Theory: NOW is the Best Time for Total World Stock

[bogledogle87]

Global-cap investors will say it was always a best time and will always be. I'm not here to refute that, but rather to suggest that those of us in 80%-100% US equities (myself included) might reconsider this stance right now for several reasons.

A Few Data Points (**See 3//5/2019 Edit**)
- From 1986-2018, the US has increased its World Market Share from 30% to 54%
- The US outperformed Int'l by over 3.5% CAGR over these 33 years
- In 1989, the US fell to its lowest world share of 18% of World Cap in recent history



Reasons to Reconsider Overweighting US
- International Investing is more affordable than ever with VTIAX and VTWAX low ER's
- The current World Cap is within spitting distance of a Vanguard's recommended 60/40 equity allocation
- The US has it's highest relative valuation to the rest of the world that it has ever had in modern history
- Unless you are absolutely convinced the US is going to gain World cap share to the tune of 60% - 80%, you might reconsider.
- Home Country Bias is a real risk, even for the US, albeit a much lower one than others. Do not assume is it near zero due to a nice track record.

How many US investors in 1989 would have been comfortable with a 18% US / 82% Int'l portfolio? Probably not many considering the added expense, political, and currency risk. If those investors had overweighted the US heavily, they have been handsomely rewarded over the past 30 years and had their strategies well-justified in their minds all these years later. Looking at this time period as a justification for the next 33 years might be very risky.

Let's say you switch from 100% US to 100% Total World right now (Currently 54% US / 46% Int'l)
- If the US charges toward a 60-80% of World Cap, you will enjoy significant returns
- If the US finds itself back at 25-50% of World Cap at any point for any reason, you will have made the right call
---- If the US undergoes a significant recession and the rest of the world doesn't as much, you will be covered
---- If there are no major recessions worldwide, but Int'l wildly outperforms US, you will be covered

The more I evaluate the reasonable cost of international exposures, along with the current market weights and valuations, the more I am starting to believe that RIGHT NOW is the best time for a US investor to consider Total World compared to any point in the past 30-40 years. Would love to hear some feedback!

EDIT 3/5/2019: One user has challenged me on the accuracy of the graph above - especially the US capitalization in the 1980's - since other sources cite otherwise. To arrive at the data above, I used backtesting of Total US and Global-Ex US indexes with no re-balancing to arrive at the current weights. In my mind, this should have painted an accurate picture looking back, but maybe not. It may depend on which indexes have been piecewised together to cover this time period for each source. Vanguard has published a paper in Feb 2019 that shows higher US weights during the 1980's (Link below). Take what you will from my post, Vanguard's paper, and all other sources. I will say I have enjoyed all of your thoughts and feedback on the Total World approach through your contributions in this thread.

Global equity investing: The benefits of diversification and sizing your allocation
https://www.vanguard.com/pdf/ISGGEB.pdf

EDIT 4/29/2019
This graphic below appears to be more accurate and covers many more years than my original backtesting result. Unless an investor feels confident they could have predicted any portion of this graph, or can extrapolate it in a meaningful way going forward, Total World should at least be strongly considered as a reasonable starting point.

1900-2017 via Credit Suisse

[3funder]

It's a great time. I have no idea what the best time would have been, is, or will be, but I am 50/50 US/International and don't plan to make any consequential changes.

[UpperNwGuy]

OP: How do you allocate your own stocks between US and international? Are you planning to change that allocation based on your post?

[bogledogle87]

OP: How do you allocate your own stocks between US and international? Are you planning to change that allocation based on your post?

Full Disclosure: I've invested in stocks for about 10 years - 9 year doing whatever my commissioned advisor said & 1 year on my own. I am sharing my research and ideas in real time on this forum as learn how to come up with a strategy I can stick with. Looking at my equity assets as a whole, I am about 10% international today. I was initially swayed by JL Collins book that 100% VTSAX could be a reasonable approach.

Yes, based on some of my conclusions stated above and the introduction of the Total World Admiral Shares last week, I am strongly considering the merits of a Global Cap approach as possibly being the right choice for me. Please share any other feedback and experiences you may have

[pdavi21]

There's the option that the US falls to 25%, but only because INTL stock funds buy new offerings as they become available without the old holdings outperforming US.

I.E. 55/45 US/INTL
Size of investable INTL market doubles from IPOs/China A Shares etc.
New portfolio is 38/62 US INTL without ANY appreciation or depreciation.

[asif408]

OP,

I think you proposal is sound. Especially considering that you only have 10% in international currently, making a change now or in the near future could potentially be of great benefit in the coming decades, and the odds that it will hurt you badly are low. For example, since the inception of Vanguard's international fund in 1996, a US only investor has beaten a 50/50 US/Int'l portfolio by about 1.6%: https://www.portfoliovisualizer.com/bac ... ion2_3=100, and nearly all of that US outperformance occurred in the last 10 years.

Also, don't forget by going total world you'll virtually eliminate the possibility of a Japan type scenario, however unlikely, from occurring to you. Of course, you're going to have to block out the chorus of folks here preaching their US only sermons, which can be hard for many to do, especially if international keeps lagging for a few years.

[bogledogle87]

There's the option that the US falls to 25%, but only because INTL stock funds buy new offerings as they become available without the old holdings outperforming US.

I.E. 55/45 US/INTL
Size of investable INTL market doubles from IPOs/China A Shares etc.
New portfolio is 38/62 US INTL without ANY appreciation or depreciation.

I'll admit I don't know enough about the scenario you've described to fully understand it's likelihood, but if it did happen, which boat would you personally rather be in - 100% US or 100% Total World - if given only those two options?

[bogledogle87]

You're going to have to block out the chorus of folks here preaching their US only sermons, which can be hard for many to do, especially if international keeps lagging for a few years.

My challenge is that I am a total details and numbers nerd, as I'm sure a lot of this forum can relate to. I recognize that being that serves me well in a lot of ways, but I also need to protect myself from myself. By that I mean needing the resist the urge to act in some way based on trends or recent evidence (even even 40 year trends in the case of US equities). I'll never be a day trader or a sector slice and dicer, but I have definitely been swayed toward a home country bias in the past by the JL Collins 100% VTSAX approach. Just working to understand and move toward something I know I'll never mess with that will also meet my financial objectives.

[anil686]

I would add (in addition to your logic) that the dollar is and has been very strong in relation to most currencies in both Europe and Asia which have depressed international returns for US investors in dollar denominated currency. An example of this (I believe from memory but I can look it up) was 2015 where global ex-US stock returns in local currency was positive 6% but in dollar denominated currencies was negative 5%. In essence, the strong dollar and continued dollar strength showed up in the form of currency risk. I would also add that your graph from the late 1980s is exaggerated by the same effect - in fact a very weak dollar as it had weakened throughout most of the 1980s. I am not saying you are right or wrong, but currency risk is real and significant for US investors due to the dollar being reserve currency of the world. If the dollar weakens over time (I would say a high likelihood just like saying interest rates would rise when they were near zero), international returns will look much better and having a higher percentage allocated to global ex-US equities will have much enhanced returns with a large part coming from currency movements. JMO though to add to this discussion...

[imyeti2]

From 1980s to now, lot of US companies have become global. Also reverse is true. By owning stock in large US companies, you are already being exposed to global markets.

[MotoTrojan]

There's the option that the US falls to 25%, but only because INTL stock funds buy new offerings as they become available without the old holdings outperforming US.

I.E. 55/45 US/INTL
Size of investable INTL market doubles from IPOs/China A Shares etc.
New portfolio is 38/62 US INTL without ANY appreciation or depreciation.

I'll admit I don't know enough about the scenario you've described to fully understand it's likelihood, but if it did happen, which boat would you personally rather be in - 100% US or 100% Total World - if given only those two options?

As written the scenario would be equivalent; neither group appreciated or depreciated. The point is you can grow market share without actually gaining value. When Uber IPOs there won’t be an instant growth in US large cap index value as the IPO was funded with new capital. Same thing applies to international stocks, especially emerging markets where there are lots of technological gains and new businesses/industries.

[FinancialRookie]

My strategy has always been to split the difference. Vanguard now recommends ~40%, my tendency to want 0%, so I'm shooting for ~20% Intl. Seems reasonable to me.

[sunnywindy]

I think the theory is sound (use global market cap - I am 55/45 US/Intl), but I'm not sure "now" is the perfect time. However, I'm not sure "now" is not the perfect time, either. I just set my asset allocation and let it do its thing.

[spangineer]

You may be interested in the suggestion of a 75% world + 25% domestic allocation. Basically this means overweighting your home country relative to the rest of the world, but not extensively.

The author of the linked post does a lot of analysis and backtesting to show that this strategy would have worked reasonably well when facing an economic disaster like the lost decades in Japan.

[bogledogle87]

I think the theory is sound (use global market cap - I am 55/45 US/Intl), but I'm not sure "now" is the perfect time. However, I'm not sure "now" is not the perfect time, either. I just set my asset allocation and let it do its thing.

My logic of "now" is that the US market cap as a percentage of world is the highest it's ever been. If US were to grow to 60% by the end of the year, of course that future "now" would be better and my literal claim of 2/14/2019 is invalid. I really wanted to convey the overall sentiment that right now may be better than ever we've ever seen, given the current valuations. If an investor is coming from 100% or heavily overweighted to US, they should be pretty confident they are selling high on US and buying low on International to some degree by moving to Total World.

[bogledogle87]

My strategy has always been to split the difference. Vanguard now recommends ~40%, my tendency to want 0%, so I'm shooting for ~20% Intl. Seems reasonable to me.

Fair enough! Vanguard recommends a minimum of 20%. Bogle and Buffet have said they prefer 0% but understand a maximum of 20% in the past. Picking the one number everyone agrees on seems reasonable.

[visualguy]

I think the theory is sound (use global market cap - I am 55/45 US/Intl), but I'm not sure "now" is the perfect time. However, I'm not sure "now" is not the perfect time, either. I just set my asset allocation and let it do its thing.

My logic of "now" is that the US market cap as a percentage of world is the highest it's ever been. If US were to grow to 60% by the end of the year, of course that future "now" would be better and my literal claim of 2/14/2019 is invalid. I really wanted to convey the overall sentiment that right now may be better than ever we've ever seen, given the current valuations. If an investor is coming from 100% or heavily overweighted to US, they should be pretty confident they are selling high on US and buying low on International to some degree by moving to Total World.

The problem is that ex-US isn't cheap either. Valuations are lower than US (which is nothing new), but they are still much higher than their historical average.

Also, even if US returns become poor over the next, say, decade (as many expect), there is no reason to believe that they won't be as poor for ex-US. You have to remember that ex-US is mostly Europe and Japan. Are you really bullish on those? Then you have the big fast-growing economies of China and India where stock market index investment has been a bust due to the nature of their economies and stock markets.

[cjking]

Broadly speaking, I think now is nearly always a good time for most people to get their equity exposure from the world index.

Having said that, in the late 80's I would have wanted zero exposure to Japan, and now (as a non US-investor, and after a recent change in strategy) I have zero exposure to the US...

(Although the US is nowhere near as expensive now as Japan was then.)

[ruralavalon]

Trying to call the "best time" for any investing move is futile in my opinion.

[cjking]

The problem is that ex-US isn't cheap either. Valuations are lower than US (which is nothing new), but they are still much higher than their historical average.

I wonder what countries and numbers you are looking at? I have world-ex-US on an expected return of 5.5% versus US on 3.5%, for the actual indices before costs and taxes. Europe by itself is 5.5% on the same basis. Emerging Markets is 6.3%. These yields don't seem unusually low to me, though I deliberately don't compare to historical values.

Japan (4.2%) and Canada (4.8%) are other relatively expensive places I avoid. (Canada doesn't look expensive before costs, but when I make adjustments for ERs and withholding taxes, Canada gets a absolutely massive reduction in yield. 0.70%, compared to 0.22% median reduction for other trackers.)

[bogledogle87]

Trying to call the "best time" for any investing move is futile in my opinion.

What I really meant is "better than it ever has been" given what we see the the rear view mirror. Obviously I'm not claiming to have any insight on market timing for future results. World cap makes more sense right now for a US investor at 54%/46% than it did in 1989 at 18%/82% US/Int'l. I feel fairly confident in stating this point at least, even without being able to predict the future.

[Compound]

Put me squarely in the “nobody knows nothin’” camp on this one.

Using relative valuations as a metric on what an investor should do is at best very, very tricky in my opinion.

Let’s take the opposite case than is proposed in your situation. Let’s say someone’s portfolio is heavily overweight in international stocks relative to US. For the sake of example, let’s say this person has 90% of their stock assets in international (e.g. VTIAX) and the other 10% in US companies (e.g. VTSAX). If our hypothetical investor were considering increasing exposure to US stocks to become more in line with their home country bias, would now be the worst time for them to do so?

It seems to me that finding a plan you’re comfortable with and that you will stay the course with over many decades is the essential element that you should be focusing on. The matter of correctly timing when to make portfolio changes based on market conditions is unknowable beforehand. There are soooo many examples of unexpected massive market turmoil that trying to logically suggest what the market will do based on past recent trends (including over years) seems a fool’s errand. In retrospect, over a certain period of time, will having a portfolio either tilted toward international or toward US stocks produce better returns relative to the other? Sure. (Of course there is the case of if they tie. ) But is that decision of which one to pick knowable in advance? Not so much.

(In case it isn’t obvious, I would not dissuade the hypothetical investor from making a change to their plan, assuming that move strengthens their resolve to stay the course through thick and thin.)

[nisiprius]

Same-old, same-old. Every attempt to determine a "best time" runs into the usual contradiction.

A few years ago, the narrative was that US stocks had a declining share of world market cap, and therefore the US was doomed and one had better start investing internationally. At one point--too lazy to do the search, probably near the end of 2000-2009--someone did not believe me when I said that the US share was higher than it had been in 1990.

Now, people are saying that the US share is rising and that is unsustainable and must soon stop, therefore the US has peaked and it is "the best time" to invest internationally.

If something is down and you feel like selling, you say "don't catch a falling knife," "momentum," and "cut your losses and let your profits run."

If something is down and you feel like buying, you say "it's cheap," "it's 'on sale,'" "buy low, sell high," "mean reversion,"

If something is up and you feel like selling, you say "nobody ever went broke taking a profit" and "buy low, sell high" and "mean reversion."

If something is up and you feel like buying, you say "the trend is your friend" and "momentum" and "cut your losses and let your profits run" and "you're playing with house money now."

What the chart is probably reflecting, mostly, is simply that the dollar was weakening from 2002-2008 and that it has been strengthening since then.

I think that all large, sudden changes in asset allocation are suspect. A change from 100% US to 100% total world--i.e. 100% to 50% US all at once, 0% to 50% international all at one, based on the sorts of considerations you mention, is... too much.

[cjking]

You have to remember that ex-US is mostly Europe and Japan. Are you really bullish on those?

"Bullish" is a phrase I'd use for anticipating good luck with the earnings multiple. If Europe has a 2% higher smoothed earnings yield, nothing special needs to happen for it to earn 2% more, if both Europe and the US multiples were static, I think Europe would outperform by roughly 2%.

As it happens, I have an argument that says US out-performance this century has been mostly due to good luck, rather than any fundamental economic superiority. In another thread in recent months I showed figures that suggested almost all the out-performance of the S&P 500 over the FTSE 100 over the past 20 years was due to expansion in PE multiples. From memory, the S&P 500 had out-peformed by 1.6% a year, of which only 0.1% was due to better actual earnings, the other 1.5% was it just becoming more expensive. I don't necessarily believe that expansion will unwind, my policy is always to be neutral on multiples. I don't need to predict a change in multiples to shun the US, the low smoothed earnings yield is already enough reason to avoid it.

(Edit: I should clarify that "smoothed earnings yield" is just my own label I use to describe 1/PE10 for a market, which is what I use to estimate expected return.)

[bgf]

From 1980s to now, lot of US companies have become global. Also reverse is true. By owning stock in large US companies, you are already being exposed to global markets.

owning companies that are domiciled in country "xyz" but do business globally is not comparable to owning countries domiciled all over the globe.

[bogledogle87]

For the sake of example, let’s say this person has 90% of their stock assets in international (e.g. VTIAX) and the other 10% in US companies (e.g. VTSAX). If our hypothetical investor were considering increasing exposure to US stocks to become more in line with their home country bias, would now be the worst time for them to do so?

Great Question - I have no idea. I understand by putting NOW in all caps I have introduced a discussion around timing. What I really meant is that the world cap is so close to the balance where historical testing has found the greatest diversification for US investors. Couple that with the reasonable cost of those exposures, I find it to be a good time to consider it.

60/40 US/Intl is a very popular allocation is a far better bet right at this moment than 30 years ago when the World cap was 18/82 US/Intl. You would have been taking monumental risk at a much higher expense back in 1989. With the world cap so close to this allocation in 2019, you can get the diversification benefit, at a reasonable cost. Regardless of who outperforms who, you will be seeing those benefits just by keeping with market weight. At least this is how I am seeing it - the stars are kind of aligning where world cap is equal to the well diversified portfolios observed through backtesting.

[bgf]

For the sake of example, let’s say this person has 90% of their stock assets in international (e.g. VTIAX) and the other 10% in US companies (e.g. VTSAX). If our hypothetical investor were considering increasing exposure to US stocks to become more in line with their home country bias, would now be the worst time for them to do so?

Great Question - I have no idea. I understand by putting NOW in all caps I have introduced a discussion around timing. What I really meant is that the world cap is so close to the balance where historical testing has found the greatest diversification for US investors. Couple that with the reasonable cost of those exposures, I find it to be a good time to consider it.

60/40 US/Intl is a very popular allocation is a far better bet right at this moment than 30 years ago when the World cap was 18/82 US/Intl. You would have been taking monumental risk at a much higher expense back in 1989. With the world cap so close to this allocation in 2019, you can get the diversification benefit, at a reasonable cost. Regardless of who outperforms who, you will be seeing those benefits just by keeping with market weight. At least this is how I am seeing it - the stars are kind of aligning where world cap is equal to the well diversified portfolios observed through backtesting.

it is easy to fall prey to the logic of your position - the intersection of the current world market cap to the vanguard recommendation, etc. but relying at any time on valuation or timing inevitably leads an inquiring mind down a rabbit hole from which you will never logically escape. it forces you to act from first principles that are by definition more arbitrary and capricious than a global market cap strategy.

global market cap is as cheap as its ever been, as simple and easy to implement as its ever been, and involves the absolute least amount of human decision making, which is generally a good thing for an investor with no articulable and practical edge. i don't have to worry about US v. International because I invest in everything. I don't have to worry about large cap v. small cap because I investing in everything. i dont have to worry about value v. growth because i invest in everything. i dont have to worry about factor investing v. market beta because i invest in everything.

things get far more complicated again when you have to deal with bonds, but thankfully I am 100% equities and not at that stage yet...

[cjking]

By owning stock in large US companies, you are already being exposed to global markets.

I implicitly disagree with this argument. I believe in market efficiency within stock-markets, but am betting (perhaps mistakenly) that home bias means it doesn't exist across markets. So if the same company moved its listing from one country to another, it could be worth vastly more or less, because investors in the destination country are comfortable with different PE multiples.

What matters is not just profits, but how much a crowd of investors is willing to pay for them, and the American crowd seem willing to pay a lot more than the European one.

If I'm right, if a European-listed multinational moved its listing to the US, it would become worth vastly more, if a US one moved in the other direction, it would be worth vastly less. This is in both cases assuming no actual change in their profits. You'd just be able to buy the company cheaper if you could buy it in Europe. Of course, I may be wrong.

[ray.james]

Total world is an excellent choice, but market time of it is pretty much dubious.

My guess is , USA will continue out performance compared to rest of the world. However, the out performance might be muted due to dollar weakening with the expanding deficits. The interest payments are expected to hit 10% in 2020. Adding a 1 trillion or 5% additional each year in debt is not a great sign! On the contrast, most countries are in the range of -2 to +2% budget. Even UK with its pound being beaten is at -1.8%.

[DB2]

Total world is an excellent choice, but market time of it is pretty much dubious.

My guess is , USA will continue out performance compared to rest of the world. However, the out performance might be muted due to dollar weakening with the expanding deficits. The interest payments are expected to hit 10% in 2020. Adding a 1 trillion or 5% additional each year in debt is not a great sign! On the contrast, most countries are in the range of -2 to +2% budget. Even UK with its pound being beaten is at -1.8%.

Agreed on all points.

I've lately considered going Total World for all equity allocation. It logically makes a lot of sense and I'm sorry to say, I feel there are more volatile/pressing issues facing the U.S. in the next decade compared to many other larger countries. I will be working for at least 20 more years so my stock investment will be greatly impacted since I will stay mostly equity. Even Vanguard suggests international returns will be higher than U.S. over the next 10 years. However, the emotional side of me keeps looking at how much better US returns have been the last decade and even into this year. I know, I know...you cannot base everything on the past. But I'm trying to squash that feeling if you will.

From a bond perspective, even Total World bond (BNDW) has appeal to me lately although I am still thinking all of this through.

Hmmmmm.

[92irish]

You can now get the Total World Index with Admiral shares at .10% annual expense ratio. All in one package and finally with lower cost admiral shares (what took you so long Vanguard?). I like it!

[DB2]

You can now get the Total World Index with Admiral shares at .10% annual expense ratio. All in one package and finally with lower cost admiral shares (what took you so long Vanguard?). I like it!

Any negative just going with VT (ETF version)?

[HomerJ]

How many US investors in 1989 would have been comfortable with a 18% US / 82% Int'l portfolio? Probably not many considering the added expense, political, and currency risk.

Have those risks gone away?

[HomerJ]

There's the option that the US falls to 25%, but only because INTL stock funds buy new offerings as they become available without the old holdings outperforming US.

I.E. 55/45 US/INTL
Size of investable INTL market doubles from IPOs/China A Shares etc.
New portfolio is 38/62 US INTL without ANY appreciation or depreciation.

I'll admit I don't know enough about the scenario you've described to fully understand it's likelihood, but if it did happen, which boat would you personally rather be in - 100% US or 100% Total World - if given only those two options?

I have near zero interest in investing in China. No rule of law there to protect my investments (as an American).

But that's responding the hypothetical situation above. I do not believe China is a very large percentage of International at this time.

But if it became a very large percentage of international investing, then I would go to 100% U.S. (given the choices above).

Currently my stock holdings are 80/20 VTSAX/VTIAX

[HomerJ]

From 1980s to now, lot of US companies have become global. Also reverse is true. By owning stock in large US companies, you are already being exposed to global markets.

owning companies that are domiciled in country "xyz" but do business globally is not comparable to owning countries domiciled all over the globe.

You are correct, it can be better.

If country "xyz" has solid rule of law, and other countries do not.

Or if country "xyz" is using YOUR currency, and other countries are not.

Best of both worlds. Mitigate some of the international risks, still get some of the profits from the rising middle-class in the rest of the world.

[pdavi21]

There's the option that the US falls to 25%, but only because INTL stock funds buy new offerings as they become available without the old holdings outperforming US.

I.E. 55/45 US/INTL
Size of investable INTL market doubles from IPOs/China A Shares etc.
New portfolio is 38/62 US INTL without ANY appreciation or depreciation.

I'll admit I don't know enough about the scenario you've described to fully understand it's likelihood, but if it did happen, which boat would you personally rather be in - 100% US or 100% Total World - if given only those two options?

It's very simple. Something like (90%-a total guess) of US companies are in VT while only (10%-another total guess) of Chinese companies are in VT. If all of the remaining Chinese companies go public, VT goes from 55% US/3.5% China to 42% US/27% China after Vanguard buys shares in all the Chinese companies that are now invest-able. You made zero dollars. Vanguard sold 23% of their non-China stocks and used the money to purchase shares in the newly available Chinese companies. It's more likely you lose a bit short term because investors (especially mutual funds) will be dumping US stocks to buy overpriced IPOs.

I like market weighting or over-weighting (depends on tax and currency risk) International stocks, but your reason is a poor one. US is 55% of the STOCK market, not the ECONOMY. US is only about 24% of the economy.

[Valuethinker]

Same-old, same-old. Every attempt to determine a "best time" runs into the usual contradiction.

A few years ago, the narrative was that US stocks had a declining share of world market cap, and therefore the US was doomed and one had better start investing internationally. At one point--too lazy to do the search, probably near the end of 2000-2009--someone did not believe me when I said that the US share was higher than it had been in 1990.

Now, people are saying that the US share is rising and that is unsustainable and must soon stop, therefore the US has peaked and it is "the best time" to invest internationally.

If something is down and you feel like selling, you say "don't catch a falling knife," "momentum," and "cut your losses and let your profits run."

If something is down and you feel like buying, you say "it's cheap," "it's 'on sale,'" "buy low, sell high," "mean reversion,"

If something is up and you feel like selling, you say "nobody ever went broke taking a profit" and "buy low, sell high" and "mean reversion."

If something is up and you feel like buying, you say "the trend is your friend" and "momentum" and "cut your losses and let your profits run" and "you're playing with house money now."

What the chart is probably reflecting, mostly, is simply that the dollar was weakening from 2002-2008 and that it has been strengthening since then.

I think that all large, sudden changes in asset allocation are suspect. A change from 100% US to 100% total world--i.e. 100% to 50% US all at once, 0% to 50% international all at one, based on the sorts of considerations you mention, is... too much.

Since 2009 it is not the dollar.

US stocks have outperformed. In particular the FAANGs + Microsoft the super tech stocks.

But also the financials. Most US banks are above their pre 2008 highs. Most European banks are not and some like Royal Bank of Scotland will never get there.

US banks were encouraged to write off their bad assets and recapitalize their balance sheets with fresh equity relatively quickly.

Also the US economy recovered more quickly due in part to looser fiscal policy and so asset values rose more quickly as well as loan volumes etc. Thus written off assets turned out to have value.

I'd have to check but roughly for every 2 per cent European markets rose post crash, US ones rose by 3 per cent.

[pkcrafter]

bogledogle wrote:

My challenge is that I am a total details and numbers nerd, as I'm sure a lot of this forum can relate to. I recognize that being that serves me well in a lot of ways, but I also need to protect myself from myself. By that I mean needing the resist the urge to act in some way based on trends or recent evidence (even even 40 year trends in the case of US equities). I'll never be a day trader or a sector slice and dicer, but I have definitely been swayed toward a home country bias in the past by the JL Collins 100% VTSAX approach. Just working to understand and move toward something I know I'll never mess with that will also meet my financial objectives.

Many on the forum are details and numbers guys. You seem to be aware of potential problems, but you also appear to be making those mistakes you are concerned about. First off, why did you choose to go 100% VTSAX based on what one person said? You can certainly find other "experts" that don't recommend that. Maybe you already had the idea and were looking for confirmation? Now you want to swing to 46% international (world allocation). Is it optimal? No one knows. I'm not saying it's bad, but you are basing this on some recent analyses that you believe are valid and accurate. The stock market is not static and whatever is optimal is constantly changing. The optimal future U.S. to International allocation is not known, but discussions on this topic always generate a lot of discussion, but never end up with a consensus on the answer. I would guess that something between 20% and 45% international is better than all in or all out because it kind of hedges the bet.

Global-cap investors will say it was always a best time and will always be. I'm not here to refute that, but rather to suggest that those of us in 80%-100% US equities (myself included) might reconsider this stance right now for several reasons.

"Right now" is not a term a good investor will use.

The more I evaluate the reasonable cost of international exposures, along with the current market weights and valuations, the more I am starting to believe that RIGHT NOW is the best time for a US investor to consider Total World compared to any point in the past 30-40 years. Would love to hear some feedback!

You sound convinced and confident when there really is no way to come to that conclusion.

You need to rethink your long term strategy and write it down in an Investment Policy Statement and then go do something else. Stop trying to apply your numbers skill and detail orientation to investing, it will only cause fiddling and loss of potential returns.

https://www.bogleheads.org/wiki/Investm ... _statement

Behavior

https://www.bogleheads.org/wiki/Behavioral_pitfalls


Paul

[bogledogle87]

How many US investors in 1989 would have been comfortable with a 18% US / 82% Int'l portfolio? Probably not many considering the added expense, political, and currency risk.

Have those risks gone away?

I am far from an expert on this, but i would suggest that yes, two of those factors are significantly less.

1) 46% in 2019 vs 82% in 1989 in international is almost half the current risk for an US investor, unless I am thinking about this the wrong way
2) Expense ratios have decreased dramatically for international investing with the introduction of international cap-weighted indexes.

[sambb]

OP is probably right. Target retirement have alot of intl also. Good luck.

[bogledogle87]

Why did you choose to go 100% VTSAX based on what one person said?

I got rid of my 1.35% AUM investment advisor once I realized how much I was losing and read the JL Collins stock series. So in a way, yes. Maybe a rash move, but I was just happy to get rid of the fees. I still see that move as progress. Now time to really understand what I am doing and stick with it for the long haul.

Now you want to swing to 46% international (world allocation).

Possibly, It seems to make more sense than what I've done before now.

"Right now" is not a term a good investor will use.

This is completely fair. The sentiment i was trying to convey is that right now could be better than any point over the last 33 years. It may also not be. but 2/14/2019 has more justification in my mind than 2/14/1989 would have.

You sound convinced and confident when there really is no way to come to that conclusion.

I might disagree slightly here. I do think there is rationale that the global cap investment makes a lot more sense to enter when it's 55% US than when it was 18% US. The cost of ownership is much lower and if the US ever falls to 50% or even well below, it will have been the right call. If US surges to 75 or 80%, it still wasn't a bad call.

You need to rethink your long term strategy and write it down in an Investment Policy Statement and then go do something else. Stop trying to apply your numbers skill and detail orientation to investing, it will only cause fiddling and loss of potential returns.

Absolutely. That was part of the reason of this post, was to share my research and thoughts in real time and have them critiqued by this great community. I know I have a ton to learn - or maybe I am trying to learn too much and it's over-complicating things for myself. Agree with the IPS, It needs to happen. My conundrum is understanding a strategy well enough to justify it for decades, but not overdoing it such that I'm going to want to be tempted to act on new or unexpected information. Just trying to figure out where this really lies for me. Appreciate the direct and candid feedback.

[bogledogle87]

it is easy to fall prey to the logic of your position - the intersection of the current world market cap to the vanguard recommendation, etc. but relying at any time on valuation or timing inevitably leads an inquiring mind down a rabbit hole from which you will never logically escape. it forces you to act from first principles that are by definition more arbitrary and capricious than a global market cap strategy.

I freely admit this. Thus my journey to find an allocation I won't justify messing with!! My currently allocation of 90% VTSAX is even more arbitrary, looking back. I definitely got lured in by the indirect international exposure argument by JL Collins & Company.

global market cap is as cheap as its ever been, as simple and easy to implement as its ever been, and involves the absolute least amount of human decision making, which is generally a good thing for an investor with no articulable and practical edge.

Absolutely. The Total World Admiral Shares had a lot to do with the motivation of this post. I'm currently assessing whether or not i'm someone who needs to be shielded from his own temptations to gather information and make informed decisions, at least as far as investing goes.

[bgf]

From 1980s to now, lot of US companies have become global. Also reverse is true. By owning stock in large US companies, you are already being exposed to global markets.

owning companies that are domiciled in country "xyz" but do business globally is not comparable to owning countries domiciled all over the globe.

You are correct, it can be better.

If country "xyz" has solid rule of law, and other countries do not.

Or if country "xyz" is using YOUR currency, and other countries are not.

Best of both worlds. Mitigate some of the international risks, still get some of the profits from the rising middle-class in the rest of the world.

currency can cut both ways, good or bad. i am in no way qualified to make claims about the laws, regulations, and corporate structures of the US, let alone other countries.

[lostdog]

OP,

Before you start world market cap investing, you'll need to come to the realization that it's hard to beat the markets. You can admit that anything outside of world market cap is a bet. If you tilt, you're virtually saying that you know more than than everyone else in the market.

If you can come to grips with this then you can start your VTWAX journey.

Will you change your mind when international still lags for a few years?

Will you be swayed by the U.S. only crowd's reasonings:

The rest of the world is corrupt.
We only invest in the rear view mirror.
Jack and Warren said so.
International coverage in VTSAX is sufficient.



Will you be tempted to change your mind?

[Trader Joe]

Global-cap investors will say it was always a best time and will always be. I'm not here to refute that, but rather to suggest that those of us in 80%-100% US equities (myself included) might reconsider this stance right now for several reasons.

A Few Data Points
- From 1986-2018, the US has increased its World Market Share from 30% to 54%
- The US outperformed Int'l by over 3.5% CAGR over these 33 years
- In 1989, the US fell to its lowest world share of 18% of World Cap in recent history



Reasons to Reconsider Overweighting US
- International Investing is more affordable than ever with VTIAX and VTWAX low ER's
- The current World Cap is within spitting distance of a Vanguard's recommended 60/40 equity allocation
- The US has it's highest relative valuation to the rest of the world that it has ever had in modern history
- Unless you are absolutely convinced the US is going to gain World cap share to the tune of 60% - 80%, you might reconsider.
- Home Country Bias is a real risk, even for the US, albeit a much lower one than others. Do not assume is it near zero due to a nice track record.

How many US investors in 1989 would have been comfortable with a 18% US / 82% Int'l portfolio? Probably not many considering the added expense, political, and currency risk. If those investors had overweighted the US heavily, they have been handsomely rewarded over the past 30 years and had their strategies well-justified in their minds all these years later. Looking at this time period as a justification for the next 33 years might be very risky.

Let's say you switch from 100% US to 100% Total World right now (Currently 54% US / 46% Int'l)
- If the US charges toward a 60-80% of World Cap, you will enjoy significant returns
- If the US finds itself back at 25-50% of World Cap at any point for any reason, you will have made the right call
---- If the US undergoes a significant recession and the rest of the world doesn't as much, you will be covered
---- If there are no major recessions worldwide, but Int'l wildly outperforms US, you will be covered

The more I evaluate the reasonable cost of international exposures, along with the current market weights and valuations, the more I am starting to believe that RIGHT NOW is the best time for a US investor to consider Total World compared to any point in the past 30-40 years. Would love to hear some feedback!

Thank you very much for the information that you have posted. As a United States citizen living in the United States, I am 100% invested in United States equities. I am extremely happy with my results.

[asset_chaos]

Make a plan and stick with it. I'm not a fan of big changes just because something new has come out. I'm plenty conservative: I prefer gradual changes that I test out a lot. I started investing in total world when it came out in 2008. Was that a good time for total world? No, that turned out to be a poor time for any stocks. But I was already roughly approximating the global stock market with three stock funds, so moving to a simpler single fund that better approximated the global stock market made sense: it was essentially no big change for me. I'm still invested in total world as my core stock holding. Is now the best time for total world? For me it'll have to be adequate because I'm not changing.

But from one point of view switching from even 100% US to total world is not that big of a change. You go from less than 2x overweight the US compared to global market weight to exactly global market weight. The <2x overweight is already far less home bias than most investors outside the US have. Compared to a typical non-US investor you've gone from not very overweight home market to essentially the same thing. It's a fact of the large size of the US market that a US investor can mostly eliminate home market concentration risk by having non-US stocks at any weighting greater than zero and less then or equal to market weight.

[sunnywindy]

I think the theory is sound (use global market cap - I am 55/45 US/Intl), but I'm not sure "now" is the perfect time. However, I'm not sure "now" is not the perfect time, either. I just set my asset allocation and let it do its thing.

My logic of "now" is that the US market cap as a percentage of world is the highest it's ever been. If US were to grow to 60% by the end of the year, of course that future "now" would be better and my literal claim of 2/14/2019 is invalid. I really wanted to convey the overall sentiment that right now may be better than ever we've ever seen, given the current valuations. If an investor is coming from 100% or heavily overweighted to US, they should be pretty confident they are selling high on US and buying low on International to some degree by moving to Total World.

In the context of a person who is 100% US, I completely agree with you. It is an excellent time to reallocate US money to Intl money and the probability that this action is a 'bad' move is low. (Also, the headwinds the stronger dollar presented in the last 4-5 years are probably over with, so that will help unhedged holdings.) But, just because it never happened before or the ratio is at levels never seen before, doesn't mean that these trends won't continue. I don't buy or sell on political trends, but there's every reason to believe that with Brexit, the Euro troubles, China's debt, etc... that there is potentially more structural economic trouble outside of the US than within. So, I personally think that the US/ex-US ratio will increase in the next year or two and that will present an even better buying opportunity.

[pward]

You say that they are the highest they've ever been so it's a reason it should revert... however, if you look at the chart it's a long term series of higher lows and higher highs. Pretty strong 35 year up-trend going on there with no sign of letting up. I'm not so sure on a technical basis that there's a case that it can't go higher long term. Matter of fact, what looks most likely is a short to medium term pull back at sometime in the next decade to set another higher low, followed by another strong longer term higher high. Also, if you look at the years that we lost ground they were all years that the dollar itself was struggling. So the times international outperformed had nothing to do with business fundamentals, it was strictly the fact that the dollar weakened that caused international to outperform. International performance for an American shareholder is dictated more by currency fluctuations than the underlying businesses.

I'm not saying not to invest in international, but I personally don't think market cap weighting is worth the added risk. Just because things are unbalanced doesn't mean they can't get a whole lot more unbalanced... I personally look at international stocks more as a currency hedge than a core investment. And if you're making a hedge almost half your portfolio, you're doing it wrong, imo.

[deltaneutral83]

The chart I saw posted several years ago about how 20-25% Intl gives you the lower standard deviation/volatility while sacrificing very little in ROI (over say a 40 year period) is what hooked me on a 20-25% Intl allocation. I'll be this way % wise for equities (between 75/25 80/20) until my time is up. If I was forced to be 100/0 or 60/40 for Dom/Intl I'd much rather be 60/40 which is what the PAS system at VG proposes. I can live with Intl not performing for the next 30 years much easier than I could live with having all my eggs in the US basket and something going awry domestically.

[andrew99999]

OP: How do you allocate your own stocks between US and international? Are you planning to change that allocation based on your post?

Full Disclosure: I've invested in stocks for about 10 years - 9 year doing whatever my commissioned advisor said & 1 year on my own. I am sharing my research and ideas in real time on this forum as learn how to come up with a strategy I can stick with. Looking at my equity assets as a whole, I am about 10% international today. I was initially swayed by JL Collins book that 100% VTSAX could be a reasonable approach.

Yes, based on some of my conclusions stated above and the introduction of the Total World Admiral Shares last week, I am strongly considering the merits of a Global Cap approach as possibly being the right choice for me. Please share any other feedback and experiences you may have

I like JL Collins (earlier) theories such as buy the haystack, don't market time.
But his implementation was flawed since he was not buying the haystack at all, leaving out the entire rest of the world.
This doesn't mean his concepts were not spot on.
In particular, you just stated that your reason for changing allocation was for market timing.

So I would say that as you learn to throw out his implementation, don't do the same with the concepts. Make sure your new allocation is one that does not involve market timing and instead decide on an allocation that makes sense to you in a way that you can stick with regardless of whether the US continues to out perform or international moves ahead.