International Allocation and Siamond's "Investing in the World" Series

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Amadis_of_Gaul
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International Allocation and Siamond's "Investing in the World" Series

Post by Amadis_of_Gaul » Sat Jan 19, 2019 10:52 am

First of all, let me say how much I appreciate this forum and its participants. I only found it a few weeks ago, but in that time I've learned a great deal. Thank you all!

Recently, I've been gnawing on that perpetual bone of contention on here: the proper amount of international allocation. As a philosophical indexer, market-cap global weighting has seemed most reasonable to me. I haven't had trouble grasping the argument that more diversification is better.
However, then I encountered Siamond's series "Investing in the World" on the Bogleheads blog.

https://finpage.blog/2017/03/18/investi ... ld-part-1/
https://finpage.blog/2017/03/25/investi ... ld-part-2/
https://finpage.blog/2017/03/25/investi ... ld-part-3/

The first part of this series especially changed my thinking because it showed the problems with naive market-cap global weighting. In particular, currency risk is a much more significant factor than I had realized. Previously, I had thought that currency risk would come out in the wash. It will revert to the mean eventually, right?

However, I had not reckoned with the magnitude of the volatility that currency risk can introduce. If you're market-cap weighted globally, and there's a significant currency event when you retire, leading to a large drawdown in real terms, it doesn't matter that exchange rates will probably revert to the mean in 10 years. Sequence-of-returns risk will eat you alive anyway.

Even being in a country that makes up a large proportion of global market cap (I'm a US citizen) won't help you, as the example of Japan shows. No, I don't think that the US economy is in the same place as Japan's economy in 1987. However, Japan's history does prove that dramatic currency risk doesn't just happen to itty-bitty countries without much market-cap weight to throw around. It happens to larger countries too, and it could happen to the US, even if we don't now see a way that it could happen. I think wise investors try to protect themselves from unknown unknowns.

It seems to me, then, that the Charybdis and Scylla of international investing are a) home-country bias and insufficient diversification, and b) overexposure to currency risk. Siamond's recommendation is to steer a middle course between them, with a domestic equity allocation of 25-50 percent and a global equity allocation of 50-75 percent.

With the advent of Vanguard's Global Stock Market Index Admiral Shares, this should be easy for any Boglehead to accomplish. Given current global cap weighting, a 50/50 domestic/global split would lead to a US investor holding about 75 percent domestic and 25 percent international equities, which strikes me as a reasonable place for a US investor to end up. Conceptually, such a balance should lead to strong equity returns while minimizing sources of volatility.

Does this reasoning seem sound to everyone?

samsdad
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by samsdad » Sat Jan 19, 2019 11:01 am

The reasoning seems sound.

I still won’t do international, but wouldn’t look at you funny if you did.
It will revert to the mean eventually, right?
I don’t think mean reversion means “inevitable” reversion to mean. Say that ten times fast. :D

bgf
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by bgf » Sat Jan 19, 2019 11:16 am

i guess it is similar to my portfolio. 80% global equities and 20% individual US stocks.

i wont have a bond allocation for years, but when i do i am likely to go with a global US dollar hedged fund. vanguard has convinced me that taking currency risk on the equity side is one thing, while taking it on the bond is another. this makes sense to me intuitively.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

andrew99999
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Sat Jan 19, 2019 12:31 pm

That article is fantastic. Was actually referring back to it again today.

One thing that I really wish was covered in the article was a home-currency-hedged global equities allocation.

Say
25% local stocks
37.5% all-world
37.5% all-world home-currency-hedged

Or 1/3 each if it makes it simpler.

So then your currency diversification/risk is lower, but your diversification between equity markets is wider.

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Earl Lemongrab
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by Earl Lemongrab » Sat Jan 19, 2019 1:47 pm

Oh. I thought it said, "Investing in the World Series". So, nothing to do with baseball.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by HEDGEFUNDIE » Sat Jan 19, 2019 2:42 pm

If you are concerned with currency risk, hedge it out!

There are dozens of USD hedged international stock funds available to the retail investor.

ICH
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by ICH » Sun Jan 20, 2019 1:41 am

Amadis_of_Gaul wrote:
Sat Jan 19, 2019 10:52 am
Does this reasoning seem sound to everyone?
From a non-US, European expat, with an emerging market home country, point of view: NO.
Reasons:
1. My portfolio includes property and other assets (such as a pension) in home country. I am overweight in home country exposure even if do not own a single stock there.
2. Home country is 0.1% of global stock market cap. I don't see a reason to put it at anything more than that and certainly not at 25%-50%!
3. Home country market regulatory environment is a joke.
4. Home country currency today is the Euro. Tomorrow I do not know.
5. I have no idea where I 'm going to retire.
6. Having an additional fund costs money (mainly transaction costs but also the opportunity to make mistakes)

Concluding, for me, the Scylla of home-country bias and insufficient diversification is by far more important than the Charybdis of overexposure to currency risk. Global market cap all the way...

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by s8r » Sun Jan 20, 2019 2:41 am

ICH wrote:
Sun Jan 20, 2019 1:41 am
Amadis_of_Gaul wrote:
Sat Jan 19, 2019 10:52 am
Does this reasoning seem sound to everyone?
From a non-US, European expat, with an emerging market home country, point of view: NO.
Reasons:
1. My portfolio includes property and other assets (such as a pension) in home country. I am overweight in home country exposure even if do not own a single stock there.
2. Home country is 0.1% of global stock market cap. I don't see a reason to put it at anything more than that and certainly not at 25%-50%!
3. Home country market regulatory environment is a joke.
4. Home country currency today is the Euro. Tomorrow I do not know.
5. I have no idea where I 'm going to retire.
6. Having an additional fund costs money (mainly transaction costs but also the opportunity to make mistakes)

Concluding, for me, the Scylla of home-country bias and insufficient diversification is by far more important than the Charybdis of overexposure to currency risk. Global market cap all the way...
Let me guess, you're from Greece? :happy

ICH
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by ICH » Sun Jan 20, 2019 2:46 am

s8r wrote:
Sun Jan 20, 2019 2:41 am
Let me guess, you're from Greece? :happy
Bingo! :happy

andrew99999
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Sun Jan 20, 2019 2:49 am

ICH wrote:
Sun Jan 20, 2019 1:41 am
From a non-US, European expat, with an emerging market home country, point of view: NO.
Agree with this. When your home country is an emerging market, currency hedged global equities is definitely a clear winner in place of home country equities due to massive concentration risk in highly volatile markets. In developed countries the choice between home country equities and currency-hedged global equities is more debatable. Also the article only discusses developed countries, so be careful applying it to emerging markets.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by columbia » Sun Jan 20, 2019 8:05 am

andrew99999 wrote:
Sat Jan 19, 2019 12:31 pm
That article is fantastic. Was actually referring back to it again today.

One thing that I really wish was covered in the article was a home-currency-hedged global equities allocation.

Say
25% local stocks
37.5% all-world
37.5% all-world home-currency-hedged

Or 1/3 each if it makes it simpler.

So then your currency diversification/risk is lower, but your diversification between equity markets is wider.
It’s interesting that there is apparently no demand for a currency hedged global fund. One stop shopping.

*I* would certainly be interested in one.
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Amadis_of_Gaul
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by Amadis_of_Gaul » Sun Jan 20, 2019 8:55 am

ICH wrote:
Sun Jan 20, 2019 1:41 am
Amadis_of_Gaul wrote:
Sat Jan 19, 2019 10:52 am
Does this reasoning seem sound to everyone?
From a non-US, European expat, with an emerging market home country, point of view: NO.
Reasons:
1. My portfolio includes property and other assets (such as a pension) in home country. I am overweight in home country exposure even if do not own a single stock there.
2. Home country is 0.1% of global stock market cap. I don't see a reason to put it at anything more than that and certainly not at 25%-50%!
3. Home country market regulatory environment is a joke.
4. Home country currency today is the Euro. Tomorrow I do not know.
5. I have no idea where I 'm going to retire.
6. Having an additional fund costs money (mainly transaction costs but also the opportunity to make mistakes)

Concluding, for me, the Scylla of home-country bias and insufficient diversification is by far more important than the Charybdis of overexposure to currency risk. Global market cap all the way...
I think you raise some solid counterpoints. If you're in Greece, you're in a county with an even smaller economy than the likes of Spain or Italy, so you're really beyond the scope of Siamond's analysis. I'm certainly no expert on the Greek economy, but what I do know leads me to wince at the thought of investing in the Greek market at any level beyond market cap. Frankly, your choices are innately less good than the choices available to an investor in a developed country, and the course you've chosen seems as wise as any. I wish you the best!

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siamond
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by siamond » Sun Jan 20, 2019 9:04 am

Amadis_of_Gaul wrote:
Sat Jan 19, 2019 10:52 am
First of all, let me say how much I appreciate this forum and its participants. I only found it a few weeks ago, but in that time I've learned a great deal. Thank you all! [...] I think wise investors try to protect themselves from unknown unknowns.
Welcome. You have a very cool user name, you made it look it up on wikipedia!

Yes, my article was essentially a long ramble on the theme of 'hedging your bets'. Putting all eggs in one (domestic) basket seems rather unwise to me. But opinions about this topic wary widely on the forum, so I tried to quantify it a bit... It's hard to come up with definite answers though.
andrew99999 wrote:
Sat Jan 19, 2019 12:31 pm
One thing that I really wish was covered in the article was a home-currency-hedged global equities allocation.
That is an interesting point. Unfortunately, I really doubt that there are enough currency hedged series to perform any kind of meaningful analysis. I did a cursory search, and only found 15 or 20 years of history for such an ex-US or Global index (S&P Devlp Ex US LargeMd TR Hdg USD or FTSE Gbl All Cap TR Hdg USD as a case in point), which is nowhere near good enough for any meaningful analysis. Plus we would have even less data to perform do such analysis from the perspective of a non-US investor (with his/her local currency), which was the entire point. I do understand where you are coming from though.

Please note that currency risk is one thing. Inflation risk is another beast. They are somewhat coupled, but not entirely. Maybe we should step back one level and ponder about the historical efficiency (or lack thereof) of currency hedging. I never understood how this works, as it seems to me that exchange rates are as unpredictable as stock returns... This would be a good topic to dig in.
Earl Lemongrab wrote:
Sat Jan 19, 2019 1:47 pm
Oh. I thought it said, "Investing in the World Series". So, nothing to do with baseball.
THAT IS FUNNY. Notably knowing that I really do not know anything about baseball... Although it seems that one can easily go spreadsheet-crazy with corresponding stats... Hm, maybe I should take a good look... :D
andrew99999 wrote:
Sun Jan 20, 2019 2:49 am
ICH wrote:
Sun Jan 20, 2019 1:41 am
From a non-US, European expat, with an emerging market home country, point of view: NO.
Agree with this. When your home country is an emerging market, currency hedged global equities is definitely a clear winner in place of home country equities due to massive concentration risk in highly volatile markets. In developed countries the choice between home country equities and currency-hedged global equities is more debatable. Also the article only discusses developed countries, so be careful applying it to emerging markets.
Yes, Andrew is perfectly correct, the article was only discussing developed countries with a fairly sizable economy and stock market. Also the recommendation at the end was quite loose. I was essentially suggesting to 'Invest with the world and add some tilt towards your home country', but I think there could be many valid viewpoints about the size of the tilt, and this would indeed depend on your home country. For those things, frankly, there is no magic formula. One thing is crucial though. Make a decision based on solid beliefs of yours and STICK TO IT FOR DECADES. It's the meandering between more or less domestic/international that is the true killer for an investor. Oh, and ICH, I agree with you, in your specific case, I would simply invest with the world...

ICH
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by ICH » Sun Jan 20, 2019 9:19 am

siamond wrote:
Sun Jan 20, 2019 9:04 am
One thing is crucial though. Make a decision based on solid beliefs of yours and STICK TO IT FOR DECADES. It's the meandering between more or less domestic/international that is the true killer for an investor. Oh, and ICH, I agree with you, in your specific case, I would simply invest with the world...
Siamond,
by the way: I big thanks for preparing all this. I am certain it was not easy.

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fortyofforty
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by fortyofforty » Sun Jan 20, 2019 9:44 am

I submit for your evaluation, a report by Tweedy Browne, regarding currency hedging:
A number of empirical studies and our own observance of the performance of hedged versus
unhedged indices (since the inception of our flagship fund) suggest that over long measurement periods
there may indeed be a “free lunch” in currency hedging, i.e. a reduction of currency risk (including
reductions in interim volatility and tracking error) at what would appear to be very little to no cost in terms
of foregone return.
Indexing works, not because of magic, but because of math. | Diligentia. Vis. Celeritas. - Jeff Cooper | Out of self-quarantine.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Sun Jan 20, 2019 11:01 am

columbia wrote:
Sun Jan 20, 2019 8:05 am
It’s interesting that there is apparently no demand for a currency hedged global fund. One stop shopping.

*I* would certainly be interested in one.
Some markets do have currency hedged global funds. I assumed it was most but might be a recent thing.

andrew99999
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Sun Jan 20, 2019 11:01 am

siamond wrote:
Sun Jan 20, 2019 9:04 am
andrew99999 wrote:
Sat Jan 19, 2019 12:31 pm
One thing that I really wish was covered in the article was a home-currency-hedged global equities allocation.
That is an interesting point. Unfortunately, I really doubt that there are enough currency hedged series to perform any kind of meaningful analysis. I did a cursory search, and only found 15 or 20 years of history for such an ex-US or Global index (S&P Devlp Ex US LargeMd TR Hdg USD or FTSE Gbl All Cap TR Hdg USD as a case in point), which is nowhere near good enough for any meaningful analysis. Plus we would have even less data to perform do such analysis from the perspective of a non-US investor (with his/her local currency), which was the entire point. I do understand where you are coming from though.

Please note that currency risk is one thing. Inflation risk is another beast. They are somewhat coupled, but not entirely. Maybe we should step back one level and ponder about the historical efficiency (or lack thereof) of currency hedging. I never understood how this works, as it seems to me that exchange rates are as unpredictable as stock returns... This would be a good topic to dig in.
hmm I don't think you would need it to be from an actual currency based fund.
If you had the returns of a global fund, couldn't you just adjust it to the change in the currency of the country relative to .. hmm yea you would have to know the currency that country relative to the "worlds" currency (whatever you consider to be the "words" currency.

It's a bummer because for countries other than the US, I suspect this would make a big difference because you are maintaining diversification of companies, markets, and sectors but removing the uncompensated risk of currency.

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Vulcan
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by Vulcan » Sun Jan 20, 2019 11:15 am

All of this noise amounts to a lot of backtesting-based models that tell us nothing about the future.
The world of 1970s is not the globalized world we will live in in the coming decades.
Those that think that their living expenses have nothing to do with foreign currency fluctuations may have been more right in 1980 than they will be in 2030.
If your home country currency is the one that ends up getting devalued in the end, you may appreciate having all this foreign currency exposure.

Global Cap for me since early 2000s. 20% international simply don't make enough of a difference either way to even bother.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

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siamond
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by siamond » Sun Jan 20, 2019 12:05 pm

andrew99999 wrote:
Sun Jan 20, 2019 11:01 am
hmm I don't think you would need it to be from an actual currency based fund.
If you had the returns of a global fund, couldn't you just adjust it to the change in the currency of the country relative to .. hmm yea you would have to know the currency that country relative to the "worlds" currency (whatever you consider to be the "words" currency.
If we had perfect data expressed in USD, then I do have the currency exchange rates since 1970 and can convert in local currency. But such 'perfect data' would be currency-hedging in USD. Hence telling you nothing about how effective currency hedging in a local home currency would have been performing if home isn't the US... Not so easy to take the perspective of a non-US investor... :shock:

Anyhoo, we should first try to assess if currency hedging (say in USD) DOES work, or if it's yet another financial fantasy from day traders...
fortyofforty wrote:
Sun Jan 20, 2019 9:44 am
I submit for your evaluation, a report by Tweedy Browne, regarding currency hedging
Thank you! Will read!

columbia
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by columbia » Sun Jan 20, 2019 12:18 pm

siamond wrote:
Sun Jan 20, 2019 12:05 pm
andrew99999 wrote:
Sun Jan 20, 2019 11:01 am
hmm I don't think you would need it to be from an actual currency based fund.
If you had the returns of a global fund, couldn't you just adjust it to the change in the currency of the country relative to .. hmm yea you would have to know the currency that country relative to the "worlds" currency (whatever you consider to be the "words" currency.
If we had perfect data expressed in USD, then I do have the currency exchange rates since 1970 and can convert in local currency. But such 'perfect data' would be currency-hedging in USD. Hence telling you nothing about how effective currency hedging in a local home currency would have been performing if home isn't the US... Not so easy to take the perspective of a non-US investor... :shock:

Anyhoo, we should first try to assess if currency hedging (say in USD) DOES work, or if it's yet another financial fantasy from day traders...
fortyofforty wrote:
Sun Jan 20, 2019 9:44 am
I submit for your evaluation, a report by Tweedy Browne, regarding currency hedging
Thank you! Will read!
Siamond: do you have an opinion whether hedging “works” (which I suppose in a different, unique argument, ie what does working really mean)?
If you leave your head in the sand for too long, you might get run over by a Jeep.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by siamond » Sun Jan 20, 2019 12:23 pm

columbia wrote:
Sun Jan 20, 2019 12:18 pm
Siamond: do you have an opinion whether hedging “works” (which I suppose in a different, unique argument, ie what does working really mean)?
I have no clue... Andrew basically convinced me that I should look at it in details at some point, and try to form a more factual opinion than what my gut feeling expresses (skepticism!)... Inputs welcome!

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by vitaflo » Sun Jan 20, 2019 12:35 pm

Vulcan wrote:
Sun Jan 20, 2019 11:15 am
If your home country currency is the one that ends up getting devalued in the end, you may appreciate having all this foreign currency exposure.
This is how I look at it and why currency risk doesn't bother me much. The worst time to retire was in '65-'66, and not because the market tanked, but because of runaway inflation. When the dollar gets devalued like that, holding foreign investments isn't all that bad.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Sun Jan 20, 2019 12:37 pm

Vulcan wrote:
Sun Jan 20, 2019 11:15 am
All of this noise amounts to a lot of backtesting-based models that tell us nothing about the future.
The world of 1970s is not the globalized world we will live in in the coming decades.
Those that think that their living expenses have nothing to do with foreign currency fluctuations may have been more right in 1980 than they will be in 2030.
If your home country currency is the one that ends up getting devalued in the end, you may appreciate having all this foreign currency exposure.
The point is to balance the 2 risks
1. Home currency upside risk - where a portfolio is entirely in global unhedged equities and home currency rises causing your X% withdrwal to be a lot more than X%
2. Home currency downside risk - where a portfolio is entirely in home currency based equities and home currency is the one that gets devalued

Sure your 100% global equities mitigates the risk of the second scenario. Which is extremely important.
However, dealing with one risk and completely ignoring another is not a workable solution. It's like saying 100% equities does best in the long term and ignoring the short term risk where a long bear market early in retirement could decimate your portfolio to a point that is not recoverable. How exactly is saying 100% equities to mitigate long term risk going to help you with short term risk? And how is 100% global unhedged equities that will help when your home currency gets devalued help you when your home currency goes up relative to global currencies for an extended period? The Australian dollar more than doubled from 2000 to 2011 meaning a 4% withdrawal rate would be withdrawing 8%, and now almost 2 decades later is still 1.5x what it was in 2000. Sure your 100% global equities helped mitigate downside currency risk, but facing upside currency risk your portfolio could easily be decimated and leave you destitute.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by Vulcan » Sun Jan 20, 2019 12:45 pm

andrew99999 wrote:
Sun Jan 20, 2019 12:37 pm
Vulcan wrote:
Sun Jan 20, 2019 11:15 am
All of this noise amounts to a lot of backtesting-based models that tell us nothing about the future.
The world of 1970s is not the globalized world we will live in in the coming decades.
Those that think that their living expenses have nothing to do with foreign currency fluctuations may have been more right in 1980 than they will be in 2030.
If your home country currency is the one that ends up getting devalued in the end, you may appreciate having all this foreign currency exposure.
The point is to balance the 2 risks
1. Home currency upside risk - where a portfolio is entirely in global unhedged equities and home currency rises causing your X% withdrwal to be a lot more than X%
2. Home currency downside risk - where a portfolio is entirely in home currency based equities and home currency is the one that gets devalued

Sure your 100% global equities mitigates the risk of the second scenario. Which is extremely important.
However, dealing with one risk and completely ignoring another is not a workable solution. It's like saying 100% equities does best in the long term and ignoring the short term risk where a long bear market early in retirement could decimate your portfolio to a point that is not recoverable. How exactly is saying 100% equities to mitigate long term risk going to help you with short term risk? And how is 100% global unhedged equities that will help when your home currency gets devalued help you when your home currency goes up relative to global currencies for an extended period? The Australian dollar more than doubled from 2000 to 2011 meaning a 4% withdrawal rate would be withdrawing 8%, and now almost 2 decades later is still 1.5x what it was in 2000. Sure your 100% global equities helped mitigate downside country risk, but facing upside currency risk your portfolio could easily be decimated and leave you destitute.
My 100% global equities happen to be 50% US, which I am entirely comfortable with.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

ICH
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by ICH » Sun Jan 20, 2019 12:57 pm

siamond wrote:
Sun Jan 20, 2019 12:23 pm
columbia wrote:
Sun Jan 20, 2019 12:18 pm
Siamond: do you have an opinion whether hedging “works” (which I suppose in a different, unique argument, ie what does working really mean)?
I have no clue... Andrew basically convinced me that I should look at it in details at some point, and try to form a more factual opinion than what my gut feeling expresses (skepticism!)... Inputs welcome!
How would you incorporate the direct cost of hedging?
Example: there is a guy in the mutual fund company dealing with the hedging process-> the guy needs to get paid -> fund returns reduce.

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Amadis_of_Gaul
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by Amadis_of_Gaul » Sun Jan 20, 2019 2:14 pm

columbia wrote:
Sun Jan 20, 2019 8:05 am

It’s interesting that there is apparently no demand for a currency hedged global fund. One stop shopping.

*I* would certainly be interested in one.
I would be intrigued also, _if_ there were a currency-hedged global index fund with a sufficiently low expense ratio. The future is uncertain; the effects of high expense ratios are all too certain!

In the meantime, at least for Americans, a tilt toward domestic equities looks like a sound strategy for mitigating currency risk. It's also worth remembering that you don't need much of an international allocation to achieve the bulk of the diversification benefit. Historically, about 30 percent international leads to the greatest decrease in volatility.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Sun Jan 20, 2019 10:46 pm

Vulcan wrote:
Sun Jan 20, 2019 12:45 pm
My 100% global equities happen to be 50% US, which I am entirely comfortable with.
Oh yea for a US investor that works.
For the rest of the world it doesn't and has risks.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Sun Jan 20, 2019 10:51 pm

ICH wrote:
Sun Jan 20, 2019 12:57 pm
How would you incorporate the direct cost of hedging?
Example: there is a guy in the mutual fund company dealing with the hedging process-> the guy needs to get paid -> fund returns reduce.
The MER difference is 0.03% more for the 2 currency hedged global large caps funds I have access to, so in today's world I don't think this would be significant.

However there is another cost to the investor based on interest rate difference, which is sometimes a cost and sometimes a bonus and I find it complicated and confusing so I can't say much more other than it exists but is separate to the cost to the fund manager.

ICH
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by ICH » Sun Jan 20, 2019 11:20 pm

andrew99999 wrote:
Sun Jan 20, 2019 10:46 pm
Vulcan wrote:
Sun Jan 20, 2019 12:45 pm
My 100% global equities happen to be 50% US, which I am entirely comfortable with.
Oh yea for a US investor that works.
For the rest of the world it doesn't and has risks.
Why? I 've just spent half a page writing that it's ok with me too, and I 've never even stepped foot on the US.
I recognise that there are risks; there are always risks.
andrew99999 wrote:
Sun Jan 20, 2019 10:51 pm
ICH wrote:
Sun Jan 20, 2019 12:57 pm
How would you incorporate the direct cost of hedging?
Example: there is a guy in the mutual fund company dealing with the hedging process-> the guy needs to get paid -> fund returns reduce.
The MER difference is 0.03% more for the 2 currency hedged global large caps funds I have access to, so in today's world I don't think this would be significant.

However there is another cost to the investor based on interest rate difference, which is sometimes a cost and sometimes a bonus and I find it complicated and confusing so I can't say much more other than it exists but is separate to the cost to the fund manager.
0.03% is small for me. Which funds are you referring to?

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nedsaid
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by nedsaid » Mon Jan 21, 2019 12:15 am

After skimming Siamonds "Investing in the World" articles, it just makes sense to me that investors should be invested Internationally. It seems that U.S., U.K., and Canadian investors have been pretty fortunate and could have gotten away with being domestic investors only. The world does change though and the advantaged position that U.S., U.K., and Canadian investors have been in might not last. I have said that U.S. investors should have 20% to 50% of their equity investment in International markets and that investment in International Bonds is entirely optional. I am coming to the viewpoint that bond investors should invest Internationally as well.

My bark is worse than its bite, I have 28% or so of my stocks in International and about 7% of my bonds. I am still mostly a U.S. investor. I think I want to expand my commitment to International Bonds. In recent months, I bought an International Aggregate Bond ETF, ticker symbol IAGG, and have been pleased with it. It is currency hedged. When I rolled my workplace savings plans at Fidelity to a Fidelity Rollover IRA, I have to give up my Templeton Global Bond fund.

Somehow, I just don't all my eggs in the United States basket though it was been a very good basket indeed.
A fool and his money are good for business.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Mon Jan 21, 2019 12:26 am

ICH wrote:
Sun Jan 20, 2019 11:20 pm
andrew99999 wrote:
Sun Jan 20, 2019 10:46 pm
Vulcan wrote:
Sun Jan 20, 2019 12:45 pm
My 100% global equities happen to be 50% US, which I am entirely comfortable with.
Oh yea for a US investor that works.
For the rest of the world it doesn't and has risks.
Why? I 've just spent half a page writing that it's ok with me too, and I 've never even stepped foot on the US.
I recognise that there are risks; there are always risks.
I explained above why it's not ok - upside home currency risk - where you invest globally and your home currency rises significantly over a very long period. The example I gave above was that from 2000 to 2011, the Australian dollar doubled vs the USD, so in AUD your money has lost half it's value vs a hedged version, and now almost 2 decades later is still 1.5x. This is a separate risk in addition to market risk and it is an uncompensated risk.

You might not be able to offset this risk with currency hedging for developing and unstable economies or currencies, but stable developed economies, I believe it can.
ICH wrote:
Sun Jan 20, 2019 11:20 pm
0.03% is small for me. Which funds are you referring to?
I'm referring to a couple of Australian funds.
VGAD at 0.021% ER is the hedged version of VGS at 0.18% ER.
IHWL at 0.19% ER is the hedged version of IWLD at 0.16% ER
The underlying stocks are the same. Vanguard are both MSCI developed lge/mid caps and iShares both MSCI developed all caps.

ICH
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by ICH » Mon Jan 21, 2019 5:48 am

Andrew,
Noted the point for Australia but that's different than saying that global unhedged works for the US but not for the rest of the world. It's as if Australia is the world.

I hate to generalize, but nobody can be certain what a stable, developed economy will do in the future. Greece was classified as a developed market not so many years ago.
You expect an unstable, emerging country to be unreliable to offset this risk with currency hedging. No black swans there - you are prepared and if you're not, you should have been.
You do not expect a stable, developed economy though and may get hit.

I had a look at the AUD hedged ETFs. They seem to be a bargain for what you 're looking for, although relatively new.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Mon Jan 21, 2019 10:20 am

@ICH

Fair point about separating developed and developing. I was actually thinking after that, that even in a developing country I would think a currency hedged all-world fund would still be useful. Not to hedge 100%, but part.

Also I doubt Australia is such an outlier to have had it's currency double over 10 years. The Canadian dollar moved from 0.95 USD in 2011 to 1.45 in 2016 and now 9 years later is still at 1.33. I would guess there are many others. If you can cheaply remove upside currency risk by hedging part of your global equities, would you really decide not to do it because there is a non-zero chance the CAD could collapse?

I do see your point though - the worst may occur, so be prepared.

My thinking was that 25% currency diversification was plenty - eg 40% home currency bonds, 25% global unhedged equities, leaving 35% in some form of home currency based equities - but maybe even this is too much because if your home currency does get hit, your 75% in home currency based equities will be a lot of suffering. In fact, even if it doesn't get a major hit and just performs the "wrong way" that you have bet on for a very extended period you will still suffer considerably. Maybe 50/50 makes more sense. Investing is an annoying balancing act mitigating various risks, and certainly you have a point that while hedging removes home currency upside risk from your equities, it simultaneously increases home currency downside risk which should not be ignored.

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spdoublebass
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by spdoublebass » Mon Jan 21, 2019 11:33 am

I think Siamond's work is fantastic.
I am not one to give advice on this forum, but this has been my thinking.

50% US/50% Global puts you at 75/25 US/INT which is close to the people on this forum who say if you want international do 20%.

25% US/75% Global puts you at 62.5US/37.5%INT, which is close to Vanguards 40% International in their Target Date funds.

I think it's most important to pick something and stay the course.

Another poster (or maybe Siamond) also made some charts about revenue exposer. That made me look at things differently too.

Edit: It wasn't Siamond it was Simplegift who wrote about Global Revenue Exposer. The threads can be found here
viewtopic.php?t=243868

and here
viewtopic.php?t=150504
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by longinvest » Tue Jan 22, 2019 3:07 pm

andrew99999 wrote:
Sun Jan 20, 2019 10:51 pm
ICH wrote:
Sun Jan 20, 2019 12:57 pm
How would you incorporate the direct cost of hedging?
Example: there is a guy in the mutual fund company dealing with the hedging process-> the guy needs to get paid -> fund returns reduce.
The MER difference is 0.03% more for the 2 currency hedged global large caps funds I have access to, so in today's world I don't think this would be significant.

However there is another cost to the investor based on interest rate difference, which is sometimes a cost and sometimes a bonus and I find it complicated and confusing so I can't say much more other than it exists but is separate to the cost to the fund manager.
In another thread, I've estimated the cost of hedging currency (and related factors) for VUS, a Canadian-based CAD-hedged ETF wrapper for the US-based VTI ETF (Vanguard Total US Stock Market). To isolate costs, I also used VUN, a VTI wrapper without currency hedging. The expense ratios of the hedged and unhedged ETFs VUS and VUN were identical.

I've estimated the annualized cost of hedging currency (and related factors) to 0.23%. The overall costs (ER, withholding taxes, currency conversion, currency hedging) of investing into the US market for a Canadian investor were far from negligible, especially with currency hedging, 0.75% annually. That's 0.59% more than the 0.16% expense ratio of the ETF.

There's no reason to believe that US investors aren't exposed to similar significant hidden costs when investing into the stocks and bonds of foreign countries.

Here were my findings (click on the ↑ for the original post, providing full context):
longinvest wrote:
Sun Nov 18, 2018 4:57 pm
Here's an attempt to breakdown costs. [...]
  • VTI ER: 0.04%
  • VUS/VUN additional ER: (0.16% Canadian MER which includes VTI ER - 0.04%) = 0.12%
  • US tax withholding on dividends: (2.14% dividend yield X 15% withholding) = 0.32%
  • Currency conversion costs and other factors: (0.52% - 0.04% - 0.12% - 0.32%) = 0.04%
  • Currency hedging costs and related factors: (0.75% - 0.52%) = 0.23%
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

andrew99999
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Tue Jan 22, 2019 9:42 pm

longinvest wrote:
Tue Jan 22, 2019 3:07 pm
longinvest wrote:
Sun Nov 18, 2018 4:57 pm
Here's an attempt to breakdown costs. [...]
  • VTI ER: 0.04%
  • VUS/VUN additional ER: (0.16% Canadian MER which includes VTI ER - 0.04%) = 0.12%
  • US tax withholding on dividends: (2.14% dividend yield X 15% withholding) = 0.32%
  • Currency conversion costs and other factors: (0.52% - 0.04% - 0.12% - 0.32%) = 0.04%
  • Currency hedging costs and related factors: (0.75% - 0.52%) = 0.23%
Ah thank you, I have not seen the breakdown before.

Oh when you include the withholding tax, does that mean you are comparing US stock to Canadian stock? Or how else would the withholding tax be different with international unhedged vs international hedged?
Last edited by andrew99999 on Tue Jan 22, 2019 9:52 pm, edited 2 times in total.

staythecourse
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by staythecourse » Tue Jan 22, 2019 9:47 pm

HEDGEFUNDIE wrote:
Sat Jan 19, 2019 2:42 pm
If you are concerned with currency risk, hedge it out!

There are dozens of USD hedged international stock funds available to the retail investor.
Folks only have an issue with currency risk IF it lowers their returns. If it benefits them they have no issues of it. Tongue and cheek, but sadly true. The ability to rationalize is a STRONG behavioral risk.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

longinvest
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Re: International Allocation and Siamond's "Investing in the World" Series

Post by longinvest » Tue Jan 22, 2019 11:44 pm

andrew99999 wrote:
Tue Jan 22, 2019 9:42 pm
longinvest wrote:
Tue Jan 22, 2019 3:07 pm
longinvest wrote:
Sun Nov 18, 2018 4:57 pm
Here's an attempt to breakdown costs. [...]
  • VTI ER: 0.04%
  • VUS/VUN additional ER: (0.16% Canadian MER which includes VTI ER - 0.04%) = 0.12%
  • US tax withholding on dividends: (2.14% dividend yield X 15% withholding) = 0.32%
  • Currency conversion costs and other factors: (0.52% - 0.04% - 0.12% - 0.32%) = 0.04%
  • Currency hedging costs and related factors: (0.75% - 0.52%) = 0.23%
Ah thank you, I have not seen the breakdown before.

Oh when you include the withholding tax, does that mean you are comparing US stock to Canadian stock? Or how else would the withholding tax be different with international unhedged vs international hedged?
Both VUS and VUN have a single main holding: VTI. VUS holds, in addition to VTI, a set of currency contracts.

When VTI pays a dividend, the US government withholds 15% of the payment, because VUS and VUS are foreign owners. Only 85% of VTI's dividends are received by VUS and VUN. That's how withholding taxes work.

The same happens for Canadian stocks held by the US-based VXUS ETF (total international stock index); the Canadian government withholds 15%* of dividends because VXUS is a foreign owner.

* I'm not sure of the exact percentage; I'm just guessing that it's equal to the US withholding percentage.

Here is a sequence of related posts I wrote about foreign investing (from which the above breakdown was taken):
Bogleheads investment philosophy | One-ETF global balanced index portfolio | VPW

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by visualguy » Wed Jan 23, 2019 12:13 am

siamond wrote:
Sun Jan 20, 2019 9:04 am
One thing is crucial though. Make a decision based on solid beliefs of yours and STICK TO IT FOR DECADES. It's the meandering between more or less domestic/international that is the true killer for an investor.
It's bad to keep going back and forth, but if you make a change for the long term, that's ok. For example, I had quite a lot of ex-US in the 90s, got completely out of it in the late 90s, and stayed out since then which has definitely been a good thing to say the least. If I had money in it now, I would still get out and stay out. Nothing wrong with realizing a mistake and changing course, as long as you don't keep changing it.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Wed Jan 23, 2019 2:01 am

longinvest wrote:
Tue Jan 22, 2019 11:44 pm
Both VUS and VUN have a single main holding: VTI. VUS holds, in addition to VTI, a set of currency contracts.

When VTI pays a dividend, the US government withholds 15% of the payment, because VUS and VUS are foreign owners. Only 85% of VTI's dividends are received by VUS and VUN. That's how withholding taxes work.

The same happens for Canadian stocks held by the US-based VXUS ETF (total international stock index); the Canadian government withholds 15%* of dividends because VXUS is a foreign owner.

* I'm not sure of the exact percentage; I'm just guessing that it's equal to the US withholding percentage.

Here is a sequence of related posts I wrote about foreign investing (from which the above breakdown was taken):
Ahhh it was your post that I saw that broke down the costs and I had no idea how to find it again! Will be keeping a link this time.
Thank you - appreciate you taking the time to gather those links.

You make a compelling argument for home bias.

I still would not feel comfortable with more than around 25% of my portfolio in my very concentrated developed home country equities, but would want no more than around 35-40% in unhedged international equities, so I see why Vanguard Australia split it between home based equities, currency hedged global, and unhedged global as a way to trade off between currency risk, hedging cost, and concentration risk.

For an Aussie investor, the 15% is not double taxed, so that won't be an issue - actually for low income earners they would miss out on tax credits - but those credits will not be refunded after the coming election, so yea not an issue. And hedging ER increase is only 0.03. So the cost would be 0.30, and with say 20% of a portfolio in currency hedged global along with say 20-30% home country equities, the overall ER increase for total portfolio would be around 0.06, which seems ok.


Anyway, there is now some costs that can be used if siamond decides to consider backtesting a portfolio with local-currency hedged global equities in place of or in combination with home equities.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by siamond » Wed Jan 23, 2019 9:09 am

andrew99999 wrote:
Wed Jan 23, 2019 2:01 am
[...] Anyway, there is now some costs that can be used if siamond decides to consider backtesting a portfolio with local-currency hedged global equities in place of or in combination with home equities.
As you pointed out, those costs are likely to be quite different depending on one's locale. And I just don't have enough historical per-country hedged data to do a meaningful backtest along the same principles longinvest used (which is a very interesting input, agreed).

My inclination has always been to avoid any financial instrument with extra baggage, and hedged funds always seemed suspicious to me. Longinvest's math went a long way in quantifying and matching this intuition. I can appreciate though that local situations are all different, and one just cannot make simple generic recommendations. All we can do is trigger some thinking and provide various viewpoints.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by andrew99999 » Wed Jan 23, 2019 9:56 am

siamond wrote:
Wed Jan 23, 2019 9:09 am
andrew99999 wrote:
Wed Jan 23, 2019 2:01 am
[...] Anyway, there is now some costs that can be used if siamond decides to consider backtesting a portfolio with local-currency hedged global equities in place of or in combination with home equities.
As you pointed out, those costs are likely to be quite different depending on one's locale. And I just don't have enough historical per-country hedged data to do a meaningful backtest along the same principles longinvest used (which is a very interesting input, agreed).

My inclination has always been to avoid any financial instrument with extra baggage, and hedged funds always seemed suspicious to me. Longinvest's math went a long way in quantifying and matching this intuition. I can appreciate though that local situations are all different, and one just cannot make simple generic recommendations. All we can do is trigger some thinking and provide various viewpoints.
Fair enough.
The original article is so good that even without anything else it''s still seminal in my portfolio construction, so thanks again.

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Re: International Allocation and Siamond's "Investing in the World" Series

Post by HEDGEFUNDIE » Wed Jan 23, 2019 6:53 pm

staythecourse wrote:
Tue Jan 22, 2019 9:47 pm
HEDGEFUNDIE wrote:
Sat Jan 19, 2019 2:42 pm
If you are concerned with currency risk, hedge it out!

There are dozens of USD hedged international stock funds available to the retail investor.
Folks only have an issue with currency risk IF it lowers their returns. If it benefits them they have no issues of it. Tongue and cheek, but sadly true. The ability to rationalize is a STRONG behavioral risk.

Good luck.
It’s more than that, currency risk adds to volatility in both directions.

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