VTI/VXUS split
VTI/VXUS split
What is a good framework to think how to split the stock index fund portfolio between US and international stocks? Ideally, if it's at least somewhat quantitative.
My current allocation is close to 80% VTI, 10% VXUS and 10% VNQ (not counting some individual stocks and other assets not relevant to the discussion), and I'm thinking of bumping up the VXUS share, but I'd like to do it in a principled way rather than just blind guessing.
How do you choose the allocation domestic/international beyond the gut feeling?
My current allocation is close to 80% VTI, 10% VXUS and 10% VNQ (not counting some individual stocks and other assets not relevant to the discussion), and I'm thinking of bumping up the VXUS share, but I'd like to do it in a principled way rather than just blind guessing.
How do you choose the allocation domestic/international beyond the gut feeling?
Re: VTI/VXUS split
Vanguard had / has a white paper, but you know, there is not much quantitative about this i think. Do you see why after reading the white paper?
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Re: VTI/VXUS split
There are an almost unending and contentious threads regarding allocation between US and International. There will be nothing new added in this thread. It’s certainly fine to ask but I learn the most by searching topics I have questions on.
I hold Vanguard Total World which is roughly 60/40 US/ Intl. some subscribe to no more / no less than 20. Others say 0% is the only answer. All Vanguard Target Date and Lifestrategy funds hold around 60/40 equities US/Intl.
There is no definitive answer as to what is right for you.
Cheers
I hold Vanguard Total World which is roughly 60/40 US/ Intl. some subscribe to no more / no less than 20. Others say 0% is the only answer. All Vanguard Target Date and Lifestrategy funds hold around 60/40 equities US/Intl.
There is no definitive answer as to what is right for you.
Cheers
Re: VTI/VXUS split
There's no quantitative answer since the future can't be predicted. If there was hedge funds would always get it right and they don't.
So you are down to what assumptions you want to personally make and there are three groups:
1) Total World Market Cap weight (roughly 60 US/40 ex US) - the future can't be predicted so trust market cap weighting and efficient markets to take all the risks and rewards into account and give you a portfolio that is likely to perform better than most other choices
2) 100% US - believe US is the best investment environment available and will be for some time to come (inclusive of securities regulation, government support for business and investing, innovation, reserve currency, etc.)
3) Both sides have some merit so split the difference somewhere around 80/20 US/exUS to 67/33 US/exUS. Basically if you don't know the answer pick something in the middle.
A slice of international less than 20% of equities is highly unlikely to make a difference.
That's about it. Pick one and stay with it for the rest of your life (or at least until there is new information that is actionable).
So you are down to what assumptions you want to personally make and there are three groups:
1) Total World Market Cap weight (roughly 60 US/40 ex US) - the future can't be predicted so trust market cap weighting and efficient markets to take all the risks and rewards into account and give you a portfolio that is likely to perform better than most other choices
2) 100% US - believe US is the best investment environment available and will be for some time to come (inclusive of securities regulation, government support for business and investing, innovation, reserve currency, etc.)
3) Both sides have some merit so split the difference somewhere around 80/20 US/exUS to 67/33 US/exUS. Basically if you don't know the answer pick something in the middle.
A slice of international less than 20% of equities is highly unlikely to make a difference.
That's about it. Pick one and stay with it for the rest of your life (or at least until there is new information that is actionable).
Last edited by stan1 on Sun Sep 19, 2021 12:58 pm, edited 1 time in total.
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Re: VTI/VXUS split
You forgot those of us that weight more closely to the fundamental weighting, which is closer to 45% US (I am 40% US, 40% DM, 20% EM myself, all in value).stan1 wrote: ↑Sun Sep 19, 2021 12:55 pm There's no quantitative answer since the future can't be predicted.
So you are down to what assumptions you want to personally make and there are three groups:
1) Total World Market Cap weight (roughly 60 US/40 ex US) - the future can't be predicted so trust market cap weighting and efficient markets to take all the risks and rewards into account and give you a portfolio that is likely to perform better than most other choices
2) 100% US - believe US is the best investment environment available and will be for some time to come (inclusive of securities regulation, government support for business and investing, innovation, reserve currency, etc.)
3) Both sides have some merit so split the difference somewhere around 80/20 US/exUS to 67/33 US/exUS. Basically if you don't know the answer pick something in the middle.
A slice of international less than 20% is highly unlikely to make a difference.
That's about it.
https://www.rafi.com/content/dam/rafi/d ... et-usd.pdf
Re: VTI/VXUS split
Yeah, I was trying not to over complexify but you got me :-)MotoTrojan wrote: ↑Sun Sep 19, 2021 12:57 pmYou forgot those of us that weight more closely to the fundamental weighting, which is closer to 45% US (I am 40% US, 40% DM, 20% EM myself, all in value).stan1 wrote: ↑Sun Sep 19, 2021 12:55 pm There's no quantitative answer since the future can't be predicted.
So you are down to what assumptions you want to personally make and there are three groups:
1) Total World Market Cap weight (roughly 60 US/40 ex US) - the future can't be predicted so trust market cap weighting and efficient markets to take all the risks and rewards into account and give you a portfolio that is likely to perform better than most other choices
2) 100% US - believe US is the best investment environment available and will be for some time to come (inclusive of securities regulation, government support for business and investing, innovation, reserve currency, etc.)
3) Both sides have some merit so split the difference somewhere around 80/20 US/exUS to 67/33 US/exUS. Basically if you don't know the answer pick something in the middle.
A slice of international less than 20% is highly unlikely to make a difference.
That's about it.
https://www.rafi.com/content/dam/rafi/d ... et-usd.pdf
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Re: VTI/VXUS split
Just teasing. But the OP asked for a quantitative approach, of which the fundamental weighting is a great one as it is immune to relative over/under-valuation (bubble) scenarios where market-cap weighting isn't a great metric.
Re: VTI/VXUS split
The equities in my taxable account are split 60% VTI and 40% VXUS.
I've probably spent way too many hours researching S&P500 vs TSM and what's the "right" amount of international. I finally came to the realization Vanguard and Fidelity have trillions of dollars in AUM and their target date fund equities are 60% US and 40% international. I'm not smarter than them and might as well use their "free" research.
I've probably spent way too many hours researching S&P500 vs TSM and what's the "right" amount of international. I finally came to the realization Vanguard and Fidelity have trillions of dollars in AUM and their target date fund equities are 60% US and 40% international. I'm not smarter than them and might as well use their "free" research.
- burritoLover
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Re: VTI/VXUS split
How would you answer the following:ilyaraz wrote: ↑Sun Sep 19, 2021 12:27 pm What is a good framework to think how to split the stock index fund portfolio between US and international stocks? Ideally, if it's at least somewhat quantitative.
My current allocation is close to 80% VTI, 10% VXUS and 10% VNQ (not counting some individual stocks and other assets not relevant to the discussion), and I'm thinking of bumping up the VXUS share, but I'd like to do it in a principled way rather than just blind guessing.
How do you choose the allocation domestic/international beyond the gut feeling?
Over a 10 year period, your U.S. allocation returns 16%, while your international allocation makes 8%. What do you do?
A. Nothing - you continue contributing to and rebalancing into international as before, maintaining the same allocation.
B. You stop contributing and rebalancing to international because obviously it is not worth it.
C. You sell off some or all international to put more in the U.S.
Re: VTI/VXUS split
Yeah, I agree with the above.stan1 wrote: ↑Sun Sep 19, 2021 12:55 pm There's no quantitative answer since the future can't be predicted. If there was hedge funds would always get it right and they don't.
So you are down to what assumptions you want to personally make and there are three groups:
1) Total World Market Cap weight (roughly 60 US/40 ex US) - the future can't be predicted so trust market cap weighting and efficient markets to take all the risks and rewards into account and give you a portfolio that is likely to perform better than most other choices
2) 100% US - believe US is the best investment environment available and will be for some time to come (inclusive of securities regulation, government support for business and investing, innovation, reserve currency, etc.)
3) Both sides have some merit so split the difference somewhere around 80/20 US/exUS to 67/33 US/exUS. Basically if you don't know the answer pick something in the middle.
A slice of international less than 20% of equities is highly unlikely to make a difference.
That's about it. Pick one and stay with it for the rest of your life (or at least until there is new information that is actionable).
IMO worst case is to pick something, not be confident in it, then chase performance. Buy international, dump it when US outperforms for a while. Then flop back and buy ex-US somewhere into the next cycle where international outperforms.
But OP your desire for a quantitative answer based on the imperfect data and very limited visibility of the future, well, not going to happen. I have 60% US/40% International, but don't think that number is anything special. I choose to own international, and having chosen that I want to own enough to matter. My specific number is ~what Vanguard Life Strategy funds do, which is roughly market cap these days. But those aren't quantitative arguments, nor do I have any to provide.
Last edited by Da5id on Sun Sep 19, 2021 2:13 pm, edited 1 time in total.
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Re: VTI/VXUS split
If you answer B or C, then it is important to follow-up with how you'd respond if just after doing that, the following decade is 0% for US, and 8% again for international (no change)?burritoLover wrote: ↑Sun Sep 19, 2021 1:56 pm
How would you answer the following:
Over a 10 year period, your U.S. allocation returns 16%, while your international allocation makes 8%. What do you do?
A. Nothing - you continue contributing to and rebalancing into international as before, maintaining the same allocation.
B. You stop contributing and rebalancing to international because obviously it is not worth it.
C. You sell off some or all international to put more in the U.S.
Re: VTI/VXUS split
D. You buy equity at world market cap is at the time. No need to rebalance. Just buy and sell at world market cap weight.burritoLover wrote: ↑Sun Sep 19, 2021 1:56 pmHow would you answer the following:ilyaraz wrote: ↑Sun Sep 19, 2021 12:27 pm What is a good framework to think how to split the stock index fund portfolio between US and international stocks? Ideally, if it's at least somewhat quantitative.
My current allocation is close to 80% VTI, 10% VXUS and 10% VNQ (not counting some individual stocks and other assets not relevant to the discussion), and I'm thinking of bumping up the VXUS share, but I'd like to do it in a principled way rather than just blind guessing.
How do you choose the allocation domestic/international beyond the gut feeling?
Over a 10 year period, your U.S. allocation returns 16%, while your international allocation makes 8%. What do you do?
A. Nothing - you continue contributing to and rebalancing into international as before, maintaining the same allocation.
B. You stop contributing and rebalancing to international because obviously it is not worth it.
C. You sell off some or all international to put more in the U.S.
E. Just buy VT.
Stocks-80% || Bonds-20% || VTI/VXUS/AOR
Re: VTI/VXUS split
Thanks for your replies!
As I suspected, there is no good answer so it ultimately just boils down to "reasonably guessing" initially and then staying the course.
As I suspected, there is no good answer so it ultimately just boils down to "reasonably guessing" initially and then staying the course.
- Noobvestor
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Re: VTI/VXUS split
You can go market weights, which is fully neutral. I'm 50/50, because when I started that was close to market weights (and still isn't that far off) and it's simple - round/even numbers keep me from wanting to tinker and make rebalancing easier.ilyaraz wrote: ↑Sun Sep 19, 2021 12:27 pmMy current allocation is close to 80% VTI, 10% VXUS and 10% VNQ (not counting some individual stocks and other assets not relevant to the discussion), and I'm thinking of bumping up the VXUS share, but I'd like to do it in a principled way rather than just blind guessing. How do you choose the allocation domestic/international beyond the gut feeling?
Vanguard's whitepapers show volatility reduction anywhere from 1% to 60%+ (with max benefits in the 30-50 range IIRC). If you want a principled approach, though, again: market weights is neutral - hard to get more robust than that.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
- Noobvestor
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Re: VTI/VXUS split
Yes, I think that's true to an extent. But with 80%+ US, staying the course may be hard if US underperforms for a long time. One of the reasons to go somewhere closer to market weights is to reduce potential tracking error -- regrets that might lead to bad future changes to your AA.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
- happyisland
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Re: VTI/VXUS split
Why not just go by market capitalization?
Re: VTI/VXUS split
I'm in on international (40%, which is near market weight these days), but I think the volatility reduction argument is not particularly strong. Figure 3 panel a in the white paper https://personal.vanguard.com/pdf/ISGGE ... Online.pdf panel shows a very modest decrease in volatility. Peaking at maybe 25-40% international, starting to decrease at 50% actually. But the magnitude of the effect just isn't very impressive. I think the curve has shifted a bit since last I looked, as they updated the white paper in April this year.Noobvestor wrote: ↑Sun Sep 19, 2021 7:52 pm Vanguard's whitepapers show volatility reduction anywhere from 1% to 60%+ (with max benefits in the 30-50 range IIRC). If you want a principled approach, though, again: market weights is neutral - hard to get more robust than that.
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Re: VTI/VXUS split
I would sell all your VNQ and buy VXUS in its place. That would bring the VXUS up to 20% of your all-equities portfolio, and that's the percentage of international that many of us hold. It's not quantitative, but it seems right.ilyaraz wrote: ↑Sun Sep 19, 2021 12:27 pm What is a good framework to think how to split the stock index fund portfolio between US and international stocks? Ideally, if it's at least somewhat quantitative.
My current allocation is close to 80% VTI, 10% VXUS and 10% VNQ (not counting some individual stocks and other assets not relevant to the discussion), and I'm thinking of bumping up the VXUS share, but I'd like to do it in a principled way rather than just blind guessing.
How do you choose the allocation domestic/international beyond the gut feeling?
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Re: VTI/VXUS split
I'm uncomfortable with the international-heavy market weight of 40%, so I've arbitrarily decided on 25%.
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Re: VTI/VXUS split
Forget ex-US. You don't need it. VTSAX all the way!
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Re: VTI/VXUS split
I think there are 3 reasonable choices:
a) just hold VT and take world market weight
b) up to 20% ex-US because Mr. Bogle said so
c) 100/0, because Mr. Bogle actually didn't believe in ex-US
a) just hold VT and take world market weight
b) up to 20% ex-US because Mr. Bogle said so
c) 100/0, because Mr. Bogle actually didn't believe in ex-US
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Re: VTI/VXUS split
I'll take "Mr. Bogle actually didn't believe in ex-US" for $800,000, Alex.Marseille07 wrote: ↑Sun Sep 19, 2021 9:54 pm I think there are 3 reasonable choices:
a) just hold VT and take world market weight
b) up to 20% ex-US because Mr. Bogle said so
c) 100/0, because Mr. Bogle actually didn't believe in ex-US
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Re: VTI/VXUS split
We're on the same page. My choice is c) as well40 Years' Gatherin's wrote: ↑Sun Sep 19, 2021 10:13 pmI'll take "Mr. Bogle actually didn't believe in ex-US" for $800,000, Alex.Marseille07 wrote: ↑Sun Sep 19, 2021 9:54 pm I think there are 3 reasonable choices:
a) just hold VT and take world market weight
b) up to 20% ex-US because Mr. Bogle said so
c) 100/0, because Mr. Bogle actually didn't believe in ex-US
Re: VTI/VXUS split
I went 50:50 when I started and have stuck with it. I felt that it was simple, similar to the global market cap (at the time) and something I could stick with. I liked that it was so simple - half and half - and that you could bounce back and forth between different 10% increments in either direction based on the current sentiment of the day. The only change I’ve ever considered is just buying VT and forgetting about maintaining the exact via 50:50 split that I rebalance to. I feel it’s WAY MORE IMPORTANT that you just define a split and stick with it in perpetuity. The consistency of strategy is what’s key, not the exact split. Simplicity is sophistication, as they say.
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Re: VTI/VXUS split
+1 that ability to stay the course is more important than quantitative stuff. I used to have a 20% international split, but I kept having to fight the urge to tinker with it, because the percentage was completely arbitrary.
World market cap weight (VT) seems least arbitrary to me personally, so I switched and haven't felt the urge to tinker since. Owning everything and letting the ratio float gives me peace, since I no longer care how well one sector or country is doing.
Others seem very confident that the US is an intrinsically better investment than everywhere else, and will remain so for decades. I don't share that certainty, but if you feel confident enough in that belief to not feel the urge to tinker, 100% US could also be a good choice.
I say go with what feels most peaceful for you personally. Avoiding shooting yourself in the foot with behavioral errors is way more important than optimizing the statistical properties of your portfolio.
World market cap weight (VT) seems least arbitrary to me personally, so I switched and haven't felt the urge to tinker since. Owning everything and letting the ratio float gives me peace, since I no longer care how well one sector or country is doing.
Others seem very confident that the US is an intrinsically better investment than everywhere else, and will remain so for decades. I don't share that certainty, but if you feel confident enough in that belief to not feel the urge to tinker, 100% US could also be a good choice.
I say go with what feels most peaceful for you personally. Avoiding shooting yourself in the foot with behavioral errors is way more important than optimizing the statistical properties of your portfolio.
Portfolio: 75% VT, 25% BNDW/I-bonds/HYSA
Re: VTI/VXUS split
When I first encountered the BH philosophy, I searched for a reasonable (recommended?) AA primarily using ETFs, and ended up with a whole litany of possibilities. I eventually found the "Vanguard ETF Strategic Model Portfolio" brochure on line, and ended up selecting the Core Series 60/40 AA model. Like the Vanguard white paper and the Total World Stock ETF (VT), the Core Series has equities split 60 U.S. / 40 ex U.S.
While there may be 100s of possibilities, all with valid points, I'm staying where I am.
While there may be 100s of possibilities, all with valid points, I'm staying where I am.
Re: VTI/VXUS split
I tend to follow the weights for the MSCI ACWI benchmark. That is roughly 59% US, 32% International, and 9% EM.
I have found that VXUS actually has a higher weighting to EM than I expected (Roughly 25%) which made it hard to marry up to ACWI with any precision.
What this means in practice is that I use VEA (developed international) alongside VXUS to ensure the EM exposure doesn’t get too out of kilter. I use ITOT for most of my US exposure.
In hindsight I would’ve done a building block approach via ITOT, VEA, and EEM, or simply just VT exposure. But I’ve put a decent chunk of change into VXUS and don’t want to sell it and incur a tax hit.
I have found that VXUS actually has a higher weighting to EM than I expected (Roughly 25%) which made it hard to marry up to ACWI with any precision.
What this means in practice is that I use VEA (developed international) alongside VXUS to ensure the EM exposure doesn’t get too out of kilter. I use ITOT for most of my US exposure.
In hindsight I would’ve done a building block approach via ITOT, VEA, and EEM, or simply just VT exposure. But I’ve put a decent chunk of change into VXUS and don’t want to sell it and incur a tax hit.
- ruralavalon
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Re: VTI/VXUS split
That's 10% of stocks in international stocks. That's lowish in my opinion.ilyaraz wrote: ↑Sun Sep 19, 2021 12:27 pm What is a good framework to think how to split the stock index fund portfolio between US and international stocks? Ideally, if it's at least somewhat quantitative.
My current allocation is close to 80% VTI, 10% VXUS and 10% VNQ (not counting some individual stocks and other assets not relevant to the discussion), and I'm thinking of bumping up the VXUS share, but I'd like to do it in a principled way rather than just blind guessing.
How do you choose the allocation domestic/international beyond the gut feeling?
I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities", available as an archived pdf. Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). The diversification benefit has varied over time.
You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box, upper right, this page.
Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.
What is your age? About how long to expected retirement? Are you eligible for a substantial pension? Do you have a fixed income allocation? A fixed income allocation will be much more important to diversification than an international stock allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
- ruralavalon
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Re: VTI/VXUS split
"Immune to" overweight/underweight seems an odd way to phrase this. Market weight is a right qualitative choice if, and only if, you religiously believe in the Efficient Market Hypothesis (EMH) as a doctrine or creed. But the EMH is unproven.MotoTrojan wrote: ↑Sun Sep 19, 2021 1:07 pmJust teasing. But the OP asked for a quantitative approach, of which the fundamental weighting is a great one as it is immune to relative over/under-valuation (bubble) scenarios where market-cap weighting isn't a great metric.
It's called a "hypothesis" for a reason. A hypothesis is "a supposition or proposed explanation made on the basis of limited evidence as a starting point for further investigation" or "a proposition made as a basis for reasoning, without any assumption of its truth" bing search link.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
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Re: VTI/VXUS split
If you believe in bubbles or over/under-valuation you by definition don't subscribe to EMH. In a bubble, market weight will overweight the bubble. If you use a fundamental weight you'll maintain your weighting to economic scale, no matter what happens with valuations. In that sense it is immune.ruralavalon wrote: ↑Mon Sep 20, 2021 9:40 am"Immune to" overweight/underweight seems an odd way to phrase this. Market weight is a right qualitative choice if, and only if, you religiously believe in the Efficient Market Hypothesis (EMH) as a doctrine or creed. But the EMH is unproven.MotoTrojan wrote: ↑Sun Sep 19, 2021 1:07 pmJust teasing. But the OP asked for a quantitative approach, of which the fundamental weighting is a great one as it is immune to relative over/under-valuation (bubble) scenarios where market-cap weighting isn't a great metric.
It's called a "hypothesis" for a reason. A hypothesis is "a supposition or proposed explanation made on the basis of limited evidence as a starting point for further investigation" or "a proposition made as a basis for reasoning, without any assumption of its truth" bing search link.
- ruralavalon
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Re: VTI/VXUS split
Sorry, I don't understand what you are saying. Probably my fault.MotoTrojan wrote: ↑Mon Sep 20, 2021 7:54 pmIf you believe in bubbles or over/under-valuation you by definition don't subscribe to EMH. In a bubble, market weight will overweight the bubble. If you use a fundamental weight you'll maintain your weighting to economic scale, no matter what happens with valuations. In that sense it is immune.ruralavalon wrote: ↑Mon Sep 20, 2021 9:40 am"Immune to" overweight/underweight seems an odd way to phrase this. Market weight is a right qualitative choice if, and only if, you religiously believe in the Efficient Market Hypothesis (EMH) as a doctrine or creed. But the EMH is unproven.MotoTrojan wrote: ↑Sun Sep 19, 2021 1:07 pmJust teasing. But the OP asked for a quantitative approach, of which the fundamental weighting is a great one as it is immune to relative over/under-valuation (bubble) scenarios where market-cap weighting isn't a great metric.
It's called a "hypothesis" for a reason. A hypothesis is "a supposition or proposed explanation made on the basis of limited evidence as a starting point for further investigation" or "a proposition made as a basis for reasoning, without any assumption of its truth" bing search link.
I just do not see proof that market weighting in international stocks is the objectively the best weight for diversification. That is an unproven idea.
I see proof that historically less than market weight in international stocks has given very good diversification benefits.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
- jakehefty17
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Re: VTI/VXUS split
Personally, I look at VT (Vanguard Total World Stock Index Fund ETF) and set my asset allocation near that. That led me to a 60/40 split US/ex-US.ilyaraz wrote: ↑Sun Sep 19, 2021 12:27 pm What is a good framework to think how to split the stock index fund portfolio between US and international stocks? Ideally, if it's at least somewhat quantitative.
My current allocation is close to 80% VTI, 10% VXUS and 10% VNQ (not counting some individual stocks and other assets not relevant to the discussion), and I'm thinking of bumping up the VXUS share, but I'd like to do it in a principled way rather than just blind guessing.
How do you choose the allocation domestic/international beyond the gut feeling?
That's good enough for me. Good luck!
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski
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Re: VTI/VXUS split
I think your confusion is in that I didn't say market weight was objectively the best, I said fundamental weight was as it is immune to mispricings (whether they overvalue the US or ex-US) since it's weighting is not in any way linked to price, only fundamentals.ruralavalon wrote: ↑Tue Sep 21, 2021 9:56 amSorry, I don't understand what you are saying. Probably my fault.MotoTrojan wrote: ↑Mon Sep 20, 2021 7:54 pmIf you believe in bubbles or over/under-valuation you by definition don't subscribe to EMH. In a bubble, market weight will overweight the bubble. If you use a fundamental weight you'll maintain your weighting to economic scale, no matter what happens with valuations. In that sense it is immune.ruralavalon wrote: ↑Mon Sep 20, 2021 9:40 am"Immune to" overweight/underweight seems an odd way to phrase this. Market weight is a right qualitative choice if, and only if, you religiously believe in the Efficient Market Hypothesis (EMH) as a doctrine or creed. But the EMH is unproven.MotoTrojan wrote: ↑Sun Sep 19, 2021 1:07 pmJust teasing. But the OP asked for a quantitative approach, of which the fundamental weighting is a great one as it is immune to relative over/under-valuation (bubble) scenarios where market-cap weighting isn't a great metric.
It's called a "hypothesis" for a reason. A hypothesis is "a supposition or proposed explanation made on the basis of limited evidence as a starting point for further investigation" or "a proposition made as a basis for reasoning, without any assumption of its truth" bing search link.
I just do not see proof that market weighting in international stocks is the objectively the best weight for diversification. That is an unproven idea.
I see proof that historically less than market weight in international stocks has given very good diversification benefits.
The "proof" you speak of is just past returns, no? The US has been less volatile, and had higher returns, so it isn't a surprise that you got the best diversification with more of it. Does that tell you about the future though? In particular, does it tell you anything valid if the US outperformed primarily due to valuations growing? That could suggest the least optimal portfolio if we expect that to revert, and if we expect that valuation spread to persist, it still would suggest optimal had more US than the future would be expected to have.
https://www.aqr.com/Insights/Perspectiv ... ing-to-You
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Re: VTI/VXUS split
60/30 is the best split, objectively, you’re as diversified as you can be.
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Re: VTI/VXUS split
Moreover, samples from other time periods, often do not reproduce Vanguard's result.Da5id wrote: ↑Sun Sep 19, 2021 8:35 pmI'm in on international (40%, which is near market weight these days), but I think the volatility reduction argument is not particularly strong. Figure 3 panel a in the white paper https://personal.vanguard.com/pdf/ISGGE ... Online.pdf panel shows a very modest decrease in volatility. Peaking at maybe 25-40% international, starting to decrease at 50% actually. But the magnitude of the effect just isn't very impressive. I think the curve has shifted a bit since last I looked, as they updated the white paper in April this year.Noobvestor wrote: ↑Sun Sep 19, 2021 7:52 pm Vanguard's whitepapers show volatility reduction anywhere from 1% to 60%+ (with max benefits in the 30-50 range IIRC). If you want a principled approach, though, again: market weights is neutral - hard to get more robust than that.
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Re: VTI/VXUS split
If small caps are overvalued, equal weighting will overweight them.MotoTrojan wrote: ↑Mon Sep 20, 2021 7:54 pmIf you believe in bubbles or over/under-valuation you by definition don't subscribe to EMH. In a bubble, market weight will overweight the bubble. If you use a fundamental weight you'll maintain your weighting to economic scale, no matter what happens with valuations. In that sense it is immune.ruralavalon wrote: ↑Mon Sep 20, 2021 9:40 am"Immune to" overweight/underweight seems an odd way to phrase this. Market weight is a right qualitative choice if, and only if, you religiously believe in the Efficient Market Hypothesis (EMH) as a doctrine or creed. But the EMH is unproven.MotoTrojan wrote: ↑Sun Sep 19, 2021 1:07 pmJust teasing. But the OP asked for a quantitative approach, of which the fundamental weighting is a great one as it is immune to relative over/under-valuation (bubble) scenarios where market-cap weighting isn't a great metric.
It's called a "hypothesis" for a reason. A hypothesis is "a supposition or proposed explanation made on the basis of limited evidence as a starting point for further investigation" or "a proposition made as a basis for reasoning, without any assumption of its truth" bing search link.
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Re: VTI/VXUS split
+1stefan_lec wrote: ↑Mon Sep 20, 2021 1:38 am +1 that ability to stay the course is more important than quantitative stuff. I used to have a 20% international split, but I kept having to fight the urge to tinker with it, because the percentage was completely arbitrary.
World market cap weight (VT) seems least arbitrary to me personally, so I switched and haven't felt the urge to tinker since. Owning everything and letting the ratio float gives me peace, since I no longer care how well one sector or country is doing.
Others seem very confident that the US is an intrinsically better investment than everywhere else, and will remain so for decades. I don't share that certainty, but if you feel confident enough in that belief to not feel the urge to tinker, 100% US could also be a good choice.
I say go with what feels most peaceful for you personally. Avoiding shooting yourself in the foot with behavioral errors is way more important than optimizing the statistical properties of your portfolio.
This is my exact same philosophy and approach.
Founding Father
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Re: VTI/VXUS split
FoundingFather wrote: ↑Thu Sep 23, 2021 12:46 am+1stefan_lec wrote: ↑Mon Sep 20, 2021 1:38 am +1 that ability to stay the course is more important than quantitative stuff. I used to have a 20% international split, but I kept having to fight the urge to tinker with it, because the percentage was completely arbitrary.
World market cap weight (VT) seems least arbitrary to me personally, so I switched and haven't felt the urge to tinker since. Owning everything and letting the ratio float gives me peace, since I no longer care how well one sector or country is doing.
Others seem very confident that the US is an intrinsically better investment than everywhere else, and will remain so for decades. I don't share that certainty, but if you feel confident enough in that belief to not feel the urge to tinker, 100% US could also be a good choice.
I say go with what feels most peaceful for you personally. Avoiding shooting yourself in the foot with behavioral errors is way more important than optimizing the statistical properties of your portfolio.
This is my exact same philosophy and approach.
Founding Father
+2
I still think I that in the area of 20-30% of stocks in international stocks is probably about right for good diversification, but don't feel that there is any clear right answer objectively.
When there is no clear right answer that necessarily means that there is no clear wrong answer either.
I have become pretty lackadaisical about adhering to that allocation in practice, I don't pay much attention to what it is at any given time or even rebalance U.S./international.
Our portfolio is a tinker-free zone .
Any factual evidence that exists for any viewpoint on this is necessarily found in past returns. For the future we only have opinions, there are no available facts yet.
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Re: VTI/VXUS split
I suppose it is a good thing that I said fundamental weight, not equal weight .Northern Flicker wrote: ↑Wed Sep 22, 2021 11:38 pmIf small caps are overvalued, equal weighting will overweight them.MotoTrojan wrote: ↑Mon Sep 20, 2021 7:54 pm
If you believe in bubbles or over/under-valuation you by definition don't subscribe to EMH. In a bubble, market weight will overweight the bubble. If you use a fundamental weight you'll maintain your weighting to economic scale, no matter what happens with valuations. In that sense it is immune.
While I think a fundamental weight is more efficient than equal-weight, an EW will still not overweight the individual names that are overvalued as it by definition is not tied to price. But yes if small-caps in aggregate are overvalued, equal-weight will likely underperform, but I wouldn't say it is overweighting them since it is a static weighting scheme.
Market-cap weight however will increase it's weighting to overvalued names as they become overvalued. If we assume some companies are randomly over and some under valued, then we have to also acknowledge that market-cap is by definition holding more of those (unknown) over-valued ones, and less of the under-valued ones, than a dart-board would (or equal-weight, or fundamental weight). This isn't an opinion, it is the only possible outcome assuming the over/under-valuation is random.
Re: VTI/VXUS split
+2 Well said. You're at peace. No confirmation needed.FoundingFather wrote: ↑Thu Sep 23, 2021 12:46 am+1stefan_lec wrote: ↑Mon Sep 20, 2021 1:38 am +1 that ability to stay the course is more important than quantitative stuff. I used to have a 20% international split, but I kept having to fight the urge to tinker with it, because the percentage was completely arbitrary.
World market cap weight (VT) seems least arbitrary to me personally, so I switched and haven't felt the urge to tinker since. Owning everything and letting the ratio float gives me peace, since I no longer care how well one sector or country is doing.
Others seem very confident that the US is an intrinsically better investment than everywhere else, and will remain so for decades. I don't share that certainty, but if you feel confident enough in that belief to not feel the urge to tinker, 100% US could also be a good choice.
I say go with what feels most peaceful for you personally. Avoiding shooting yourself in the foot with behavioral errors is way more important than optimizing the statistical properties of your portfolio.
This is my exact same philosophy and approach.
Founding Father
Stocks-80% || Bonds-20% || VTI/VXUS/AOR
Re: VTI/VXUS split
My framework is to match the US/International split used by major target date index funds. It used to be that Fidelity was 70/30 and Vanguard was 60/40, so I went with 65/35. Now Both Fidelity and Vanguard are 60/40, so I do the same. I figure they have more time and expertise to do the research, so if that's where they're putting their customers money then it's good enough for me.
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Re: VTI/VXUS split
Fundamental weighting is just adding some contrarian rebalancing at the individual security level.MotoTrojan wrote: While I think a fundamental weight is more efficient than equal-weight, an EW will still not overweight the individual names that are overvalued as it by definition is not tied to price. But yes if small-caps in aggregate are overvalued, equal-weight will likely underperform, but I wouldn't say it is overweighting them since it is a static weighting scheme.
Market-cap weight however will increase it's weighting to overvalued names as they become overvalued.
I think this is inefficient. I would implement a strategy to achieve a similar result using factor tilts at the asset class level. An example would be 70% VTI & 30% VBR with rebalancing.
Re: VTI/VXUS split
What do you with the other 10?drumboy256 wrote: ↑Wed Sep 22, 2021 11:23 pm 60/30 is the best split, objectively, you’re as diversified as you can be.
80% global equities (faith-based tilt) + 20% TIPS (LDI)
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Re: VTI/VXUS split
Spend it on learning to do arithmetic , or doing something funHorton wrote: ↑Fri Sep 24, 2021 9:03 amWhat do you with the other 10?drumboy256 wrote: ↑Wed Sep 22, 2021 11:23 pm 60/30 is the best split, objectively, you’re as diversified as you can be.
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Re: VTI/VXUS split
There's 3 kinds of people in this world: Those who are good at math, and those who aren't.ruralavalon wrote: ↑Fri Sep 24, 2021 9:59 amSpend it on learning to do arithmetic , or doing something funHorton wrote: ↑Fri Sep 24, 2021 9:03 amWhat do you with the other 10?drumboy256 wrote: ↑Wed Sep 22, 2021 11:23 pm 60/30 is the best split, objectively, you’re as diversified as you can be.
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Re: VTI/VXUS split
VGLT or EDV of courseHorton wrote: ↑Fri Sep 24, 2021 9:03 amWhat do you with the other 10?drumboy256 wrote: ↑Wed Sep 22, 2021 11:23 pm 60/30 is the best split, objectively, you’re as diversified as you can be.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson |
20% IVV / 40% IBIT / 20% IXUS / 20% VGLT + chill
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Re: VTI/VXUS split
Use the other 10% learning to post fund names, not just just ticker symbols alone.drumboy256 wrote: ↑Fri Sep 24, 2021 10:19 amVGLT or EDV of courseHorton wrote: ↑Fri Sep 24, 2021 9:03 amWhat do you with the other 10?drumboy256 wrote: ↑Wed Sep 22, 2021 11:23 pm 60/30 is the best split, objectively, you’re as diversified as you can be.
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Re: VTI/VXUS split
Digging the sarcasm!ruralavalon wrote: ↑Fri Sep 24, 2021 10:26 amUse the other 10% learning to post fund names, not just just ticker symbols alone.drumboy256 wrote: ↑Fri Sep 24, 2021 10:19 amVGLT or EDV of courseHorton wrote: ↑Fri Sep 24, 2021 9:03 amWhat do you with the other 10?drumboy256 wrote: ↑Wed Sep 22, 2021 11:23 pm 60/30 is the best split, objectively, you’re as diversified as you can be.
Promise is one thing. Fulfilling that promise is quite another. - Sir Alex Ferguson |
20% IVV / 40% IBIT / 20% IXUS / 20% VGLT + chill
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Re: VTI/VXUS split
I consulted the crystal ball, 75/25 is the absolute right answer. I hope this ends the all the debate around investing in international once and for all.
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Re: VTI/VXUS split
I used my time machine to learn about future performance, we are all wrong. You will all be surprised.Boglebiker wrote: ↑Fri Sep 24, 2021 11:22 am I consulted the crystal ball, 75/25 is the absolute right answer. I hope this ends the all the debate around investing in international once and for all.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy