What is the Point of International Developed Large Cap?

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nzahir
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What is the Point of International Developed Large Cap?

Post by nzahir »

Hey guys,

With the increasing correlation between US and International DM, what is the point of owning international developed large cap?

Why not just own International Small Caps (or Intl SCV, such as AVDV) and EM?

Less correlation and higher returns since you are taking on more risk (well at least you would expect over a long period of time)

If International is outperforming the US during a decade or 2, it is likely that Intl small caps will have done just as well, if not better, right? (I am not sure here, so any data would be great).

Please feel free to share any data or thoughts
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Re: What is the Point of International Developed Large Cap?

Post by Nathan Drake »

The same argument could be made for US stocks. What’s the point of US LC vs US SCV?

Well, they have different risk characteristics and add diversification to the portfolio. That’s the major difference
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Re: What is the Point of International Developed Large Cap?

Post by JoMoney »

nzahir wrote: Sat Jul 24, 2021 12:02 am ...and higher returns since you are taking on more risk (well at least you would expect over a long period of time)...
It could happen, but it's not really what I would "expect", I don't expect that taking on more risk leads to higher returns.
DFA's Small-Cap fund (DFSCX) over the course of it's near 40 years of existence, founded on the premise that small-caps would beat large and capture some "risk premium", didn't beat the S&P 500 index over the period.

There are many such examples that should confound the EMH "risk premium" theorsists. The book "The Missing RIsk Premium" by Erik Falkenstein, as well as some of his academic papers, make for some thought provoking examples.
I'm more of the opinion of Benjamin Graham, that the market will have some broad average return over any particular time period, and it's a relatively simple matter to capture that (especially now days with cheap broad market index funds). To improve on that commodity like rate, you have to bring something else to the table, like with any business, you have to bring something the market values and will pay more for. If you have better information, that might garner something, but anybody can take "risk" there's no shortage of people willing to gamble on a coin flip often even when they know they have no expected advantage.
"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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Re: What is the Point of International Developed Large Cap?

Post by Nathan Drake »

JoMoney wrote: Sat Jul 24, 2021 12:20 am
nzahir wrote: Sat Jul 24, 2021 12:02 am ...and higher returns since you are taking on more risk (well at least you would expect over a long period of time)...
It could happen, but it's not really what I would "expect", I don't expect that taking on more risk leads to higher returns.
DFA's Small-Cap fund (DFSCX) over the course of it's near 40 years of existence, founded on the premise that small-caps would beat large and capture some "risk premium", didn't beat the S&P 500 index over the period.

There are many such examples that should confound the EMH "risk premium" theorsists. The book "The Missing RIsk Premium" by Erik Falkenstein, as well as some of his academic papers, make for some thought provoking examples.
I'm more of the opinion of Benjamin Graham, that the market will have some broad average return over any particular time period, and it's a relatively simple matter to capture that (especially now days with cheap broad market index funds). To improve on that commodity like rate, you have to bring something else to the table, like with any business, you have to bring something the market values and will pay more for. If you have better information, that might garner something, but anybody can take "risk" there's no shortage of people willing to gamble on a coin flip often even when they know they have no expected advantage.
You should be using portfolio visualizer.

DFA SCV had over a 1% premium since inception

Why wouldn’t you expect higher returns for higher risk? Do you think stocks don’t have a higher expected return than bonds?
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nzahir
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

Nathan Drake wrote: Sat Jul 24, 2021 12:15 am The same argument could be made for US stocks. What’s the point of US LC vs US SCV?

Well, they have different risk characteristics and add diversification to the portfolio. That’s the major difference
Largest GDP
Largest Stock market
One of the best countries in the world in terms of innovation, if not the best
Gov Stability
Reserve Currency
Foreigners want to come here

So it should still be a staple of the portfolio, but what benefits does Developed International give?

They correlate heavily
EU is usually less innovative

Where is the diversification and different risk characteristics?

When the US markets pull back, so will everyone else

I don't think this is Japan in the 80s and early 90s.

The world is too connected now and heavily correlated

But it seems like Intl small caps haven't caught up as much and EM hasn't either

Yes they will still move up and down together, but they will have less correlation in terms of returns

We saw it in the 2000s

SP500 down like 10% in that lost decade and Intl developed up 10%

Yes there is some difference when you look at a decade, but intl small cap and EM did even better and are much less correlated. Isn't that what we look for in a portfolio?

Not sure if small outperformance over that decade is worth another decade or so of huge underperformance

When Non US outperforms, hopefully soon, it should be in EM and Small caps
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Re: What is the Point of International Developed Large Cap?

Post by Nathan Drake »

nzahir wrote: Sat Jul 24, 2021 1:12 am
Nathan Drake wrote: Sat Jul 24, 2021 12:15 am The same argument could be made for US stocks. What’s the point of US LC vs US SCV?

Well, they have different risk characteristics and add diversification to the portfolio. That’s the major difference
Largest GDP
Largest Stock market
One of the best countries in the world in terms of innovation, if not the best
Gov Stability
Reserve Currency
Foreigners want to come here

So it should still be a staple of the portfolio, but what benefits does Developed International give?

They correlate heavily
EU is usually less innovative

Where is the diversification and different risk characteristics?

When the US markets pull back, so will everyone else

I don't think this is Japan in the 80s and early 90s.

The world is too connected now and heavily correlated

But it seems like Intl small caps haven't caught up as much and EM hasn't either

Yes they will still move up and down together, but they will have less correlation in terms of returns

We saw it in the 2000s

SP500 down like 10% in that lost decade and Intl developed up 10%

Yes there is some difference when you look at a decade, but intl small cap and EM did even better and are much less correlated. Isn't that what we look for in a portfolio?

Not sure if small outperformance over that decade is worth another decade or so of huge underperformance

When Non US outperforms, hopefully soon, it should be in EM and Small caps
DM has been underperforming for over two decades. If mean reversion occurs, that could make it a great investment.

US has been greatly over performing for a decade. If mean reversion occurs, it could be lousy.

Nobody knows what the future will be, but the market has priced in whatever it is you claim to see.

That said, I tilt towards small cap value and have a sizable portion in AVDV. You’re exposed to market beta so if you want to go all in with that you’ll probably be fine not adding large cap.
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Re: What is the Point of International Developed Large Cap?

Post by sf_tech_saver »

Sectors/factors don't capture market returns -- companies do.

I'm certainly glad I have holdings like TSMC as part of VT from Vanguard.
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Re: What is the Point of International Developed Large Cap?

Post by YRT70 »

nzahir wrote: Sat Jul 24, 2021 12:02 am Hey guys,

With the increasing correlation between US and International DM, what is the point of owning international developed large cap?
The decade from 2000 to 2009 the US total market returned a negative 0.3%. International total market returned a positive 2.3% over the same 10 years. I don't know about you but I like that sort of diversification.

I also tilt to small value in both regions by the way.

If you're a true factor believer you could also skip US large cap. For example the Larry portfolio is only US SCV, International SCV and EM value and intermediate treasury.
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Re: What is the Point of International Developed Large Cap?

Post by UpperNwGuy »

nzahir wrote: Sat Jul 24, 2021 12:02 am With the increasing correlation between US and International DM, what is the point of owning international developed large cap?
Diversification.

The way you've phrased your question confuses me. You seem to equate developed markets with large cap. Developed markets have both large cap and small cap, as do emerging markets. What's your real concern?
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Re: What is the Point of International Developed Large Cap?

Post by backofbeyond »

I have 32% of my portfolio in Tech stocks.

There are some very solid International Tech Companies that currently play a large roll in making it "all happen" and IMHO have a very bright future. My favorite by far is Taiwan Semiconductor Mfg. But Samsung & Sony are two others I have money in.
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Re: What is the Point of International Developed Large Cap?

Post by BuyAndHoldOn »

[I don't mean to be a smart alec, but my first thought was:]
These stocks (Intl Developed large cap) haven't done well the last 10+ years, otherwise this thread wouldn't exist :happy

Hopefully such will not be the case forevermore. Exchange rates (assuming currency unhedged holdings, as is the case for low-cost indicies) have also hurt over the last 10+ years, but that could reverse.

As I have ~roughly global market weight in equity holdings, I know I have consistently lagged the S&P 500, but that's the role diversification plays (sometimes it helps, sometimes it hurts).

@OP: I do not mean to lecture, but obviously: Don't invest internationally if you don't want to; feel free to avoid it. I am comfortable with the risks and rewards and hold accordingly.

If only wanting international small caps: I think the VSS ETF is a good option, or so I have read on this forum / heard from a friend that holds it. My guess [and likely anyone's] is that VSS could lag or lead depending on conditions that would impact non-US equities more broadly.
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Re: What is the Point of International Developed Large Cap?

Post by JoMoney »

Nathan Drake wrote: Sat Jul 24, 2021 12:28 am
JoMoney wrote: Sat Jul 24, 2021 12:20 am
nzahir wrote: Sat Jul 24, 2021 12:02 am ...and higher returns since you are taking on more risk (well at least you would expect over a long period of time)...
It could happen, but it's not really what I would "expect", I don't expect that taking on more risk leads to higher returns.
DFA's Small-Cap fund (DFSCX) over the course of it's near 40 years of existence, founded on the premise that small-caps would beat large and capture some "risk premium", didn't beat the S&P 500 index over the period.

There are many such examples that should confound the EMH "risk premium" theorsists. The book "The Missing RIsk Premium" by Erik Falkenstein, as well as some of his academic papers, make for some thought provoking examples.
I'm more of the opinion of Benjamin Graham, that the market will have some broad average return over any particular time period, and it's a relatively simple matter to capture that (especially now days with cheap broad market index funds). To improve on that commodity like rate, you have to bring something else to the table, like with any business, you have to bring something the market values and will pay more for. If you have better information, that might garner something, but anybody can take "risk" there's no shortage of people willing to gamble on a coin flip often even when they know they have no expected advantage.
You should be using portfolio visualizer.

DFA SCV had over a 1% premium since inception

Why wouldn’t you expect higher returns for higher risk? Do you think stocks don’t have a higher expected return than bonds?
I do use portfolio visualizer, but for some things I prefer the more detail available on the old-style Morningstar growth charts.

FWIW, DFA's DFSVX (Small-Value) fund failed to outperform their broader balanced small-cap DFSCX over the period since it's inception [PV Link]... which I see as yet another indictment of claimed persistence of the "value risk premium".
While both the small and small-value funds did have higher returns then the S&P 500 since the 1993 start of the DFSVX fund, the standard deviation was much higher (one could have leveraged up S&P 500 and had higher returns with lower SD, or the same portfolio tempered with bonds to an equivalent SD would have done better with S&P500), and the claimed "premium" hasn't achieved any unsurmountable out-performance relative to its coin-flip standard deviation risk. As recently as October of last year, the DFSVX was below the S&P 500's return since it's inception [M* Chart Link]

I don't know what to tell you. "Risk premiums" is a failed explanation for stock returns. If taking risk meant higher returns it wouldn't really be "risk". It doesn't work in other areas of reality either. Not wearing your seat-belt doesn't get the car to it's destination. Casinos are full of people willingly taking "risk", at a known disadvantage with no expected "premium", sometimes they get lucky, but most will lose, and even if they had an advantage tend to take on more risk they they're bankrolled for and run a risk of ruin that's certain to wipe them out based on the standard deviation of the game let-alone the negative expected value.

Stocks are not certain to outperform bonds, plenty of examples where they have not (especially looking outside the U.S.)
Stocks represent a fundamentally different stake in the enterprise. The "Equity premium puzzle" is a well known conundrum for those trying to use "risk" explanations for stock returns. Unfortunately, other explanations don't lend themselves to comfortable stories to sell stocks, nor provide mathematical relationships for formulaic responses to model.... so the finance and academic types continue to use the empirically failed models that give them some story of risk/return and when it doesn't work go off looking for some other model of "risk".
"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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Re: What is the Point of International Developed Large Cap?

Post by Doc »

nzahir wrote: Sat Jul 24, 2021 12:02 am With the increasing correlation between US and International DM, what is the point of owning international developed large cap?
None. Both domestic LC and foreign developed LC are nominated by international firms and the major difference in the funds is due to currency differences and tax differences.
nzahir wrote: Sat Jul 24, 2021 12:02 am Why not just own International Small Caps (or Intl SCV, such as AVDV) and EM?
International small cap, yes. EM, no for health reasons (sleeping well).
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Re: What is the Point of International Developed Large Cap?

Post by Forester »

IMHO it wouldn't matter much if a US investor paired their US total market index fund with either (1) US small cap (2) ex-US (3) Emerging.

The only thing that would make me nervous is being over-exposed to the US Dollar. I think most US Bogleheads already mitigate this with one or all of; TIPS, ex-US stocks, precious metals. A 60/40 US TSM / US govt bond is not optimal but will likely pan out OK in the long term.
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Re: What is the Point of International Developed Large Cap?

Post by JoMoney »

Forester wrote: Sat Jul 24, 2021 10:28 am... A 60/40 US TSM / US govt bond is not optimal but will likely pan out OK in the long term.
I think so, Mr. Bogle seemed to as well. Although, I do pause when I agree with your forecast after the ribbing you've taken with some of your short-term predictions :D :wink:
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Re: What is the Point of International Developed Large Cap?

Post by BitTooAggressive »

nzahir wrote: Sat Jul 24, 2021 12:02 am Hey guys,

With the increasing correlation between US and International DM, what is the point of owning international developed large cap?

Why not just own International Small Caps (or Intl SCV, such as AVDV) and EM?

Less correlation and higher returns since you are taking on more risk (well at least you would expect over a long period of time)

If International is outperforming the US during a decade or 2, it is likely that Intl small caps will have done just as well, if not better, right? (I am not sure here, so any data would be great).

Please feel free to share any data or thoughts
And if you were in Japan in the 1980s with their stock market the largest in the world at that time you could have been making the same argument to only hold large cap Japanese stocks.

Diversifying is a good percentage play.
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Re: What is the Point of International Developed Large Cap?

Post by Nathan Drake »

JoMoney wrote: Sat Jul 24, 2021 9:34 am
Nathan Drake wrote: Sat Jul 24, 2021 12:28 am
JoMoney wrote: Sat Jul 24, 2021 12:20 am
nzahir wrote: Sat Jul 24, 2021 12:02 am ...and higher returns since you are taking on more risk (well at least you would expect over a long period of time)...
It could happen, but it's not really what I would "expect", I don't expect that taking on more risk leads to higher returns.
DFA's Small-Cap fund (DFSCX) over the course of it's near 40 years of existence, founded on the premise that small-caps would beat large and capture some "risk premium", didn't beat the S&P 500 index over the period.

There are many such examples that should confound the EMH "risk premium" theorsists. The book "The Missing RIsk Premium" by Erik Falkenstein, as well as some of his academic papers, make for some thought provoking examples.
I'm more of the opinion of Benjamin Graham, that the market will have some broad average return over any particular time period, and it's a relatively simple matter to capture that (especially now days with cheap broad market index funds). To improve on that commodity like rate, you have to bring something else to the table, like with any business, you have to bring something the market values and will pay more for. If you have better information, that might garner something, but anybody can take "risk" there's no shortage of people willing to gamble on a coin flip often even when they know they have no expected advantage.
You should be using portfolio visualizer.

DFA SCV had over a 1% premium since inception

Why wouldn’t you expect higher returns for higher risk? Do you think stocks don’t have a higher expected return than bonds?
I do use portfolio visualizer, but for some things I prefer the more detail available on the old-style Morningstar growth charts.

FWIW, DFA's DFSVX (Small-Value) fund failed to outperform their broader balanced small-cap DFSCX over the period since it's inception [PV Link]... which I see as yet another indictment of claimed persistence of the "value risk premium".
While both the small and small-value funds did have higher returns then the S&P 500 since the 1993 start of the DFSVX fund, the standard deviation was much higher (one could have leveraged up S&P 500 and had higher returns with lower SD, or the same portfolio tempered with bonds to an equivalent SD would have done better with S&P500), and the claimed "premium" hasn't achieved any unsurmountable out-performance relative to its coin-flip standard deviation risk. As recently as October of last year, the DFSVX was below the S&P 500's return since it's inception [M* Chart Link]

I don't know what to tell you. "Risk premiums" is a failed explanation for stock returns. If taking risk meant higher returns it wouldn't really be "risk". It doesn't work in other areas of reality either. Not wearing your seat-belt doesn't get the car to it's destination. Casinos are full of people willingly taking "risk", at a known disadvantage with no expected "premium", sometimes they get lucky, but most will lose, and even if they had an advantage tend to take on more risk they they're bankrolled for and run a risk of ruin that's certain to wipe them out based on the standard deviation of the game let-alone the negative expected value.

Stocks are not certain to outperform bonds, plenty of examples where they have not (especially looking outside the U.S.)
Stocks represent a fundamentally different stake in the enterprise. The "Equity premium puzzle" is a well known conundrum for those trying to use "risk" explanations for stock returns. Unfortunately, other explanations don't lend themselves to comfortable stories to sell stocks, nor provide mathematical relationships for formulaic responses to model.... so the finance and academic types continue to use the empirically failed models that give them some story of risk/return and when it doesn't work go off looking for some other model of "risk".

DFSCX is a Small Value fund. It just has more Small loading than it does Value. P/B is 2.0 but the average market cap is less than 2B. DFSVX has a P/B of 1.3 but an average market cap of over 3B. During different time periods one factor may command larger premiums than others, or one combination may have better results than others. Regardless, both funds outperformed with a sizable premium over market beta since inception.

I don't know what to tell you - Nobel prizes were awarded for this research and its persistence across time periods, across territories, etc. You can choose not to agree with investing in a way that tilts, but to deny the risk premiums is basically to deny the market risk premium itself.

The comparison to a Casino is faulty; small companies that are struggling can deal with whatever issues they face to improve the underlying business overtime and hopefully dig themselves out of the hole they find themselves in - that's risk. That seatbelt analogy isn't good either. A better analogy would be driving at a higher speed. Most of the time it will lead to your destination faster, but occasionally it can mean a more dangerous accident.

Not all "companies" have similar risk profiles. This should be intuitive. Stocks with lower discount rates are perceived as "less risky" due to them being successful in the moment. Stocks that are riskier have larger discount rates. In aggregate, the research shows that risk has been rewarded, but it is not guaranteed during certain stretches of time. Not all "companies" have similar risk profiles. This should be intuitive. Stocks with lower discount rates are perceived as "less risky" due to them being successful in the moment. Stocks that are riskier have larger discount rates. And the outperformance of the premiums is uncorrelated with market risk, which is another huge benefit.

A portfolio that had higher amounts of bonds but with a SCV Tilt provided better risk-adjusted returns over the long term, had better sequencing of returns, and was less prone to prolonged bouts of dramatic underperformance like the general market.
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

sf_tech_saver wrote: Sat Jul 24, 2021 1:52 am Sectors/factors don't capture market returns -- companies do.

I'm certainly glad I have holdings like TSMC as part of VT from Vanguard.
TSMC is also in VWO or EEM...

I said I would be holding emerging markets
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

YRT70 wrote: Sat Jul 24, 2021 7:13 am
nzahir wrote: Sat Jul 24, 2021 12:02 am Hey guys,

With the increasing correlation between US and International DM, what is the point of owning international developed large cap?
The decade from 2000 to 2009 the US total market returned a negative 0.3%. International total market returned a positive 2.3% over the same 10 years. I don't know about you but I like that sort of diversification.

I also tilt to small value in both regions by the way.

If you're a true factor believer you could also skip US large cap. For example the Larry portfolio is only US SCV, International SCV and EM value and intermediate treasury.
So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?

Even when the US drops eventually, so will Intl DM. Maybe in a 10 year span it does 10-20% better? But then it will do poorly again

There are reasons for why US has done better and should continue to, like I stated above

Younger
More innovation, mainly b/c of so many immigrants wanting to come here
Reserve currency

I would still have small cap intl and EM
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

UpperNwGuy wrote: Sat Jul 24, 2021 7:24 am
nzahir wrote: Sat Jul 24, 2021 12:02 am With the increasing correlation between US and International DM, what is the point of owning international developed large cap?
Diversification.

The way you've phrased your question confuses me. You seem to equate developed markets with large cap. Developed markets have both large cap and small cap, as do emerging markets. What's your real concern?
I said I would be investing in Small cap intl and EM

What part was confusing?
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Re: What is the Point of International Developed Large Cap?

Post by cos »

nzahir wrote: Sat Jul 24, 2021 12:02 am With the increasing correlation between US and International DM, what is the point of owning international developed large cap?

Why not just own International Small Caps (or Intl SCV, such as AVDV) and EM?

Less correlation and higher returns since you are taking on more risk (well at least you would expect over a long period of time)
Vineviz came to the very same conclusion a while back and proposed a model portfolio implementing these ideas over here: viewtopic.php?f=10&t=286862
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Re: What is the Point of International Developed Large Cap?

Post by Blue456 »

nzahir wrote: Sat Jul 24, 2021 12:02 am Hey guys,

With the increasing correlation between US and International DM, what is the point of owning international developed large cap?

Why not just own International Small Caps (or Intl SCV, such as AVDV) and EM?

Less correlation and higher returns since you are taking on more risk (well at least you would expect over a long period of time)

If International is outperforming the US during a decade or 2, it is likely that Intl small caps will have done just as well, if not better, right? (I am not sure here, so any data would be great).

Please feel free to share any data or thoughts
Because correlations can change and developed can outperform U.S.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

Blue456 wrote: Sat Jul 24, 2021 2:58 pm
nzahir wrote: Sat Jul 24, 2021 12:02 am Hey guys,

With the increasing correlation between US and International DM, what is the point of owning international developed large cap?

Why not just own International Small Caps (or Intl SCV, such as AVDV) and EM?

Less correlation and higher returns since you are taking on more risk (well at least you would expect over a long period of time)

If International is outperforming the US during a decade or 2, it is likely that Intl small caps will have done just as well, if not better, right? (I am not sure here, so any data would be great).

Please feel free to share any data or thoughts
Because correlations can change and developed can outperform U.S.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't think looking 35 years ago really helps paint a picture of correlation

There wasn't even internet in the 80s

Companies weren't as well connected internationally

US and Foreign Companies now sell way more to each other than before

You could be right, but who knows. And you may find less correlation in a shorter span, but I bet it gets closer in a longer time period

I am conflicted here

I do have intl developed in my 401k as an option though, so maybe I just use it there

Still trying to get more data if I can

Is there any data from 1980-1989 on intl vs US developed

Portfolio visualizer wont go that far back sadly
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Re: What is the Point of International Developed Large Cap?

Post by Blue456 »

nzahir wrote: Sat Jul 24, 2021 3:17 pm
Blue456 wrote: Sat Jul 24, 2021 2:58 pm
nzahir wrote: Sat Jul 24, 2021 12:02 am Hey guys,

With the increasing correlation between US and International DM, what is the point of owning international developed large cap?

Why not just own International Small Caps (or Intl SCV, such as AVDV) and EM?

Less correlation and higher returns since you are taking on more risk (well at least you would expect over a long period of time)

If International is outperforming the US during a decade or 2, it is likely that Intl small caps will have done just as well, if not better, right? (I am not sure here, so any data would be great).

Please feel free to share any data or thoughts
Because correlations can change and developed can outperform U.S.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't think looking 35 years ago really helps paint a picture of correlation

There wasn't even internet in the 80s

Companies weren't as well connected internationally

US and Foreign Companies now sell way more to each other than before

You could be right, but who knows. And you may find less correlation in a shorter span, but I bet it gets closer in a longer time period

I am conflicted here

I do have intl developed in my 401k as an option though, so maybe I just use it there

Still trying to get more data if I can

Is there any data from 1980-1989 on intl vs US developed

Portfolio visualizer wont go that far back sadly
I do think that globalization did increase correlation but I don't think that correlation itself will mean that the United States will continue to outperform reminder of the developed market. I can see a reverse scenario happening where country X will lead developed market and the U.S. will trail it. The correlation will be still there but U.S. will simply have inferior returns.
YRT70
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Re: What is the Point of International Developed Large Cap?

Post by YRT70 »

nzahir wrote: Sat Jul 24, 2021 1:59 pm There are reasons for why US has done better and should continue to, like I stated above
If you believe that then it makes sense to avoid international large caps. I don't share your beliefs. I don't know what the future will bring.

Image
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
visualguy
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Re: What is the Point of International Developed Large Cap?

Post by visualguy »

YRT70 wrote: Sun Jul 25, 2021 2:36 am
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
You would expect it to even out in the long run, but that's not what happened. In the long run, US outperformed a lot more than is underperformed. That's the point that nzahir is making. Now, you could say that the future could be different, and that's true in principal, but that would mean Europe and Japan outperforming the US overall going forward. It's reasonable to be highly skeptical of that.
Topic Author
nzahir
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

YRT70 wrote: Sun Jul 25, 2021 2:36 am
nzahir wrote: Sat Jul 24, 2021 1:59 pm There are reasons for why US has done better and should continue to, like I stated above
If you believe that then it makes sense to avoid international large caps. I don't share your beliefs. I don't know what the future will bring.

Image
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
But what has happened previously won't fully matter going forward, right?

We actually know that over 15-20 year periods, returns will be worse when valuations are much higher than the average (1-2 Standard Deviations).

But we also know profitability matters, GDP matters, age in countries matters, culture matters

This is why Japan has struggled

Had extremely high valuations, very poor growth, older country, and they like to spend more than they save

Do I want to bet on an older, slower growth UK, France, Japan, and Germany vs the US and Emerging markets?

I would never be 100% US, but I am not seeing why I wouldn't get the diversification from EM and small cap Intl (not sure if I will tilt value like AVDV or more blend like VSS)

At least Intl Small cap has less correlation and there should be higher returns over the decades since there is more room for growth, albeit with more risk.

EM also has less correlation, is more volatile, and is more riskier due to gov/currency/etc

But they are "undervalued" and they have a lot more room for growth due to age and gdp

I am still thinking and haven't come to a conclusion, but still trying to get more input
Topic Author
nzahir
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

visualguy wrote: Sun Jul 25, 2021 4:38 pm
YRT70 wrote: Sun Jul 25, 2021 2:36 am
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
You would expect it to even out in the long run, but that's not what happened. In the long run, US outperformed a lot more than is underperformed. That's the point that nzahir is making. Now, you could say that the future could be different, and that's true in principal, but that would mean Europe and Japan outperforming the US overall going forward. It's reasonable to be highly skeptical of that.
I just posted as you were posting this, but does my post right above this one make sense?

We are really betting on older countries with slower GDP growth to really outperform the US?

Younger, immigrants coming in to help lower the age and bring more talent, more innovation, still reserve currency

I am not saying don't have Intl, but why the total large cap market?

At least EM has a lot of space for growth and is also undervalued.

Same for the small caps

Idk maybe I am wrong, nobody knows, but still looking for as much info and thoughts as I can get that also takes some thought into consideration

Not just showing a graph of outperformance in the 80s when all these factors were different
visualguy
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Re: What is the Point of International Developed Large Cap?

Post by visualguy »

nzahir wrote: Sun Jul 25, 2021 4:45 pm
visualguy wrote: Sun Jul 25, 2021 4:38 pm
YRT70 wrote: Sun Jul 25, 2021 2:36 am
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
You would expect it to even out in the long run, but that's not what happened. In the long run, US outperformed a lot more than is underperformed. That's the point that nzahir is making. Now, you could say that the future could be different, and that's true in principal, but that would mean Europe and Japan outperforming the US overall going forward. It's reasonable to be highly skeptical of that.
I just posted as you were posting this, but does my post right above this one make sense?

We are really betting on older countries with slower GDP growth to really outperform the US?

Younger, immigrants coming in to help lower the age and bring more talent, more innovation, still reserve currency

I am not saying don't have Intl, but why the total large cap market?

At least EM has a lot of space for growth and is also undervalued.

Same for the small caps

Idk maybe I am wrong, nobody knows, but still looking for as much info and thoughts as I can get that also takes some thought into consideration

Not just showing a graph of outperformance in the 80s when all these factors were different
I also believe that there are reasonable slice-and-dice approaches to ex-US. I don't view indexing the whole thing as a good strategy, particularly with Europe and Japan being more than half of it. However, if I pick some subset of ex-US, it just wouldn't be a large-enough percentage of my portfolio to make much of a difference, and be worth the headache of researching and managing it, so I just avoid ex-US altogether.
Topic Author
nzahir
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

visualguy wrote: Sun Jul 25, 2021 5:04 pm
nzahir wrote: Sun Jul 25, 2021 4:45 pm
visualguy wrote: Sun Jul 25, 2021 4:38 pm
YRT70 wrote: Sun Jul 25, 2021 2:36 am
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
You would expect it to even out in the long run, but that's not what happened. In the long run, US outperformed a lot more than is underperformed. That's the point that nzahir is making. Now, you could say that the future could be different, and that's true in principal, but that would mean Europe and Japan outperforming the US overall going forward. It's reasonable to be highly skeptical of that.
I just posted as you were posting this, but does my post right above this one make sense?

We are really betting on older countries with slower GDP growth to really outperform the US?

Younger, immigrants coming in to help lower the age and bring more talent, more innovation, still reserve currency

I am not saying don't have Intl, but why the total large cap market?

At least EM has a lot of space for growth and is also undervalued.

Same for the small caps

Idk maybe I am wrong, nobody knows, but still looking for as much info and thoughts as I can get that also takes some thought into consideration

Not just showing a graph of outperformance in the 80s when all these factors were different
I also believe that there are reasonable slice-and-dice approaches to ex-US. I don't view indexing the whole thing as a good strategy, particularly with Europe and Japan being more than half of it. However, if I pick some subset of ex-US, it just wouldn't be a large-enough percentage of my portfolio to make much of a difference, and be worth the headache of researching and managing it, so I just avoid ex-US altogether.
What is your portfolio then?

You don't think its a good idea to at least hold EM

Not just for diversity, but real growth potential

Just had its worst decade ever
visualguy
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Re: What is the Point of International Developed Large Cap?

Post by visualguy »

nzahir wrote: Sun Jul 25, 2021 7:57 pm What is your portfolio then?

You don't think its a good idea to at least hold EM

Not just for diversity, but real growth potential

Just had its worst decade ever
My stock portfolio is 100% US.

I'm not against selective investment in foreign stock markets, but, like I said, I don't see how it would make enough of a difference to be worth the trouble. For example, I think the entire EM is about 12.5% of world market cap. Not enough to make much of a difference if you invest based on market cap. Selecting a few countries from EM and DM has a similar problem.
Nathan Drake
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Re: What is the Point of International Developed Large Cap?

Post by Nathan Drake »

nzahir wrote: Sun Jul 25, 2021 4:40 pm
YRT70 wrote: Sun Jul 25, 2021 2:36 am
nzahir wrote: Sat Jul 24, 2021 1:59 pm There are reasons for why US has done better and should continue to, like I stated above
If you believe that then it makes sense to avoid international large caps. I don't share your beliefs. I don't know what the future will bring.

Image
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
But what has happened previously won't fully matter going forward, right?

We actually know that over 15-20 year periods, returns will be worse when valuations are much higher than the average (1-2 Standard Deviations).

But we also know profitability matters, GDP matters, age in countries matters, culture matters

This is why Japan has struggled

Had extremely high valuations, very poor growth, older country, and they like to spend more than they save

Do I want to bet on an older, slower growth UK, France, Japan, and Germany vs the US and Emerging markets?

I would never be 100% US, but I am not seeing why I wouldn't get the diversification from EM and small cap Intl (not sure if I will tilt value like AVDV or more blend like VSS)

At least Intl Small cap has less correlation and there should be higher returns over the decades since there is more room for growth, albeit with more risk.

EM also has less correlation, is more volatile, and is more riskier due to gov/currency/etc

But they are "undervalued" and they have a lot more room for growth due to age and gdp

I am still thinking and haven't come to a conclusion, but still trying to get more input
Japan struggled moreso due to valuations going from over 90 to where we are today. That level of valuations can, and did, take decades of unwinding.

It's fallacious reasoning to link Japanese companies entirely to their domestic markets; Japanese companies are global just like US companies - but they are focused in certain industries like industrial manufacturing, electronics, and cameras.

Some may argue that their current values are very low and may be poised to be fantastic investments.

So, avoiding "older, slower groth" countries like Japan and Europe doesn't mean you will be correct that they are bad investments. Further, US has its own demographics issues, lack of social safety nets, large wealth inequality, and huge Debt / GDP. Things aren't all roses in the US

People do like to paint this fictitious narrative that US is somehow immune to bad things happening just because returns (and P/E expansion) has been so high. It's as though US has the perfect balance of low risk and high reward not found anywhere else. The moment you start thinking that is the moment you lose grasp of the nature of markets and the risks that are present, leading to bad outcomes.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Topic Author
nzahir
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

Nathan Drake wrote: Sun Jul 25, 2021 11:05 pm
nzahir wrote: Sun Jul 25, 2021 4:40 pm
YRT70 wrote: Sun Jul 25, 2021 2:36 am
nzahir wrote: Sat Jul 24, 2021 1:59 pm There are reasons for why US has done better and should continue to, like I stated above
If you believe that then it makes sense to avoid international large caps. I don't share your beliefs. I don't know what the future will bring.

Image
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
But what has happened previously won't fully matter going forward, right?

We actually know that over 15-20 year periods, returns will be worse when valuations are much higher than the average (1-2 Standard Deviations).

But we also know profitability matters, GDP matters, age in countries matters, culture matters

This is why Japan has struggled

Had extremely high valuations, very poor growth, older country, and they like to spend more than they save

Do I want to bet on an older, slower growth UK, France, Japan, and Germany vs the US and Emerging markets?

I would never be 100% US, but I am not seeing why I wouldn't get the diversification from EM and small cap Intl (not sure if I will tilt value like AVDV or more blend like VSS)

At least Intl Small cap has less correlation and there should be higher returns over the decades since there is more room for growth, albeit with more risk.

EM also has less correlation, is more volatile, and is more riskier due to gov/currency/etc

But they are "undervalued" and they have a lot more room for growth due to age and gdp

I am still thinking and haven't come to a conclusion, but still trying to get more input
Japan struggled moreso due to valuations going from over 90 to where we are today. That level of valuations can, and did, take decades of unwinding.

It's fallacious reasoning to link Japanese companies entirely to their domestic markets; Japanese companies are global just like US companies - but they are focused in certain industries like industrial manufacturing, electronics, and cameras.

Some may argue that their current values are very low and may be poised to be fantastic investments.

So, avoiding "older, slower groth" countries like Japan and Europe doesn't mean you will be correct that they are bad investments. Further, US has its own demographics issues, lack of social safety nets, large wealth inequality, and huge Debt / GDP. Things aren't all roses in the US

People do like to paint this fictitious narrative that US is somehow immune to bad things happening just because returns (and P/E expansion) has been so high. It's as though US has the perfect balance of low risk and high reward not found anywhere else. The moment you start thinking that is the moment you lose grasp of the nature of markets and the risks that are present, leading to bad outcomes.
Is Japan really undervalued? CAPE of 32

Still the leader, by far, of debt to gdp

US has some demographic issues, but not as bad as Japan, UK or EU. We also have immigrants who come and many, especially Hispanic immigrants, have more children.

Yes we have wealth inequality that is worse than Europes, but US growth has still been pretty good. But it is an issue, feels like newer policies should try to help a bit, but wealth inequality is kind of a tough issue. It is mostly a math issue. The more wealth you have built, the easier it is to grow with compound interest

I think US valuations are ridiculous though, so we should see much lower returns in the future and see other countries outperform

But it seems like the principles and the valuations favor EM

Had an even worse decade than international
YRT70
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Re: What is the Point of International Developed Large Cap?

Post by YRT70 »

visualguy wrote: Sun Jul 25, 2021 4:38 pm
YRT70 wrote: Sun Jul 25, 2021 2:36 am
nzahir wrote: Sat Jul 24, 2021 1:59 pm So you liked the fact that Intl DM has underperformed in the 90s by a lot and the 2010s by a lot for the extra couple of % total in a decade?
And that it outperformed a lot in the 80s and 70s. And yeah that's just what diversification does, sometimes it works in your favour, sometimes it doesn't.
You would expect it to even out in the long run, but that's not what happened. In the long run, US outperformed a lot more than is underperformed. That's the point that nzahir is making. Now, you could say that the future could be different, and that's true in principal, but that would mean Europe and Japan outperforming the US overall going forward. It's reasonable to be highly skeptical of that.
Many people take the opposite position and believe their position is reasonable. They've actually got data supporting their position.

Image

Personally I take neither position. I don't know what the future will bring and I'm not making any active bets on it.
YRT70
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Re: What is the Point of International Developed Large Cap?

Post by YRT70 »

nzahir wrote: Sun Jul 25, 2021 4:40 pm We actually know that over 15-20 year periods, returns will be worse when valuations are much higher than the average (1-2 Standard Deviations).
If you believe that then why invest in US large cap?
Topic Author
nzahir
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Re: What is the Point of International Developed Large Cap?

Post by nzahir »

YRT70 wrote: Mon Jul 26, 2021 6:12 am
nzahir wrote: Sun Jul 25, 2021 4:40 pm We actually know that over 15-20 year periods, returns will be worse when valuations are much higher than the average (1-2 Standard Deviations).
If you believe that then why invest in US large cap?
You may have a point, but I don't think all US large caps are overvalued, many of those are in tech or the FAANG stocks

I gave my reasonings for why I prefer US (would just go total mkt) over Intl. But I would tilt towards scv and still have EM and Intl small cap to diversify and lessen the weight of US large caps.

Bogle had his own reasons for going only with the US, so I am diversifying even more than he would

Image
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