USA vs International Allocation and Confidence

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

USA vs International Allocation and Confidence

Post by One More Thing »

I hope to ask a fresh question on what must be a dead horse topic. How do you invest in any allocation between USA and international markets with long term confidence? I know what Bogle or Buffett said about US stocks. I know about the global sum of capital in all stock markets. I know what Swedroe said about international bonds. Et cetera.

If you invest in VTSAX/VTI how do you not fear mean reversion between US and International stocks? If you invest in VTI + VXUS or VT how do you not regret not investing 100% VTI despite results?

Thank you for your time.
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: USA vs International Allocation and Confidence

Post by retired@50 »

Diversification means you'll always be disappointed in some portion of your portfolio.

I've learned to accept that I can't predict the future. That's what I'm really confident about. So, I diversify and live with the small disappointments that come along with it.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: USA vs International Allocation and Confidence

Post by Marseille07 »

deleted, topic not worth my tme.
Last edited by Marseille07 on Wed Sep 22, 2021 10:53 pm, edited 2 times in total.
User avatar
climber2020
Posts: 2708
Joined: Sun Mar 25, 2012 8:06 pm

Re: USA vs International Allocation and Confidence

Post by climber2020 »

Not sure this answers your question, but the plan I came up with to minimize tinkering and self sabotage is to make contributions based on a fixed percentage. Every time I get paid, I contribute in a 3:1 ratio US to international. I don't rebalance between the two and I don't contribute more to whichever fund is lagging behind. Over the last decade, this has resulted in my US pot growing faster than my International pot, but I'm okay with that.
User avatar
FoundingFather
Posts: 407
Joined: Fri Dec 18, 2020 9:20 pm

Re: USA vs International Allocation and Confidence

Post by FoundingFather »

One More Thing wrote: Wed Sep 22, 2021 12:21 pm I hope to ask a fresh question on what must be a dead horse topic. How do you invest in any allocation between USA and international markets with long term confidence? I know what Bogle or Buffett said about US stocks. I know about the global sum of capital in all stock markets. I know what Swedroe said about international bonds. Et cetera.

If you invest in VTSAX/VTI how do you not fear mean reversion between US and International stocks? If you invest in VTI + VXUS or VT how do you not regret not investing 100% VTI despite results?

Thank you for your time.
Out of respect for the dead horse, I will copy here a post I just made on another, similar thread, in brief form :wink: :

I switched from 20% international to market capitalization when I realized that I was continuing to wonder what the correct ratio was. Along those lines, I would encourage you to choose an allocation that allows you to stop asking questions about what the right ratio is.

For me, in terms of investing, the enemy is within the walls, so I have attempted to limit my ability to sabotage myself by choosing an allocation I am not tempted to tinker with.

Founding Father
"I do not think myself equal to the Command I am honored with." -George Washington (excerpt from Journals of the Continental Congress, 16 June 1775)
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

Re: USA vs International Allocation and Confidence

Post by One More Thing »

FoundingFather wrote: Wed Sep 22, 2021 12:33 pm
One More Thing wrote: Wed Sep 22, 2021 12:21 pm I hope to ask a fresh question on what must be a dead horse topic. How do you invest in any allocation between USA and international markets with long term confidence? I know what Bogle or Buffett said about US stocks. I know about the global sum of capital in all stock markets. I know what Swedroe said about international bonds. Et cetera.

If you invest in VTSAX/VTI how do you not fear mean reversion between US and International stocks? If you invest in VTI + VXUS or VT how do you not regret not investing 100% VTI despite results?

Thank you for your time.
Out of respect for the dead horse, I will copy here a post I just made on another, similar thread, in brief form :wink: :

I switched from 20% international to market capitalization when I realized that I was continuing to wonder what the correct ratio was. Along those lines, I would encourage you to choose an allocation that allows you to stop asking questions about what the right ratio is.

For me, in terms of investing, the enemy is within the walls, so I have attempted to limit my ability to sabotage myself by choosing an allocation I am not tempted to tinker with.

Founding Father
Would you say that you endorse VT/VTWAX?
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: USA vs International Allocation and Confidence

Post by vanbogle59 »

One More Thing wrote: Wed Sep 22, 2021 12:21 pm If you invest in VTSAX/VTI how do you not fear mean reversion between US and International stocks? If you invest in VTI + VXUS or VT how do you not regret not investing 100% VTI despite results?
I wrote down why I thought I needed VXUS.
I adjusted my AA to match that requirement.
Done.
retired@50 wrote: Wed Sep 22, 2021 12:25 pm Diversification means you'll always be disappointed in some portion of your portfolio.
Exactly.
:sharebeer
Thesaints
Posts: 5108
Joined: Tue Jun 20, 2017 12:25 am

Re: USA vs International Allocation and Confidence

Post by Thesaints »

The way to calculate the optimal ratio goes about like this:

- Domestic and International stocks, in good approximation, cover each 50% of the market.
- They have in principle the same expected return and variance, except that for a US investor International stocks come with an additional variance due to currency exchange.
- Currency exchange by itself has zero expected return.
- Domestic and International stocks have a correlation Cr, which we can only estimate.

The optimal allocation is the one that minimizes the total variance. If Cr were zero and one ignored currency, it would be 50/50. Due to currency exchange and partial correlation, that optimal allocation is skewed in favor of a Domestic stocks overweight.
In fact, if the currency exchange variance were much larger than the stocks variance, the optimal allocation would be 100/0 and if the two markets were perfectly correlated, than it would also be 100/0 for any currency exchange variance >0.

Since we can only estimate correlations and variances, the optimal allocation is a matter of how we estimate those quantities and, therefore, there is a bit of subjectivity involved.
User avatar
FoundingFather
Posts: 407
Joined: Fri Dec 18, 2020 9:20 pm

Re: USA vs International Allocation and Confidence

Post by FoundingFather »

One More Thing wrote: Wed Sep 22, 2021 12:21 pm
Would you say that you endorse VT/VTWAX?
Yes and No.

Yes: I invest my own money, my entire stock allocation, in a total world stock fund when able. In my 403b I invest in a split of total US and total international stock index funds that roughly approximates a total world stock index fun, since one is not available.

No: I strongly believe that knowing yourself, and investing in a way that accounts for your own beliefs, biases, behavioral weaknesses, risk tolerance, age, job security, etc is far MORE important than the strength of any single investment approach.

In sum, I think that a total world stock index fund (such as VT/VTWAX), combined with I Bonds and a total world bond index fund, is a great default starting point. However, I refrain from strongly endorsing specific approaches/allocations for people I don't know well because only you know if the your own psychology will allow my approach to also work for you.

Founding Father
"I do not think myself equal to the Command I am honored with." -George Washington (excerpt from Journals of the Continental Congress, 16 June 1775)
livesoft
Posts: 86076
Joined: Thu Mar 01, 2007 7:00 pm

Re: USA vs International Allocation and Confidence

Post by livesoft »

I do not invest with confidence. I do not worry about regret because that comes with investing.

Maybe it is because I have been investing more than 40 years? You may feel the same way when you have been investing more than 40 years, but if you have already been investing more than 40 years, then please let me know.

But more importantly, the outcomes of my investing have nothing to do with any degree of confidence or even total lack of confidence that I might have. Nor do the outcomes have anything to do with any perceived regret(s) or lack thereof.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
imak
Posts: 212
Joined: Fri Mar 22, 2019 5:18 pm
Location: Austin, TX

Re: USA vs International Allocation and Confidence

Post by imak »

One More Thing wrote: Wed Sep 22, 2021 12:21 pm

If you invest in VTSAX/VTI how do you not fear mean reversion between US and International stocks? If you invest in VTI + VXUS or VT how do you not regret not investing 100% VTI despite results?
For me it is reminding myself that VTI is not my benchmark. I chose DFA Global Equity allocation (from the DFA Matrix Book) and try to consciously benchmark my ETF allocations against that every quarter.

This is still a tough thing and mentally draining from time to time, as I see my colleagues boasting about their QQQ and Growth stock gains. Its very difficult to not compare my gains with S&P500.
RXfiles
Posts: 469
Joined: Tue May 26, 2020 1:23 pm
Location: Birmingham, AL

Re: USA vs International Allocation and Confidence

Post by RXfiles »

retired@50 wrote: Wed Sep 22, 2021 12:25 pm Diversification means you'll always be disappointed in some portion of your portfolio.

I've learned to accept that I can't predict the future. That's what I'm really confident about. So, I diversify and live with the small disappointments that come along with it.

Regards,
It's better to be slightly disappointed in 20-40% of it then majorly disappointed in 100% of it
User avatar
steve r
Posts: 1300
Joined: Mon Feb 13, 2012 7:34 pm
Location: Connecticut

Re: USA vs International Allocation and Confidence

Post by steve r »

FoundingFather wrote: Wed Sep 22, 2021 1:23 pm ....

I strongly believe that knowing yourself, and investing in a way that accounts for your own beliefs, biases, behavioral weaknesses, risk tolerance, age, job security, etc is far MORE important than the strength of any single investment approach.

...

refrain from strongly endorsing specific approaches/allocations for people I don't know well because only you know if the your own psychology will allow my approach to also work for you.

Founding Father
+1 (again, I really like this post)

(As stated in that other post) "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.)"

Conquering behavioral weaknesses is a key component. Thus I set something somewhat near middle of the road.
retired@50 wrote: Wed Sep 22, 2021 12:25 pm ...
Diversification means you'll always be disappointed in some portion of your portfolio.

I've learned to accept that I can't predict the future. That's what I'm really confident about. So, I diversify and live with the small disappointments that come along with it.
+1 also very good.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
etfan
Posts: 526
Joined: Sun May 16, 2021 4:22 pm

Re: USA vs International Allocation and Confidence

Post by etfan »

Expert opinion on this matter ranges between no international exposure to market weight international exposure. The best way to minimize regret between the two extreme opinions is to pick the middle ground. That way, no matter who's right, you're always at least half way to their side. It's a diversification of expert opinion.
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

Re: USA vs International Allocation and Confidence

Post by One More Thing »

RXfiles wrote: Wed Sep 22, 2021 1:47 pm
retired@50 wrote: Wed Sep 22, 2021 12:25 pm Diversification means you'll always be disappointed in some portion of your portfolio.

I've learned to accept that I can't predict the future. That's what I'm really confident about. So, I diversify and live with the small disappointments that come along with it.

Regards,
It's better to be slightly disappointed in 20-40% of it then majorly disappointed in 100% of it
Half a dozen in one hand, six in the other. Fair way to express it either way.
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

Re: USA vs International Allocation and Confidence

Post by One More Thing »

etfan wrote: Wed Sep 22, 2021 4:26 pm Expert opinion on this matter ranges between no international exposure to market weight international exposure. The best way to minimize regret between the two extreme opinions is to pick the middle ground. That way, no matter who's right, you're always at least half way to their side. It's a diversification of expert opinion.
This is what I often do when faced with such dilemmas. The Golden Mean can serve one well. So can the "80/20 rule" though too. Maybe "60/40" hits the sweet spot between those two approaches.
User avatar
galeno
Posts: 2653
Joined: Fri Dec 21, 2007 11:06 am

Re: USA vs International Allocation and Confidence

Post by galeno »

USA investors should START with X% TSM + Y% TBM. KISS or slice, dice, and tilt to your heart's content. Should NOT use non-USA domiciled stocks or bonds. Hidden taxes on non-USA domiciled stocks. Higher ERs on non-USA stocks and bonds. Non-USA diversification not worth the costs.

Non-USA should START with X% TWSM + Y% TWBM and complicate from there. For us, USA domiciled stocks have a 15% DWT*. Non-USA developed equities = 8.5%. EM equities = 11.3%. Non-USA domiciled equities charge less DWT*. So we get "paid" to hold non-USA domiciled equities.

* = dividend withdrawal taxes.
KISS & STC.
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

Re: USA vs International Allocation and Confidence

Post by One More Thing »

What about domestic versus international bonds? I realize that a domestic TBM is safe insofar as the USD is the world reserve currency which makes US treasury bonds as safe as it gets. Is a WBM fund a gamble against that status? Is it just reaching for yield?
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: USA vs International Allocation and Confidence

Post by retired@50 »

One More Thing wrote: Wed Sep 22, 2021 8:10 pm What about domestic versus international bonds? I realize that a domestic TBM is safe insofar as the USD is the world reserve currency which makes US treasury bonds as safe as it gets. Is a WBM fund a gamble against that status? Is it just reaching for yield?
Vanguard has a paper on international bond investing. See link: https://personal.vanguard.com/pdf/inter ... income.pdf

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: USA vs International Allocation and Confidence

Post by 000 »

galeno wrote: Wed Sep 22, 2021 5:16 pm USA investors should START with X% TSM + Y% TBM. KISS or slice, dice, and tilt to your heart's content. Should NOT use non-USA domiciled stocks or bonds. Hidden taxes on non-USA domiciled stocks. Higher ERs on non-USA stocks and bonds. Non-USA diversification not worth the costs.

Non-USA should START with X% TWSM + Y% TWBM and complicate from there. For us, USA domiciled stocks have a 15% DWT*. Non-USA developed equities = 8.5%. EM equities = 11.3%. Non-USA domiciled equities charge less DWT*. So we get "paid" to hold non-USA domiciled equities.

* = dividend withdrawal taxes.
What about the valuation cost though? Buying a higher valued asset also comes with a hidden cost.
Triple digit golfer
Posts: 10433
Joined: Mon May 18, 2009 5:57 pm

Re: USA vs International Allocation and Confidence

Post by Triple digit golfer »

You can do the same thing in tech vs. financials, large vs. small, value vs. growth. But you don't, right? You just hold them all in market weights, I assume.

So why do it with U.S. vs international? Why not just hold at market weight like you do for everything else?

VT/VTWAX should be the default, in my opinion.
User avatar
nps
Posts: 1633
Joined: Thu Dec 04, 2014 9:18 am

Re: USA vs International Allocation and Confidence

Post by nps »

The point of a diversified portfolio is that you don't have confidence that any of its constituent parts are the best "bet." If you had that confidence, you wouldn't want a diversified portfolio.
tomsense76
Posts: 1428
Joined: Wed Oct 14, 2020 1:52 am

Re: USA vs International Allocation and Confidence

Post by tomsense76 »

galeno wrote: Wed Sep 22, 2021 5:16 pm USA investors should START with X% TSM + Y% TBM. KISS or slice, dice, and tilt to your heart's content. Should NOT use non-USA domiciled stocks or bonds. Hidden taxes on non-USA domiciled stocks. Higher ERs on non-USA stocks and bonds. Non-USA diversification not worth the costs.

Non-USA should START with X% TWSM + Y% TWBM and complicate from there. For us, USA domiciled stocks have a 15% DWT*. Non-USA developed equities = 8.5%. EM equities = 11.3%. Non-USA domiciled equities charge less DWT*. So we get "paid" to hold non-USA domiciled equities.

* = dividend withdrawal taxes.
Interesting perspective. Though it is worth noting that US investors get a foreign tax credit that offsets some US taxes that would be otherwise paid based on how much was paid to foreign governments. As this offset is smaller than the US tax owed, US investors are fully compensated for the foreign taxes (as long as they hold non-US stocks in taxable).

However as you mention hidden taxes on non-US stocks am guessing you mean there are other expenses that are not the reported taxes. Am curious, what other expenses did you have in mind?
Last edited by tomsense76 on Wed Sep 22, 2021 9:25 pm, edited 1 time in total.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

Re: USA vs International Allocation and Confidence

Post by One More Thing »

Triple digit golfer wrote: Wed Sep 22, 2021 9:01 pm You can do the same thing in tech vs. financials, large vs. small, value vs. growth. But you don't, right? You just hold them all in market weights, I assume.

So why do it with U.S. vs international? Why not just hold at market weight like you do for everything else?

VT/VTWAX should be the default, in my opinion.
That's my gut instinct. However Jack Bogle thought that international allocation was frivolous for US investors. On the other hand home country bias is also a concern for an investor.
tomsense76
Posts: 1428
Joined: Wed Oct 14, 2020 1:52 am

Re: USA vs International Allocation and Confidence

Post by tomsense76 »

There are a lot of bright people here who are very good about optimizing as much as they can out of various financial decisions. This works well in a lot of finance.

However I think this decision is one we can only optimize in retrospect. While there are arguments ranging from 0 to market cap, there is no guarantee that we can pick one that works best going forward. None of us really knows how things will play out in the future. So we can't really tell you what the right answer is. Though I think you are getting at the same idea with these questions.
One More Thing wrote: Wed Sep 22, 2021 12:21 pm If you invest in VTSAX/VTI how do you not fear mean reversion between US and International stocks? If you invest in VTI + VXUS or VT how do you not regret not investing 100% VTI despite results?
IOW it's not about holding the absolute best performing portfolio in terms of international and US as that is unknowable. Instead it is about holding the portfolio that you can stick with. As we do know that it is very hard to market time into a particular allocation, so one may be better off just stick with one and staying the course. So what ratio of US/international can you hold without bailing?
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
l1am
Posts: 438
Joined: Wed Mar 02, 2016 1:27 pm

Re: USA vs International Allocation and Confidence

Post by l1am »

OP, do you think about VGT vs. VTI the same way? If not, why not?
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

Re: USA vs International Allocation and Confidence

Post by One More Thing »

l1am wrote: Wed Sep 22, 2021 10:48 pm OP, do you think about VGT vs. VTI the same way? If not, why not?
I had to look VGT up as I ignore sector ETFs. I view sector investing as a long term risk due to shifts in market trends over time. Is your point that the US TSM is effectively a "sector" within a World TSM? If so do you endorse a World TSM > US TSM as I favor VTI > VGT? Your point may hit the mark if I understood you.
User avatar
Raspberry-503
Posts: 954
Joined: Sat Oct 03, 2020 6:42 am

Re: USA vs International Allocation and Confidence

Post by Raspberry-503 »

I do have a bias for international exposure for diversification, a few days ago all my US funds were down for the day but international was up for example. Since I'm in it for the long term, I accept the fact that in the short term I will not match the SP500, just like my 60/40 AA means I won't.

I've chosen to mirror the allocations of the Vanguard LifeStrategy Moderate Growth Fund. It's a 60/40 global fund with international exposure. I don't really know how they choose the % foreign vs US, and they do change it over time, but they can't be completely wrong and it's a way to prevent me from agonizing over some other right/better way.
User avatar
ApeAttack
Posts: 915
Joined: Wed Dec 23, 2020 7:28 pm
Location: Gorillatown, USA

Re: USA vs International Allocation and Confidence

Post by ApeAttack »

etfan wrote: Wed Sep 22, 2021 4:26 pm Expert opinion on this matter ranges between no international exposure to market weight international exposure. The best way to minimize regret between the two extreme opinions is to pick the middle ground. That way, no matter who's right, you're always at least half way to their side. It's a diversification of expert opinion.
That's what I do. About 75-25 US-exUS.
May all your index funds gain +0.5% today.
bogledogle87
Posts: 478
Joined: Wed Sep 26, 2018 7:03 pm

Re: USA vs International Allocation and Confidence

Post by bogledogle87 »

One More Thing wrote: Wed Sep 22, 2021 9:25 pm
Triple digit golfer wrote: Wed Sep 22, 2021 9:01 pm You can do the same thing in tech vs. financials, large vs. small, value vs. growth. But you don't, right? You just hold them all in market weights, I assume.

So why do it with U.S. vs international? Why not just hold at market weight like you do for everything else?

VT/VTWAX should be the default, in my opinion.
That's my gut instinct. However Jack Bogle thought that international allocation was frivolous for US investors. On the other hand home country bias is also a concern for an investor.

Jack held only one opinion. You are entitled to your own. Unfortunately Jack will no longer have an opportunity to revise his opinions amidst a rapidly evolving global economy. On this particular discussion, there is no reason to believe that one man’s very specific advice on geographical allocation will hold true 5, 10, 50 years after his death.

If you fundamentally subscribe to passive index investing, VTWAX is arguably the most complete option available in the investment universe.
VTWAX and chill
Dude2
Posts: 1780
Joined: Fri Jun 08, 2007 3:40 pm
Location: FL

Re: USA vs International Allocation and Confidence

Post by Dude2 »

US-only surely misses out on factors related to how the US is positioned relative to the rest of the world. What about the concept of how any particular country would favor policies that make it so that foreigners are more likely to buy their products? Currencies move relative to each other. Tariffs and taxes and incentives drive markets.
Then ’tis like the breath of an unfee’d lawyer.
whereskyle
Posts: 1911
Joined: Wed Jan 29, 2020 9:29 am

Re: USA vs International Allocation and Confidence

Post by whereskyle »

One More Thing wrote: Wed Sep 22, 2021 12:21 pm I hope to ask a fresh question on what must be a dead horse topic. How do you invest in any allocation between USA and international markets with long term confidence? I know what Bogle or Buffett said about US stocks. I know about the global sum of capital in all stock markets. I know what Swedroe said about international bonds. Et cetera.

If you invest in VTSAX/VTI how do you not fear mean reversion between US and International stocks? If you invest in VTI + VXUS or VT how do you not regret not investing 100% VTI despite results?

Thank you for your time.
This is an excruciatingly difficult decision if you ask me, and I think the key to taking action for me was embracing a bit of schizophrenia and accepting that the best I can hope to do is "good enough" rather than making the perfect decision in advance.

For me, I own both VTSAX and VTWAX and I try to keep both funds roughly equal.

That's it. I know Jack and Warren would tell me to own VTSAX. I know true agnosticism, simplicity, Bill Bernstein, and many Bogleheads would likely tell me to own VTWAX.

So I do both. Can't complain about the results. Also can't say I still don't wonder what the best allocation would be. My advice is to not let perfection be the enemy of the good.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
lostdog
Posts: 5368
Joined: Thu Feb 04, 2016 1:15 pm

Re: USA vs International Allocation and Confidence

Post by lostdog »

Triple digit golfer wrote: Wed Sep 22, 2021 9:01 pm You can do the same thing in tech vs. financials, large vs. small, value vs. growth. But you don't, right? You just hold them all in market weights, I assume.

So why do it with U.S. vs international? Why not just hold at market weight like you do for everything else?

VT/VTWAX should be the default, in my opinion.
This is a very logical explanation. There is no place in in investing for hunches, emotions, personal biases, predictions etc...

Buy the world haystack and let it ride for decades.
Stocks-80% || Bonds-20% || Taxable-VTI/VXUS || IRA-VT/BNDW
EddyB
Posts: 2431
Joined: Fri May 24, 2013 3:43 pm

Re: USA vs International Allocation and Confidence

Post by EddyB »

galeno wrote: Wed Sep 22, 2021 5:16 pm USA investors should START with X% TSM + Y% TBM. KISS or slice, dice, and tilt to your heart's content. Should NOT use non-USA domiciled stocks or bonds. Hidden taxes on non-USA domiciled stocks. Higher ERs on non-USA stocks and bonds. Non-USA diversification not worth the costs.

Non-USA should START with X% TWSM + Y% TWBM and complicate from there. For us, USA domiciled stocks have a 15% DWT*. Non-USA developed equities = 8.5%. EM equities = 11.3%. Non-USA domiciled equities charge less DWT*. So we get "paid" to hold non-USA domiciled equities.

* = dividend withdrawal taxes.
Now do US citizens who reside outside the US….
User avatar
galeno
Posts: 2653
Joined: Fri Dec 21, 2007 11:06 am

Re: USA vs International Allocation and Confidence

Post by galeno »

Great question. It depends where you live.

E.g. an expat USA citizen living in North or Central America should hold TSM and TBM.

Others? That depends. On your exposure to the USD. And your willingness to pay the extra portfolio costs associated with TWSM and TWBM.

"Now do US citizens who reside outside the US…."
KISS & STC.
User avatar
nisiprius
Advisory Board
Posts: 52213
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: USA vs International Allocation and Confidence

Post by nisiprius »

I invest with confidence that stocks are stocks, the world is pretty globalized, and I see nothing to suggest it has ever made or will ever make a heck of a lot of difference. So I'm going to stick to what I picked in the early 2000's, and not stress about it.

Here is a chart of the comparative performance of three 60/40 portfolios in which the stock allocation is:

a) all US, which I'll call 60/40
b) 75% US, 25% ex-US, which I'll call (45+15)/40
c) 50% US, 50% ex-US which is pretty close to global cap-weight allocation, which I'll call (30+30)/40.

In order to go back farther than Total International, I'm going to use:
the Vanguard 500 Index Fund, VFINX, for US stocks
the Fidelity Diversified International Fund, FDIVX, for ex-US stocks
Vanguard Total Bond, VBMFX, for bonds.

Source

Image

There's a difference in performance, sure, but it's not the difference between "can retire" and "can't retire." Average annual returns over this time period, for the three portfolios, were 8.74%, 8.59%, and 8.41%.

This is the longest period I can think of, looking at real money in real mutual funds I've heard of. If you know something longer--particularly, a good, solid, well-diversified international stock fund--it would be interesting to re-do the comparison.

Certainly you can look at shorter periods and see bigger differences, with international performing in some and US in others.

But it's not a huge difference, and I think you could have "confidence" in any of the three.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

Re: USA vs International Allocation and Confidence

Post by One More Thing »

nisiprius wrote: Fri Sep 24, 2021 5:28 pm I invest with confidence that stocks are stocks, the world is pretty globalized, and I see nothing to suggest it has ever made or will ever make a heck of a lot of difference. So I'm going to stick to what I picked in the early 2000's, and not stress about it.

Here is a chart of the comparative performance of three 60/40 portfolios in which the stock allocation is:

a) all US, which I'll call 60/40
b) 75% US, 25% ex-US, which I'll call (45+15)/40
c) 50% US, 50% ex-US which is pretty close to global cap-weight allocation, which I'll call (30+30)/40.

In order to go back farther than Total International, I'm going to use:
the Vanguard 500 Index Fund, VFINX, for US stocks
the Fidelity Diversified International Fund, FDIVX, for ex-US stocks
Vanguard Total Bond, VBMFX, for bonds.

Source

Image

There's a difference in performance, sure, but it's not the difference between "can retire" and "can't retire." Average annual returns over this time period, for the three portfolios, were 8.74%, 8.59%, and 8.41%.

This is the longest period I can think of, looking at real money in real mutual funds I've heard of. If you know something longer--particularly, a good, solid, well-diversified international stock fund--it would be interesting to re-do the comparison.

Certainly you can look at shorter periods and see bigger differences, with international performing in some and US in others.

But it's not a huge difference, and I think you could have "confidence" in any of the three.
Impressive. If that doesn't help you sleep well at night I don't know what would.

EDIT: Wait, I just looked up FDIVX. I take it you chose that due to how far back it goes. Nowadays Fidelity has FTIHX (Total International Index Fund) and FSPSX (International Index Fund) which have much lower ERs.
User avatar
burritoLover
Posts: 4097
Joined: Sun Jul 05, 2020 12:13 pm

Re: USA vs International Allocation and Confidence

Post by burritoLover »

If only the last 25 years were like the next 25 - that, in and of itself, would be unprecedented.
Topic Author
One More Thing
Posts: 107
Joined: Mon Sep 20, 2021 10:02 pm

Re: USA vs International Allocation and Confidence

Post by One More Thing »

Come to think of it, I invest 100% into VITSX in my 401k. In a sea of T. Rowe Price equity funds, TDFs, and PimCo bond funds it's the only rational option. That makes choosing VT > VTI easier.
DangerDad
Posts: 47
Joined: Tue Apr 27, 2021 7:37 pm

Re: USA vs International Allocation and Confidence

Post by DangerDad »

Triple digit golfer wrote: Wed Sep 22, 2021 9:01 pm You can do the same thing in tech vs. financials, large vs. small, value vs. growth. But you don't, right? You just hold them all in market weights, I assume.
So why do it with U.S. vs international? Why not just hold at market weight like you do for everything else?
VT/VTWAX should be the default, in my opinion.
This is a very reasonable, logical argument. Not trying to be contentious—I’m still sorting this out—however I believe the US vs ex-US question is fundamentally different than the others you mentioned (tech vs. financials, large vs. small, value vs. growth) in that it involves geopolitical risk which is not an issue with those others (large vs small, value vs growth, etc). This doesn’t necessarily argue against investing in ex-US but it suggests a higher expectation for returns to compensate investors for these additional risks…yes? In addition, ex-US investments generally involve higher cost which also raises the bar in terms of performance expectation. I appreciate the value of diversification which is a separate issue. However just in terms of long term performance I can understand why some folks are soured on ex-US equities. For quite some time many investors (in ex-US equities) have been taking greater risk and paying higher expenses for inferior (compared to US) performance. Of course no one knows whether this trend will continue.

Regards,

DangerDad
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: USA vs International Allocation and Confidence

Post by Beensabu »

One More Thing wrote: Wed Sep 22, 2021 12:21 pm How do you invest in any allocation between USA and international markets with long term confidence?
By choosing to believe something. Once a belief gets its claws into your brain, it's not letting go unless you make it let go. Nobody else can do it. Therein lies confidence.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Post Reply