International (Non-US) versus US Equities (The "Arguments")

[CraigTester]

Hypothesis:

At the core of answering the question of this thread (and all the other threads on this topic) is a fundamental question.

And that is whether or not the following Argument (on our list for 100% US’rs) is accurate:

“Int’l has NOT proven itself in the long run…, so what if it occasionally outperforms.”

Can anyone provide data supporting the above Argument?

We’ve all seen the Professor’s charts, and all the data already captured on our list (under Global Market Cappers) that seems to establish the above Argument is not defensible in the post-WW2 era.

I propose we either delete it, edit it, or bring forth data supporting it.

[Tom_T]

Hypothesis:

At the core of answering the question of this thread (and all the other threads on this topic) is a fundamental question.

And that is whether or not the following Argument (on our list for 100% US’rs) is accurate:

“Int’l has NOT proven itself in the long run…, so what if it occasionally outperforms.”

Can anyone provide data supporting the above Argument?

We’ve all seen the Professor’s charts, and all the data already captured on our list (under Global Market Cappers) that seems to establish the above Argument is not defensible in the post-WW2 era.

I propose we either delete it, edit it, or bring forth data supporting it.

Is that not the crux of the thousands of posts on this topic? Any discussion of performance quickly deteriorates into (1) it depends on what your start and end points are, and (2) allow for the factors that can skew the results. The fact is that most of the arguments on the list aren't "accurate" - they are opinions which others will vehemently disagree with. That is the whole point of the list, no? To present the arguments on each side? There are no facts, not really... just past performance (defined multiple ways depending on who's talking) and future speculation. What else is there in a market?

[CraigTester]

Hypothesis:

At the core of answering the question of this thread (and all the other threads on this topic) is a fundamental question.

And that is whether or not the following Argument (on our list for 100% US’rs) is accurate:

“Int’l has NOT proven itself in the long run…, so what if it occasionally outperforms.”

Can anyone provide data supporting the above Argument?

We’ve all seen the Professor’s charts, and all the data already captured on our list (under Global Market Cappers) that seems to establish the above Argument is not defensible in the post-WW2 era.

I propose we either delete it, edit it, or bring forth data supporting it.

Is that not the crux of the thousands of posts on this topic? Any discussion of performance quickly deteriorates into (1) it depends on what your start and end points are, and (2) allow for the factors that can skew the results. The fact is that most of the arguments on the list aren't "accurate" - they are opinions which others will vehemently disagree with. That is the whole point of the list, no? To present the arguments on each side? There are no facts, not really... just past performance (defined multiple ways depending on who's talking) and future speculation. What else is there in a market?

This is a fair point, to an extent....

But while we are all entitled to our own opinions, we are not all entitled to our own facts.

If someone argued that:

"US returned 25% CAGR the last 100 years"

We would not capture that Argument because it is simply not factually true.

[Tom_T]

Hypothesis:

At the core of answering the question of this thread (and all the other threads on this topic) is a fundamental question.

And that is whether or not the following Argument (on our list for 100% US’rs) is accurate:

“Int’l has NOT proven itself in the long run…, so what if it occasionally outperforms.”

Can anyone provide data supporting the above Argument?

We’ve all seen the Professor’s charts, and all the data already captured on our list (under Global Market Cappers) that seems to establish the above Argument is not defensible in the post-WW2 era.

I propose we either delete it, edit it, or bring forth data supporting it.

Is that not the crux of the thousands of posts on this topic? Any discussion of performance quickly deteriorates into (1) it depends on what your start and end points are, and (2) allow for the factors that can skew the results. The fact is that most of the arguments on the list aren't "accurate" - they are opinions which others will vehemently disagree with. That is the whole point of the list, no? To present the arguments on each side? There are no facts, not really... just past performance (defined multiple ways depending on who's talking) and future speculation. What else is there in a market?

This is a fair point, to an extent....

But while we are all entitled to our own opinions, we are not all entitled to our own facts.

If someone argued that:

"US returned 25% CAGR the last 100 years"

We would not capture that Argument because it is simply not factually true.

"Int’l has NOT proven itself in the long run" is not something that can be supported one way or another by black-and-white-facts. What does "proven itself" even mean, anyway? If you wanted to say "International has a x% CAGR over the past 50 years", or something like that, then that is a fact that someone can accept, or dispute as misleading... but at least it's a verifiable number.

[watchnerd]

Should Australian investors have bothered with investing in international in the form of US stocks?

[CraigTester]

Hypothesis:

At the core of answering the question of this thread (and all the other threads on this topic) is a fundamental question.

And that is whether or not the following Argument (on our list for 100% US’rs) is accurate:

“Int’l has NOT proven itself in the long run…, so what if it occasionally outperforms.”

Can anyone provide data supporting the above Argument?

We’ve all seen the Professor’s charts, and all the data already captured on our list (under Global Market Cappers) that seems to establish the above Argument is not defensible in the post-WW2 era.

I propose we either delete it, edit it, or bring forth data supporting it.

Is that not the crux of the thousands of posts on this topic? Any discussion of performance quickly deteriorates into (1) it depends on what your start and end points are, and (2) allow for the factors that can skew the results. The fact is that most of the arguments on the list aren't "accurate" - they are opinions which others will vehemently disagree with. That is the whole point of the list, no? To present the arguments on each side? There are no facts, not really... just past performance (defined multiple ways depending on who's talking) and future speculation. What else is there in a market?

This is a fair point, to an extent....

But while we are all entitled to our own opinions, we are not all entitled to our own facts.

If someone argued that:

"US returned 25% CAGR the last 100 years"

We would not capture that Argument because it is simply not factually true.

"Int’l has NOT proven itself in the long run" is not something that can be supported one way or another by black-and-white-facts. What does "proven itself" even mean, anyway? If you wanted to say "International has a x% CAGR over the past 50 years", or something like that, then that is a fact that someone can accept, or dispute as misleading... but at least it's a verifiable number.

Exactly.

So can we rephrase that bullet into something that doesn't "mislead" a casual observer of our list?

As currently written, it seems to imply for instance, that Prof McQ's charts should just be ignored/dismissed....

[watchnerd]

As currently written, it seems to imply for instance, that Prof McQ's charts should just be ignored/dismissed....

Question:

Why is historical data relevant to present and future returns?

This applies whether one is pro-US only or more internationalist.

Stocks aren't some kind of cyclical machine that oscillates in a predictable fashion.

If we say "past performance is no guarantee future results", why obsess over past data?

[CraigTester]

As currently written, it seems to imply for instance, that Prof McQ's charts should just be ignored/dismissed....

Question:

Why is historical data relevant to present and future returns?

This applies whether one is pro-US only or more internationalist.

Stocks aren't some kind of cyclical machine that oscillates in a predictable fashion.

Stocks do seem to predictably return 6 or 7% real CAGR, eventually....

And this historical observation helps people decide whether to invest in stocks versus putting cash under their mattress.

So in turn, if we claim that historical observation shows that:

"Int’l has NOT proven itself in the long run"

... it's going to factor into people's decision about where to invest...

So why would we say such a thing when we have access to prof McQ's charts......?

[Vulcan]

Question:

Why is historical data relevant to present and future returns?

This applies whether one is pro-US only or more internationalist.

Stocks aren't some kind of cyclical machine that oscillates in a predictable fashion.

If we say "past performance is no guarantee future results", why obsess over past data?

This right there is the crux of the question.

If you believe the future will be similar to the past, you should just buy Apple.

If you don't believe you know what the future will look like, you diversify.

"With high hope for the future no prediction in regard to it is ventured." ~Abraham Lincoln's Second Inaugural Address

[watchnerd]

Stocks do seem to predictably return 6 or 7% real CAGR, eventually....

And this historical observation helps people decide whether to invest in stocks versus putting cash under their mattress.

So in turn, if we claim that historical observation shows that "International Stocks haven't proven themselves" it's going to factor into people's decision about where to invest...

So why would we say such a thing when we have access to prof McQ's charts......?

Correction:

Stocks *have* returned 6-7% real CAGR.

Under different economic conditions, with different GDP growth, different productivity improvements (or lack thereof), different demographics, climate induced costs, and different financial regimes, the future could be quite different.

And this historical observation helps people decide whether to invest in stocks versus putting cash under their mattress.

I have no opinion on whether stocks will outperform bonds or real assets in the future.

I could make a case for why they *should*, but that case isn't based upon the past, but instead on the basics of risk vs risk-free assets.

[CraigTester]

We could add an Argument that says:

“US stocks have NOT proven themselves in the long term”

But not sure this would be helpful to anyone trying to make a decision.

Or we could say that International Stocks underperformed when the referenced economies have been obliterated by world wars…

But again not very helpful…

So again, unless we can reword the Argument in question, or show data to support it, I propose we just delete it….

It just doesn’t help anyone make an informed decision, as currently written….

[watchnerd]

We could add an Argument that says:

“US stocks have NOT proven themselves in the long term”

But not sure this would be helpful to anyone trying to make a decision.

Or we could say that International Stocks underperformed when the referenced economies have been obliterated by world wars…

But again not very helpful…

So again, unless we can reword the Argument in question, or show data to support it, I propose we just delete it….

It just doesn’t help anyone make an informed decision, as currently written….

One of the arguments for global market cap is that there is no informed decision to be made.

That the past data is not predictive of future results, so just hold the whole haystack.

[unwitting_gulag]

That "past performance is no guarantee of future results", is a literal truism, but it exaggerates the point. If we completely disbelieved in past data's predictive value, we’d have no reason to favor stocks, as an asset-class, over less risky things. We’d not even have a cogent metric for the meaning of risk itself. If prior knowledge tells us literally nothing about the future, then nothing is more risky, or less risky, than anything else. Might as well just buy options on pork-bellies.

Investment isn't a chaotic system, where things are calm and munificent for centuries, only to suddenly collapse in gory violence. This whole black-swan thing is needlessly dramatic. Yes, such a thing happened to the Russian stock market in 1918. But for how many-sigma events, does it make sense to harbor anticipation? If we're that timorous, we'd never leave the house.

McQ's post-WW2 chart tells me that a global market-share allocation isn't shockingly worse than US-only. But neither does it offer a compelling advantage. Some amount of international diversification probably makes sense, just to feel more morally self-righteous about being a good acolyte of the church of diversification. But I would not, to follow the analogy, expect a blessing - let alone a miracle.

[lostdog]

VT and chill...

[Nathan Drake]

That "past performance is no guarantee of future results", is a literal truism, but it exaggerates the point. If we completely disbelieved in past data's predictive value, we’d have no reason to favor stocks, as an asset-class, over less risky things. We’d not even have a cogent metric for the meaning of risk itself. If prior knowledge tells us literally nothing about the future, then nothing is more risky, or less risky, than anything else. Might as well just buy options on pork-bellies.

Investment isn't a chaotic system, where things are calm and munificent for centuries, only to suddenly collapse in gory violence. This whole black-swan thing is needlessly dramatic. Yes, such a thing happened to the Russian stock market in 1918. But for how many-sigma events, does it make sense to harbor anticipation? If we're that timorous, we'd never leave the house.

McQ's post-WW2 chart tells me that a global market-share allocation isn't shockingly worse than US-only. But neither does it offer a compelling advantage. Some amount of international diversification probably makes sense, just to feel more morally self-righteous about being a good acolyte of the church of diversification. But I would not, to follow the analogy, expect a blessing - let alone a miracle.

Investment is a highly chaotic system. I am not sure why you are under the impression that it is not. The argument for not concentrating into a single country should be abundantly clear from those black swan type events. Some believe the US to largely be immune from them for some reason. Furthermore, you don't need a black swan event to have a terrible sequence of returns. I don't think anyone believes 1966-1982 was marred by a singular black swan event like the great depression or WW2, and yet it had a WORSE outcome for investors and retirees than that period with multiple black swans.

The compelling advantage in a post-WW2 chart is diversification. Not that one soundly beats the other over a 70 year period. That's the flaw in your thinking. The path those 70 years took was very different at certain periods of time. When US investors needed diversification the most, exUS spared them a hugely negative outcome (and vice versa).

A large component of portfolio optimization is matching assets with similar returns/risk profiles over the very long term, but where there's less covariance over longer term horizons. This mitigates sequence risk.

[HomerJ]

The argument for not concentrating into a single country should be abundantly clear from those black swan type events. Some believe the US to largely be immune from them for some reason. Furthermore, you don't need a black swan event to have a terrible sequence of returns. I don't think anyone believes 1966-1982 was marred by a singular black swan event like the great depression or WW2, and yet it had a WORSE outcome for investors and retirees than that period with multiple black swans.

The compelling advantage in a post-WW2 chart is diversification. Not that one soundly beats the other over a 70 year period. That's the flaw in your thinking. The path those 70 years took was very different at certain periods of time. When US investors needed diversification the most, exUS spared them a hugely negative outcome (and vice versa).

A large component of portfolio optimization is matching assets with similar returns/risk profiles over the very long term, but where there's less covariance over longer term horizons. This mitigates sequence risk.

I'm not so sure people think the US is immune to black swan events, but are probably thinking if the US gets hit hard by a financial event, there's really no place to hide. Anything that affects the U.S. financial system strongly will probably be a global event.

But like you said, it's also possible just to have some underperformance for a while, so some diversification is good.

I agree with you there. I've always been open to the diversification argument. Our main point of contention has always been the market-timing aspect of it, where you feel it's possible to CHANGE one's allocation at different times based on "signals" in order to increase returns.

[Nathan Drake]

The argument for not concentrating into a single country should be abundantly clear from those black swan type events. Some believe the US to largely be immune from them for some reason. Furthermore, you don't need a black swan event to have a terrible sequence of returns. I don't think anyone believes 1966-1982 was marred by a singular black swan event like the great depression or WW2, and yet it had a WORSE outcome for investors and retirees than that period with multiple black swans.

The compelling advantage in a post-WW2 chart is diversification. Not that one soundly beats the other over a 70 year period. That's the flaw in your thinking. The path those 70 years took was very different at certain periods of time. When US investors needed diversification the most, exUS spared them a hugely negative outcome (and vice versa).

A large component of portfolio optimization is matching assets with similar returns/risk profiles over the very long term, but where there's less covariance over longer term horizons. This mitigates sequence risk.

I'm not so sure people think the US is immune to black swan events, but are probably thinking if the US gets hit hard by a financial event, there's really no place to hide. Anything that affects the U.S. financial system strongly will probably be a global event.

But like you said, it's also possible just to have some underperformance for a while, so some diversification is good.

I agree with you there. I've always been open to the diversification argument. Our main point of contention has always been the market-timing aspect of it, where you feel it's possible to CHANGE one's allocation at different times based on "signals" in order to increase returns.

FWIW, I don't advocate for my specific strategy for anyone but myself. I'm simply trying to get higher returns by taking on more risk. It may not pay off over the long term even though there's strong evidence to support it. But I'm not abandoning major asset classes or getting all out or in on certain investments.

I think a market cap weighted strategy, or a slight US tilted strategy is fine. I prefer market cap weights for default investor allocations. I think what the 100% US crowd fails to understand is just how meaningful a minor amount of diversification can be. If you are uncomfortable for whatever reason, just go with Bogle's 20% maximum for exUS and let it ride. You're unlikely to get FOMO vs. 100% US TSM, and if we go through a bad period the exUS allocation could help significantly like it did in the 1960s through 80s

[McQ]

I haven't been closely enough involved with the thread to want to interpret my charts for the thread; that piece i leave to all of you.

But it may help to discuss two very general ways to read a chart like the post-WW II version, repeated below



1. Oscillation
-one reader might interpret this chart as showing a back and forth, a horse race, in which now the US, now international moves into the lead. That interpretation implies that the current downswing of international will, in a lawful fashion, be replaced by an upswing.

2. Non-stationarity
-another reader might say (especially with the longer term charts in the back of their mind) that what is visible here is a series of non-repeatable, one-off events, like the great Japanese bubble of 1989, some of which happened to favor international, and others of which did not (the dotcom boom). The seeming alternation is just an artifact of using a small arbitrary slice of time which appeared to show reversion, but which in in fact, merely shows a fundamentally chaotic succession of one-off events, with the next such occurring an unknown number of years in the future in an unknown direction.

I am agnostic between the two interpretations.

[unwitting_gulag]

The argument for not concentrating into a single country should be abundantly clear from those black swan type events. Some believe the US to largely be immune from them for some reason. ...

I'm not so sure people think the US is immune to black swan events, but are probably thinking if the US gets hit hard by a financial event, there's really no place to hide. Anything that affects the U.S. financial system strongly will probably be a global event. ...

FWIW, I don't advocate for my specific strategy for anyone but myself. I'm simply trying to get higher returns by taking on more risk. ...

Homer phrased it nicely (sorry, I messed up the nested-quotes and may have misattributed who-said-what). In essence it's the American Exceptionalism argument, which Craig already collated.

If Japan has a lost 3-decades, Japan suffers, but the rest of the world marches along. If Russia nationalizes its stock market (that 1918 example again), Russian investors get wiped out, but the rest of the world keeps on chugging. But if America writes a bunch of junk loans and securitizes them into dodgy bonds, the entire world goes down into near-collapse... until and unless America comes to the rescue. This may not last forever, but my hunch is that many of us posters on this site, will join the great financial forum in the sky, before the Exceptionalism argument runs its course.

And if I were sincerely willing to chase higher returns in exchange for knowingly taking on more risk, I'd just go 100% QQQ.

[Nathan Drake]

The argument for not concentrating into a single country should be abundantly clear from those black swan type events. Some believe the US to largely be immune from them for some reason. ...

I'm not so sure people think the US is immune to black swan events, but are probably thinking if the US gets hit hard by a financial event, there's really no place to hide. Anything that affects the U.S. financial system strongly will probably be a global event. ...

FWIW, I don't advocate for my specific strategy for anyone but myself. I'm simply trying to get higher returns by taking on more risk. ...

Homer phrased it nicely (sorry, I messed up the nested-quotes and may have misattributed who-said-what). In essence it's the American Exceptionalism argument, which Craig already collated.

If Japan has a lost 3-decades, Japan suffers, but the rest of the world marches along. If Russia nationalizes its stock market (that 1918 example again), Russian investors get wiped out, but the rest of the world keeps on chugging. But if America writes a bunch of junk loans and securitizes them into dodgy bonds, the entire world goes down into near-collapse... until and unless America comes to the rescue. This may not last forever, but my hunch is that many of us posters on this site, will join the great financial forum in the sky, before the Exceptionalism argument runs its course.

And if I were sincerely willing to chase higher returns in exchange for knowingly taking on more risk, I'd just go 100% QQQ.

American exceptionalism loses its luster when it has seen itself multiple lost decade periods throughout an "Exceptional" period overall. Periods that can devastate you as an investor. 1966-1982 saw the 4% SWR fail. US did terribly, but the world (ExUS) marched on. So the examples you just gave conveniently leave out points in time where the US tanked and the world didn't catch a cold, quite the opposite.

The Post-WW2 data does not suggest much exceptionalism in terms of stock market performance, as much of that period was relatively neutral until recently. Most of the American exceptionalism has taken place during the first half of the 20th century during two world wars that they were spared most of the damage.

[CraigTester]

I haven't been closely enough involved with the thread to want to interpret my charts for the thread; that piece i leave to all of you.

But it may help to discuss two very general ways to read a chart like the post-WW II version, repeated below



1. Oscillation
-one reader might interpret this chart as showing a back and forth, a horse race, in which now the US, now international moves into the lead. That interpretation implies that the current downswing of international will, in a lawful fashion, be replaced by an upswing.

2. Non-stationarity
-another reader might say (especially with the longer term charts in the back of their mind) that what is visible here is a series of non-repeatable, one-off events, like the great Japanese bubble of 1989, some of which happened to favor international, and others of which did not (the dotcom boom). The seeming alternation is just an artifact of using a small arbitrary slice of time which appeared to show reversion, but which in in fact, merely shows a fundamentally chaotic succession of one-off events, with the next such occurring an unknown number of years in the future in an unknown direction.

I am agnostic between the two interpretations.

I am personally inclined to see your chart as akin to a sine-wave with modulating amplitude and frequency ....

But yes, I suppose we could see the data as random...., and only appearing to follow a pattern by non-repeatable coincidence .....

However, independent of which perspective one prefers, I believe there is a more important takeaway:

"Neither US nor Int'l stocks have demonstrated sustainably superior returns over the last 70 year, post-WW2 period"

And IMHO, this is why your chart gets right to the heart of helping people to answer the question of the thread....

There appears to be little historical basis for claiming either US or Int'l stocks should out-perform the other....

And I suspect this observation is quite calibrating to a great many people that have been operating under a different prism.

Question:

Do you, or anyone, have any proposals for how best to add this chart(s) to our compendium of Arguments captured on page 1 of this thread?

[watchnerd]

I am personally inclined to see your chart as akin to a sine-wave with modulating amplitude and frequency ....

But yes, I suppose we could see the data as random...., and only appearing to follow a pattern by non-repeatable coincidence .....

Humans are cognitively biased to see patterns.

[CraigTester]

I just added Prof McQ's 70 year chart to our list of Arguments on page 1 of this thread..., under Global Market Cappers...

[*]Neither US nor Int'l stocks have demonstrated sustainably superior returns over the last 70 year, post-WW2 period
https://i.postimg.cc/xCMLqtCR/1949-telltale.png

[watchnerd]

I just added Prof McQ's 70 year chart to our list of Arguments on page 1 of this thread..., under Global Market Cappers...

[*]Neither US nor Int'l stocks have demonstrated sustainably superior returns over the last 70 year, post-WW2 period
https://i.postimg.cc/xCMLqtCR/1949-telltale.png

Meh, I wish you wouldn't.

Sharpe doesn't use any historical data for the rationale in his essays on the global market portfolio.

I think it's a misunderstanding of the theory behind the approach to list historical data as a rationale.

It's also a pretty arbitrary period of history and brings up accusations of data-mining; Sharpe's own theoretical underpinnings (while there are weaknesses, to be sure), don't suffer from this.

[unwitting_gulag]

I just added Prof McQ's 70 year chart to our list of Arguments on page 1 of this thread..., under Global Market Cappers...

[*]Neither US nor Int'l stocks have demonstrated sustainably superior returns over the last 70 year, post-WW2 period
https://i.postimg.cc/xCMLqtCR/1949-telltale.png

The chart is archival, while our attempts at adumbration are... less so.

Would it be possible to post a .csv file, or similar, with the source-data, going back to 1792? Would be illuminating to play with statistical analysis on one's own.

[r.walker]

The chart is archival, while our attempts at adumbration are... less so.

Would it be possible to post a .csv file, or similar, with the source-data, going back to 1792? Would be illuminating to play with statistical analysis on one's own.

[ quote fixed by admin LadyGeek]

Great word! Had to look it up: The act of providing vague advance indications; representing beforehand.

[McQ]

I just added Prof McQ's 70 year chart to our list of Arguments on page 1 of this thread..., under Global Market Cappers...

[*]Neither US nor Int'l stocks have demonstrated sustainably superior returns over the last 70 year, post-WW2 period
https://i.postimg.cc/xCMLqtCR/1949-telltale.png

The chart is archival, while our attempts at adumbration are... less so.

Would it be possible to post a .csv file, or similar, with the source-data, going back to 1792? Would be illuminating to play with statistical analysis on one's own.

My data is freely available but I don't have the right to post a file of the GFD returns, just graphs and summaries.

[Thorwald]

I think we are at a point like 99-2000. Strong dollar, big gains on the Nasdaq, faith in the AI revolution. As interest rates on US bonds fall, the dollar will gradually weaken. For capital from outside the US, it will become less and less profitable to invest in US stocks because they will lose out on the exchange rate. Growth in stocks will move to places like India, Vietnam, Latin America.

[CraigTester]

We have captured the below Argument for Global Market Cappers:

"QE (2008-2022), coincided with a period of extreme US out-performance - but it has ended".

Background:

1970-2008

EAFE (Int'l) CAGR = 9.66%

SP500 CAGR = 9.48%

What happened next...?

The first link below shows returns during multiple rounds of QE running from Nov 2008- Mar 2022.

The second link shows returns since QE "officially" ended in Mar 2022 as the Fed "acknowledged" inflation.

Note: US results show both VTI and RSP (Non-market cap weighted)

Question

Is the below difference reflecting a coincidence, random noise, cherry picking, too early to draw any conclusion, etc...?


Nov 2008 - Mar 2022

https://www.portfoliovisualizer.com/bac ... uiLJm72BZ0


Mar 2022 - Oct 2023

https://www.portfoliovisualizer.com/bac ... m0TIztMcDm

[watchnerd]

We have captured the below Argument for Global Market Cappers:

"QE (2008-2022), coincided with a period of extreme US out-performance - but it has ended".

Background:

1970-2008

EAFE (Int'l) CAGR = 9.66%

SP500 CAGR = 9.48%

What happened next...?

The first link below shows returns during multiple rounds of QE running from Nov 2008- Mar 2022.

The second link shows returns since QE "officially" ended in Mar 2022 as the Fed "acknowledged" inflation.

Note: US results show both VTI and RSP (Non-market cap weighted)

Question

Is the below difference reflecting a coincidence, random noise, cherry picking, too early to draw any conclusion, etc...?


Nov 2008 - Mar 2022

https://www.portfoliovisualizer.com/bac ... uiLJm72BZ0


Mar 2022 - Oct 2023

https://www.portfoliovisualizer.com/bac ... m0TIztMcDm

Again:

None of those historic performances are the usual rationales for holding global market cap.

The rationale for holding global market cap is the same as that of holding the total US market / owning the whole haystack -- that the market is efficient, one can't easily pick future winners.

It doesn't require a belief in cyclic markets, return to mean, or anything of that nature.

If you're going to insert your own narrative, you should at least add a disclaimer that nothing in William Sharpe's essays concerns itself with backtesting or looking at historical data.

[HomerJ]

Question

Is the below difference reflecting a coincidence, random noise, cherry picking, too early to draw any conclusion, etc...?

All 4 (coincidence, random noise, cherry picking, and too early to draw a conclusion) are probably true. You've got less than 2 years there.

And you left out that the Fed actually stopped QE in 2014, and initiated QT from 2017 until 2019, when it restarted QE.

So we already had a recent two year period with QT, and US still out-performed International.

[CraigTester]

Question

Is the below difference reflecting a coincidence, random noise, cherry picking, too early to draw any conclusion, etc...?

All 4 (coincidence, random noise, cherry picking, and too early to draw a conclusion) are probably true. You've got less than 2 years there.

And you left out that the Fed actually stopped QE in 2014, and initiated QT from 2017 until 2019, when it restarted QE.

So we already had a recent two year period with QT, and US still out-performed International.

But there is a "critical" difference between the Fed stopping QE in 2014 versus in March 2022.

In 2014 there was still very little inflation, or seemingly any negative consequence, for their QE experiment....

And this left the "Fed Put" firmly in place....

However, this changed with spiking inflation in Mar 2022, for which the Fed was blamed....

So I am not claiming we have an "answer" yet as to whether we have root cause identified for US Out-Performance "this time".....

But you have to admit, it's one heck of a coincidence....!

BTW, Some claim a "similar" root cause explains Japan's out-performance highlighted in McQ's 70 year chart.....

So if this does turn out to be more than just a coincidence, Valuations and Foreign Exchange might eventually matter again....

[CraigTester]

We have captured the below Argument for Global Market Cappers:

"QE (2008-2022), coincided with a period of extreme US out-performance - but it has ended".

Background:

1970-2008

EAFE (Int'l) CAGR = 9.66%

SP500 CAGR = 9.48%

What happened next...?

The first link below shows returns during multiple rounds of QE running from Nov 2008- Mar 2022.

The second link shows returns since QE "officially" ended in Mar 2022 as the Fed "acknowledged" inflation.

Note: US results show both VTI and RSP (Non-market cap weighted)

Question

Is the below difference reflecting a coincidence, random noise, cherry picking, too early to draw any conclusion, etc...?


Nov 2008 - Mar 2022

https://www.portfoliovisualizer.com/bac ... uiLJm72BZ0


Mar 2022 - Oct 2023

https://www.portfoliovisualizer.com/bac ... m0TIztMcDm

Again:

None of those historic performances are the usual rationales for holding global market cap.

The rationale for holding global market cap is the same as that of holding the total US market / owning the whole haystack -- that the market is efficient, one can't easily pick future winners.

It doesn't require a belief in cyclic markets, return to mean, or anything of that nature.

If you're going to insert your own narrative, you should at least add a disclaimer that nothing in William Sharpe's essays concerns itself with backtesting or looking at historical data.

As long as someone believes that US stocks and Int'l stocks will eventually return about the same, everything you say is true....

However, if you review our list of Arguments for 100% US'ers, there are a LOT of respected posters on this forum who simply don't believe this.

And this is why we spend so much time level setting....

Once you believe everything is going to return the same, there's very little remaining reason, to not as you say, just buy the global haystack....remove the single country risk of black swans, historically high valuations, currency, et al....

[SpanishInquisition]

We have captured the below Argument for Global Market Cappers:

"QE (2008-2022), coincided with a period of extreme US out-performance - but it has ended".

Background:

1970-2008

EAFE (Int'l) CAGR = 9.66%

SP500 CAGR = 9.48%

What happened next...?

The first link below shows returns during multiple rounds of QE running from Nov 2008- Mar 2022.

The second link shows returns since QE "officially" ended in Mar 2022 as the Fed "acknowledged" inflation.

Note: US results show both VTI and RSP (Non-market cap weighted)

Question

Is the below difference reflecting a coincidence, random noise, cherry picking, too early to draw any conclusion, etc...?


Nov 2008 - Mar 2022

https://www.portfoliovisualizer.com/bac ... uiLJm72BZ0


Mar 2022 - Oct 2023

https://www.portfoliovisualizer.com/bac ... m0TIztMcDm

Again:

None of those historic performances are the usual rationales for holding global market cap.

The rationale for holding global market cap is the same as that of holding the total US market / owning the whole haystack -- that the market is efficient, one can't easily pick future winners.

It doesn't require a belief in cyclic markets, return to mean, or anything of that nature.

If you're going to insert your own narrative, you should at least add a disclaimer that nothing in William Sharpe's essays concerns itself with backtesting or looking at historical data.

+1

In fact, +1,000,000, since international markets are only becoming increasingly efficient in the aggregate and will continue to do so, IMHO & etc. The backwards-looking data is only of general historical value in this context. The slicing and dicing is fine for interesting historical analysis and is valuable for improving one’s intellectual fund of knowledge, but turning to it for predictive value it is clear error. Again, IMHO & etc.

[Tib]

I haven't been closely enough involved with the thread to want to interpret my charts for the thread; that piece i leave to all of you.

But it may help to discuss two very general ways to read a chart like the post-WW II version, repeated below



1. Oscillation
-one reader might interpret this chart as showing a back and forth, a horse race, in which now the US, now international moves into the lead. That interpretation implies that the current downswing of international will, in a lawful fashion, be replaced by an upswing.

2. Non-stationarity
-another reader might say (especially with the longer term charts in the back of their mind) that what is visible here is a series of non-repeatable, one-off events, like the great Japanese bubble of 1989, some of which happened to favor international, and others of which did not (the dotcom boom). The seeming alternation is just an artifact of using a small arbitrary slice of time which appeared to show reversion, but which in in fact, merely shows a fundamentally chaotic succession of one-off events, with the next such occurring an unknown number of years in the future in an unknown direction.

I am agnostic between the two interpretations.

A "fundamentally chaotic succession of one-off events" affecting the relative performance of US and ex-US stock markets would seem to favor (not to say assure) an oscillation of outperforming markets. 2 would help to explain 1---and would also provide a reason to expect oscillation in the future. I'm glad to have a sizable allocation to each market.

[watchnerd]

We have captured the below Argument for Global Market Cappers:

"QE (2008-2022), coincided with a period of extreme US out-performance - but it has ended".

Background:

1970-2008

EAFE (Int'l) CAGR = 9.66%

SP500 CAGR = 9.48%

What happened next...?

The first link below shows returns during multiple rounds of QE running from Nov 2008- Mar 2022.

The second link shows returns since QE "officially" ended in Mar 2022 as the Fed "acknowledged" inflation.

Note: US results show both VTI and RSP (Non-market cap weighted)

Question

Is the below difference reflecting a coincidence, random noise, cherry picking, too early to draw any conclusion, etc...?


Nov 2008 - Mar 2022

https://www.portfoliovisualizer.com/bac ... uiLJm72BZ0


Mar 2022 - Oct 2023

https://www.portfoliovisualizer.com/bac ... m0TIztMcDm

Again:

None of those historic performances are the usual rationales for holding global market cap.

The rationale for holding global market cap is the same as that of holding the total US market / owning the whole haystack -- that the market is efficient, one can't easily pick future winners.

It doesn't require a belief in cyclic markets, return to mean, or anything of that nature.

If you're going to insert your own narrative, you should at least add a disclaimer that nothing in William Sharpe's essays concerns itself with backtesting or looking at historical data.

As long as someone believes that US stocks and Int'l stocks will eventually return about the same, everything you say is true....

However, if you review our list of Arguments for 100% US'ers, there are a LOT of respected posters on this forum who simply don't believe this.

And this is why we spend so much time level setting....

Once you believe everything is going to return the same, there's very little remaining reason, to not as you say, just buy the global haystack....remove the single country risk of black swans, historically high valuations, currency, et al....

I guess I don't view the arguments for holding global market cap requiring refuting US-only.

It's the same argument (hold the haystack), global market cap is just a bigger haystack.

One could argue (as I do), that holding a smaller haystack is an active management decision.

It's a "tilt", an overweight of US.

[CraigTester]

We have captured the below Argument for Global Market Cappers:

"QE (2008-2022), coincided with a period of extreme US out-performance - but it has ended".

Background:

1970-2008

EAFE (Int'l) CAGR = 9.66%

SP500 CAGR = 9.48%

What happened next...?

The first link below shows returns during multiple rounds of QE running from Nov 2008- Mar 2022.

The second link shows returns since QE "officially" ended in Mar 2022 as the Fed "acknowledged" inflation.

Note: US results show both VTI and RSP (Non-market cap weighted)

Question

Is the below difference reflecting a coincidence, random noise, cherry picking, too early to draw any conclusion, etc...?


Nov 2008 - Mar 2022

https://www.portfoliovisualizer.com/bac ... uiLJm72BZ0


Mar 2022 - Oct 2023

https://www.portfoliovisualizer.com/bac ... m0TIztMcDm

Again:

None of those historic performances are the usual rationales for holding global market cap.

The rationale for holding global market cap is the same as that of holding the total US market / owning the whole haystack -- that the market is efficient, one can't easily pick future winners.

It doesn't require a belief in cyclic markets, return to mean, or anything of that nature.

If you're going to insert your own narrative, you should at least add a disclaimer that nothing in William Sharpe's essays concerns itself with backtesting or looking at historical data.

As long as someone believes that US stocks and Int'l stocks will eventually return about the same, everything you say is true....

However, if you review our list of Arguments for 100% US'ers, there are a LOT of respected posters on this forum who simply don't believe this.

And this is why we spend so much time level setting....

Once you believe everything is going to return the same, there's very little remaining reason, to not as you say, just buy the global haystack....remove the single country risk of black swans, historically high valuations, currency, et al....

I guess I don't view the arguments for holding global market cap requiring refuting US-only.

It's the same argument (hold the haystack), global market cap is just a bigger haystack.

One could argue (as I do), that holding a smaller haystack is an active management decision.

It's a "tilt", an overweight of US.

In theory, I completely agree with you!

But at a practical level, there are many on this forum that genuinely believe US returns, will be, and always have been, better than international.

Why else would we have over 170,000 views and over 3000 comments (and a gazillion threads) on a topic that you see as, so non-controversial?

If you still don’t see it, have a look at some of the early pages of this thread…

The center of gravity of those that are now contributing to this thread, has clearly shifted….

[watchnerd]

In theory, I completely agree with you!

But at a practical level, there are many on this forum that genuinely believe US returns, will be, and always have been, better than international.

Why else would we have over 170,000 views and over 3000 comments (and a gazillion threads) on a topic that you see as, so non-controversial?

If you still don’t see it, have a look at some of the early pages of this thread…

The center of gravity of those that are now contributing to this thread, has clearly shifted….

I guess I don't see this as an evangelist endeavor.

I don't have a desire to 'convert' people, just educate.

What other people choose doesn't change my returns or results -- I don't have a "dog in the fight" with regard to their portfolio returns, or behavioral choices.

[CraigTester]

In theory, I completely agree with you!

But at a practical level, there are many on this forum that genuinely believe US returns, will be, and always have been, better than international.

Why else would we have over 170,000 views and over 3000 comments (and a gazillion threads) on a topic that you see as, so non-controversial?

If you still don’t see it, have a look at some of the early pages of this thread…

The center of gravity of those that are now contributing to this thread, has clearly shifted….

I guess I don't see this as an evangelist endeavor.

I don't have a desire to 'convert' people, just educate.

What other people choose doesn't change my returns or results -- I don't have a "dog in the fight" with regard to their portfolio returns, or behavioral choices.

So on that note, anything to contribute to our list?

[McQ]

HOT OFF THE PRESSES:

… a new SSRN paper almost custom-designed to provoke discussion on this thread.

Read Brett Arends’ helpful summary at marketwatch.com for the Cliff Notes version:https://www.marketwatch.com/story/dump- ... =home-page.

Then, if interested, load up some caffeine and go to: https://papers.ssrn.com/sol3/papers.cfm ... id=4590406.

Short version: Retirement savers should not diversify US stocks with US bonds—they should diversify US stocks with International stocks in a 100% equity portfolio. Regardless of age.

Uniformly superior results for retirement savings and ultimate bequest, and also for sustaining withdrawal rates in retirement.

If the methodology withstands your scrutiny …

PS: discussion of an earlier effort by this author team (led by an up-and-coming young professor) may be found in this thread: viewtopic.php?t=387165

[Nathan Drake]

HOT OFF THE PRESSES:

… a new SSRN paper almost custom-designed to provoke discussion on this thread.

Read Brett Arends’ helpful summary at marketwatch.com for the Cliff Notes version:https://www.marketwatch.com/story/dump- ... =home-page.

Then, if interested, load up some caffeine and go to: https://papers.ssrn.com/sol3/papers.cfm ... id=4590406.

Short version: Retirement savers should not diversify US stocks with US bonds—they should diversify US stocks with International stocks in a 100% equity portfolio. Regardless of age.

Uniformly superior results for retirement savings and ultimate bequest, and also for sustaining withdrawal rates in retirement.

If the methodology withstands your scrutiny …

PS: discussion of an earlier effort by this author team (led by an up-and-coming young professor) may be found in this thread: viewtopic.php?t=387165

That article speaks to my biased heart. I’m 100% equity, highly diversified across regions and factors.

I’ve always assumed I’d need to add bonds at some point…but maybe not?

[CraigTester]

HOT OFF THE PRESSES:

… a new SSRN paper almost custom-designed to provoke discussion on this thread.

Read Brett Arends’ helpful summary at marketwatch.com for the Cliff Notes version:https://www.marketwatch.com/story/dump- ... =home-page.

Then, if interested, load up some caffeine and go to: https://papers.ssrn.com/sol3/papers.cfm ... id=4590406.

Short version: Retirement savers should not diversify US stocks with US bonds—they should diversify US stocks with International stocks in a 100% equity portfolio. Regardless of age.

Uniformly superior results for retirement savings and ultimate bequest, and also for sustaining withdrawal rates in retirement.

If the methodology withstands your scrutiny …

PS: discussion of an earlier effort by this author team (led by an up-and-coming young professor) may be found in this thread: viewtopic.php?t=387165

Thanks for linking this, Professor McQ.

I confess to only very briefly scanning so far, but offer two quick reactions off the cuff:

1) Most SWR summaries (e.g. linked below) tend to conclude that 100% equities slightly reduces SWR's for standard retirement periods. And this seems to conflict with the above findings, but I'd have to read more thoroughly to make sure that's what they are concluding....

https://www.whitecoatinvestor.com/the-4 ... wal-rates/

2) We've already included a VG study in our list of Arguments for Global Market Cappers suggesting that Diversifying globally can boost the probability of success of safe withdrawal rates.

https://corporate.vanguard.com/content/ ... Online.pdf

So on balance I tend to directionally agree with that part of their findings...

But where it mostly leaves me is wishing I had access to more extensive international data (that I could fully vet) to do a bunch of what-if analysis...

I may ruminate further while eating Turkey....

.

[SpanishInquisition]

HOT OFF THE PRESSES:

… a new SSRN paper almost custom-designed to provoke discussion on this thread.

Read Brett Arends’ helpful summary at marketwatch.com for the Cliff Notes version:https://www.marketwatch.com/story/dump- ... =home-page.

Then, if interested, load up some caffeine and go to: https://papers.ssrn.com/sol3/papers.cfm ... id=4590406.

Short version: Retirement savers should not diversify US stocks with US bonds—they should diversify US stocks with International stocks in a 100% equity portfolio. Regardless of age.

Uniformly superior results for retirement savings and ultimate bequest, and also for sustaining withdrawal rates in retirement.

If the methodology withstands your scrutiny …

PS: discussion of an earlier effort by this author team (led by an up-and-coming young professor) may be found in this thread: viewtopic.php?t=387165

Thank you!!

Concerns: The math and data crunching are way over my head. So if there is something wrong with it, I wouldn’t know. Also, I’m concerned that markets have evolved quite a bit since, what, 1890, and that using historical data that far back to make fine-tuned portfolio allocation recommendations in current global markets is qualitative folly.

Still, I feel generally simpatico with the conclusions.

Charles Ellis says similar things in his latest edition of Winning the Loser’s Game. He criticizes normal asset allocation theory as being based on too short of a time horizon and in this context advocates generally for a much higher than conventionally advised allocation to stocks. He calls bonds very expensive anxiety insurance. He characterizes stocks as being less risky than bonds over long time horizons. He recommends that those who intend to leave bequests view themselves as having longer time horizons than just to the ends of their lives, justifying higher stock allocations relative to bonds. He says that bonds generally keep you at pace with inflation but not much more. He states that a purely rational investor will be global market cap invested in their equities. To the best of my recollection & etc., that should give you a flavor.

That these well-informed opinions are apparently rationally supportable by reference to mathematical analysis of past market performance does not really surprise me.

[Noobvestor]

Lots of observations but: which aren't baked into valuations? I'll never understand why people treat ex-US as something 'extra' - plenty of other countries have beaten the US for years, decades, even the entire past century. Lumping them together to compare them is reductive.

[Tib]

So interesting—thanks, McQ!!

I’ll add a little to McQ’s “short version” of the findings. The first two findings noted below apply to some allocation options for a couple who retire together at 65 and make 4%, inflation-adjusted withdrawals. The findings are based on the methods and historical data employed in the study. (References are to the long article; I couldn’t access the short one.)

1. The main disadvantage of StockI (all stock, half US, half international) is the large mean maximum real drawdown. During retirement, it’s 50%. For BalancedI (40% bonds, 30% US stock, 30% international stock.), it’s substantially less: 40%. (Table VII, p. 41)

2. But a point highly relevant to this thread: The mean maximum real drawdown during retirement for Stock (all stock, all US) is 63%, much higher than the 50% for StockI. For Balanced (40% bonds, 60% US stock), it’s 49%, substantially higher than the 40% for BalancedI. (Table VII, p. 41)

3. Regarding inflation: “Anarkulova, Cederburg, and O’Doherty (2023) show that the negative correlation between real bond returns and inflation grows from −0.33 at a one-month horizon to −0.74 at a 30-year horizon. Domestic stocks and, in particular, international stocks provide better inflation hedges with long-horizon correlations of −0.30 and −0.03 with inflation, respectively.” (p. 24)

4.Regarding the diversification provided by international stock as compared with (US) bonds: “The diversification benefits of bonds also depend on horizon. Anarkulova, Cederburg, and O’Doherty (2023) estimate a correlation of 0.18 between one-month real returns on domestic stocks and bonds. This correlation increases to 0.46 at a 30-year horizon, however, such that bonds offer less diversification benefit for long-horizon investors while giving low average returns. International stocks, in contrast, offer high average returns and better diversification with a 30-year correlation between real returns on domestic stocks and international stocks of 0.35.” (p 25)

[WestCoastPhan]

Short version: Retirement savers should not diversify US stocks with US bonds—they should diversify US stocks with International stocks in a 100% equity portfolio. Regardless of age.

That's been my approach for years!

[dcabler]

Telltale charts as requested

That proved an interesting exercise, thanks for the invitation, dcabler.

I more typically use multi-decade rolls rather than tell-tale charts, so, putting these together was educational for me.

There are three charts to come. The first one is for the entire period. A few reminders:

1. Real returns in US dollars
2. Post-1897 US is not my newly collected data, but existing sources (Shiller/CRSP total market)
3. All of the international data is from Global Financial Data



This first one is not as illuminating as I might have hoped. It occurs to me that the linear scale used on the y-axis of tell-tale charts (thanks to LadyGeek for the wiki reference):

a) Breaks down over very long series, as when centuries rather than decades are charted; and/or
b) Doesn’t do well when one of the two series plunges below the other and stays way down.

So, let’s shorten the time span. This next chart is anchored to 1899. It has none of my data. This is the period that “everybody knows,” i.e., the period that has become familiar from the Credit Suisse yearbook (Dimson et al. anchored to 1899; this is where language like “4.4% annualized” applies). It’s also 20th century US data, Shiller until 1926 and then CRSP total market, e.g. VTI; familiar turf, if you have a taste for financial history.



On the face of it, international has stunk up the joint practically forever (=from the start of the 20th century).

But I think that’s still says more about the limits of the tell-tale charting technique, again when faced with a very long period that saw a plunge early on.

On to the next and final chart. I’ve cut the Gordian knot here by excluding WW I and WW II and everything before. The chart is anchored to the end of 1949, so 70 years of return. The post-war world, if you will.



At last I think the tell-tale methodology is doing its job and revealing patterns difficult to see in the kind of chart I put up yesterday.

But I’ll wait for others to interpret: what has this re-charting revealed about the concerns central to this thread?

You say it breaks down over long periods. I say it provides exactly what it is supposed to provide over long periods. Remember, with tell-tale charts, the value is in the slopes of the graphs more than the values on the graphs themselves because you're wanting to see very long term trends. By focusing on the slopes instead of the values, you're removing starting/ending date bias from the analysis of the charts.

What I see in the first graph is that there's a long period until about the time of the civil war where International beat US (long term positive slope), followed by a long period where international lost out to the US as it became ascendant from about the time of the civil war until after WWII (long term negative slope). From that point onwards, it's been close to par for US vs. international as the long term slope is close to zero with a bump in the mid/late 80's.

For an analysis over this sort of timespan shown in the first graph, it's more of a mega-trend and might not be actionable for individual investors since their investment timespan tends to be quite a bit shorter and with the shortening of the investment timespan comes a lot more noise in the data.

The 1949 graph-onwards is a bit shorter, but you can still see the patterns both relatively short term as well as long term and everything in between. Regarding how to interpret it, the answer is "it doesn't matter" whether it's an oscillation or non-stationary. There is randomness on top of patterns of varying lengths. And, again, focusing only on the slopes and not the actual values, what I conclude is what vineviz and others have noted before about diversification. It's not a free lunch in terms of returns - it's more about adding assets which have correlations of less than 1.0 in order to spread the sources of risk around. It might improve your returns or it might reduce your returns in your timeframe of interest.

Cheers.

[watchnerd]

In theory, I completely agree with you!

But at a practical level, there are many on this forum that genuinely believe US returns, will be, and always have been, better than international.

Why else would we have over 170,000 views and over 3000 comments (and a gazillion threads) on a topic that you see as, so non-controversial?

If you still don’t see it, have a look at some of the early pages of this thread…

The center of gravity of those that are now contributing to this thread, has clearly shifted….

I guess I don't see this as an evangelist endeavor.

I don't have a desire to 'convert' people, just educate.

What other people choose doesn't change my returns or results -- I don't have a "dog in the fight" with regard to their portfolio returns, or behavioral choices.

So on that note, anything to contribute to our list?

Link to the Sharpe paper:

https://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-7.pdf

[CraigTester]

In theory, I completely agree with you!

But at a practical level, there are many on this forum that genuinely believe US returns, will be, and always have been, better than international.

Why else would we have over 170,000 views and over 3000 comments (and a gazillion threads) on a topic that you see as, so non-controversial?

If you still don’t see it, have a look at some of the early pages of this thread…

The center of gravity of those that are now contributing to this thread, has clearly shifted….

I guess I don't see this as an evangelist endeavor.

I don't have a desire to 'convert' people, just educate.

What other people choose doesn't change my returns or results -- I don't have a "dog in the fight" with regard to their portfolio returns, or behavioral choices.

So on that note, anything to contribute to our list?

Link to the Sharpe paper:

https://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-7.pdf

Is there an Argument you wish to add to our list associated with Sharpe’s research?

[watchnerd]

In theory, I completely agree with you!

But at a practical level, there are many on this forum that genuinely believe US returns, will be, and always have been, better than international.

Why else would we have over 170,000 views and over 3000 comments (and a gazillion threads) on a topic that you see as, so non-controversial?

If you still don’t see it, have a look at some of the early pages of this thread…

The center of gravity of those that are now contributing to this thread, has clearly shifted….

I guess I don't see this as an evangelist endeavor.

I don't have a desire to 'convert' people, just educate.

What other people choose doesn't change my returns or results -- I don't have a "dog in the fight" with regard to their portfolio returns, or behavioral choices.

So on that note, anything to contribute to our list?

Link to the Sharpe paper:

https://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-7.pdf

Is there an Argument you wish to add to our list associated with Sharpe’s research?

To quote directly from Sharpe:

Many investment firms and advisors argue that some portfolio composition other than that of
the market is “smarter” and will provide better outcomes for any investor (although different
firms and advisors tend to differ in their choices of superior investments). One hears of
strategies with names such as “smart beta”, “factor tilt”, “momentum”, “value” “small
capitalization” and on and on.

Let's say that the amount you wish to invest in a risky portfolio is x% of the total value of all
the securities in the market and that your investment advisor advocates that you overweight
(hold more than x% of) certain “underpriced” securities , market-weight (hold x% of) those that
are “correctly priced”, and underweight (hold less than x% of) those that are “overpriced”.
This, he or she says, is a portfolio with better risk and return characteristics than the market
portfolio.

Perhaps it is, and by holding it you will indeed be smart. But if so, then those holding the
market portfolio must be dumb. And those who underweight the securities that you overweight
and overweight the securities that you underweight are even dumber. If this is the case, one
might assume that sooner or later both groups will recognize their mistakes and try to buy the
underpriced securities and sell the overpriced ones. But of course every buyer needs a seller
and every seller needs a buyer. The net result will be for the prices of the formerly underpriced
securities to increase and the prices of the formerly overpriced securities to decrease until every
security is “correctly priced”. At this point it will be smart to hold the market portfolio. In this
sense a strategy that can successfully “beat the market” will carry the seeds of its own
destruction.

Or maybe to summarize:

Any weighting other than the global market portfolio is an active management decision and runs the risk at some point of under-performing the global market porfolio in the future when the 'over weighting' moves out of favor.