Equity potion of your portfolio; increasing international

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facchina
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Equity potion of your portfolio; increasing international

Post by facchina »

I live in the United States. I am now 80% international in my equity investments. I believe United States equities are pricey and this will not end well (e.g., crash, long period of underperformance).

Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
Last edited by facchina on Sun Oct 03, 2021 1:22 pm, edited 7 times in total.
Ramjet
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Re: Equity potion of your portfolio; increasing international

Post by Ramjet »

facchina wrote: Wed Sep 22, 2021 7:30 am I live in the United States. I am now 80% international in my equity investments. I believe Unite States equities are pricey and this will not end well (e.g., crash, long period of underperformance).

Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings. Thank you so much!
I increased my international holdings from zero to world market cap a while back

Reason: With valuations so out of whack, I feel more comfortable not making a bet one way or another and view VT as a neutral position that I can hold indefinitely

Concerns: If growth does better when interest rates are low and value does better during periods of higher inflation, then it is entirely possible, maybe even probable that he U.S. continues to out perform. The best tech companies in the world are in the U.S. and International is made up of more of the "old economy", i.e., what many would consider value. Bond rates are saying interest rates may remain low for decades
muffins14
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Re: Equity potion of your portfolio; increasing international

Post by muffins14 »

facchina wrote: Wed Sep 22, 2021 7:30 am To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
So you only want a thread for confirmation bias with like-minded opinions?

Your post will generate the same mix of responses as every other post about market timing or US/ex-US preferences.

Perhaps you can share more about your unique situation that would help people give more specific advice, in turn helping this be more productive for you?
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dbr
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Re: Equity potion of your portfolio; increasing international

Post by dbr »

I have considered increasing international because my international allocation is not large.

I have decided not to bother because it doesn't really matter much though I agree it is sensible to have some diversification.

I would not make a change because I think I can predict the future movement of either US or international stocks.
JBTX
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Re: Equity potion of your portfolio; increasing international

Post by JBTX »

I've slowly made my weight up to approximately world wide market weight, with a tilt towards emerging markets and small cap/scv. My concerns? That perhaps the US is always better argument will turn out to be right. I don't think it will, but anything is possible.

Would I go higher than market weight? If US valuations reached stratospheric levels I may consider up to 50% international.
bikechuck
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Re: Equity potion of your portfolio; increasing international

Post by bikechuck »

I am in the deaccumulation phase and several years ago chose to set my international = to 20% of my equities. I have not yet withdrawn any equities from my portfolio and over the past few years my international % has bobbed up and down slightly whilst remaining close to 20%.

If the futurists from Vanguard and many other financial institutions are correct my mix of international equities will increase and my 20% allocation will rise. If that should happen I will let it rise until it reaches 40%.

If the futurists are wrong my 20% allocation to international will fall and if that happens I will do nothing unless it falls to below 10% and then I will consider rebalancing to 20%.

Bottom line ... I suspect that I will never have to rebalance.
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FoundingFather
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Re: Equity potion of your portfolio; increasing international

Post by FoundingFather »

facchina wrote: Wed Sep 22, 2021 7:30 am I live in the United States. I am now 80% international in my equity investments. I believe Unite States equities are pricey and this will not end well (e.g., crash, long period of underperformance).

Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?
I switched from 20% to market capitalization when I realized that I was continuing to wonder what the correct ratio was. Be careful, however, using a valuation metric or some general sense of economic uncertainty to make such a decision.

I would encourage you to choose an allocation that allows you to stop asking questions about what the right ratio is, and that allows you to not feel like you need to seek for external confirmation.

Said another way - 80% international is probably fine, as would be 80% US. However, an uncertain investor that tinkers with this ratio is likely to do worse that either.

For me, in terms of investing, the enemy is within the walls, so I have attempted to limit his ability to sabotage me. :D

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Re: Equity potion of your portfolio; increasing international

Post by theorist »

facchina wrote: Wed Sep 22, 2021 7:30 am I live in the United States. I am now 80% international in my equity investments. I believe Unite States equities are pricey and this will not end well (e.g., crash, long period of underperformance).

Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
My international allocation, averaged across holdings, is probably just under 40% of stocks. I plan to keep to it. You might find the recent link from Morningstar to your liking:

https://www.morningstar.com/articles/10 ... ook-abroad

Rob Arnott of research affiliates is advocating a stock portfolio holding a mix of EAFE value and emerging markets value, and heralding a decade of ex-US outperformance.
homebuyer6426
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Re: Equity potion of your portfolio; increasing international

Post by homebuyer6426 »

I have increased my international holdings to about 15% now, up from around 7%.

My belief is that Japan is undervalued and China overvalued. 2/3s of my international is Japanese, 1/3 the rest of the world. However, I can't actually know that with any reliability. It is my instinct from reading and researching markets and countries over the years.

I could see myself increasing international up to market cap at the maximum. I wouldn't go over. For me, there's little indication that the USA is going to stop being the hyperpower in the short to medium term. Though there are causes for concern, the timescale is an open question.
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steve r
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Re: Equity potion of your portfolio; increasing international

Post by steve r »

FoundingFather wrote: Wed Sep 22, 2021 10:04 am I switched from 20% to market capitalization when I realized that I was continuing to wonder what the correct ratio was.

...

I would encourage you to choose an allocation that allows you to stop asking questions about what the right ratio is, and that allows you to not feel like you need to seek for external confirmation.

Said another way - 80% international is probably fine, as would be 80% US. However, an uncertain investor that tinkers with this ratio is likely to do worse that either.
...
+1
Vanguard, in the last decade or so, wrote research/white papers that went from 20 percent to 30 percent to market cap. The paper that made the most sense to me was 30 percent to optimize diversification / manage risk.

After much thought recently, I increased to 35 percent (from 20 percent). A little less than market cap as I live in the U.S., but a significant amount for diversification / risk management.

For me, who tends to set up portfolios where I resist tinkering, 35 percent is about right. I would definitely tinker/time anything at or higher than market cap. One needs to avoid being a weak hand. Weak hands in any holding tends to be problematic for me (sell after an extended period of underperformance and miss out on outperformance.)

I would say to the original poster, if you think you can stick with 80 percent international during many years of underperformance without second guessing yourself, go for it. This is not for me.

But I did increase recently, so ....
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Re: Equity potion of your portfolio; increasing international

Post by mrpotatoheadsays »

facchina wrote: Wed Sep 22, 2021 7:30 am Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?
Yes. I am a student of Benjamin Graham, the father of value investing. I market-time to valuations via allocation, annual re-balancing. In my stock portfolio, I am 66% international; 33% US. One look at the S&P 500 CAPE should tell you why.

I have no concerns about holding international equity; historically they produced the exact same long-term returns as US.

I do NOT invest in any pure emerging markets funds.
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Re: Equity potion of your portfolio; increasing international

Post by asif408 »

I'm pretty much on the same page as you. I'm about 80-85% international equities, heavily tilted to value. My main concern is country concentration, at this point my largest country holdings are China at 14% and Japan at 10%, so I don't feel like I have too much country concentration in one or two countries at this time. If I was 25-30% or more in one country then I might look at ways to reduce my country exposure.

I also have some concern with share dilution in Chinese stocks, which is historically high relative to other countries, but I'm not sure there is anything I can do about it other than accept it's part of the risk with investing in China, and over 85% of my portfolio is not invested in Chinese stocks. There is also a small concern about owning a decent chunk of state owned enterprises (SOEs), but I feel that my country allocation is spread out enough that, unless all the SOEs in every country all fail or perform poorly at the same time, it's a risk I'm willing to take.
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facchina
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Re: Equity potion of your portfolio; increasing international

Post by facchina »

deleted. redundant.
Last edited by facchina on Fri Sep 24, 2021 2:57 pm, edited 1 time in total.
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facchina
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Re: Equity potion of your portfolio; increasing international

Post by facchina »

muffins14 wrote: Wed Sep 22, 2021 8:58 am
facchina wrote: Wed Sep 22, 2021 7:30 am To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
So you only want a thread for confirmation bias with like-minded opinions?

Your post will generate the same mix of responses as every other post about market timing or US/ex-US preferences.

Perhaps you can share more about your unique situation that would help people give more specific advice, in turn helping this be more productive for you?
Fair question. It is an approach to narrow the topic and discussion.

I could ask: Should I move to Colorado? Or I could say: If you already moved to Colorado, tell me about your experience. I took the latter approach because I wanted to talk to people who are already in Colorado.
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facchina
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Re: Equity potion of your portfolio; increasing international

Post by facchina »

asif408 wrote: Wed Sep 22, 2021 11:46 am I'm pretty much on the same page as you. I'm about 80-85% international equities, heavily tilted to value. My main concern is country concentration, at this point my largest country holdings are China at 14% and Japan at 10%, so I don't feel like I have too much country concentration in one or two countries at this time. If I was 25-30% or more in one country then I might look at ways to reduce my country exposure.

I also have some concern with share dilution in Chinese stocks, which is historically high relative to other countries, but I'm not sure there is anything I can do about it other than accept it's part of the risk with investing in China, and over 85% of my portfolio is not invested in Chinese stocks. There is also a small concern about owning a decent chunk of state owned enterprises (SOEs), but I feel that my country allocation is spread out enough that, unless all the SOEs in every country all fail or perform poorly at the same time, it's a risk I'm willing to take.
I use the broadest index funds available to me, so I have some China.
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Re: Equity potion of your portfolio; increasing international

Post by WhiteMaxima »

I am 70/30 US/Int'l.
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Re: Equity potion of your portfolio; increasing international

Post by cegibbs »

Holding international stocks isn’t necessary. The U.S. market provides sufficient diversification without taking on accounting, currency, and political risks. Jack Bogle was correct in my opinion.
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Re: Equity potion of your portfolio; increasing international

Post by burritoLover »

cegibbs wrote: Sat Sep 25, 2021 6:55 am Holding international stocks isn’t necessary. The U.S. market provides sufficient diversification without taking on accounting, currency, and political risks. Jack Bogle was correct in my opinion.
Right - despite history showing us that individual countries can experience events that decimate their country’s stock market or result in very poor returns in the long term - cases that aren’t experienced by other countries at the time - this can’t happen because the U.S. has a magic protective bubble. Another feature of the magic bubble is that even if something was so bad that it could penetrate the bubble, all other countries would be affected equally as bad (maybe worse) - cause, well, that is how it works - duh.
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Re: Equity potion of your portfolio; increasing international

Post by burritoLover »

Market timing based on valuations doesn’t work - end of story. Unless you fancy yourself on par with Buffett at his peak, it makes no sense to make large allocation changes based on CAPE or other valuation metrics.
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Re: Equity potion of your portfolio; increasing international

Post by ruralavalon »

facchina wrote: Wed Sep 22, 2021 7:30 am . . . . .

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
So you only want to hear from posters who agree with your planned market timing move?

You can never learn anything new if you will only listen to people who agree with you.
Last edited by ruralavalon on Sat Sep 25, 2021 8:44 am, edited 1 time in total.
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Re: Equity potion of your portfolio; increasing international

Post by Triple digit golfer »

Be careful with this line of thinking. At any point in time, market prices of assets match that of what the aggregate of millions of investors believe is the fair price.

Do you think millions of investors together have it wrong and that you are smarter than them?
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Re: Equity potion of your portfolio; increasing international

Post by BitTooAggressive »

mrpotatoheadsays wrote: Wed Sep 22, 2021 10:26 am
facchina wrote: Wed Sep 22, 2021 7:30 am Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?
Yes. I am a student of Benjamin Graham, the father of value investing. I market-time to valuations via allocation, annual re-balancing. In my stock portfolio, I am 66% international; 33% US. One look at the S&P 500 CAPE should tell you why.

I have no concerns about holding international equity; historically they produced the exact same long-term returns as US.

I do NOT invest in any pure emerging markets funds.
Seems sensible to me.
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Re: Equity potion of your portfolio; increasing international

Post by Hannibal Barca »

burritoLover wrote: Sat Sep 25, 2021 8:08 am Market timing based on valuations doesn’t work - end of story. Unless you fancy yourself on par with Buffett at his peak, it makes no sense to make large allocation changes based on CAPE or other valuation metrics.
If the difference in relative value between US and International was small (e.g., +/- 1 standard deviation from the norm) I'd agree with you. But the current difference is large by historical standards, probably closer to 2 standard deviations. It's extremely hard to see mathematically how US stocks in particular could generate mid-to-high single digit returns in the next decade given current prices, which is generally what one expects from stocks over the long term.

That gives me comfort to tilt my portfolio more towards international. I generally shoot for 65/35 for US / International, but I'm around 50/50 now. And to be clear I didn't sell out of anything taxable, what I did was change my future contributions and move money around that is in tax advantaged accounts.
Last edited by Hannibal Barca on Sat Sep 25, 2021 9:02 am, edited 1 time in total.
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Re: Equity potion of your portfolio; increasing international

Post by BitTooAggressive »

burritoLover wrote: Sat Sep 25, 2021 8:02 am
cegibbs wrote: Sat Sep 25, 2021 6:55 am Holding international stocks isn’t necessary. The U.S. market provides sufficient diversification without taking on accounting, currency, and political risks. Jack Bogle was correct in my opinion.
Right - despite history showing us that individual countries can experience events that decimate their country’s stock market or result in very poor returns in the long term - cases that aren’t experienced by other countries at the time - this can’t happen because the U.S. has a magic protective bubble. Another feature of the magic bubble is that even if something was so bad that it could penetrate the bubble, all other countries would be affected equally as bad (maybe worse) - cause, well, that is how it works - duh.
Lol.

Also you can look at it, if it provides no diversification then why not hold international instead of US stocks? If you say performance then you are performance chasing. There is no rational explanation making the US immune to economic hardships because of terrible financial mismanagement or any other failure due to poor government….. well at least the bubble is an explanation rather than a statement we must take on blind faith.

I have great respect for Mr Bogle but some people treat him… well maybe the equivalent as the financial pope or something. It’s possible he was wrong on somethings despite being right on so many others and changing the world for the better.
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Re: Equity potion of your portfolio; increasing international

Post by JoMoney »

BitTooAggressive wrote: Sat Sep 25, 2021 9:01 am... why not hold international instead of US stocks? ...
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
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Re: Equity potion of your portfolio; increasing international

Post by Jovby »

FoundingFather wrote: Wed Sep 22, 2021 10:04 am
I switched from 20% to market capitalization when I realized that I was continuing to wonder what the correct ratio was. Be careful, however, using a valuation metric or some general sense of economic uncertainty to make such a decision.

For me, in terms of investing, the enemy is within the walls, so I have attempted to limit his ability to sabotage me. :D

Founding Father
I'm working through this right now.

When I became aware of the world of personal investing about 6 years ago I went 100% US after reading the Stock Series by JL Collin. That has worked out really well.

However lately I've been constantly doubting my allocation. I know the key to success over the long term is to pick something and stick with it, and I don't feel that I'm there right now.

I am contemplating a move to (world wide market weight) - (5 to 10%). A tilt to the US, but with enough international to have an impact if it performs better. Once I feel comfortable I'll make the move.
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Re: Equity potion of your portfolio; increasing international

Post by SpreadsheetsAreFun »

facchina wrote: Wed Sep 22, 2021 7:30 am I live in the United States. I am now 80% international in my equity investments. I believe Unite States equities are pricey and this will not end well (e.g., crash, long period of underperformance).

Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
I am not changing my target allocation, which is 50% US and 50% exUS on the equity side, but almost all my contributions to equity are going towards exUS because US has outperformed lately. I am interpreting your specified filtering criterion liberally and think it includes me and assume you are interested in my $0.02 :happy

I think what you are doing can make sense, but I would recommend that you include such a step in your ISP with clear metrics that trigger what your allocation percentages should be. This would need to include not just what metric you are looking for (e.g. P/E, fwd PE, CAPE10, P/B; adjusted for interest rate?; sector-neutral?; a compound of all of those?) but also how those metrics will impact your allocation decisions (e.g. indirectly proportional to the ratio of your metric? Or to the square root of your metric? And if so, why?) and that you try to understand how that would have behaved historically. The latter part might be the most difficult to source data for.

Personally, I have a fixed 50% US and 50% exUS. Multiple aspects about that: (1) It makes my rebalancing simple. I don't have to look up what the quarterly global capitalization is to know what I want my targets to be, (2) if either US or exUS gets expensive, I automatically rebalance into the cheaper regions. This may be heresy for some bogleheads, but this approach might work for you, too. It is not the reason why I chose that allocation but a side-effect, and (3) over the long run, it approximates the capitalization trend since WW1.
Image

A couple of thoughts on valuations: If you are worried about valuations, I'd highly recommend you to take a look not just at US vs. exUS but also into Large Cap vs. Small Cap and Growth vs. Value. Really good public sources on FWD PE Ratios (if that is your favored metric): https://www.yardeni.com/pub/stockmktperatio.pdf or https://www.yardeni.com/pub/mscipe.pdf are updated at least weekly. Here's a quick summary of that data accessed today:
Image
I am not arguing that this is the right metric to use or that one should follow an adaptive allocation approach. But if you are inclined to do so, then my interpretation is not that everything is expensive an one has to look for pockets of reasonably priced equity. I think it is the other way around: most markets are within the historical norm of their fwd PEs with the exception of US Large Caps and US growth. Now, of course, many US investors have strong home country bias for one reasons or another (I wish I received a dollar for every time someone states that US stocks are all you need because reasons) and the US "market" if defined by market capitalization is dominated by US Large Caps.

One more thought on alternatives to dynamic allocations. Have you considered fundamental indices? You can find more information here https://www.rafi.com/index-strategies/r ... al-indices. These do not weigh by market capitalization at all, ever. Company weights are assigned by what they refer to as fundamental metrics like Adjusted Sales, Cash Flow, Dividends and Buybacks, and Book Value. Even if a company's capitalization increases 100-fold, it will not impact the percentage owned by a fund following this index if the fundamentals remain unchanged. In other words, they should not be impacted by the effects of speculation and formation of unjustified bubbles. Funds are available for different regions and capitalization ranges (Large+Mid or Small). So, for example, you could decide that you your percentages of the Adjusted Sales, Cash Flow, Dividends and Buybacks, and Book Value of the equity in your allocation to be something like 40% from US Large+Mid Caps, 20% from US Small Caps, 30% from exUS Large+Mid Caps, and 10% from exUS Small Caps and buy your funds accordingly. Now your portfolio will never change because some subset of the markets are expensive or cheap. No need for adaptive allocations. Just some food for thought.
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Re: Equity potion of your portfolio; increasing international

Post by livesoft »

facchina wrote: Wed Sep 22, 2021 7:30 amTo keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
I have not bought any more international equities, but I have sold US equities until I buy them back in the next week or so. So I have increased by international holdings as a percentage of my equities temporarily. :twisted: You are welcome!
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Re: Equity potion of your portfolio; increasing international

Post by exodusNH »

mrpotatoheadsays wrote: Wed Sep 22, 2021 10:26 am
facchina wrote: Wed Sep 22, 2021 7:30 am Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?
Yes. I am a student of Benjamin Graham, the father of value investing. I market-time to valuations via allocation, annual re-balancing. In my stock portfolio, I am 66% international; 33% US. One look at the S&P 500 CAPE should tell you why.

I have no concerns about holding international equity; historically they produced the exact same long-term returns as US.

I do NOT invest in any pure emerging markets funds.
Rational Reminder talks about this:

https://youtu.be/MOA4-FBKsUY

The YouTube app won't copy a timestamp. Discussion starts at about 14m.
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Re: Equity potion of your portfolio; increasing international

Post by nedsaid »

facchina wrote: Wed Sep 22, 2021 7:30 am I live in the United States. I am now 80% international in my equity investments. I believe Unite States equities are pricey and this will not end well (e.g., crash, long period of underperformance).

Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
I think you are taking things too far, personally I would not go further than market weights. You might want to put your stock investments in a Global Stock Index instead. Pretty much, you are betting against the United States, which historically hasn't worked. The U.S. right now is between 50% and 60% of Global Market weight. Vanguard has a sensible suggestion of 40% of stocks in International and 30% of Bonds. I am at about 28/29% of my stocks in International, probably anywhere between 20% and 50% is just fine. With rebalancing, I have tried to get my International to 30% of stocks but the U.S. Market has been strong and I just don't get there.
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Beensabu
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Re: Equity potion of your portfolio; increasing international

Post by Beensabu »

Not really. ~50/50.

I've thought about overweighting ex-US by reversing cap weight, but not unless US:exUS cap weight hits about 70:30 or higher. That hasn't happened yet.

It's really just: yes, US total market is expensive and overpriced, but that doesn't mean it can't continue to be so for awhile. And who knows what "awhile" is? Not me. I just know it will be shorter if cap weight gets to 70:30.

So I'm keeping TSM/TISM at ~50/50 and ~50% of equity allocation (~20% of overall portfolio). I'm countering "overpricedness" with a large value (perhaps trap, perhaps not) sector tilt (~50% of equity allocation and ~20% of overall portfolio) that is also ~50/50 US/exUS as well as a conservative stock:bond allocation and then reaching for yield while managing both duration and credit quality in fixed income with LTT and HY matched to total ~75% of bond allocation with the rest in aggregate bond. But then I also have new contributions going to active small growth because it's such a small proportionate amount and I figure the match will make up a 45% drop, plus I get access to the admiral shares expense ratio without needing to meet that asset level, so why not.

I also have very strange rules for each account vs. portfolio as a whole that are particular to me and only me that could potentially result in those %s changing. Like 25% per "category" in tIRA, conservative growth all-in-one in Roth, 401k is back and forth between small cap and harvesting all gains and deciding agg bond or small cap for new contributions. It's madness, madness, I tell you. But my brain is happy, and I am neither anxious nor exuberant -- there is no second guessing, so I'm good.

It's all very imprecise and chock full of cognitive bias, but I feel like it's best for me based on what my brain managed to come up with and is satisfied with.

Do what you want, as long as your brain believes in it. Plenty of people will tell you not to. They may very well be right. You can listen to them in whole or in part, if you want to. Or not. It's up to you.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Vtsax100
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Re: Equity potion of your portfolio; increasing international

Post by Vtsax100 »

facchina wrote: Wed Sep 22, 2021 7:30 am I live in the United States. I am now 80% international...[/b]
Im so sorry.
BitTooAggressive
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Re: Equity potion of your portfolio; increasing international

Post by BitTooAggressive »

JoMoney wrote: Sat Sep 25, 2021 9:07 am
BitTooAggressive wrote: Sat Sep 25, 2021 9:01 am... why not hold international instead of US stocks? ...
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
I don’t ignore or gloss over. I don’t see any additional risk for long term investments. Currency risk is most likely a wash but could work for or against you a bit. Tax considerations can be real but for me in tax advantage accounts I don’t think it’s an issue. So I really don’t see anything that would make me give up the added diversification.
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burritoLover
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Re: Equity potion of your portfolio; increasing international

Post by burritoLover »

JoMoney wrote: Sat Sep 25, 2021 9:07 am
BitTooAggressive wrote: Sat Sep 25, 2021 9:01 am... why not hold international instead of US stocks? ...
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
Overblown rationalizations to justify the real reason they hold heavy U.S. tilts - because they strongly believe the U.S. will vastly outperform ex-US and somehow with less risk.
UpperNwGuy
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Re: Equity potion of your portfolio; increasing international

Post by UpperNwGuy »

facchina wrote: Wed Sep 22, 2021 7:30 am I live in the United States. I am now 80% international in my equity investments. I believe United States equities are pricey and this will not end well (e.g., crash, long period of underperformance).

Is anyone here taking the same approach?
I am holding steady. My IPS includes the phrase, "Ignore valuations."

There may or may not be a crash followed by a long period period of underperformance — I have no way of knowing. However, I believe that, if US stocks crash and underperform, ex-US stocks will do likewise, negating the hoped-for advantage of a large international allocation.
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JoMoney
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Re: Equity potion of your portfolio; increasing international

Post by JoMoney »

burritoLover wrote: Sun Sep 26, 2021 9:21 am
JoMoney wrote: Sat Sep 25, 2021 9:07 am
BitTooAggressive wrote: Sat Sep 25, 2021 9:01 am... why not hold international instead of US stocks? ...
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
Overblown rationalizations to justify the real reason they hold heavy U.S. tilts - because they strongly believe the U.S. will vastly outperform ex-US and somehow with less risk.
You might choose to dismiss the risks and expenses as insignificant for you, that doesn't make it so for anyone else. The tax impacts and expenses will be there regardless if you acknowledge it.
Given the past 30+ years of U.S. / ex-US relative performance, it shouldn't be hard to imagine it could "somehow" happen that US stocks end up with better returns without the risks international stocks bring into the portfolio.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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burritoLover
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Re: Equity potion of your portfolio; increasing international

Post by burritoLover »

JoMoney wrote: Sun Sep 26, 2021 10:03 am
burritoLover wrote: Sun Sep 26, 2021 9:21 am
JoMoney wrote: Sat Sep 25, 2021 9:07 am
BitTooAggressive wrote: Sat Sep 25, 2021 9:01 am... why not hold international instead of US stocks? ...
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
Overblown rationalizations to justify the real reason they hold heavy U.S. tilts - because they strongly believe the U.S. will vastly outperform ex-US and somehow with less risk.
You might choose to dismiss the risks and expenses as insignificant for you, that doesn't make it so for anyone else. The tax impacts and expenses will be there regardless if you acknowledge it.
Given the past 30+ years of U.S. / ex-US relative performance, it shouldn't be hard to imagine it could "somehow" happen that US stocks end up with better returns without the risks international stocks bring into the portfolio.
That's not how risk works.
DetroitRick
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Re: Equity potion of your portfolio; increasing international

Post by DetroitRick »

I'm a US-based investor, and have increased international equity exposure a bit over the past year - migrating from 30% to 35% of equity. Will likely continue upward trajectory until around 40% within the half year. I could be comfortable going even higher, up to market cap weighting, but don't feel very compelled to do so.

More than anything, this simply stems from a desire for better diversification. To a MUCH lesser extent, while all equity markets seem a bit overvalued, international markets appear a bit less so (on average, and of course there are lots of countries out there). Looking out into the future, I am bullish on both US and most non-US segments and can't predict differential returns to any great extent. Actually, I don't expect a migration from 30% to 40% (or even 50%) to result in earth-shattering performance changes over time. But I would love to be wrong on the upside.

I recognize risks and costs of international investing, but have no great level of concern. Cost differentials have become trivial, and I simply handle all risks via portfolio diversification, allocation adjustments, security selection, etc.
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Re: Equity potion of your portfolio; increasing international

Post by BitTooAggressive »

JoMoney wrote: Sun Sep 26, 2021 10:03 am
burritoLover wrote: Sun Sep 26, 2021 9:21 am
JoMoney wrote: Sat Sep 25, 2021 9:07 am
BitTooAggressive wrote: Sat Sep 25, 2021 9:01 am... why not hold international instead of US stocks? ...
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
Overblown rationalizations to justify the real reason they hold heavy U.S. tilts - because they strongly believe the U.S. will vastly outperform ex-US and somehow with less risk.
You might choose to dismiss the risks and expenses as insignificant for you, that doesn't make it so for anyone else. The tax impacts and expenses will be there regardless if you acknowledge it.
Given the past 30+ years of U.S. / ex-US relative performance, it shouldn't be hard to imagine it could "somehow" happen that US stocks end up with better returns without the risks international stocks bring into the portfolio.
I think I pay about 0.1 % additional or less for my international. That is not enough to discourage me from international investment. Is that a deal breaker for you?
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JoMoney
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Re: Equity potion of your portfolio; increasing international

Post by JoMoney »

BitTooAggressive wrote: Sun Sep 26, 2021 1:49 pm
JoMoney wrote: Sun Sep 26, 2021 10:03 am
burritoLover wrote: Sun Sep 26, 2021 9:21 am
JoMoney wrote: Sat Sep 25, 2021 9:07 am
BitTooAggressive wrote: Sat Sep 25, 2021 9:01 am... why not hold international instead of US stocks? ...
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
Overblown rationalizations to justify the real reason they hold heavy U.S. tilts - because they strongly believe the U.S. will vastly outperform ex-US and somehow with less risk.
You might choose to dismiss the risks and expenses as insignificant for you, that doesn't make it so for anyone else. The tax impacts and expenses will be there regardless if you acknowledge it.
Given the past 30+ years of U.S. / ex-US relative performance, it shouldn't be hard to imagine it could "somehow" happen that US stocks end up with better returns without the risks international stocks bring into the portfolio.
I think I pay about 0.1 % additional or less for my international. That is not enough to discourage me from international investment. Is that a deal breaker for you?
The difference between iShares MSCI All-Country World Index ex.US fund (ACWX) and the gross-return index (which is before foreign tax withholding) has been about -0.60% annualized for the past decade.
MStar Link

The difference between iShares S&P 500 fund (IVV) and the S&P 500 index has been -0.05% annualized
MStar Link

I think that's enough of a cost difference to make it a serious consideration. I've seen plenty of people advised to avoid 401k's and active funds where the "high fees" amounted to much less than that.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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facchina
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Re: Equity potion of your portfolio; increasing international

Post by facchina »

ruralavalon wrote: Sat Sep 25, 2021 8:41 am
facchina wrote: Wed Sep 22, 2021 7:30 am . . . . .

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
So you only want to hear from posters who agree with your planned market timing move?

You can never learn anything new if you will only listen to people who agree with you.
As noted above, it is an approach to narrow the topic and discussion. I could ask: Should I move to Colorado? Or I could say: If you already moved to Colorado, tell me about your experience. I took the latter approach because I wanted to talk to people who are already in Colorado.
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facchina
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Re: Equity potion of your portfolio; increasing international

Post by facchina »

JoMoney wrote: Sun Sep 26, 2021 2:33 pm
BitTooAggressive wrote: Sun Sep 26, 2021 1:49 pm
JoMoney wrote: Sun Sep 26, 2021 10:03 am
burritoLover wrote: Sun Sep 26, 2021 9:21 am
JoMoney wrote: Sat Sep 25, 2021 9:07 am
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
Overblown rationalizations to justify the real reason they hold heavy U.S. tilts - because they strongly believe the U.S. will vastly outperform ex-US and somehow with less risk.
You might choose to dismiss the risks and expenses as insignificant for you, that doesn't make it so for anyone else. The tax impacts and expenses will be there regardless if you acknowledge it.
Given the past 30+ years of U.S. / ex-US relative performance, it shouldn't be hard to imagine it could "somehow" happen that US stocks end up with better returns without the risks international stocks bring into the portfolio.
I think I pay about 0.1 % additional or less for my international. That is not enough to discourage me from international investment. Is that a deal breaker for you?
The difference between iShares MSCI All-Country World Index ex.US fund (ACWX) and the gross-return index (which is before foreign tax withholding) has been about -0.60% annualized for the past decade.
MStar Link

The difference between iShares S&P 500 fund (IVV) and the S&P 500 index has been -0.05% annualized
MStar Link

I think that's enough of a cost difference to make it a serious consideration. I've seen plenty of people advised to avoid 401k's and active funds where the "high fees" amounted to much less than that.
I do not fully understand this part of the conversation. Can you please expand on it?

That is, you note the delta between the index and the index fund is more material for foreign vs. domestic Why is that? Is it a problem of execution of structural?

Thank you
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facchina
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Re: Equity potion of your portfolio; increasing international

Post by facchina »

SpreadsheetsAreFun wrote: Sat Sep 25, 2021 11:21 am
facchina wrote: Wed Sep 22, 2021 7:30 am I live in the United States. I am now 80% international in my equity investments. I believe Unite States equities are pricey and this will not end well (e.g., crash, long period of underperformance).

Is anyone here taking the same approach? If so, why? And what percentage are your international holdings? What concerns do you have about holding international equity? What are you doing to mitigate your concerns, if anything?

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
I am not changing my target allocation, which is 50% US and 50% exUS on the equity side, but almost all my contributions to equity are going towards exUS because US has outperformed lately. I am interpreting your specified filtering criterion liberally and think it includes me and assume you are interested in my $0.02 :happy

I think what you are doing can make sense, but I would recommend that you include such a step in your ISP with clear metrics that trigger what your allocation percentages should be. This would need to include not just what metric you are looking for (e.g. P/E, fwd PE, CAPE10, P/B; adjusted for interest rate?; sector-neutral?; a compound of all of those?) but also how those metrics will impact your allocation decisions (e.g. indirectly proportional to the ratio of your metric? Or to the square root of your metric? And if so, why?) and that you try to understand how that would have behaved historically. The latter part might be the most difficult to source data for.

Personally, I have a fixed 50% US and 50% exUS. Multiple aspects about that: (1) It makes my rebalancing simple. I don't have to look up what the quarterly global capitalization is to know what I want my targets to be, (2) if either US or exUS gets expensive, I automatically rebalance into the cheaper regions. This may be heresy for some bogleheads, but this approach might work for you, too. It is not the reason why I chose that allocation but a side-effect, and (3) over the long run, it approximates the capitalization trend since WW1.
Image

A couple of thoughts on valuations: If you are worried about valuations, I'd highly recommend you to take a look not just at US vs. exUS but also into Large Cap vs. Small Cap and Growth vs. Value. Really good public sources on FWD PE Ratios (if that is your favored metric): https://www.yardeni.com/pub/stockmktperatio.pdf or https://www.yardeni.com/pub/mscipe.pdf are updated at least weekly. Here's a quick summary of that data accessed today:
Image
I am not arguing that this is the right metric to use or that one should follow an adaptive allocation approach. But if you are inclined to do so, then my interpretation is not that everything is expensive an one has to look for pockets of reasonably priced equity. I think it is the other way around: most markets are within the historical norm of their fwd PEs with the exception of US Large Caps and US growth. Now, of course, many US investors have strong home country bias for one reasons or another (I wish I received a dollar for every time someone states that US stocks are all you need because reasons) and the US "market" if defined by market capitalization is dominated by US Large Caps.

One more thought on alternatives to dynamic allocations. Have you considered fundamental indices? You can find more information here https://www.rafi.com/index-strategies/r ... al-indices. These do not weigh by market capitalization at all, ever. Company weights are assigned by what they refer to as fundamental metrics like Adjusted Sales, Cash Flow, Dividends and Buybacks, and Book Value. Even if a company's capitalization increases 100-fold, it will not impact the percentage owned by a fund following this index if the fundamentals remain unchanged. In other words, they should not be impacted by the effects of speculation and formation of unjustified bubbles. Funds are available for different regions and capitalization ranges (Large+Mid or Small). So, for example, you could decide that you your percentages of the Adjusted Sales, Cash Flow, Dividends and Buybacks, and Book Value of the equity in your allocation to be something like 40% from US Large+Mid Caps, 20% from US Small Caps, 30% from exUS Large+Mid Caps, and 10% from exUS Small Caps and buy your funds accordingly. Now your portfolio will never change because some subset of the markets are expensive or cheap. No need for adaptive allocations. Just some food for thought.
My spouse would love you. So technical!

This was very thoughtful and useful. I am still digesting it and may have some questions for you.

Thank you
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JoMoney
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Re: Equity potion of your portfolio; increasing international

Post by JoMoney »

facchina wrote: Wed Sep 29, 2021 7:59 am
JoMoney wrote: Sun Sep 26, 2021 2:33 pm
BitTooAggressive wrote: Sun Sep 26, 2021 1:49 pm
JoMoney wrote: Sun Sep 26, 2021 10:03 am
burritoLover wrote: Sun Sep 26, 2021 9:21 am
Overblown rationalizations to justify the real reason they hold heavy U.S. tilts - because they strongly believe the U.S. will vastly outperform ex-US and somehow with less risk.
You might choose to dismiss the risks and expenses as insignificant for you, that doesn't make it so for anyone else. The tax impacts and expenses will be there regardless if you acknowledge it.
Given the past 30+ years of U.S. / ex-US relative performance, it shouldn't be hard to imagine it could "somehow" happen that US stocks end up with better returns without the risks international stocks bring into the portfolio.
I think I pay about 0.1 % additional or less for my international. That is not enough to discourage me from international investment. Is that a deal breaker for you?
The difference between iShares MSCI All-Country World Index ex.US fund (ACWX) and the gross-return index (which is before foreign tax withholding) has been about -0.60% annualized for the past decade.
MStar Link

The difference between iShares S&P 500 fund (IVV) and the S&P 500 index has been -0.05% annualized
MStar Link

I think that's enough of a cost difference to make it a serious consideration. I've seen plenty of people advised to avoid 401k's and active funds where the "high fees" amounted to much less than that.
I do not fully understand this part of the conversation. Can you please expand on it?

That is, you note the delta between the index and the index fund is more material for foreign vs. domestic Why is that? Is it a problem of execution of structural?

Thank you
The major delta is in the "Gross Return" index versus the "Net Return Index".
The index fund would compare itself to the "Net Return Index", which is what an investor in foreign stocks would receive after foreign tax withholding from any distributions from those stocks.
A U.S. investor never sees the the actual foreign tax withholding unless they go digging looking for it. It's automatically withheld by the custodian bank that's facilitating your pseudo "ownership" of foreign stocks. If you hold the ex-US stocks in a taxable account, you can likely claim a tax credit for the foreign taxes paid to offset your US taxes. If you hold ex-US stocks in a retirement account you can't. Foreign stocks tend to have higher distributions, and less likely to be qualified for lower US tax rates, so holding them in a taxable account can have a heavier impact on ones U.S. taxes - so there's some considerations one needs to look closely at.

There are some additional considerations of the execution of trading foreign stocks through funds on a US exchange, in some cases there might be concerns about the liquidity on the US exchange having higher liquidity then the underlying stock does on it's home market exchange. There are also small fees involved by the custodian banks that make a small impact.

I'll also point out that the whole process of that allows for a U.S. bank/financial institution to work with a foreign financial institution to custody ownership of foreign stocks you can't actually buy/own directly creates some additional risk relative to a US stock a US person can directly "own". It's not too much different then a US person owning a mutual fund, that has a relationship with a custodian bank to actually hold the stocks, but the foreign relationship is a level deeper into being derivative, and one by which a US person has no legal recourse against the foreign entity.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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ruralavalon
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Re: Equity potion of your portfolio; increasing international

Post by ruralavalon »

facchina wrote: Wed Sep 29, 2021 7:54 am
ruralavalon wrote: Sat Sep 25, 2021 8:41 am
facchina wrote: Wed Sep 22, 2021 7:30 am . . . . .

To keep this topic on track, I respectfully request that you only respond if you have increased your international holdings or are considering it. Thank you so much!
So you only want to hear from posters who agree with your planned market timing move?

You can never learn anything new if you will only listen to people who agree with you.
As noted above, it is an approach to narrow the topic and discussion. I could ask: Should I move to Colorado? Or I could say: If you already moved to Colorado, tell me about your experience. I took the latter approach because I wanted to talk to people who are already in Colorado.
The future hasn't happened yet, nobody yet knows if U.S. investing "will not end well (e.g., crash, long period of underperformance)".

Nobody yet has any experience report. In other words nobody has yet moved to Colorado (the place where U.S. investing ended poorly with a crash and a long period of underperformance).

Narrowing discussion in that manner is only begging for confirmation of an opinion you already believe, a conclusion you have already reached.

Bogleheads' wiki wrote:Confirmation bias
A tendency to seek information that confirms one’s existing opinions and overlook or ignore information that refutes them. For example, when researching an investment, an investor might inadvertently look for information that supports his or her beliefs and fail to see information that presents different ideas. The resulting one-sided view can result in a poor investment choice. [3] “In short, your own mind acts like a compulsive yes-man who echoes whatever you want to believe,” says Wall Street Journal columnist Jason Zweig. [4] [note 1]
source
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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burritoLover
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Re: Equity potion of your portfolio; increasing international

Post by burritoLover »

JoMoney wrote: Sun Sep 26, 2021 2:33 pm
BitTooAggressive wrote: Sun Sep 26, 2021 1:49 pm
JoMoney wrote: Sun Sep 26, 2021 10:03 am
burritoLover wrote: Sun Sep 26, 2021 9:21 am
JoMoney wrote: Sat Sep 25, 2021 9:07 am
It's repeatedly pointed out, and for some reason the international advocates seem to ignore or gloss over it, but there are additional risks, expenses, and tax considerations for a U.S. investor to hold ex-US stocks.
Overblown rationalizations to justify the real reason they hold heavy U.S. tilts - because they strongly believe the U.S. will vastly outperform ex-US and somehow with less risk.
You might choose to dismiss the risks and expenses as insignificant for you, that doesn't make it so for anyone else. The tax impacts and expenses will be there regardless if you acknowledge it.
Given the past 30+ years of U.S. / ex-US relative performance, it shouldn't be hard to imagine it could "somehow" happen that US stocks end up with better returns without the risks international stocks bring into the portfolio.
I think I pay about 0.1 % additional or less for my international. That is not enough to discourage me from international investment. Is that a deal breaker for you?
The difference between iShares MSCI All-Country World Index ex.US fund (ACWX) and the gross-return index (which is before foreign tax withholding) has been about -0.60% annualized for the past decade.
MStar Link

The difference between iShares S&P 500 fund (IVV) and the S&P 500 index has been -0.05% annualized
MStar Link

I think that's enough of a cost difference to make it a serious consideration. I've seen plenty of people advised to avoid 401k's and active funds where the "high fees" amounted to much less than that.
Hmm, conveniently left out the fact that the Ishares ex-US (ACWX) has a 0.30% expense ratio vs. IVV (S&P 500) of 0.03% - so your 0.55% cost implication is really only 0.27% less fund fees. Choose a Vanguard total international (VXUS) fund, with an ER of 0.08 (vs total U.S. VIT of 0.03%), and that is only a 5 bps difference in fund cost - so the opportunity cost of international with Vanguard would be 27 bps + 5 = 32 bps. That doesn't include the foreign tax credit if you use smart tax location and locate international funds in taxable. The scare about qualified dividends is also overblown - currently 72% of VXUS dividends are qualified.

And if that weren't enough, this example of the cost difference is if you went 100% international instead of 100% U.S., which no U.S. investor here is doing. Let's take the worse case of 32 bps for international with no foreign tax credit. If you have portfolio of 60% VTI and 40% VXUS, your combined cost would be 0.15% vs 0.03% (all-in on VTI), so a difference of 12 bps for adding the diversification benefits of 7000+ stocks that you didn't have in your portfolio otherwise. Do the typical 80/20 U.S./ex-U.S. BH portfolio and the difference would be 9 bps. And all this is even lower if you take advantage of the foreign tax credit with placement in taxable.

So, yeah, not 50+ bps lol.
Bminor
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Re: Equity potion of your portfolio; increasing international

Post by Bminor »

Currently 90/10 allocation (US/exUS) for equities. Have just begun to deploy new investment (currently overweight cash after a real estate sale) into exUS, gradually, with target allocation of 70/30 (US/ex-US). Using VXUS and VTIAX (for account types where brokerage is not an option), and taxable accounts as much as possible.

I'm not rebalancing "out" of any US equities, but it certainly feels more comfortable to invest new cash in an asset class that should have relatively similar long term prospects and is on the friendlier side of possible reversion to the mean. Keenly aware of current metrics/valuations, but solidly staying the course for existing US investments.

Raising my relative allocation to equities (versus bonds/cash) is also a goal, and this approach blends with that target nicely.

No decision yet on my part regarding exUS bonds (my current exUS bond allocation is minimal, in a Vanguard Ultra Short Bond Fund). My sentiment in that area (and the entire current bond market, for that matter) is a work in progress ...

Bminor :beer
SpreadsheetsAreFun
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Re: Equity potion of your portfolio; increasing international

Post by SpreadsheetsAreFun »

JoMoney wrote: Wed Sep 29, 2021 8:15 am
facchina wrote: Wed Sep 29, 2021 7:59 am
JoMoney wrote: Sun Sep 26, 2021 2:33 pm
BitTooAggressive wrote: Sun Sep 26, 2021 1:49 pm
JoMoney wrote: Sun Sep 26, 2021 10:03 am
You might choose to dismiss the risks and expenses as insignificant for you, that doesn't make it so for anyone else. The tax impacts and expenses will be there regardless if you acknowledge it.
Given the past 30+ years of U.S. / ex-US relative performance, it shouldn't be hard to imagine it could "somehow" happen that US stocks end up with better returns without the risks international stocks bring into the portfolio.
I think I pay about 0.1 % additional or less for my international. That is not enough to discourage me from international investment. Is that a deal breaker for you?
The difference between iShares MSCI All-Country World Index ex.US fund (ACWX) and the gross-return index (which is before foreign tax withholding) has been about -0.60% annualized for the past decade.
MStar Link

The difference between iShares S&P 500 fund (IVV) and the S&P 500 index has been -0.05% annualized
MStar Link

I think that's enough of a cost difference to make it a serious consideration. I've seen plenty of people advised to avoid 401k's and active funds where the "high fees" amounted to much less than that.
I do not fully understand this part of the conversation. Can you please expand on it?

That is, you note the delta between the index and the index fund is more material for foreign vs. domestic Why is that? Is it a problem of execution of structural?

Thank you
The major delta is in the "Gross Return" index versus the "Net Return Index".
The index fund would compare itself to the "Net Return Index", which is what an investor in foreign stocks would receive after foreign tax withholding from any distributions from those stocks.
A U.S. investor never sees the the actual foreign tax withholding unless they go digging looking for it. It's automatically withheld by the custodian bank that's facilitating your pseudo "ownership" of foreign stocks. If you hold the ex-US stocks in a taxable account, you can likely claim a tax credit for the foreign taxes paid to offset your US taxes. If you hold ex-US stocks in a retirement account you can't. Foreign stocks tend to have higher distributions, and less likely to be qualified for lower US tax rates, so holding them in a taxable account can have a heavier impact on ones U.S. taxes - so there's some considerations one needs to look closely at.

There are some additional considerations of the execution of trading foreign stocks through funds on a US exchange, in some cases there might be concerns about the liquidity on the US exchange having higher liquidity then the underlying stock does on it's home market exchange. There are also small fees involved by the custodian banks that make a small impact.

I'll also point out that the whole process of that allows for a U.S. bank/financial institution to work with a foreign financial institution to custody ownership of foreign stocks you can't actually buy/own directly creates some additional risk relative to a US stock a US person can directly "own". It's not too much different then a US person owning a mutual fund, that has a relationship with a custodian bank to actually hold the stocks, but the foreign relationship is a level deeper into being derivative, and one by which a US person has no legal recourse against the foreign entity.
Thank you for pointing these aspects out. I had not fully realized the foreign taxes on dividends are completely lost in tax-advantaged accounts compared to taxable accounts because one can't apply those for the foreign tax credit. In fact, I had not internalized at all how foreign taxes on dividends play out and how to claim the credit. Thank you for opening my eyes to this. I am not yet sure how it will inform my desired asset allocation between tax-advantaged and brokerage because, as you point out, that needs to be closely looked at to attempt to optimize.

Interestingly, the impact of this seems to change significantly over time with apparently clear transition points. I have plotted below how much lower returns of the MSCI EAFA (Net) index have historically been relative to the corresponding (Gross) index. It appears that through the 70s, (Net) returns were ~1.30% points lower, through the 90s ~0.25% points and since the mid-2000s ~0.5% points. Any idea why that might be? Did the steep drop in the eighties occur because the Japan bubble inflated P/E ratios and reduced dividend yields? What about tax changes over time? Did more nations sign bilateral tax agreements? Does anyone know details?

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JoMoney
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Re: Equity potion of your portfolio; increasing international

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SpreadsheetsAreFun wrote: Thu Sep 30, 2021 12:47 pm...
Interestingly, the impact of this seems to change significantly over time with apparently clear transition points. I have plotted below how much lower returns of the MSCI EAFA (Net) index have historically been relative to the corresponding (Gross) index. It appears that through the 70s, (Net) returns were ~1.30% points lower, through the 90s ~0.25% points and since the mid-2000s ~0.5% points. Any idea why that might be? Did the steep drop in the eighties occur because the Japan bubble inflated P/E ratios and reduced dividend yields? What about tax changes over time? Did more nations sign bilateral tax agreements? Does anyone know details?

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I don't have details, but I do know the tax rates have changed over time in part with various tax-treaties between the US and foreign countries.
When looking at the difference between the Gross-Return and the Net-Return index it might also be impacted by the overall dividend yield over the time period, since the withholding is taken out of the dividend distribution if whatever gains during that era came more from capital appreciation and less from dividend yield, I would expect that would lower the impact of the dividends (and the withholding) as a factor in the difference of the return.
e.g. if they withhold 15% of a 2% dividend yield, that's a lower impact than 15% of a 4% dividend yield

https://www.simplysafedividends.com/int ... -tax-guide
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kimura king
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Re: Equity potion of your portfolio; increasing international

Post by kimura king »

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