differences in returns & drawdown in the right hand side should be solely due to local currency performance differences.

I have nothing against real historical data. The synthetic data comment referred to the paper Ben Felix cited, which Nathan Drake quoted, which I believe is this paper: https://papers.ssrn.com/sol3/papers.cfm ... id=4227132

This paper doesn't automatically determine that single-country SWR goes necessarily lower than a mix of local + foreign stocks.

The paper shows that it narrows the dispersion and risk of outcomes which is precisely what you would expect and desire from a diversified portfolio.

If you prefer skewness, then maybe single country investing is more your style, but the drawbacks make that personally not tenable for me

[visualguy]

Care to explain how an 8.3% return isn't a good way to invest? That seems pretty satisfactory to me, even if the US HAS performed better over the very long term.

If half your portfolio is in Real Estate, you're subject to even more risks than the markets as it's idiosyncratic and probably has quite a bit of leverage on top of it as well.

Annualized real return in USD for the US during 1900-2020 was 6.6%. It was 5.3% for the world (including US). That's a huge difference when compounded over 120 years. Adding ex-US to the mix really cost you dearly over that very long period, and it has been even more brutal over the last few decades, of course.

I have to hold my nose even with my US investment when considering the return for the wild roller coaster ride, and the fact that my return has been better on my real estate without the wild ride. There is no way I would be able to tolerate ex-US performance. If the US had been like ex-US, I would have just gone all real estate long ago like my parents and grandparents did, and like some of my colleagues do (other than their 401(k)).

My real estate holdings are by far my least risky assets all things considered. Yes, lower risk and higher returns. It does require some work, though.

Sure, it’s big, but 5.3% is “good enough”

From 1950-1990 Japanese stocks utterly destroyed US returns. Some would say “that’s long enough” to place conviction into Japan only.

Since 1990, Japan has had negative real returns.

I can’t invest for 1950-1990 Japan. I can’t invest for 1900-2020 US. I can only invest into an unknown future. And all I know is I’m perfectly okay taking the tradeoff of 5.3% vs attempting to achieve 6.6% and actually ending up with negative real returns instead.

Your real estate holdings could be luck. It’s not more reward with less risk. You’re not marking to market, so you never know the true volatility. It also requires more work.

This would go back to all the arguments covered in many other threads about how salvation isn't going to come from Europe, Japan, China, etc. We're stuck with the world we have in all likelihood for the remainder of our investment horizon. I think all we can do is agree to disagree, and let's see where things stand in the future in terms of the results of our strategies.

Let me tell you one more thing that depresses me about ex-US which isn't discussed as frequently. When you have a major rising star country, we've seen the US government kick in strongly. We saw it in the 80s when trying to counter the rise of Japan, and we've been seeing it in a huge way in recent years with US actions on China. There's no reason to believe it won't happen with India if they rise next - same stakes. The US is in a uniquely strong position in the world to orchestrate this, it is not hesitant or shy about exercising this power to maintain its top position, and this power isn't going away within our lifetime. This limits the ability of other countries to rise before they get whacked, and I find it to be a distorting factor from the perspective of investing globally.

[Marseille07]

This would go back to all the arguments covered in many other threads about how salvation isn't going to come from Europe, Japan, China, etc. We're stuck with the world we have in all likelihood for the remainder of our investment horizon. I think all we can do is agree to disagree, and let's see where things stand in the future in terms of the results of our strategies.

Let me tell you one more thing that depresses me about ex-US which isn't discussed as frequently. When you have a major rising star country, we've seen the US government kick in strongly. We saw it in the 80s when trying to counter the rise of Japan, and we've been seeing it in a huge way in recent years with US actions on China. There's no reason to believe it won't happen with India if they rise next - same stakes. The US is in a uniquely strong position in the world to orchestrate this, it is not hesitant or shy about exercising this power to maintain its top position, and this power isn't going away within our lifetime. This limits the ability of other countries to rise before they get whacked, and I find it to be a distorting factor from the perspective of investing globally.

China has a huge domestic economy though. Companies like Tencent for example do not have to make worldwide hits - they just need to make money in the Chinese market. The US can only whack certain businesses like TikTok and Huawei.

[Nathan Drake]

Care to explain how an 8.3% return isn't a good way to invest? That seems pretty satisfactory to me, even if the US HAS performed better over the very long term.

If half your portfolio is in Real Estate, you're subject to even more risks than the markets as it's idiosyncratic and probably has quite a bit of leverage on top of it as well.

Annualized real return in USD for the US during 1900-2020 was 6.6%. It was 5.3% for the world (including US). That's a huge difference when compounded over 120 years. Adding ex-US to the mix really cost you dearly over that very long period, and it has been even more brutal over the last few decades, of course.

I have to hold my nose even with my US investment when considering the return for the wild roller coaster ride, and the fact that my return has been better on my real estate without the wild ride. There is no way I would be able to tolerate ex-US performance. If the US had been like ex-US, I would have just gone all real estate long ago like my parents and grandparents did, and like some of my colleagues do (other than their 401(k)).

My real estate holdings are by far my least risky assets all things considered. Yes, lower risk and higher returns. It does require some work, though.

Sure, it’s big, but 5.3% is “good enough”

From 1950-1990 Japanese stocks utterly destroyed US returns. Some would say “that’s long enough” to place conviction into Japan only.

Since 1990, Japan has had negative real returns.

I can’t invest for 1950-1990 Japan. I can’t invest for 1900-2020 US. I can only invest into an unknown future. And all I know is I’m perfectly okay taking the tradeoff of 5.3% vs attempting to achieve 6.6% and actually ending up with negative real returns instead.

Your real estate holdings could be luck. It’s not more reward with less risk. You’re not marking to market, so you never know the true volatility. It also requires more work.

This would go back to all the arguments covered in many other threads about how salvation isn't going to come from Europe, Japan, China, etc. We're stuck with the world we have in all likelihood for the remainder of our investment horizon. I think all we can do is agree to disagree, and let's see where things stand in the future in terms of the results of our strategies.

Let me tell you one more thing that depresses me about ex-US which isn't discussed as frequently. When you have a major rising star country, we've seen the US government kick in strongly. We saw it in the 80s when trying to counter the rise of Japan, and we've been seeing it in a huge way in recent years with US actions on China. There's no reason to believe it won't happen with India if they rise next - same stakes. The US is in a uniquely strong position in the world to orchestrate this, it is not hesitant or shy about exercising this power to maintain its top position, and this power isn't going away within our lifetime. This limits the ability of other countries to rise before they get whacked, and I find it to be a distorting factor from the perspective of investing globally.

Much of the lousy recent return of exUS was due to revaluation and not necessarily issues with their society or governments.

Valuations are historically cheap or normal now so that shouldn’t be a major headwind.

US actually didn’t do anything to counter Japan, we are not competing in their industries generally speaking. Their stock market just got way overvalued. Japanese stocks also had better fundamental performance this past decade but still took a revaluation lower

[Marseille07]

Much of the lousy recent return of exUS was due to revaluation and not necessarily issues with their society or governments.

Valuations are historically cheap or normal now so that shouldn’t be a major headwind.

US actually didn’t do anything to counter Japan, we are not competing in their industries generally speaking. Their stock market just got way overvalued. Japanese stocks also had better fundamental performance this past decade but still took a revaluation lower

Which era are you talking about?

There have been plenty of battles like CPUs, automobiles, gaming etc etc.

[visualguy]

Much of the lousy recent return of exUS was due to revaluation and not necessarily issues with their society or governments.

Valuations are historically cheap or normal now so that shouldn’t be a major headwind.

US actually didn’t do anything to counter Japan, we are not competing in their industries generally speaking. Their stock market just got way overvalued. Japanese stocks also had better fundamental performance this past decade but still took a revaluation lower

Which era are you talking about?

There have been plenty of battles like CPUs, automobiles, gaming etc etc.

I think Nathan needs to read about the economic war fought with Japan by the US in the 80s: the Plaza Accord as well as the trade war.

[visualguy]

This would go back to all the arguments covered in many other threads about how salvation isn't going to come from Europe, Japan, China, etc. We're stuck with the world we have in all likelihood for the remainder of our investment horizon. I think all we can do is agree to disagree, and let's see where things stand in the future in terms of the results of our strategies.

Let me tell you one more thing that depresses me about ex-US which isn't discussed as frequently. When you have a major rising star country, we've seen the US government kick in strongly. We saw it in the 80s when trying to counter the rise of Japan, and we've been seeing it in a huge way in recent years with US actions on China. There's no reason to believe it won't happen with India if they rise next - same stakes. The US is in a uniquely strong position in the world to orchestrate this, it is not hesitant or shy about exercising this power to maintain its top position, and this power isn't going away within our lifetime. This limits the ability of other countries to rise before they get whacked, and I find it to be a distorting factor from the perspective of investing globally.

China has a huge domestic economy though. Companies like Tencent for example do not have to make worldwide hits - they just need to make money in the Chinese market. The US can only whack certain businesses like TikTok and Huawei.

Pretty much everything needs chips.

[halfnine]

...Let me tell you one more thing that depresses me about ex-US which isn't discussed as frequently. When you have a major rising star country, we've seen the US government kick in strongly. We saw it in the 80s when trying to counter the rise of Japan, and we've been seeing it in a huge way in recent years with US actions on China. There's no reason to believe it won't happen with India if they rise next - same stakes. The US is in a uniquely strong position in the world to orchestrate this, it is not hesitant or shy about exercising this power to maintain its top position, and this power isn't going away within our lifetime. This limits the ability of other countries to rise before they get whacked, and I find it to be a distorting factor from the perspective of investing globally...

US military and economic might and is determination on geopolitics has been waning. It isn't the first country to experience this and it won't be the last. And it certainly can have an impact on the US market returns over my lifetime.

[secondopinion]

It didn't make sense to be sarcastic because no one is opposing the idea of adding some Australia.

Right. It performed better, did it not? Why not 100% then?

Small and limited market.

By the way, it has underperformed US during my accumulation period of close to 30 years.

I would be hesitant to invest 100% in either one. But why make the choice when one can have both? Australia might be limited as a market, but it is kind of unique in its region economically and in the world geographically.

This goes back to what I mentioned before. I would have to overweigh it by a very large amount to make a difference. It is just 2.1% of world market cap. Without a big overweighing, it's pretty much just a pointless complication and headache.

Like I said, I thought about a bunch of these options of selective investment in foreign stock markets, but could never figure out a strategy that made sense to me. Indexing the whole thing (ex-US) doesn't qualify as a reasonable investment in my opinion based on its long-term return for the volatility.

It's interesting (and frightening) that simply indexing the stock market hasn't actually been a good way to invest your money in most foreign markets. There are only a few countries where this has provided solid long-term returns (in USD) for the risk. History has made me pretty distrustful of stock markets in general, and that's the reason I invest about half of my portfolio in direct real estate.

Some of this volatility is currency related and will never be compensated. However, that FX risk is actually helpful long-term if one is trying to hedge a weaker dollar in foreign trade; international stocks and especially with unhedged international bonds help do this. But since not many fall into the category of needing in the shorter-term but not immediate for a given foreign currency (in which one would buy bonds in that country) or have a massive amount of wealth that they are trying to merely preserve global wealth for 50+ years, unhedged international bonds are not in practice needed. International stocks are all that makes any bit of sense for younger investors to hedge these FX risks of trade in a global economy in the long-run. Older investors are more likely to experience the FX volatility as unhelpful noise, and some tilt towards the US does make sense.

If indexing has not so great of returns by itself, then active investing will be fighting for alpha over not so great of returns. It is that simple. It is not a weakness in indexing; this is the reality of the market.

I am not going to argue that real estate ran as a rental is like a business and is a not bad choice if you like it; it has some considerable correlations with the US market (as do international stocks), but it can perform when things come short in the US market. There is not enough money to buy everything, so some selection has to be made. You made your choice with real estate, I chose international stocks. At the end of the day, if the US market struggles, hopefully our other business ventures will make up the difference.

[secondopinion]

Care to explain how an 8.3% return isn't a good way to invest? That seems pretty satisfactory to me, even if the US HAS performed better over the very long term.

If half your portfolio is in Real Estate, you're subject to even more risks than the markets as it's idiosyncratic and probably has quite a bit of leverage on top of it as well.

Annualized real return in USD for the US during 1900-2020 was 6.6%. It was 5.3% for the world (including US). That's a huge difference when compounded over 120 years. Adding ex-US to the mix really cost you dearly over that very long period, and it has been even more brutal over the last few decades, of course.

I have to hold my nose even with my US investment when considering the return for the wild roller coaster ride, and the fact that my return has been better on my real estate without the wild ride. There is no way I would be able to tolerate ex-US performance. If the US had been like ex-US, I would have just gone all real estate long ago like my parents and grandparents did, and like some of my colleagues do (other than their 401(k)).

My real estate holdings are by far my least risky assets all things considered. Yes, lower risk and higher returns. It does require some work, though.

Sure, it’s big, but 5.3% is “good enough”

From 1950-1990 Japanese stocks utterly destroyed US returns. Some would say “that’s long enough” to place conviction into Japan only.

Since 1990, Japan has had negative real returns.

I can’t invest for 1950-1990 Japan. I can’t invest for 1900-2020 US. I can only invest into an unknown future. And all I know is I’m perfectly okay taking the tradeoff of 5.3% vs attempting to achieve 6.6% and actually ending up with negative real returns instead.

Your real estate holdings could be luck. It’s not more reward with less risk. You’re not marking to market, so you never know the true volatility. It also requires more work.

This would go back to all the arguments covered in many other threads about how salvation isn't going to come from Europe, Japan, China, etc. We're stuck with the world we have in all likelihood for the remainder of our investment horizon. I think all we can do is agree to disagree, and let's see where things stand in the future in terms of the results of our strategies.

Let me tell you one more thing that depresses me about ex-US which isn't discussed as frequently. When you have a major rising star country, we've seen the US government kick in strongly. We saw it in the 80s when trying to counter the rise of Japan, and we've been seeing it in a huge way in recent years with US actions on China. There's no reason to believe it won't happen with India if they rise next - same stakes. The US is in a uniquely strong position in the world to orchestrate this, it is not hesitant or shy about exercising this power to maintain its top position, and this power isn't going away within our lifetime. This limits the ability of other countries to rise before they get whacked, and I find it to be a distorting factor from the perspective of investing globally.

Was there actually any government action here from the US? This event was on investors and the Japanese government and banks.

I doubt that the US has been out to "whack" anybody as much as ensure that trade is to their benefit (which does not necessarily mean that the other side loses in the trade) like any country does. Do you have proof to the contrary?

[bendix]

I think I understand the rationale of why people diversify with international stocks, and for some older holdings I have in my portfolio I have done this deliberately myself, but... it appears to me more and more that in reality international stocks go up and down in lockstep with US stocks and that they very reliably underperform US stocks. So I can see where I pay a price for this diversification but I dont see how in times of globalisation I am getting a benefit. Does someone have a good response to that?

[strummer6969]

perhaps returns follow more of a Gaussian distribution where international can be expected to diversify certain risks of a U.S.-only portfolio. That's why I hold them, not for any particular insurance purposes.

Isn't diversification of risk exactly the business that Geico is in?

Isn't that a different type of risk? Natural disasters are localized and not perfectly correlated in 'black swan' events. I don't see how you can diversify away systemic risk with international stocks. It hasn't worked in practice.

If we're talking about risks of secular underperformance, sure. That's why I have international. But even then there's no guarantee that the global market will perform well if the U.S. underperforms.

[visualguy]

This would go back to all the arguments covered in many other threads about how salvation isn't going to come from Europe, Japan, China, etc. We're stuck with the world we have in all likelihood for the remainder of our investment horizon. I think all we can do is agree to disagree, and let's see where things stand in the future in terms of the results of our strategies.

Let me tell you one more thing that depresses me about ex-US which isn't discussed as frequently. When you have a major rising star country, we've seen the US government kick in strongly. We saw it in the 80s when trying to counter the rise of Japan, and we've been seeing it in a huge way in recent years with US actions on China. There's no reason to believe it won't happen with India if they rise next - same stakes. The US is in a uniquely strong position in the world to orchestrate this, it is not hesitant or shy about exercising this power to maintain its top position, and this power isn't going away within our lifetime. This limits the ability of other countries to rise before they get whacked, and I find it to be a distorting factor from the perspective of investing globally.

Was there actually any government action here from the US? This event was on investors and the Japanese government and banks.

I doubt that the US has been out to "whack" anybody as much as ensure that trade is to their benefit (which does not necessarily mean that the other side loses in the trade) like any country does. Do you have proof to the contrary?

Absolutely. It was a two-pronged approach. A trade war was started against Japan with a bunch of trade bills while applying pressure on them to sign the Plaza Accord to devalue the US dollar against their currency to curb their exports. After that, the US government imposed 100% tariffs on many imports from Japan, effectively blocking them from the American market.

With China, there's no need to hit the history books - the whacking has been happening on a daily basis, and on a much grander scope and scale. We now also have major government industrial policy and huge subsidies kicking in (semiconductors and green energy) which also affects Europe and other allies. Let's not forget that the previous US government was trying to start a trade war with Europe as well.

The US has no tolerance for the rise of peer competitors, and it has the ability and willingness to thwart them to maintain its top position. This is something to keep in mind when thinking about the prospects of ex-US indexing.

[Nathan Drake]

So I can see where I pay a price for this diversification but I dont see how in times of globalisation I am getting a benefit. Does someone have a good response to that?

Because markets move through long cycles

Just because the past decade was poor does not mean it won’t perform better while US does not sometime in the future.

The long term data shows similar returns for both asset classes, so be prepared to hold them for the long term

[PoorHomieQuan]

perhaps returns follow more of a Gaussian distribution where international can be expected to diversify certain risks of a U.S.-only portfolio. That's why I hold them, not for any particular insurance purposes.

Isn't diversification of risk exactly the business that Geico is in?

Isn't that a different type of risk? Natural disasters are localized and not perfectly correlated in 'black swan' events. I don't see how you can diversify away systemic risk with international stocks. It hasn't worked in practice.

If we're talking about risks of secular underperformance, sure. That's why I have international. But even then there's no guarantee that the global market will perform well if the U.S. underperforms.

My point was mainly semantic. Diversifying risk is insurance by my definition. Like you I have a hard time imagining a world where the US withers and other stuff prospers, that's why my international allocation is less than market weight.

[strummer6969]

perhaps returns follow more of a Gaussian distribution where international can be expected to diversify certain risks of a U.S.-only portfolio. That's why I hold them, not for any particular insurance purposes.

Isn't diversification of risk exactly the business that Geico is in?

Isn't that a different type of risk? Natural disasters are localized and not perfectly correlated in 'black swan' events. I don't see how you can diversify away systemic risk with international stocks. It hasn't worked in practice.

If we're talking about risks of secular underperformance, sure. That's why I have international. But even then there's no guarantee that the global market will perform well if the U.S. underperforms.

My point was mainly semantic. Diversifying risk is insurance by my definition. Like you I have a hard time imagining a world where the US withers and other stuff prospers, that's why my international allocation is less than market weight.

Gotcha. I misunderstood.

Same. I have less than market cap international. It's enough to where I won't have FOMO if it outperforms.

[Nathan Drake]

perhaps returns follow more of a Gaussian distribution where international can be expected to diversify certain risks of a U.S.-only portfolio. That's why I hold them, not for any particular insurance purposes.

Isn't diversification of risk exactly the business that Geico is in?

Isn't that a different type of risk? Natural disasters are localized and not perfectly correlated in 'black swan' events. I don't see how you can diversify away systemic risk with international stocks. It hasn't worked in practice.

If we're talking about risks of secular underperformance, sure. That's why I have international. But even then there's no guarantee that the global market will perform well if the U.S. underperforms.

My point was mainly semantic. Diversifying risk is insurance by my definition. Like you I have a hard time imagining a world where the US withers and other stuff prospers, that's why my international allocation is less than market weight.

It's always hard to imagine the unimaginable. In 1989 it would be unthinkable that anyone other than Japan would be the top economic superpower. In 1979 it would be unthinkable that the US stock market would ever produce a reasonable return ever again versus bonds (death of equities).

The market has a way of surprising us all.

[Marseille07]

It's always hard to imagine the unimaginable. In 1989 it would be unthinkable that anyone other than Japan would be the top economic superpower. In 1979 it would be unthinkable that the US stock market would ever produce a reasonable return ever again versus bonds (death of equities).

The market has a way of surprising us all.

Staying the course means you ignore surprises even when you face them.

As far as international being good insurance, some advisors mention 0~20% which is probably a reasonable range.

[Nathan Drake]

It's always hard to imagine the unimaginable. In 1989 it would be unthinkable that anyone other than Japan would be the top economic superpower. In 1979 it would be unthinkable that the US stock market would ever produce a reasonable return ever again versus bonds (death of equities).

The market has a way of surprising us all.

Staying the course means you ignore surprises even when you face them.

As far as international being good insurance, some advisors mention 0~20% which is probably a reasonable range.

Yeah staying the course is important in any strategy

If 0% exUS is fine, then 0% US is also fine

But it’s generally better to stay the course with more diversification than not

[Marseille07]

Yeah staying the course is important in any strategy

If 0% exUS is fine, then 0% US is also fine

But it’s generally better to stay the course with more diversification than not

Help me understand how US passive investing isn't diversified?

[halfnine]

It's always hard to imagine the unimaginable. In 1989 it would be unthinkable that anyone other than Japan would be the top economic superpower. In 1979 it would be unthinkable that the US stock market would ever produce a reasonable return ever again versus bonds (death of equities).

The market has a way of surprising us all.

Staying the course means you ignore surprises even when you face them.

As far as international being good insurance, some advisors mention 0~20% which is probably a reasonable range.

Advisors might mention 0-20% but it is likely for the same reason advisors never got fired for recommending IBM either.

[Marseille07]

Advisors might mention 0-20% but it is likely for the same reason advisors never got fired for recommending IBM either.

If their goal is CYA then they want to recommend 20%~40% international not 0%~20%. If they recommend 100% US and the US falters, they're in the hot seat.

[SamB-Ari]

Yeah staying the course is important in any strategy

If 0% exUS is fine, then 0% US is also fine

But it’s generally better to stay the course with more diversification than not

Help me understand how US passive investing isn't diversified?

It is diversified. What's being argued is how much diversification. Which is moot as it depends on many things which is personal taste. Pretty much all of academia has argued that diversification is important, but the definitions and extent are being debated to this day.

At the end of the day, stock prices reflect all future cash flows (profits) discounted to the present. Essentially, ROIC is the rate of return long term for stock prices. Novy-Marx, I think provides the cleanest academic profitability metric of gross profits / change in total assets which is ROIC higher up the balance sheet. Novy-Marx has shown that gross profitability firms tend to be expensive (when measured by book-to-price). Novy-Marx has also shown that current gross profits tend to be sticky and pretty good at forecasting future gross profits.

Stepping back a bit, over time, the U.S. markets have been higher in gross profitability / change in total assets than most countries. There's a reason why exUS investors want U.S. exposure especially when things go badly. Further, adjustments to gross profitability that have a negative impact on actual cashflow returned to U.S. investors are higher when investing internationally (less so between DM and EM). Higher taxes, higher costs of capital (in no way a guarantee of higher profits), and many other inefficiencies will reduce cash flow received by a U.S. investor from firms exUS vs US firms.

Now, this may not be the case. The future is unknown. No one knows if future cash flows returned to investors will continue to be higher in the U.S. vs exUS. So, the best bet would be to invest globally. With two caveats. The first rule is not to lose money. So low fee investment products are a must. And for geographical exposure (personal opinion), I would want to invest in countries with good relations with the United States. Higher returns could be had in less favorable markets, but for me, a dollar saved is a dollar earned.

Which is why I believe, for a U.S. investor, a global developed market weighted index fund is a good starting point. Tilt as needed based on personal preference. If an investor wants more risk in hopes for higher returns, I think diversifying into geographies or factors that attempt to take advantage of mispricing and other market efficiencies, that's fine. For me, I am 100% United States because (another opinion) I don't care about valuations. I care about being exposed to a geography that has high gross profitability, transparent markets, low fees and low exposure to inefficiencies that essentially reduce exposure to future cash flows of firms. exUS developed markets could, in the future, have higher profits returned to shareholders. It's unknowable. I'm personally making a bet that even if that does happen, it won't be any higher than the long term ROIC of U.S. markets, and I'm okay with that.

Burton Malkiel provides some succinct remarks in this regard (he's also a fan of a global market weight index).

Sure, there are a lot of different risks. There are a lot of different factors. And we understand more why stocks go up or down. But if you think you can put this together in a portfolio that will do better than just holding everything, which is what an index fund does, I think you're mistaken.

Yeah. Again though, I've got to tell you though, that if you think that doing that will mean that you will outperform a broad-based index fund, I think you're going to be disappointed.

Source: https://rationalreminder.ca/podcast/252

[halfnine]

Advisors might mention 0-20% but it is likely for the same reason advisors never got fired for recommending IBM either.

If their goal is CYA then they want to recommend 20%~40% international not 0%~20%. If they recommend 100% US and the US falters, they're in the hot seat.

Based on the posts around here, I'd say its the reverse.

[CookieDough]

So I can see where I pay a price for this diversification but I dont see how in times of globalisation I am getting a benefit. Does someone have a good response to that?

Because markets move through long cycles

Just because the past decade was poor does not mean it won’t perform better while US does not sometime in the future.

The long term data shows similar returns for both asset classes, so be prepared to hold them for the long term

This was my question too, about why holding international makes sense if it tracks U.S. ups and downs closely, but doesn't perform as well. I think that was an argument made by one of the big names in finance, though I don't recall which one.

I thought the long-term data showed better performance for U.S. stocks than for international? Wasn't it 6.6% to 5.3%, somewhere upthread? That seems significant to me. If we dump financial advisors for charging a 1.3% annual fee, why would a 1.3% annual difference in returns be trivial?

The other question I have is whether it makes sense to consider a huge company as solely U.S. or international, since so many big companies have branches and markets internationally. For instance, Microsoft, back in the 1990s, made more than half its money from international sales; I'm not sure what the numbers are now. So aren't the big players in the market essentially international companies anyway, whether they're technically U.S. companies or technically based in another country? (Though that argument might support buying international stocks, come to think of it.)

[asif408]

This was my question too, about why holding international makes sense if it tracks U.S. ups and downs closely, but doesn't perform as well. I think that was an argument made by one of the big names in finance, though I don't recall which one.

Because magnitude matters as much as direction. Here's an extreme example, but a good illustration: From January 2000-October 2022, the US total stock market and emerging market value stocks have had total returns within 0.1% of each other: https://www.portfoliovisualizer.com/bac ... ion2_2=100

So no difference, who cares, right? Now, zoom in to a few different periods:

2000-2007: https://www.portfoliovisualizer.com/bac ... ion2_2=100. Both fell about the same in 2000 (EM value actually fell quicker and farther) but the EM value drawdown was shorter and recovered by 2003. For US stocks, on the other hand, the fall was slightly less overall (44% vs. 47% for EM value), but the drawdown was longer and the recovery was slower (not until mid-2006). The same was true in the 2007-2009 crisis, EM fell harder and faster but recovered more quickly. In the last decade the opposite has occurred.

When you zoom out over the whole decade (2000-2010) here is the result: https://www.portfoliovisualizer.com/bac ... ion2_2=100. Two bear markets, in both cases EM value fell more, yet over the decade EM value had a double digit positive real return, while the US stock market had a negative return.

Since 2011, nearly the opposite has occurred: https://www.portfoliovisualizer.com/bac ... ion2_2=100. In the 2010 decade, EM value has had more and longer drawdowns than the US, and has returned nothing for 12 years, while US stocks have delivered double digit returns during that time.

In either period (but particularly in the decade of the 2000s), ask yourself if you would be bothered if one part of the global market returns double digits while another has a negative return, even though correlations were high and tracked the ups and downs closely? That's the idea with diversification internationally. Likely the difference won't be quite as extreme with a broad market international fund, but the concept is still the same.

[CookieDough]

This was my question too, about why holding international makes sense if it tracks U.S. ups and downs closely, but doesn't perform as well. I think that was an argument made by one of the big names in finance, though I don't recall which one.

Because magnitude matters as much as direction. Here's an extreme example, but a good illustration: From January 2000-October 2022, the US total stock market and emerging market value stocks have had total returns within 0.1% of each other: https://www.portfoliovisualizer.com/bac ... ion2_2=100

So no difference, who cares, right? Now, zoom in to a few different periods:

2000-2007: https://www.portfoliovisualizer.com/bac ... ion2_2=100. Both fell about the same in 2000 (EM value actually fell quicker and farther) but the EM value drawdown was shorter and recovered by 2003. For US stocks, on the other hand, the fall was slightly less overall (44% vs. 47% for EM value), but the drawdown was longer and the recovery was slower (not until mid-2006). The same was true in the 2007-2009 crisis, EM fell harder and faster but recovered more quickly. In the last decade the opposite has occurred.

When you zoom out over the whole decade (2000-2010) here is the result: https://www.portfoliovisualizer.com/bac ... ion2_2=100. Two bear markets, in both cases EM value fell more, yet over the decade EM value had a double digit positive real return, while the US stock market had a negative return.

Since 2011, nearly the opposite has occurred: https://www.portfoliovisualizer.com/bac ... ion2_2=100. In the 2010 decade, EM value has had more and longer drawdowns than the US, and has returned nothing for 12 years, while US stocks have delivered double digit returns during that time.

In either period (but particularly in the decade of the 2000s), ask yourself if you would be bothered if one part of the global market returns double digits while another has a negative return, even though correlations were high and tracked the ups and downs closely? That's the idea with diversification internationally. Likely the difference won't be quite as extreme with a broad market international fund, but the concept is still the same.

Got it. Thanks for the explanation!

[Marseille07]

It is diversified. What's being argued is how much diversification. Which is moot as it depends on many things which is personal taste. Pretty much all of academia has argued that diversification is important, but the definitions and extent are being debated to this day.

At the end of the day, stock prices reflect all future cash flows (profits) discounted to the present. Essentially, ROIC is the rate of return long term for stock prices. Novy-Marx, I think provides the cleanest academic profitability metric of gross profits / change in total assets which is ROIC higher up the balance sheet. Novy-Marx has shown that gross profitability firms tend to be expensive (when measured by book-to-price). Novy-Marx has also shown that current gross profits tend to be sticky and pretty good at forecasting future gross profits.

Stepping back a bit, over time, the U.S. markets have been higher in gross profitability / change in total assets than most countries. There's a reason why exUS investors want U.S. exposure especially when things go badly. Further, adjustments to gross profitability that have a negative impact on actual cashflow returned to U.S. investors are higher when investing internationally (less so between DM and EM). Higher taxes, higher costs of capital (in no way a guarantee of higher profits), and many other inefficiencies will reduce cash flow received by a U.S. investor from firms exUS vs US firms.

Now, this may not be the case. The future is unknown. No one knows if future cash flows returned to investors will continue to be higher in the U.S. vs exUS. So, the best bet would be to invest globally. With two caveats. The first rule is not to lose money. So low fee investment products are a must. And for geographical exposure (personal opinion), I would want to invest in countries with good relations with the United States. Higher returns could be had in less favorable markets, but for me, a dollar saved is a dollar earned.

Which is why I believe, for a U.S. investor, a global developed market weighted index fund is a good starting point. Tilt as needed based on personal preference. If an investor wants more risk in hopes for higher returns, I think diversifying into geographies or factors that attempt to take advantage of mispricing and other market efficiencies, that's fine. For me, I am 100% United States because (another opinion) I don't care about valuations. I care about being exposed to a geography that has high gross profitability, transparent markets, low fees and low exposure to inefficiencies that essentially reduce exposure to future cash flows of firms. exUS developed markets could, in the future, have higher profits returned to shareholders. It's unknowable. I'm personally making a bet that even if that does happen, it won't be any higher than the long term ROIC of U.S. markets, and I'm okay with that.

Burton Malkiel provides some succinct remarks in this regard (he's also a fan of a global market weight index).

Sure, there are a lot of different risks. There are a lot of different factors. And we understand more why stocks go up or down. But if you think you can put this together in a portfolio that will do better than just holding everything, which is what an index fund does, I think you're mistaken.

Yeah. Again though, I've got to tell you though, that if you think that doing that will mean that you will outperform a broad-based index fund, I think you're going to be disappointed.

Source: https://rationalreminder.ca/podcast/252

I sometimes do think that a global developed market weighted index fund is indeed a good starting point. The challenge is that VEA only contains ex-US developed markets and thus you'd have to rebalance on your own. VT has US but it also comes with non-developed markets.

[SamB-Ari]

The most recent RR podcast provides some relevant opinions on this subject! David Blanchett is the guest. Keep in mind, this is for U.S. investors and using revenue exposure and hedging local inflation risks (important if retired and consuming in USD in the United States).

In theory, domicile just becomes more and more meaningless as a metric, considering other metrics could yield a very different perspective on the global risks, for example, of an index. Even if you're not doing any kind of … decomposition, you're not doing RBSA and all that. You might just say, “Oh, well, this is a US large-cap fund.” Well, yes, all the companies are domiciled in the US. But this fund, in particular, has 60% of the revenues or 80% of the revenues coming from other countries. So, it really is an international exposure with domestic domicile.

[Podcast Hosts] Okay, now that is often used as a reason, particularly by US investors to not need international diversification. Do you think that this negates the need for international diversification?

To some extent it does. Again, I forget the numbers. But if you own Coca-Cola, that isn't like they're just selling Coke here in the US. All these really large, really, really large Apple, they are truly global companies. So, I think that it does negate the need for owning… because there is significant revenue for most of these companies that is.

Again, a big caveat is that if it makes sense to invest globally given each U.S. investor's risk profile, then do so if it can be done at low cost and low exposure to inefficiencies that will impact cash flows to the investor.

Source 1: https://rationalreminder.ca/podcast/254

Source 2: https://www.pm-research.com/content/iijpormgmt/47/6/175

[Marseille07]

Nikkei is +19% YTD, however EWJ is only up 8.1% YTD. Looks like USDJPY moved from 128 to 139 YTD, although it is lower than 150 at one point in 2022.

The exchange rate is impacting EWJ this much or is there something else going on? A big discrepancy like this is on topic in terms of international allocation being good insurance for the US investors.

[000]

Here's a question for 100% US investors. In the event of US equity underperformance relative to international, how long or to what degree do you stay the course? Is there an exit plan?

Second question. What is the plan if major US companies start redomiciling themselves abroad?

[SamB-Ari]

Here's a question for 100% US investors. In the event of US equity underperformance relative to international, how long or to what degree do you stay the course? Is there an exit plan?

Second question. What is the plan if major US companies start redomiciling themselves abroad?

Return performance will not guide my allocation. Neither are valuations. That’s speculation and fear. I would use fundamentals to guide my decision making which is based on ROIC and cost of capital (lower the better).

If revenue/gross profit/ROIC exposure is reduced globally for US companies significantly, I will consider a exUS developed index fund. But I’m more interested in diversifying my cash flow sources (how many firms actually produce cash flows relative to invested capital) numerically than placing a geographic qualifier.

ROIC and WACC guide me. Secondary is revenue to cost of capital. Companies/countries that can’t efficiently use capital to increase revenue, will have a hard time increasing actual cash flows to investors.

Not very Bogley of me. Maybe Bogle lite. I shake the haystack first to get rid of the chaff, and then buy the whole haystack.

[burritoLover]

If I was a 100% US investor, I'd be more worried about a declining dollar in the coming decades. Unless you think rapidly expanding gov't debt will be solved and political brinkmanship (such raising the debt ceiling) will disappear. The writing is on the wall - now is your chance to add a hedge against that via international unhedged stocks. The interest alone on the debt is likely not sustainable.

[SamB-Ari]

If I was a 100% US investor, I'd be more worried about a declining dollar in the coming decades. Unless you think rapidly expanding gov't debt will be solved and political brinkmanship (such raising the debt ceiling) will disappear. The writing is on the wall - now is your chance to add a hedge against that via international unhedged stocks. The interest alone on the debt is likely not sustainable.

This line of thinking has been around since the beginning of the founding of the United States. It just doesn't hold any water. In terms of government debt...is international any different? No! It's not like the United States is in a vacuum. In fact, Europe is worse off. Mounting sovereign debt, and many countries no longer have sovereignty over money supply (EU baby!). China? Please. Their total debt (public + private) that's reported (and it's underreported) is one of the highest in the world. Rest of Asia? Please. Every country has problems. International diversification isn't insurance or hedging. It's simply taking the market weight of all future cash flows globally. It's a speculation to assume that these cash flows will go up and down during different timeframes (covariance and correlation differences) to reduce sequence of returns risk. An investor is trading single country risk for increasing risk in multiple countries and multiple other risk factors in the hopes that the different risk factors pay out when the risks don't materialize.

Sure, the debt to GDP is higher. I'm not really concerned. It's more interest payments to GDP that's important. But, then during high inflation periods...it gets inflated away...and in low interest environments the interest payments decrease. International stocks will not provide any safety for sovereign debt crisis. Here or abroad.

https://www.imf.org/-/media/Files/Confe ... nitor.ashx

[burritoLover]

If I was a 100% US investor, I'd be more worried about a declining dollar in the coming decades. Unless you think rapidly expanding gov't debt will be solved and political brinkmanship (such raising the debt ceiling) will disappear. The writing is on the wall - now is your chance to add a hedge against that via international unhedged stocks. The interest alone on the debt is likely not sustainable.

This line of thinking has been around since the beginning of the founding of the United States. It just doesn't hold any water. In terms of government debt...is international any different? No! It's not like the United States is in a vacuum. In fact, Europe is worse off. Mounting sovereign debt, and many countries no longer have sovereignty over money supply (EU baby!). China? Please. Their total debt (public + private) that's reported (and it's underreported) is one of the highest in the world. Rest of Asia? Please. Every country has problems. International diversification isn't insurance or hedging. It's simply taking the market weight of all future cash flows globally. It's a speculation to assume that these cash flows will go up and down during different timeframes (covariance and correlation differences) to reduce sequence of returns risk. An investor is trading single country risk for increasing risk in multiple countries and multiple other risk factors in the hopes that the different risk factors pay out when the risks don't materialize.

Sure, the debt to GDP is higher. I'm not really concerned. It's more interest payments to GDP that's important. But, then during high inflation periods...it gets inflated away...and in low interest environments the interest payments decrease. International stocks will not provide any safety for sovereign debt crisis. Here or abroad.

https://www.imf.org/-/media/Files/Confe ... nitor.ashx

Hey we are better than Bahrain lol.

% Dept-to-GDP
Japan 221
Greece 212
Sudan 182
Eritrea 176
Singapore 164
Italy 147
Cyprus 143
Cabo Verde 142
Barbados 142
Bhutan 132
Portugal 132
Bahrain 129
Suriname 126
Maldives 125
Zambia 119
United States 115

[Marseille07]

Nikkei is +19% YTD, however EWJ is only up 8.1% YTD. Looks like USDJPY moved from 128 to 139 YTD, although it is lower than 150 at one point in 2022.

The exchange rate is impacting EWJ this much or is there something else going on? A big discrepancy like this is on topic in terms of international allocation being good insurance for the US investors.

No response on this? I think it's a pretty big deal when Nikkei is up 19% yet your return on investment as a US investor is only 8.1%. Now I used EWJ as a proxy since I don't know how you'd measure the Nikkei component in VXUS, so YMMV.

[asif408]

Nikkei is +19% YTD, however EWJ is only up 8.1% YTD. Looks like USDJPY moved from 128 to 139 YTD, although it is lower than 150 at one point in 2022.

The exchange rate is impacting EWJ this much or is there something else going on? A big discrepancy like this is on topic in terms of international allocation being good insurance for the US investors.

No response on this? I think it's a pretty big deal when Nikkei is up 19% yet your return on investment as a US investor is only 8.1%. Now I used EWJ as a proxy since I don't know how you'd measure the Nikkei component in VXUS, so YMMV.

I would think a big difference is price weighted (Nikkei) vs. market cap weighted (EWJ). And the Nikkei's current composition is almost 1/2 in tech stocks: https://indexes.nikkei.co.jp/en/nkave/f ... ?idx=nk225. EWJ, on the other hand, has only a 14% weighting in tech: https://www.ishares.com/us/products/239 ... -japan-etf. This is similar to the dynamic between the Dow and VTI, there are short periods (i.e., months) where their returns different by that much or more, because their sector compositions differ.

There is a Japan Tech ETF, and when I plot in Morningstar it has pretty closely tracked the Nikkei YTD: https://globalxetfs.co.jp/en/funds/2854/index.html

Seems like much ado about nothing.

[Marseille07]

I would think a big difference is price weighted (Nikkei) vs. market cap weighted (EWJ). And the Nikkei's current composition is almost 1/2 in tech stocks: https://indexes.nikkei.co.jp/en/nkave/f ... ?idx=nk225. EWJ, on the other hand, has only a 14% weighting in tech: https://www.ishares.com/us/products/239 ... -japan-etf. This is similar to the dynamic between the Dow and VTI, there are short periods (i.e., months) where their returns different by that much or more, because their sector compositions differ.

There is a Japan Tech ETF, and when I plot in Morningstar it has pretty closely tracked the Nikkei YTD: https://globalxetfs.co.jp/en/funds/2854/index.html

Seems like much ado about nothing.

Any impact of currency exchange rate going from 128 to 139 YTD? I think your analysis regarding tech stocks & price vs market cap are spot on, but I wouldn't call 19% vs 8.1% nothing.

I don't know the size of Nikkei 225 on Japan TSM, but S&P500 vs US TSM never diverges by 19% vs 8.1%; mathematically it's impossible.

[polldav]

The Yen is down about 10% year to date vs the USD.

[PoorHomieQuan]

History has made me pretty distrustful of stock markets in general, and that's the reason I invest about half of my portfolio in direct real estate.

Why distrustful? While RE is safer, I think it is commonly believed that the markets go up more than RE. Or, should we see a slowdown of equities then RE might also slow down.

I agree that the forces which drive up RE also drive up the stock market (population growth for obvious reasons, and productivity according to Ricardo's law of rent).

Stock markets definitely have more volatility and assets are constantly marked to market. I think that is what makes them scarier.

[PeterParker]

People are WAAAAAY over-valuing geography here.

First of all, the United States is a massive country geographically speaking, with major industries across the 50 states.

Secondly "geography" is but ONE potential diversification factor, of about 10 million different dimensions. One that people here grossly overvalue. Why aren't we talking about other major dimensions? The Vanguard/ SP 500 indexes don't contain EVERY industry. They are approximations. VTI has 2,572 underlying holdings.

Adding Australia to the mix is like taking 100 decks of playing cards and adding 1 additional deck. Except not even, because Australia's returns are not independent of US returns.

Then people think of something like a "war."

If the US declares War, well --- Australia is in the ANZAC alliance. Europe and Canada are in treaties with the US. You have far bigger problems if WW3 is happening than your (probably cratering) equities portfolio.

Mental masturbation. That's all adding Australia or Canada or UK equities to the mix is doing. If you genuinely believe these countries will outperform US equities - go for it. But to think it's adding any meaningful diversification to your portfolio? It isn't. It's like carrying a tube of mace through Ramadi, Iraq. It might make you feel all warm and fuzzy, but it will do nothing.

By the way, how many people advocating for the geographical/ political diversification of ex-US/ international equities --- have a sizable (20-60%) of their portfolio in a hyper-local piece of real estate like a house? Just curious.

[asif408]

Mental masturbation. That's all adding Australia or Canada or UK equities to the mix is doing. If you genuinely believe these countries will outperform US equities - go for it. But to think it's adding any meaningful diversification to your portfolio? It isn't. It's like carrying a tube of mace through Ramadi, Iraq. It might make you feel all warm and fuzzy, but it will do nothing.

Here's some data instead of hyperbole:

2000-2011: https://www.portfoliovisualizer.com/bac ... tion4_1=16

2011-2021: https://www.portfoliovisualizer.com/bac ... tion4_1=16

I imagine a fair number of people wouldn't call a 4-5% difference in returns over 10 years by taking 1/2 of your stocks and putting then into Austria, Canada, and the UK over 10 years "mental masturbation". It gets even more dramatic (8-10% difference) when going into emerging markets, and throwing in, say, China and Brazil in place of the developed markets:

2004-2011 (1st China fund I could find started in 2004): https://www.portfoliovisualizer.com/bac ... ion3_2=100

2011-2021: https://www.portfoliovisualizer.com/bac ... ion3_2=100

If the US declares War, well --- Australia is in the ANZAC alliance. Europe and Canada are in treaties with the US. You have far bigger problems if WW3 is happening than your (probably cratering) equities portfolio.

True, but that isn't actionable. International diversification is, and has been and may continue to be beneficial in non end of world scenarios.

[PeterParker]

Mental masturbation. That's all adding Australia or Canada or UK equities to the mix is doing. If you genuinely believe these countries will outperform US equities - go for it. But to think it's adding any meaningful diversification to your portfolio? It isn't. It's like carrying a tube of mace through Ramadi, Iraq. It might make you feel all warm and fuzzy, but it will do nothing.

Here's some data instead of hyperbole:

2000-2011: https://www.portfoliovisualizer.com/bac ... tion4_1=16

2011-2021: https://www.portfoliovisualizer.com/bac ... tion4_1=16

I imagine a fair number of people wouldn't call a 4-5% difference in returns over 10 years by taking 1/2 of your stocks and putting then into Austria, Canada, and the UK over 10 years "mental masturbation". It gets even more dramatic (8-10% difference) when going into emerging markets, and throwing in, say, China and Brazil in place of the developed markets:

2004-2011 (1st China fund I could find started in 2004): https://www.portfoliovisualizer.com/bac ... ion3_2=100

2011-2021: https://www.portfoliovisualizer.com/bac ... ion3_2=100

If the US declares War, well --- Australia is in the ANZAC alliance. Europe and Canada are in treaties with the US. You have far bigger problems if WW3 is happening than your (probably cratering) equities portfolio.

True, but that isn't actionable. International diversification is, and has been and may continue to be beneficial in non end of world scenarios.

Nonsense. First of all you picked the wrong indexes -- those are large caps. Check out VCE for a weighted cap total Canada index. VCN is another alternative.

Compare those to the US large cap ticker VV if you want. But cherry picking/ back-testing dates --- extremely specific dates -- means bupkiss. I can pick any SINGLE popular stock ticker -- AAPL, AMZN, GOOG - whatever -- add that to the mix and cherry pick dates that look swell.

Here's a random time period I randomly threw out: 2012 to 2023 present, 100% VTI vs. 90% VTI + 10% VCE (total Canada).

https://www.portfoliovisualizer.com/bac ... ion2_1=10

All that happens is you gimp returns about 5%. Eh. I'm not convinced.

[km91]

Mental masturbation. That's all adding Australia or Canada or UK equities to the mix is doing. If you genuinely believe these countries will outperform US equities - go for it. But to think it's adding any meaningful diversification to your portfolio? It isn't. It's like carrying a tube of mace through Ramadi, Iraq. It might make you feel all warm and fuzzy, but it will do nothing.

Why draw the line at ex US? The bottom 3000 stocks in VTI aren't providing any meaningful diversification so let's throw them out. The bottom 250 stocks in VOO only contribute 10% of the cap weight so we don't need them either. Just hold NASDAQ 25 or S&P 50. You might feel warm and fuzzy holding the US total market index but it's not doing anything

[000]

People are WAAAAAY over-valuing geography here.

First of all, the United States is a massive country geographically speaking, with major industries across the 50 states.

Secondly "geography" is but ONE potential diversification factor, of about 10 million different dimensions. One that people here grossly overvalue. Why aren't we talking about other major dimensions? The Vanguard/ SP 500 indexes don't contain EVERY industry. They are approximations. VTI has 2,572 underlying holdings.

Adding Australia to the mix is like taking 100 decks of playing cards and adding 1 additional deck. Except not even, because Australia's returns are not independent of US returns.

Then people think of something like a "war."

If the US declares War, well --- Australia is in the ANZAC alliance. Europe and Canada are in treaties with the US. You have far bigger problems if WW3 is happening than your (probably cratering) equities portfolio.

Mental masturbation. That's all adding Australia or Canada or UK equities to the mix is doing. If you genuinely believe these countries will outperform US equities - go for it. But to think it's adding any meaningful diversification to your portfolio? It isn't. It's like carrying a tube of mace through Ramadi, Iraq. It might make you feel all warm and fuzzy, but it will do nothing.

By the way, how many people advocating for the geographical/ political diversification of ex-US/ international equities --- have a sizable (20-60%) of their portfolio in a hyper-local piece of real estate like a house? Just curious.

It's about more than geography. Currency is a big factor.

Also..... if your argument holds weight, then why has ex-US underperformed US by so much? Shouldn't they perform about the same?

[PeterParker]

Mental masturbation. That's all adding Australia or Canada or UK equities to the mix is doing. If you genuinely believe these countries will outperform US equities - go for it. But to think it's adding any meaningful diversification to your portfolio? It isn't. It's like carrying a tube of mace through Ramadi, Iraq. It might make you feel all warm and fuzzy, but it will do nothing.

Why draw the line at ex US? The bottom 3000 stocks in VTI aren't providing any meaningful diversification so let's throw them out. The bottom 250 stocks in VOO only contribute 10% of the cap weight so we don't need them either. Just hold NASDAQ 25 or S&P 50. You might feel warm and fuzzy holding the US total market index but it's not doing anything

Not sure if you're trying to be sarcastic. But you're probably actually right.

It's unlikely that market-weighted Total US or market-weighted Total World ---- each at 1.00x leverage --- is the ideal. They are just most popular because they "feel" neat to the average Joe Blow investor, who doesn't want to do too much thinking.

And to be honest --- the extra "thinking" of a novice investor probably has a return of under minimum wage, if not negative. So I'm pro not thinking too hard on it.

[PeterParker]

It's about more than geography. Currency is a big factor.

Also..... if your argument holds weight, then why has ex-US underperformed US by so much? Shouldn't they perform about the same?

Let's get back to the intitial argument.
Adding ex-US stocks to a 100% US portfolio will reduce variance, up and down.

I think this claim -- a bold one -- has yet to proved.
It's adding 1 deck of playing cards to 100 decks of playing cards. The variance will barely budge.

Now yes if you pulling cards from each set of decks, one will outperform the other, either due to random or unpredictable factors, so what.

Let's take the counter argument.

Why not add stocks from as many countries as possible?
And then find industries not covered by Total US ... like the cannabis industry. Surely that will reduce variance as well?

And then commodities --- get those in --- and why not crypto? That's something .. ELSE .. that may or may not unccorelated (hint is is) ... throw in gold while you're at it.

.... My point is there's diminishing returns to diversification. Exponentially diminishing returns.
I'm open to changing my mind. But especially Canadian, UK, Australian stocks -- these countries are all so politically and economically aligned with the US -- I'm not seeing it. There's nothing wrong with adding international --- or not adding it -- it just isn't "insurance" in my view.