Globally Diversified or Worsified?

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Johnathon Livingston
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Globally Diversified or Worsified?

Post by Johnathon Livingston »

I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
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Re: Globally Diversified or Worsified?

Post by JBTX »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
There a literally probably 1000+ threads on the merits, or lack of them, on international investing. You will get a lot of varying opinions.

viewtopic.php?f=10&t=344625
Last edited by JBTX on Fri May 14, 2021 7:50 pm, edited 1 time in total.
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Re: Globally Diversified or Worsified?

Post by vineviz »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average?
If those average returns were truly accurate expectations for future returns (they are not), then yes the average return of the portfolio would be pulled down.

Even then, however, it probably STILL wouldn't be optimal to avoid international stocks altogether. Because even with the long-run averages you specified, you could still easily get a decade or more with international stocks outperforming US stocks. That's simply how diversification works.
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Re: Globally Diversified or Worsified?

Post by Triple digit golfer »

Why not say the same for U.S. tech stocks vs. the rest of the U.S. market? How undiversified do you want to get to chase performance?
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Re: Globally Diversified or Worsified?

Post by retired@50 »

Bonds typically return less than US stocks. Should we avoid bonds too?

You can take this sort of logic until all you are invested in is last year's highest performing asset. This doesn't usually work out well.

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Re: Globally Diversified or Worsified?

Post by Johnathon Livingston »

Triple digit golfer wrote: Fri May 14, 2021 7:50 pm Why not say the same for U.S. tech stocks vs. the rest of the U.S. market? How undiversified do you want to get to chase performance?
I’m only talking about dropping the international diversification but keeping the vast diversification offered by the thousands of stocks in the US stock market.
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Re: Globally Diversified or Worsified?

Post by Triple digit golfer »

Johnathon Livingston wrote: Fri May 14, 2021 8:00 pm
Triple digit golfer wrote: Fri May 14, 2021 7:50 pm Why not say the same for U.S. tech stocks vs. the rest of the U.S. market? How undiversified do you want to get to chase performance?
I’m only talking about dropping the international diversification but keeping the vast diversification offered by the thousands of stocks in the US stock market.
Why? Some of those have been duds too. If you're chasing performance, don't buy past duds.

Or, don't do any of it and instead own a globally diversified portfolio.
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Re: Globally Diversified or Worsified?

Post by JBTX »

vineviz wrote: Fri May 14, 2021 7:48 pm
Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average?
If those average returns were truly accurate expectations for future returns (they are not), then yes the average return of the portfolio would be pulled down.

Even then, however, it probably STILL wouldn't be optimal to avoid international stocks altogether. Because even with the long-run averages you specified, you could still easily get a decade or more with international stocks outperforming US stocks. That's simply how diversification works.
You get to the point where certain things seems mathematically improbable. US continuing to beat international by 1.5% long term is pretty significant. Currently US is 57% of world stock market cap, up from about 33% in early 90s before Japan crash. With an ongoing US 1.5% premium, most likely the US 57% share increases further. How much higher can it get? It just seems improbable that it could go a lot higher.
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Re: Globally Diversified or Worsified?

Post by JBTX »

Johnathon Livingston wrote: Fri May 14, 2021 8:00 pm
Triple digit golfer wrote: Fri May 14, 2021 7:50 pm Why not say the same for U.S. tech stocks vs. the rest of the U.S. market? How undiversified do you want to get to chase performance?
I’m only talking about dropping the international diversification but keeping the vast diversification offered by the thousands of stocks in the US stock market.
So what has changed? You poured money into international for more than a decade, and now you want to switch? This seems like performance chasing. So if you switch, and international outperforms, will you then move back into international at its peak?

You need to have a coherent and well thought out and educated plan. It doesn't seem like you have one.
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Re: Globally Diversified or Worsified?

Post by Johm221122 »

And the decade before what would/did you say (2000 to 2010)?
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Re: Globally Diversified or Worsified?

Post by TheDDC »

retired@50 wrote: Fri May 14, 2021 7:56 pm Bonds typically return less than US stocks. Should we avoid bonds too?
Yes, yes you should.

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Re: Globally Diversified or Worsified?

Post by whereskyle »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
If you really think the US is special and a good place for a business to be domiciled, but you still want to protect yourself against the deep risk that threatens every country no matter how friendly they are to business, then I think you should do what I do with my equity position:

50% in VTI (Total US Stock)
50% in VT (Total World Stock)

That'll put you at a starting allocation of approximately 80/20. If ex-us outperforms, you'll have more of it as time goes on. If ex-us really is doomed as inherently inferior, you'll have less of it as time goes on.

I actually hold a little more VT than I do VTI. That's because it usually feels like the right thing to do to buy VT.

If you're struggling with buying ex-us on its own, as I was, using VT and VTI together might help.
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Re: Globally Diversified or Worsified?

Post by nisiprius »

I hold a real minority opinion in this forum. My belief is that global diversification shouldn't be expected to make a heck of a lot of difference, one way or the other. On the principle of "stay the course" you should probably stay the course... whatever that course happens to be now. Given the feelings you say you have, I have to ask: when you decided to put money into international stocks "well over a decade ago," what was your reason for doing it then? Did you happen to write them down?

Strictly in the interests of disclosure, my course happens to be 20% of stocks invested internationally. I'm glad it's only 20% because at that level I've been able to take the last decade philosophically, without being seriously tempted to dump the international holding.

I am labeling the rest of this posting "For Amusement Purposes Only." [Added] Indeed, Vineviz has challenged the actual accuracy of these published numbers.

A 2010 book by a noted authority included a section intended to illustrate incremental improvement of a portfolio by consecutive addition of diversifying asset classes. He started with a 60/40 portfolio of the S&P 500 index and the Barclay's Capital Intermediate Government/Credit index. For his very first step, he stated that "the most important diversification on the equity side is to add an exposure to international equities." He replaced the 60% US stocks with a fifty-fifty split between US and international stocks to form Portfolio 2.

Image

To within roundoff error, there was no difference at all in either the return or the standard deviation of the two portfolios.

When an advocate for international diversification, in a presentation calling it "the most important diversification on the equity side," choosing his own data sources and time period, publishes an illustration showing no benefit whatsoever (and fails to comment on it in the book!)--I don't know what to say except that the benefit can be subtle.
Last edited by nisiprius on Sat May 15, 2021 7:19 am, edited 4 times in total.
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Re: Globally Diversified or Worsified?

Post by Triple digit golfer »

nisiprius wrote: Fri May 14, 2021 8:32 pm I hold a real minority opinion in this forum. My belief is that it global diversification shouldn't be expected to make a heck of a lot of difference, one way or the other. On the principle of "stay the course" you should probably stay the course, whatever that course happens to be. Strictly in the interests of disclosure, mine happens to be 20% of stocks invested internationally. I'm glad it's only 20% because at that level I've been able to take the last decade philosophically, without being seriously tempted to dump the international holding.

I am labeling the rest of this posting "For Amusement Purposes Only."

A 2010 book by a noted authority included a section intended to illustrate incremental improvement of a portfolio by consecutive addition of diversifying asset classes. He started with a 60/40 portfolio of the S&P 500 index and the Barclay's Capital Intermediate Government/Credit index. For his very first step, he stated that "the most important diversification on the equity side is to add an exposure to international equities." He replaced the 60% US stocks with a fifty-fifty split between US and international stocks to form Portfolio 2.

Image

To within roundoff error, there was no difference at all in either the return or the standard deviation of the two portfolios.

When an advocate for international diversification, in a presentation calling it "the most important diversification on the equity side," choosing his own data sources and time period, publishes an illustration showing no benefit whatsoever (and fails to comment on it in the book!)--I don't know what to say except that the benefit can be subtle.
A reliable, respected poster here recently said that the chart you pointed out is incorrect.

Can anybody verify one way or another?
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Re: Globally Diversified or Worsified?

Post by nisiprius »

Triple digit golfer wrote: Fri May 14, 2021 8:35 pm ...A reliable, respected poster here recently said that the chart you pointed out is incorrect...

Can anybody verify one way or another?
Incorrect in what sense? It's an accurate reproduction of the book page. This is my source. It's on page 136 and I can actually view the page with Amazon "Look Inside the Book" by searching on the word "Australasia." There wasn't any errata sheet and there hasn't been an updated edition. I don't personally have access to the actual data sets cited.

I missed or don't remember the comment, if you'll link to it I'll take a look at it. What did the poster cite as their source? Was the poster the author of the book?

On checking, I see that when I posted that page image in 2018, the author of the book sent me a PM stating
Taleb famously and correctly stated that only fools judge a strategy by the outcome without considering what alternative universes might have shown up... IMO you took exactly the wrong message from that table.
To me, that is a clear re-assertion by the book author that the actual data in the table is accurate, but that he objects to the use I made of it.
Last edited by nisiprius on Fri May 14, 2021 9:02 pm, edited 9 times in total.
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Re: Globally Diversified or Worsified?

Post by Gaston »

Another view: if you live in the USA and plan to do so long term, then what you care most about is US dollar returns. That might sound obvious, but hear me out.

I’ve kept about 10% of my portfolio in international stocks (index fund) for the past 20 years. My experience is that annual returns are more a function of currency rate changes than underlying business performance. If German companies have mediocre performance, for example, but the US dollar falls against the euro, then you do well. If the same companies excel but the dollar rises against the euro, then your return is mediocre.

If you want international exposure, that’s fine. But I think the key question to ask is where the US dollar will go over the next 20-30 years. Not that any of us knows the answer of course, but it might help you ascertain the percentage of international stocks you are comfortable holding.
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Re: Globally Diversified or Worsified?

Post by X528 »

What about Japan? So what happened to the Japanese stock market in the past 30 years or so can't happen to the U.S. stock market?
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Re: Globally Diversified or Worsified?

Post by watchnerd »

Gaston wrote: Fri May 14, 2021 8:41 pm If you want international exposure, that’s fine. But I think the key question to ask is where the US dollar will go over the next 20-30 years. Not that any of us knows the answer of course, but it might help you ascertain the percentage of international stocks you are comfortable holding.
I have no idea how the dollar will do either, but because I'm holding global market weight in unhedged stocks, I get currency diversification.
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Re: Globally Diversified or Worsified?

Post by Jaymover »

My understanding that diversity across GROWTH assets is a way to reduce risk without reducing long term return too much. Even if you invest in a global fund you are already getting alot of US FAANG stocks so some would say that that is still too concentrated.

If you think about it, the world has some pretty good companies that are not in the US so it is good to be in the action on those whether it is capital growth or revenue. Geopolitical events are a big influencer so makes sense to be global. Also if you believe in reversion to the mean concepts then yesterday's outperformer will likely be tomorrow's underperformer so global diversity going forward helps with that.

Although it has alot of weapons etc, the US is still a bit of a worry; massive deficit, massive inequality to the point where domestic human capital is being lost, ridiculously generous and unfunded state and federal defined pension schemes together with an ageing population.

Also, my Google speakers are so damn buggy. Pretty disappointing product from the worlds biggest company. Market failure?

However always good to be overweight in your domestic market, unless you live in Zimbabwe.
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Re: Globally Diversified or Worsified?

Post by bgf »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
You've done it. You've cracked the case. If US returns more than International in the future, then yes, you're guaranteed to have more money only investing in US equities.


Good job! 👍
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Re: Globally Diversified or Worsified?

Post by tibbitts »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation.
You're assuming the relative benefits will remain as they are. The U.S. hasn't existed for that long, and has been the dominant economy it's been recently for much less time. It seems like you're assuming the world has finally arrived at the "correct" state of affairs after centuries of nearly continuous change. Don't you think there was a time in history when many people would have said the same things you're saying about some other economy?
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Re: Globally Diversified or Worsified?

Post by Triple digit golfer »

nisiprius wrote: Fri May 14, 2021 8:41 pm
Triple digit golfer wrote: Fri May 14, 2021 8:35 pm ...A reliable, respected poster here recently said that the chart you pointed out is incorrect...

Can anybody verify one way or another?
Incorrect in what sense? It's an accurate reproduction of the book page. This is my source. It's on page 136 and I can actually view the page with Amazon "Look Inside the Book" by searching on the word "Australasia." There wasn't any errata sheet and there hasn't been an updated edition. I don't personally have access to the actual data sets cited.

I missed or don't remember the comment, if you'll link to it I'll take a look at it. What did the poster cite as their source? Was the poster the author of the book?

On checking, I see that when I posted that page image in 2018, the author of the book sent me a PM stating
Taleb famously and correctly stated that only fools judge a strategy by the outcome without considering what alternative universes might have shown up... IMO you took exactly the wrong message from that table.
To me, that is a clear re-assertion by the book author that the actual data in the table is accurate, but that he objects to the use I made of it.
Thanks for that information and context. I'm not stating that it is incorrect, merely that a prominent poster said that it is. Here's the chain: viewtopic.php?p=5995521#p5995521
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Re: Globally Diversified or Worsified?

Post by vineviz »

nisiprius wrote: Fri May 14, 2021 8:41 pm
Incorrect in what sense? It's an accurate reproduction of the book page.
Incorrect in the sense that data in the image is in accurate.
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Re: Globally Diversified or Worsified?

Post by junior »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
Chances are international will do better after you make the switch, so you'll be worse off.

Vanguard says international will do better in their annual economic report, and in a recent interview William Bernstein said he estimates there's a 55 to 60 percent chance international will do better over the coming decades.

But hey, maybe you'll get lucky and do something against expert recommendation and you'll luck out. But if U.S. starts doing poorly a few years from now I wonder what your next step will be?
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Re: Globally Diversified or Worsified?

Post by SantaClaraSurfer »

A US-based company with a global customer base will still skew to its likely main market...the USA. (Language, culture, time zone, sales practices, etc.)

An International company with a global customer base HAS TO skew to the global marketplace which is multi-lingual, multi-cultural, multi-time zone, and encompasses many different sales cultures. They aim to win over a fair share of US customers, of course, but they map to the global marketplace which may, or may not, help them win a competitive advantage in the sales of products as basic as soap, yogurt or mobile phones.

When you dig deep into the strategies ANY modern corporation has to embrace to succeed over the next 15 years...maybe some of these international equity stocks will represent companies with an inherent advantage vis a vis these global start points...especially as they relate to discretionary spending in emerging global capitals...baked into their business DNA.

What's crazy is that an investor located in the USA doesn't have to do all that much to gain exposure to this cohort. Allocate some percentage points in your ISP to VXUS and you'll get all of them, in the exact proportion of their market weight.

Or don't.
Last edited by SantaClaraSurfer on Sat May 15, 2021 9:21 am, edited 1 time in total.
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Re: Globally Diversified or Worsified?

Post by nisiprius »

vineviz wrote: Fri May 14, 2021 9:42 pm
nisiprius wrote: Fri May 14, 2021 8:41 pmIncorrect in what sense? It's an accurate reproduction of the book page.
Incorrect in the sense that data in the image is inaccurate.
Could be, although neither of us has the same data Larry Swedroe used, and the performance of GVI, the iShares Intermediate Government/Credit Bond ETF, which tracks the identical index he uses, has not been anything close to identical with BND. You just say "bonds" without bothering to specify the index you used, which was it? Larry Swedroe's published numbers being exactly identical is of course an amusing coincidence, of no consequence, which could be disturbed in a hundred tiny ways: annual versus monthly versus daily data for standard deviation, a possibility that the source says "1975-2009" but isn't actually using whole calendar years. Next time I post I'll mention that you've challenged the accuracy of Larry Swedroe's data. The chief interest is not that it is possible to find a time period during which the overall risk-adjusted return of a US and a globally diversified portfolio was similar, it's that this happened by chance to be true over a time period I didn't pick, in a published source that was trying to show the superiority of global diversification.

Notice that the data of publication of the book, and thus the endpoint of the data in it, represented a transition time between international outperformance (2002-2008) and international underperformance (2010-present) so it's not surprising that it would accidentally hit a sweet spot of near-equality.

The elephant in the room is the endpoint problem. The general picture of US-international is pretty obvious. If the time period goes back long enough to include World War II, the whole behavior is completely dominated by that single historic event. The US shows outperformance in any time period that includes World War II, and even more if World War I is included. I am just cynical enough to think that this is why international booster like to use "the last fifty years" as a time period.

The correlation between the Vanguard Total [US] Stock and Total International index funds over their joint history has been ρ = 0.86 which is not low enough to be a powerful diversifier. Any theoretical improvement it makes over some stated time period is a featherweight that can be wafted away in by the slightest breeze of specific historical events.

As for forecasts, the "American Century" forecast by Henry Luce began in 1941, so it is scheduled to end in 2041.
Last edited by nisiprius on Sat May 15, 2021 7:24 am, edited 1 time in total.
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Re: Globally Diversified or Worsified?

Post by abuss368 »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
You are asking all the points I have. International just has not performed. I followed Jack Bogle and Warren Buffett and simplified to the Two Fund Portfolio and never looked back.

Jack Bogle always discussed the different tax laws, legal risks, shareholder risks, political risks, currency risks, and the list goes on and on.

Consider the Two Fund Portfolio. Years from now you will be thankful with the results and happy you simplified:

viewtopic.php?f=10&t=188176

Tony
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Re: Globally Diversified or Worsified?

Post by anil686 »

Gaston wrote: Fri May 14, 2021 8:41 pm Another view: if you live in the USA and plan to do so long term, then what you care most about is US dollar returns. That might sound obvious, but hear me out.

I’ve kept about 10% of my portfolio in international stocks (index fund) for the past 20 years. My experience is that annual returns are more a function of currency rate changes than underlying business performance. If German companies have mediocre performance, for example, but the US dollar falls against the euro, then you do well. If the same companies excel but the dollar rises against the euro, then your return is mediocre.

If you want international exposure, that’s fine. But I think the key question to ask is where the US dollar will go over the next 20-30 years. Not that any of us knows the answer of course, but it might help you ascertain the percentage of international stocks you are comfortable holding.
I have the same thoughts about international in general. If you really dig down into the difference between the US and international - two things jump out over the last decade - the dollar and FAANG stocks. Take out big tech, and they are pretty similar. The dollar is more nuanced but maybe an example will help. In 2015, global markets ex - US in local currency returned a 9% gain in their respective stock markets. In USD terms, they lost 6%. Therefore if you are a US investor and you held VXUS - you lost 6% that year due to currency fluctuations. Obviously that is not permanent - currencies change and are unpredictable, but since the OP was investing in total international in 2015, the OP got stocks cheaper because they bought them in USD - as the dollar weakens - those stocks rise in value through no part of economic consequence but rather just by currency movements. Again, currency movements are not knowable in advance - so it is an additional risk. However, the USD as a the global reserve currency can also be thought of as a risk. This is something is not static - the USD has never been the all time global reserve currency and may not be in the future - investing internationally - to some extent - mitigates that risk IMO....
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Re: Globally Diversified or Worsified?

Post by nisiprius »

In my opinion, this is the key question: Johnathon Livingston, you say
I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation
yet
I’ve been pouring money into international stocks for well over a decade now.
This is a very serious question. Ideally, you would have literally written down your thoughts at the time you began pouring in that money. Why did you do it? Were your opinions about the United States different? Do you think the relative political stability and business-friendliness of the United States has changed?

If not, why are you changing course? Why now? John C. Bogle wrote "Time is your friend, impulse is your enemy." Are you acting on impulse? If not, then what?

Before doing anything in a hurry, I would begin by asking the fundamental question. Have international stocks made money for you in the time you've been holding them? Have you experienced a literal dollar loss, or are you just an "optimizer" who is dissatisfied holding a portfolio that is good enough but could have been improved in highsight?

Let's assume that "well over a decade" means fifteen years. This all is unfortunately highly dependent on starting point so you can "prove" anything you like, but the Vanguard Total International Stock Market Index Fund would have come close to doubling your money over that time period:

Source

Image

Yes, if you add Total US Stock to that chart, the underperformance of international relative to the US over these particular years is stunning. The point is that nevertheless, international stocks made money. (Yes, beat inflation, too).

Yes, of course, there's no doubt that in hindsight you would have done better not to have held a fund that did worse. But the question is: trying as hard as we can to avoid specific predictions of the relative performance of US and international between now and when you retire, is your present portfolio so bad that holding international counts as a major mistake that will make it difficult for you to meet your goals?

Here's another, even more relevant backtest. These are two 60/40 portfolios. In the first (blue line), the stock holdings are 100% US. In the second (red line), they are split 50/50 US and international. In this chart, the assumption is that we have invested $1,000 per month continuously over the whole time period. So we have put in a total of $12,000 x 15 = $144,000 over fifteen years.

Yes, the portfolio without international stocks did better. It's a backtest, we know this is a specific time period over which international lagged, there are other time periods when it would have done better. If we had a time machine we know what we'd do. And yes, of course, $1,123,250 is more than $948,127. It's the difference between 7.8X the money you put in and 6.6X. Low seven digits instead of high six. Two commas instead of one. But really, is multiplying your money 6.6X all that bad? Won't you get to retirement at that rate?

Source

Image

Maybe the US will continue to shine and international will say dim. Maybe international will shine and the US will stay dim. Is what you have good enough? If so, are you so sure that it is better to change course, that you don't want to leave well enough alone?
Last edited by nisiprius on Sat May 15, 2021 8:04 am, edited 1 time in total.
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Re: Globally Diversified or Worsified?

Post by Anon9001 »

Notice there is a diminishing effect to adding number of stocks in terms of probability of out-performing market. 25 stocks for USA has allowed you to capture majority of skewness premium even for 90 Year Horizons according to Hendrik Bessembinder's study "Do Stocks out-perform Treasury Bills". Now this explains why LEXCX has been similar to S&P 500 even though it is holding 20 stocks from 1930s. Ex-US stocks will probably not give any skewness premium as US market is having thousands of stocks. What Ex-US stocks can give you different from US stocks is currency risk which can be boost in certain time periods and drag in certain time periods. That's it because Ex-US stocks and US stocks are both multi-nationals so they share a lot in common other than this currency risk.
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Re: Globally Diversified or Worsified?

Post by watchnerd »

US vs ex-US matters less than stocks vs crypto allocation.
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Re: Globally Diversified or Worsified?

Post by abuss368 »

Johnathon Livingston wrote: Fri May 14, 2021 8:00 pm
Triple digit golfer wrote: Fri May 14, 2021 7:50 pm Why not say the same for U.S. tech stocks vs. the rest of the U.S. market? How undiversified do you want to get to chase performance?
I’m only talking about dropping the international diversification but keeping the vast diversification offered by the thousands of stocks in the US stock market.
You have a very good plan. I would simplify. Total holds over 3,600 stocks that have an international reach. That is plenty diversification.

Tony
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Re: Globally Diversified or Worsified?

Post by lostdog »

You're looking for confirmation to drop it.

If you want confirmation and a pat on the back, check out the Jack Bogle Two Fund thread.

Stick with international because when you switch it will start doing better. You'll be tempted to get back in. You'll be selling low and buying high.
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Re: Globally Diversified or Worsified?

Post by abuss368 »

lostdog wrote: Sat May 15, 2021 8:44 am
If you want confirmation and a pat on the back, check out the Jack Bogle Two Fund thread.
An excellent idea! Here is the link:

viewtopic.php?f=10&t=188176

Tony
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Re: Globally Diversified or Worsified?

Post by Triple digit golfer »

abuss368 wrote: Sat May 15, 2021 8:42 am
Johnathon Livingston wrote: Fri May 14, 2021 8:00 pm
Triple digit golfer wrote: Fri May 14, 2021 7:50 pm Why not say the same for U.S. tech stocks vs. the rest of the U.S. market? How undiversified do you want to get to chase performance?
I’m only talking about dropping the international diversification but keeping the vast diversification offered by the thousands of stocks in the US stock market.
You have a very good plan. I would simplify. Total holds over 3,600 stocks that have an international reach. That is plenty diversification.

Tony
He has an incomplete plan.

Total World Stock holds over 9,000 stocks that have a global reach. That is true diversification across countries, sectors, sizes and styles.
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Re: Globally Diversified or Worsified?

Post by vineviz »

nisiprius wrote: Sat May 15, 2021 7:16 am Larry Swedroe's published numbers being exactly identical is of course an amusing coincidence, of no consequence, which could be disturbed in a hundred tiny ways: annual versus monthly versus daily data for standard deviation, a possibility that the source says "1975-2009" but isn't actually using whole calendar years. Next time I post I'll mention that you've challenged the accuracy of Larry Swedroe's data.
It's not an "amusing coincidence": it's a typographical error containing inaccurate data. There's literally no sequence of bond returns which can be combined with the EAFE & S&P 500 returns and produce identical annualized returns AND identical standard deviations.

It's impossible for that chart to be correct, and I can't think of any disclaimer strong enough to justify using data which is incorrect in order to win points in an argument.

nisiprius wrote: Sat May 15, 2021 7:16 am The correlation between the Vanguard Total [US] Stock and Total International index funds over their joint history has been ρ = 0.86 which is not low enough to be a powerful diversifier. Any theoretical improvement it makes over some stated time period is a featherweight that can be wafted away in by the slightest breeze of specific historical events.
This is another thing that is incorrect. For one thing, there's no way to simply look at a correlation coefficient and conclude anything useful about whether something is a "powerful diversifier" or not. For a second thing, even it that WERE possible (and it's not) short-term correlations aren't the measure that would useful. Even in the short history of these two funds, you can see that short-term correlations of 0.85 to 0.9 are consistent with 10-year return gaps which are immense. The difference between annualized returns of 5% and 1%, or between 15% and 5%, when compounded over a decade are more than "powerful" enough to produce dramatically different kinds of investment performance for investors who are contributing or withdrawing from the portfolio.
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Re: Globally Diversified or Worsified?

Post by Actin »

Two points

1) International investing is market timing

2) What Vanguard believes and recommends has no value. They have an abyssal track record.
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Re: Globally Diversified or Worsified?

Post by Triple digit golfer »

Actin wrote: Sat May 15, 2021 9:33 am1) International investing is market timing
Do elaborate how holding equities in world market cap and not straying is market timing.
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Re: Globally Diversified or Worsified?

Post by abuss368 »

Actin wrote: Sat May 15, 2021 9:33 am Two points

1) International investing is market timing

2) What Vanguard believes and recommends has no value. They have an abyssal track record.
I agree and well said. I have been reading Vanguard’s information for over 13 years calling for international outperformance.

Historically, International investing has provided diversification at the expense of performance.

Tony
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Re: Globally Diversified or Worsified?

Post by Triple digit golfer »

abuss368 wrote: Sat May 15, 2021 9:39 am
Actin wrote: Sat May 15, 2021 9:33 am Two points

1) International investing is market timing

2) What Vanguard believes and recommends has no value. They have an abyssal track record.
I agree and well said. I have been reading Vanguard’s information for over 13 years calling for international outperformance.

Historically, International investing has provided diversification at the expense of performance.

Tony
So you've gone from market timing to performance chasing!

Your second point is just flat out wrong. Vineviz has shown this over and over and you continue to ignore it.
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Re: Globally Diversified or Worsified?

Post by bertilak »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm But I have to wonder, do international stocks really add anything to long term returns?
That's not really the point. It's about risk. International is a hedge against reliance on domestic.

But you are right about return. If there are two investments, combining the two will result in a return somewhere between the returns of each individually.

If (big if) international will have a lower return than domestic then adding international to a portfolio of domestic will lower, not increase returns, but making that addition addresses the "if" part.
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Re: Globally Diversified or Worsified?

Post by Da5id »

If the reasons for your original decision hold, stay the course. Dumping the underperforming asset to double down on the overperforming one (aka performance chasing) is generally a bad strategy.

US has been on a run, no doubt about it. A good part of that has been an increase in earnings multiple, with the US diverging strongly from International in terms of CAPE 10.

Image

You started at an unlucky point. In the graph below sometimes it is above the 0 line (Int'l outperform), sometimes it is below the line (US outperform). If you change now, you are making a bet that the near/long term we will average/remain below the 0 line. US outperform forever!

Image

If you want to bet that the US earnings multiples will continue to rise, or that markets aren't reasonably efficient, well, go to it. I'd rather not make the bet either way. I'd stay the course, but you do you.
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Re: Globally Diversified or Worsified?

Post by GoneOnTilt »

For the most part, US is good enough for me. The S&P 500. I hold some international in the Vanguard Lifestrategy Income Fund (VASIX), and that's fine too. But mostly it's US.
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Re: Globally Diversified or Worsified?

Post by abuss368 »

bck63 wrote: Sat May 15, 2021 10:36 am For the most part, US is good enough for me. The S&P 500. I hold some international in the Vanguard Lifestrategy Income Fund (VASIX), and that's fine too. But mostly it's US.
Total Stock and S&P 500 do the job. Those two funds provide a lot of diversification. A lot of sales from overseas. Add a simple bond fund and avoid the risk of international.
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Re: Globally Diversified or Worsified?

Post by Da5id »

abuss368 wrote: Sat May 15, 2021 11:05 am
bck63 wrote: Sat May 15, 2021 10:36 am For the most part, US is good enough for me. The S&P 500. I hold some international in the Vanguard Lifestrategy Income Fund (VASIX), and that's fine too. But mostly it's US.
Total Stock and S&P 500 do the job. Those two funds provide a lot of diversification. A lot of sales from overseas. Add a simple bond fund and avoid the risk of international.
International will have its day. Why make risky all-in bets on US permanent outperformance when you don't need to do so? Why chase after recent outperformance? Why use spurious reasoning? e.g. the claim that US stocks sell plenty overseas conveniently and magically gives you PRECISELY the amount of "international diversification" that you need is simply false. For example, if this were the case the graph below would be flat.

Image
Last edited by Da5id on Sat May 15, 2021 11:21 am, edited 1 time in total.
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Re: Globally Diversified or Worsified?

Post by abuss368 »

Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
Hi Johnathon -

You may be happy to know and take comfort in the fact that Jack Bogle agrees with you! Mr. Bogle knows more about investing than any of us ever will.

Please read: https://www.aarp.org/money/investing/in ... bogle.html

Tony
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Re: Globally Diversified or Worsified?

Post by Da5id »

abuss368 wrote: Sat May 15, 2021 11:20 am
Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
Hi Johnathon -

You may be happy to know and take comfort in the fact that Jack Bogle agrees with you! Mr. Bogle knows more about investing than any of us ever will.

Please read: https://www.aarp.org/money/investing/in ... bogle.html

Tony
When hero worship and performance chasing are your best arguments....

edit: Note that Jack Bogle is indeed a hero of mine and many here. That doesn't make invoking his name a compelling argument, at least not to me.
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Re: Globally Diversified or Worsified?

Post by spdoublebass »

abuss368 wrote: Sat May 15, 2021 7:24 am
Johnathon Livingston wrote: Fri May 14, 2021 7:39 pm I’ve been pouring money into international stocks for well over a decade now. Ouch. I’ve read Vanguard’s outlook for next decade, and they predict international will outperform US by a significant margin. Maybe it will finally payoff. But I have to wonder, do international stocks really add anything to long term returns? If US equities average 10% returns and international average 8.5% over long periods of time, then wouldn’t adding international stocks pull down the average? I personally don’t like the currency and political risk presented by international and I think no other major country comes close to the political and legal stability of the US or the US’s business friendly policies in taxation and regulation. I wouldn’t need much of a nudge to finally rid myself of international stock. Why should I keep them?
You are asking all the points I have. International just has not performed. I followed Jack Bogle and Warren Buffett and simplified to the Two Fund Portfolio and never looked back.

Jack Bogle always discussed the different tax laws, legal risks, shareholder risks, political risks, currency risks, and the list goes on and on.

Consider the Two Fund Portfolio. Years from now you will be thankful with the results and happy you simplified:

viewtopic.php?f=10&t=188176

Tony
Jack Bogle also admitted he doesn't know what the future hold. So I wouldn't make a promise like you will be thankful years from now. Bogle wouldn't make that promise. He said he didn't know nothing.

What role do you see in a person’s investment portfolio for foreign stocks?

Bogle: In my first book, in 1993, I wrote that U.S. corporations get about 50 percent of their profits from international sources. So if you own a U.S. stock fund, you already own an international fund. Since then, the U.S. market is up about 720 percent, and the non-U.S. market — the European, Australian and Far East indexes — is up about 230 percent. And you are taking currency risk if you invest overseas.

So you were right, not advocating for overseas stocks.

Bogle: But that doesn’t mean I’ll be right in the future. So given the tremendous excess of returns of the U.S. market over the past 25 years, maybe it is time for a few years of international outperformance. I would limit yourself to 20 percent of your portfolio in foreign stocks. I don’t do it myself.
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Re: Globally Diversified or Worsified?

Post by junior »

Bogle never said U.S. stocks would outperform international stocks. So no, Bogle did not agree with anyone who says you should go 100% U.S. because U.S. stocks are likely to do better.
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Re: Globally Diversified or Worsified?

Post by heyyou »

OP,
Consider just stopping your purchasing of foreign index shares. That is a middle path between continuing to buy, or selling out of them.
As is often mentioned elsewhere, diversification also assures you of owning some of whatever is not performing well.
The Callan Chart of annual stock and bond returns
https://www.bogleheads.org/w/index.php? ... eturns.png

Have you considered that you have been buying international index shares at lower prices on some of these recent years?
We are all greedy for more money but we seem to notice the laggards, instead of just relishing whatever portion we own that has done best.
The above pair of sentences suggest that the problem is in how we view the situation, more than about the isolated returns.
Some recent annual foreign index returns (rounded to reduce the typing): 7.6, 22.5, -14.1, 24.2, 2.7, -3.0, -4.3, 21.0, 16.4, -12.2
Is a 60.8% uncompounded return for a decade, bad or just so far below the US return, that it looks bad?
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