Does "international" offer any diversification?

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arcticpineapplecorp.
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Re: Does "international" offer any diversification?

Post by arcticpineapplecorp. »

stocksurfer wrote: Fri Jan 07, 2022 10:32 pm
willthrill81 wrote: Fri Jan 07, 2022 10:21 pm The 30 year SWR for the U.S.-only portfolio was 4.4%, while it was 4.6% for the 'global' stocks portfolio.
Yeah, that's not a whole lot of help, is it. Especially when you factor in that globalization in many of those years sure was not the same it's now...
I am diversifying elsewhere, I'm just looking at my Int'l holding and am wondering "why?". Over the past 30 years I believe they've just been a drag on the portfolio and it seems that EM is perennially undervalued and just about to go on a tear... Not holding int'l feels wrong to me, holding it seems dumb. Sigh.
I wrote the following in this post:

nix4me wrote: Mon Dec 27, 2021 9:34 pm International has under-performed for decades. Makes no sense.
posting.php?mode=edit&f=1&p=6409018
depends upon what data you're looking at. Just one year can make a big difference. Here are the examples:

From 1970-2008:

Image

From 1970-2007:

Image

See how you can change the performance of one over another just because of one year difference??

Here's some other info to ponder, domestic/international by decades:

Image

source: https://www.bogleheads.org/wiki/Domestic/international

different cycles of performance of US vs international (from JP Morgan's Guide to the Markets):

Image

Here's how the market cap of US vs international has changed over time:

Image

look at Callan's own reporting regarding the changing performance of assets both domestic and international over time:

Image

The US was only top dog just 1 out of 20 years (through 2018). Which did better? Finland (in top spot 4 times). Take that U.S.

Image

Should you just buy Finland and nothing else? Silly, right?

some emerging market countries did even better:

Image

source: http://static.fmgsuite.com/media/docume ... ef3871.pdf

nothing stays the same. Assuming the past will be the same as the future is a mistake. Nobody knows nothing.

Regarding people who forecast that international will underperform, here on this board or elsewhere:
There are only three types of market forecasters: those that don't know where the market is going; those that don't know that they don't know where the market is going; and those that know they don't know, but get paid a lot of money to pretend that they do know.-- Larry Swedroe, page 125 Wise Investing Made Simple
what do you think now?
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km91
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Re: Does "international" offer any diversification?

Post by km91 »

arcticpineapplecorp. wrote: Fri Jan 14, 2022 9:25 pm
nothing stays the same. Assuming the past will be the same as the future is a mistake. Nobody knows nothing.
While this statement is certainly true, I don't see why the conclusion should be that US stocks can't continue to outperform ex-US for 10 or 20 or 50 more years. Just like flipping a coin, a string of heads doesn't mean you're due to flip tails. 20 years of US outperformance doesn't negate the possibility of another 20 years of outperformance. In the long term US performance can't last but the long term is usually a lot longer than we realize
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Re: Does "international" offer any diversification?

Post by Triple digit golfer »

km91 wrote: Fri Jan 14, 2022 10:50 pm
arcticpineapplecorp. wrote: Fri Jan 14, 2022 9:25 pm
nothing stays the same. Assuming the past will be the same as the future is a mistake. Nobody knows nothing.
While this statement is certainly true, I don't see why the conclusion should be that US stocks can't continue to outperform ex-US for 10 or 20 or 50 more years. Just like flipping a coin, a string of heads doesn't mean you're due to flip tails. 20 years of US outperformance doesn't negate the possibility of another 20 years of outperformance. In the long term US performance can't last but the long term is usually a lot longer than we realize
It may last. It may not. Why place a bet on either? Diversify.
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Re: Does "international" offer any diversification?

Post by bling »

if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
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arcticpineapplecorp.
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Re: Does "international" offer any diversification?

Post by arcticpineapplecorp. »

km91 wrote: Fri Jan 14, 2022 10:50 pm
arcticpineapplecorp. wrote: Fri Jan 14, 2022 9:25 pm
nothing stays the same. Assuming the past will be the same as the future is a mistake. Nobody knows nothing.
While this statement is certainly true, I don't see why the conclusion should be that US stocks can't continue to outperform ex-US for 10 or 20 or 50 more years. Just like flipping a coin, a string of heads doesn't mean you're due to flip tails. 20 years of US outperformance doesn't negate the possibility of another 20 years of outperformance. In the long term US performance can't last but the long term is usually a lot longer than we realize
agreed. we don't know, but we also don't know US will continue to outperform. Owning the total global stock market hedges your bets because we can't know.
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nedsaid
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Re: Does "international" offer any diversification?

Post by nedsaid »

vineviz wrote: Fri Jan 14, 2022 1:04 pm
Bluemnatra wrote: Fri Jan 14, 2022 12:21 pm Everyone should make their own decisions based on their own research.
There's a very real risk, as threads like this tend to illustrate, in asking people to "do their own research" when clearly not everyone has a strong enough background in statistical reasoning and/or financial theory to conduct that research properly.

Answering the OP's question ("does "international" offer any diversification?") requires more than just looking up a growth chart for a randomly selected time period and calling it a day.

And while there is no moral superiority in having a globally diversified portfolio, and people may differ about whether diversification is even an important trait in their own personal portfolio, anyone who conducts their "own research" and gets an answer of "no" to the OP's question has undoubtedly made an analytical error somewhere.
The reason that I tell people to do their own research is that I feel responsibility for what I post and that I don't want people blindly following what I say. I want people to make informed decisions and I want them to have their own convictions behind their investments and not somebody else's.

I have invested since 1984 and have followed the economy and the markets since high school. But I am not a trained economist and I don't have licenses or credentials in the industry. I have worked twice in the industry doing back office work but certainly have not done security analysis for a living or run a portfolio. So I have some knowledge and some background but no real credentials except for a tax license and a Bachelors' Degree in Business.

Often I tell people to write an Investment Policy Statement referring to the Wiki article and using a nice 2 page worksheet provided by Morningstar. Putting things on paper has a way of clarifying things in one's mind. The worksheet really causes one to think things through.

I also point people to sources that I respect, folks like John Bogle, Bill Bernstein, Larry Swedroe, Dan Solin, Paul Merriman, Rick Ferri. I will also refer them to certain books, particularly the excellent Boglehead books.

The more informed people are, the stronger convictions people have, the better plan put down on paper, the better odds that an investor will enjoy success. I also believe that people should take personal responsibility over their investments even if they hire an Advisor.

I suppose there are pitfalls to everything, there are limitations to even "doing your own research." People do need to inform themselves and this forum is a great start.
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Re: Does "international" offer any diversification?

Post by CraigTester »

I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
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Re: Does "international" offer any diversification?

Post by 000 »

CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
The power of recency bias.
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
That's impossible.

US Stocks are better businesses, have better entrepreneurs, have better earnings growth, and they have the perfect amount of demographics without the risks of bad governments. Jack Bogle said to avoid them because they include companies from France!
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Re: Does "international" offer any diversification?

Post by Bud »

30% of the revenue of the S&P 500 is from international sales.

One perspective is owning the index is a 70/30 domestic/international diversification without the currency risk.

This is one reason I stopped investing in international specific mutual funds.

All the best...
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Re: Does "international" offer any diversification?

Post by Tom_T »

Bud wrote: Sun Jan 16, 2022 5:31 am 30% of the revenue of the S&P 500 is from international sales.

One perspective is owning the index is a 70/30 domestic/international diversification without the currency risk.

This is one reason I stopped investing in international specific mutual funds.

All the best...
I don't think that's the same thing.
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Re: Does "international" offer any diversification?

Post by CraigTester »

Nathan Drake wrote: Sun Jan 16, 2022 12:11 am
CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
That's impossible.

US Stocks are better businesses, have better entrepreneurs, have better earnings growth, and they have the perfect amount of demographics without the risks of bad governments. Jack Bogle said to avoid them because they include companies from France!
:sharebeer
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Re: Does "international" offer any diversification?

Post by Random Walker »

CraigTester wrote: Sun Jan 16, 2022 6:54 am
Nathan Drake wrote: Sun Jan 16, 2022 12:11 am
CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
That's impossible.

US Stocks are better businesses, have better entrepreneurs, have better earnings growth, and they have the perfect amount of demographics without the risks of bad governments. Jack Bogle said to avoid them because they include companies from France!
:sharebeer
But markets are efficient and markets price risk. If the US has better business, better growth prospects, better government, better regulatory environment, then the US stock market represents safer investment than international. Simply does not make sense that expected return and risk are detached from one another in that way. Of course, the risk can show up, and show up for very long time.

In many ways, the US can be viewed as a “growth stock” and Int can be viewed as a “value stock”. A good read is Jeremy Siegel’s “other book”, The Future For Investors.

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Re: Does "international" offer any diversification?

Post by DB2 »

CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
Why only go up to 2010? That seems like cherry picking dates given how strong the U.S. stock market has performed since that time.

Let's see what 1950 to 2020 looks like.
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Re: Does "international" offer any diversification?

Post by Random Walker »

DB2 wrote: Sun Jan 16, 2022 9:37 am
CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
Why only go up to 2010? That seems like cherry picking dates given how strong the U.S. stock market has performed since that time.

Let's see what 1950 to 2020 looks like.
This is good example of why it’s important to look at BOTH the longest time frames available AND shorter periods when looking at historic data. Both are relevant to individual investors.

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Re: Does "international" offer any diversification?

Post by CraigTester »

DB2 wrote: Sun Jan 16, 2022 9:37 am
CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
Why only go up to 2010? That seems like cherry picking dates given how strong the U.S. stock market has performed since that time.

Let's see what 1950 to 2020 looks like.
Exactly....the point of the 1950-2010 snapshot was to address the recency bias of 2010 - 2021 that's so hard to remember to put in context....
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Re: Does "international" offer any diversification?

Post by JoMoney »

DB2 wrote: Sun Jan 16, 2022 9:37 am
CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
Why only go up to 2010? That seems like cherry picking dates given how strong the U.S. stock market has performed since that time.

Let's see what 1950 to 2020 looks like.
Even without looking at the period after 2010:
The MSCI EAFE index from 1970 through 2010
EAFE 9.44% (annualized nominal return)
S&P 500 10.20% (annualized nominal return)
MStar Growth Chart Link

The above is using what MSCI calls the 'Net Return' index, which is what a US investor would have realized tracking the index after foreign tax withholding.
They have another index, the MSCI EAFE GR 'Gross Return' index, and it's return was much closer to that of the S&P 500 over that period through 2010 (albeit slightly less).
Chart Link

While tax laws and treaty agreements have changed over time, I think it's interesting to point out that there was a -.63% annualized difference between the MSCI EAFE 'NR' (what a US index fund would track with after foreign withholding) vs the MSCI EAFE 'GR' (the return of the stocks without the foreign withholding)

Does the Dimson-March data take foreign tax withholding into account? My guess is no, and that alone would make the international return less (for a U.S. investor) than the U.S. return over that period quoted.
"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: Does "international" offer any diversification?

Post by burritoLover »

Funny many here think the concept of equity diversification means only adding an asset that has outperformed what you currently hold. So, the all USers would “diversify” into international if international has outperformed to date.
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Re: Does "international" offer any diversification?

Post by vanbogle59 »

burritoLover wrote: Sun Jan 16, 2022 10:00 am Funny many here think the concept of equity diversification means only adding an asset that has outperformed what you currently hold. So, the all USers would “diversify” into international if international has outperformed to date.
As one who once played the "dogs of the DOW" game, I resent that remark. :oops:
I am capable of much more complicated logical fallacies than THAT!
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Re: Does "international" offer any diversification?

Post by willthrill81 »

burritoLover wrote: Sun Jan 16, 2022 10:00 am Funny many here think the concept of equity diversification means only adding an asset that has outperformed what you currently hold. So, the all USers would “diversify” into international if international has outperformed to date.
Some would certainly do that but not all.

While recency bias is clearly impacting some 'all U.S.' investors significantly, there are other considerations at work, and some of them can be quite logical. Tyler9000 had an excellent post on his site here to demonstrate why some home country bias can make sense.
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Re: Does "international" offer any diversification?

Post by Patzer »

International offers massive diversification based on the strength/weakness of the dollar.

From 1/1/2002-3/1/2008, the US dollar performed very poorly, and international developed stocks outperformed the S&P 500 by 65% before considering dividends, which would only increase it's outperformance. The dollar index had fallen 39% over that time period and I remember in 2007 and 2008, people were talking about the rise of the euro as the new global currency and how the US dollar's days were over. A few high profile celebs were even demanding their contracts be paid in euros instead of dollars.

Since 2008, the dollar index has risen 32%, and the S&P 500 has dramatically outperformed international developed stocks.
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Re: Does "international" offer any diversification?

Post by lostdog »

Bud wrote: Sun Jan 16, 2022 5:31 am 30% of the revenue of the S&P 500 is from international sales.

One perspective is owning the index is a 70/30 domestic/international diversification without the currency risk.

This is one reason I stopped investing in international specific mutual funds.

All the best...
This is a myth.
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Re: Does "international" offer any diversification?

Post by lostdog »

burritoLover wrote: Sun Jan 16, 2022 10:00 am Funny many here think the concept of equity diversification means only adding an asset that has outperformed what you currently hold. So, the all USers would “diversify” into international if international has outperformed to date.
+1

well duh... :beer
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Re: Does "international" offer any diversification?

Post by JoMoney »

willthrill81 wrote: Sun Jan 16, 2022 10:08 am
burritoLover wrote: Sun Jan 16, 2022 10:00 am Funny many here think the concept of equity diversification means only adding an asset that has outperformed what you currently hold. So, the all USers would “diversify” into international if international has outperformed to date.
Some would certainly do that but not all.
At least the "international diversification is necessary" crowd would have a leg to stand on if International had reduced risk or had higher returns. It hasn't shown to reliably do either ... but there is that one time it did briefly, so, it's not "false" to believe it might at some point have a benefit over some particular future time period.
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Re: Does "international" offer any diversification?

Post by jason2459 »

JoMoney wrote: Sun Jan 16, 2022 10:16 am
willthrill81 wrote: Sun Jan 16, 2022 10:08 am
burritoLover wrote: Sun Jan 16, 2022 10:00 am Funny many here think the concept of equity diversification means only adding an asset that has outperformed what you currently hold. So, the all USers would “diversify” into international if international has outperformed to date.
Some would certainly do that but not all.
At least the "international diversification is necessary" crowd would have a leg to stand on if International had reduced risk or had higher returns. It hasn't shown to reliably do either ... but there is that one time it did briefly, so, it's not "false" to believe it might at some point have a benefit over some particular future time period.
How many one times does it take?
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Re: Does "international" offer any diversification?

Post by willthrill81 »

jason2459 wrote: Sun Jan 16, 2022 10:19 am
JoMoney wrote: Sun Jan 16, 2022 10:16 am
willthrill81 wrote: Sun Jan 16, 2022 10:08 am
burritoLover wrote: Sun Jan 16, 2022 10:00 am Funny many here think the concept of equity diversification means only adding an asset that has outperformed what you currently hold. So, the all USers would “diversify” into international if international has outperformed to date.
Some would certainly do that but not all.
At least the "international diversification is necessary" crowd would have a leg to stand on if International had reduced risk or had higher returns. It hasn't shown to reliably do either ... but there is that one time it did briefly, so, it's not "false" to believe it might at some point have a benefit over some particular future time period.
How many one times does it take?
As I posted fairly early in this thread, the historic benefit of owning ex-U.S. stock has been small. The 30 year SWR since 1970 only increased from 4.4% to 4.6% by owning 50% U.S. and 50% ex-U.S. versus 100% U.S.

While the 'but what if the U.S. becomes Japan' argument is often laid against the U.S.-only position, the reality is that international diversification would have been helpful to Japanese investors but not as helpful as most probably think. Since 1970, a 60/40 AA with all Japanese stock had a 30 year SWR of 3.0%. Splitting their stocks between 50% Japan, 25% U.S., and 25% ex-U.S. would have increased the 30 year SWR to 3.8%, but owning only U.S. and ex-U.S. stock would have resulted in a 30 year SWR of 3.5%. The reason for this was currency risk.
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Re: Does "international" offer any diversification?

Post by JoMoney »

lostdog wrote: Sun Jan 16, 2022 10:13 am
Bud wrote: Sun Jan 16, 2022 5:31 am 30% of the revenue of the S&P 500 is from international sales.

One perspective is owning the index is a 70/30 domestic/international diversification without the currency risk.

This is one reason I stopped investing in international specific mutual funds.

All the best...
This is a myth.
It's varied over time, but 30% is a pretty good estimate of S&P 500 foreign revenue. In 2019 it was reported as a "10 year low" at 29%
https://www.spglobal.com/marketintellig ... s-59094991

The pro-"more international" argument I've heard, is to flip it around and look at the U.S. revenue exposure in an international index, then compare that the U.S. only makes up 25% of global GDP, so one should hold something closer to a 75% weighting in international stocks.
... but that also would imply that there's some reason to hold stocks based on GDP weighting, which is itself a pretty dubious argument.
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Re: Does "international" offer any diversification?

Post by Patzer »

bling wrote: Sat Jan 15, 2022 6:44 am if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
The world doesn't play by the same rules.
I strongly support diversification in Developed Markets, which play by similar rules as the US.
I don't think diversification to Emerging Markets is worth the risk.
In some countries there is almost zero correlation between economic growth and market growth, because their market doesn't exist to reward international shareholders. A large portion of the EM index is made up of markets like that, and it's too expensive (both in fees and research time) to invest in emerging on a country by country basis to avoid that.
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Re: Does "international" offer any diversification?

Post by wander »

International adds currency diversification.
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Re: Does "international" offer any diversification?

Post by bling »

Patzer wrote: Sun Jan 16, 2022 11:02 am
bling wrote: Sat Jan 15, 2022 6:44 am if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
The world doesn't play by the same rules.
I strongly support diversification in Developed Markets, which play by similar rules as the US.
I don't think diversification to Emerging Markets is worth the risk.
In some countries there is almost zero correlation between economic growth and market growth, because their market doesn't exist to reward international shareholders. A large portion of the EM index is made up of markets like that, and it's too expensive (both in fees and research time) to invest in emerging on a country by country basis to avoid that.
https://investor.vanguard.com/etf/profile/portfolio/vt

holding the world at market cap already has the US at 60%. emerging markets is only 10%. small cap value people tilt more than that!
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Re: Does "international" offer any diversification?

Post by GaryA505 »

https://ibb.co/Ln2vtJ6

To me, this is one of the most interesting charts. What the heck is going on? Why is the last period of US outperformance lasting so much longer than might be expected, based on earlier cycles.
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Re: Does "international" offer any diversification?

Post by Patzer »

bling wrote: Sun Jan 16, 2022 11:10 am
Patzer wrote: Sun Jan 16, 2022 11:02 am
bling wrote: Sat Jan 15, 2022 6:44 am if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
The world doesn't play by the same rules.
I strongly support diversification in Developed Markets, which play by similar rules as the US.
I don't think diversification to Emerging Markets is worth the risk.
In some countries there is almost zero correlation between economic growth and market growth, because their market doesn't exist to reward international shareholders. A large portion of the EM index is made up of markets like that, and it's too expensive (both in fees and research time) to invest in emerging on a country by country basis to avoid that.
https://investor.vanguard.com/etf/profile/portfolio/vt

holding the world at market cap already has the US at 60%. emerging markets is only 10%. small cap value people tilt more than that!
Small Cap Value is a tilt towards quality and profitability, whereas Emerging Markets is a tilt away from that.
Someone else doing something isn't a reason for me to do it.

20-30% Ex-US Developed gets most of the diversification benefit in worst case scenarios, while limiting performance impact.
Also, holding all countries in a single fund means you can't get any rebalancing benefit when one's share grows too large or too small.
Would you have been happy holding total world when Japan peaked, or would you have preferred to be able to rebalance a little bit out of that?
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Re: Does "international" offer any diversification?

Post by jason2459 »

Patzer wrote: Sun Jan 16, 2022 11:23 am
bling wrote: Sun Jan 16, 2022 11:10 am
Patzer wrote: Sun Jan 16, 2022 11:02 am
bling wrote: Sat Jan 15, 2022 6:44 am if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
The world doesn't play by the same rules.
I strongly support diversification in Developed Markets, which play by similar rules as the US.
I don't think diversification to Emerging Markets is worth the risk.
In some countries there is almost zero correlation between economic growth and market growth, because their market doesn't exist to reward international shareholders. A large portion of the EM index is made up of markets like that, and it's too expensive (both in fees and research time) to invest in emerging on a country by country basis to avoid that.
https://investor.vanguard.com/etf/profile/portfolio/vt

holding the world at market cap already has the US at 60%. emerging markets is only 10%. small cap value people tilt more than that!
Small Cap Value is a tilt towards quality and profitability, whereas Emerging Markets is a tilt away from that.
Someone else doing something isn't a reason for me to do it.

20-30% Ex-US Developed gets most of the diversification benefit in worst case scenarios, while limiting performance impact.
Also, holding all countries in a single fund means you can't get any rebalancing benefit when one's share grows too large or too small.
Would you have been happy holding total world when Japan peaked, or would you have preferred to be able to rebalance a little bit out of that?

Small cap value is by definition SmB+HmL and does not include RmW. However, some fund companies add in RmW. EM can have the same applied to it as well. EM is a geographic selection with its own inherent risks.
Last edited by jason2459 on Sun Jan 16, 2022 11:30 am, edited 1 time in total.
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Re: Does "international" offer any diversification?

Post by vineviz »

willthrill81 wrote: Sun Jan 16, 2022 10:30 am
As I posted fairly early in this thread, the historic benefit of owning ex-U.S. stock has been small. The 30 year SWR since 1970 only increased from 4.4% to 4.6% by owning 50% U.S. and 50% ex-U.S. versus 100% U.S.
It might seem like that is a small improvement, but for an investor who is withdrawing at something close to the rate the difference can be quite dramatic. Imagine two hypothetical 1973 retirees with $100k, one has a 60/40 portfolio using only US stocks while the second splits the stocks equally between US and international (as your example references). Each withdraws an inflation adjusted $358/month. Here's what their portfolios looked like from 1973 to 2007.

Image

Clearly it's a small difference in average returns, but the experience of those two investors would have been anything but small. Obviously these investors could have made adjustments, or maybe they died early, etc. but the point remains: it's really easy to underestimate the power of diversification.

An important reason we diversify is to improve the odds that we will successfully achieve our goals. That's why looking at probabilities and base rates is often more important that looking at average returns or, worse, recent returns. Using 30-year periods from 1961 to present, even a small 20% allocation to international stocks improved the SWR 73% of the time.

Even if someone thinks the payoff to international diversification is likely to be small, moving the odds from 1:3 against you to 3:1 in your favor is almost certainly a good decision.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Does "international" offer any diversification?

Post by Patzer »

jason2459 wrote: Sun Jan 16, 2022 11:27 am Small cap value is by definition SmB+HmL and does not include RmW. However, some fund companies add in RmW. EM can have the same applied to it as well. EM is a geographic selection with its own inherent risks.
You are correct.
I use AVUV for a small tilt, and I was thinking of my own experience, not necessarily all SCV funds.
I don't trust the data coming out of half the EM economies to believe that you could successfully tilt towards those factors in an EM SCV fund, and I certainly wouldn't compare EM at market cap to US SCV.
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Re: Does "international" offer any diversification?

Post by bling »

Patzer wrote: Sun Jan 16, 2022 11:23 am Would you have been happy holding total world when Japan peaked, or would you have preferred to be able to rebalance a little bit out of that?
you can only know that in hindsight.
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Re: Does "international" offer any diversification?

Post by Patzer »

bling wrote: Sun Jan 16, 2022 11:48 am
Patzer wrote: Sun Jan 16, 2022 11:23 am Would you have been happy holding total world when Japan peaked, or would you have preferred to be able to rebalance a little bit out of that?
you can only know that in hindsight.
If in the next 5 years Sweden became half of the global stock market, would you want to keep half of your equity in Sweden or would you think Sweden might be mispriced and want to diversify out of that and back to something more balanced?
If you have invest only in a global market cap ETF to cover the market's it's very expensive to do that, especially in a taxable account.
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

Patzer wrote: Sun Jan 16, 2022 11:02 am
bling wrote: Sat Jan 15, 2022 6:44 am if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
The world doesn't play by the same rules.
I strongly support diversification in Developed Markets, which play by similar rules as the US.
I don't think diversification to Emerging Markets is worth the risk.
In some countries there is almost zero correlation between economic growth and market growth, because their market doesn't exist to reward international shareholders. A large portion of the EM index is made up of markets like that, and it's too expensive (both in fees and research time) to invest in emerging on a country by country basis to avoid that.
Over the last 21 years EM Value dramatically outperformed the S&P 500
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: Does "international" offer any diversification?

Post by nigel_ht »

000 wrote: Sat Jan 15, 2022 11:56 pm
CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
The power of recency bias.
The power of start and end date sensitivity.
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Re: Does "international" offer any diversification?

Post by Patzer »

Nathan Drake wrote: Sun Jan 16, 2022 12:50 pm
Patzer wrote: Sun Jan 16, 2022 11:02 am
bling wrote: Sat Jan 15, 2022 6:44 am if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
The world doesn't play by the same rules.
I strongly support diversification in Developed Markets, which play by similar rules as the US.
I don't think diversification to Emerging Markets is worth the risk.
In some countries there is almost zero correlation between economic growth and market growth, because their market doesn't exist to reward international shareholders. A large portion of the EM index is made up of markets like that, and it's too expensive (both in fees and research time) to invest in emerging on a country by country basis to avoid that.
Over the last 21 years EM Value dramatically outperformed the S&P 500
I don't have EM Value data, but the fact that you are cherry picking 21 years and comparing EM Value to US Large Cap, sounds pretty suspect.

My point is not even about performance. It's about additional risk, lack of transparency, and lack of shareholder rights. I am just not interested in investing in that environment even if it might pay out better occasionally.

If you go with US Total Market vs EM Total Market, EM loses slightly at 21 years, wins slightly at 23 years, and gets wrecked in every other date period from 15-25 years. In all date periods it has much higher standard deviation and lower Sharpe and Sortino ratios.
I acknowledge that combining a little bit of it into a US portfolio does give a historical diversification benefit, but I am not interested in it for the reasons stated above.

10K starting value, and ending values by data range...
Last 15 years: Total Market 45.2K, EM 18.5K
Last 16 years: Total Market 52.2K, EM 23.8K
Last 17 years: Total Market 55.4K, EM 31.5K
Last 18 years: Total Market 62.3K, EM 39.8K
Last 19 years: Total Market 81.8K, EM 62.7K
Last 20 years: Total Market 64.7K, EM 58.1K
Last 21 years: Total Market 57.6K, EM 56.4K
Last 22 years: Total Market 51.5K, EM 40.8K
Last 23 years: Total Market 63.7K, EM 66K
Last 24 years: Total Market 78.6K, EM 54K
Last 25 years: Total Market 102.9K, EM 44.9K
Last edited by Patzer on Sun Jan 16, 2022 1:38 pm, edited 1 time in total.
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Re: Does "international" offer any diversification?

Post by JoMoney »

Nathan Drake wrote: Sun Jan 16, 2022 12:50 pm
Patzer wrote: Sun Jan 16, 2022 11:02 am
bling wrote: Sat Jan 15, 2022 6:44 am if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
The world doesn't play by the same rules.
I strongly support diversification in Developed Markets, which play by similar rules as the US.
I don't think diversification to Emerging Markets is worth the risk.
In some countries there is almost zero correlation between economic growth and market growth, because their market doesn't exist to reward international shareholders. A large portion of the EM index is made up of markets like that, and it's too expensive (both in fees and research time) to invest in emerging on a country by country basis to avoid that.
Over the last 21 years EM Value dramatically outperformed the S&P 500
🙄
... but it's just the U.S. only investors that are chasing returns
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 11:29 am
willthrill81 wrote: Sun Jan 16, 2022 10:30 am
As I posted fairly early in this thread, the historic benefit of owning ex-U.S. stock has been small. The 30 year SWR since 1970 only increased from 4.4% to 4.6% by owning 50% U.S. and 50% ex-U.S. versus 100% U.S.
An important reason we diversify is to improve the odds that we will successfully achieve our goals. That's why looking at probabilities and base rates is often more important that looking at average returns or, worse, recent returns. Using 30-year periods from 1961 to present, even a small 20% allocation to international stocks improved the SWR 73% of the time.

Even if someone thinks the payoff to international diversification is likely to be small, moving the odds from 1:3 against you to 3:1 in your favor is almost certainly a good decision.
20% sounds reasonable. Doesn’t seem like an overwhelming need or value to go market weight.

I’d rather add 10%-20% SCV vs another 10%-20% International. 40% US, 20% international, 10% scv and 30% bonds/other seems much better than 70% VT and 30% bonds/other.
Last edited by nigel_ht on Sun Jan 16, 2022 1:51 pm, edited 1 time in total.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 1:31 pm
000 wrote: Sat Jan 15, 2022 11:56 pm
CraigTester wrote: Sat Jan 15, 2022 10:55 pm I stumbled on this factoid in a WSJ article today.... Seems tangentally relevant to this discussion:

From 1950 to 2010, U.S. stocks returned 6.9% a year above inflation, including dividends, while the rest of the world returned 7.6%, according to market historians Elroy Dimson, Paul Marsh and Mike Staunton
The power of recency bias.
The power of start and end date sensitivity.
Same thing.

Investors suffering from recency bias are, by definition, OVERLY focused on the most recent end date. They might see the dramatic outperformance of US stocks over the past 10 years, and fail to account for the fact that international stocks have outperformed US stocks in 57% of prior 10-year periods.

It's a form of treating the exception as the rule.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 1:47 pm
vineviz wrote: Sun Jan 16, 2022 11:29 am
willthrill81 wrote: Sun Jan 16, 2022 10:30 am
As I posted fairly early in this thread, the historic benefit of owning ex-U.S. stock has been small. The 30 year SWR since 1970 only increased from 4.4% to 4.6% by owning 50% U.S. and 50% ex-U.S. versus 100% U.S.
An important reason we diversify is to improve the odds that we will successfully achieve our goals. That's why looking at probabilities and base rates is often more important that looking at average returns or, worse, recent returns. Using 30-year periods from 1961 to present, even a small 20% allocation to international stocks improved the SWR 73% of the time.

Even if someone thinks the payoff to international diversification is likely to be small, moving the odds from 1:3 against you to 3:1 in your favor is almost certainly a good decision.
20% sounds reasonable. Doesn’t seem like an overwhelming need or value to go market weight.
"Overwhelming need" seems like a fairly subjective way to approach the topic. Some diversification is obviously going to be better than none, but the benefits continue to increase up to 40% or 50% international. As long as low-cost tax-efficient international funds are available, what rational reason would we offer to justify aiming for the bare minimum benefit?
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

Patzer wrote: Sun Jan 16, 2022 1:31 pm
Nathan Drake wrote: Sun Jan 16, 2022 12:50 pm
Patzer wrote: Sun Jan 16, 2022 11:02 am
bling wrote: Sat Jan 15, 2022 6:44 am if you invest in VTI because it is a market cap weighted index of everything in the US why wouldn't you be consistent and apply that to the world?
The world doesn't play by the same rules.
I strongly support diversification in Developed Markets, which play by similar rules as the US.
I don't think diversification to Emerging Markets is worth the risk.
In some countries there is almost zero correlation between economic growth and market growth, because their market doesn't exist to reward international shareholders. A large portion of the EM index is made up of markets like that, and it's too expensive (both in fees and research time) to invest in emerging on a country by country basis to avoid that.
Over the last 21 years EM Value dramatically outperformed the S&P 500
I don't have EM Value data, but the fact that you are cherry picking 21 years and comparing EM Value to US Large Cap, sounds pretty suspect.

My point is not even about performance. It's about additional risk, lack of transparency, and lack of shareholder rights. I am just not interested in investing in that environment even if it might pay out better occasionally.

If you go with US Total Market vs EM Total Market, EM loses slightly at 21 years, wins slightly at 23 years, and gets wrecked in every other date period from 15-25 years. In all date periods it has much higher standard deviation and lower Sharpe and Sortino ratios.
I acknowledge that combining a little bit of it into a US portfolio does give a historical diversification benefit, but I am not interested in it for the reasons stated above.

10K starting value, and ending values by data range...
Last 15 years: Total Market 45.2K, EM 18.5K
Last 16 years: Total Market 52.2K, EM 23.8K
Last 17 years: Total Market 55.4K, EM 31.5K
Last 18 years: Total Market 62.3K, EM 39.8K
Last 19 years: Total Market 81.8K, EM 62.7K
Last 20 years: Total Market 64.7K, EM 58.1K
Last 21 years: Total Market 57.6K, EM 56.4K
Last 22 years: Total Market 51.5K, EM 40.8K
Last 23 years: Total Market 63.7K, EM 66K
Last 24 years: Total Market 78.6K, EM 54K
Last 25 years: Total Market 102.9K, EM 44.9K
Yes I am just "cherry picking the data" coinciding with an absolutely awful 10 year run for EM Value.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

My point was simply that there's no evidence to suggest that investing in EM markets isn't rewarded. The risks are known and become priced in.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 1:50 pm
nigel_ht wrote: Sun Jan 16, 2022 1:47 pm
vineviz wrote: Sun Jan 16, 2022 11:29 am
willthrill81 wrote: Sun Jan 16, 2022 10:30 am
As I posted fairly early in this thread, the historic benefit of owning ex-U.S. stock has been small. The 30 year SWR since 1970 only increased from 4.4% to 4.6% by owning 50% U.S. and 50% ex-U.S. versus 100% U.S.
An important reason we diversify is to improve the odds that we will successfully achieve our goals. That's why looking at probabilities and base rates is often more important that looking at average returns or, worse, recent returns. Using 30-year periods from 1961 to present, even a small 20% allocation to international stocks improved the SWR 73% of the time.

Even if someone thinks the payoff to international diversification is likely to be small, moving the odds from 1:3 against you to 3:1 in your favor is almost certainly a good decision.
20% sounds reasonable. Doesn’t seem like an overwhelming need or value to go market weight.
"Overwhelming need" seems like a fairly subjective way to approach the topic. Some diversification is obviously going to be better than none, but the benefits continue to increase up to 40% or 50% international. As long as low-cost tax-efficient international funds are available, what rational reason would we offer to justify aiming for the bare minimum benefit?
I edited my post but I have other things to buy vs more international. It’s a zero sum game.

As I added I’d rather be 40/20/10 VTI/VXUS/VIOV than 70 VT. I also want 5-10% GLDM (or whatever).

40% international doesn’t do much for me given that it’s large cap and what? 70-80% correlation in the last couple decades?

And frankly recency bias is less dangerous than ignoring that 2020 is a different political and economic environment than 1920 or even 1970.
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Re: Does "international" offer any diversification?

Post by vineviz »

nigel_ht wrote: Sun Jan 16, 2022 1:58 pm
40% international doesn’t do much for me given that it’s large cap and what? 70-80% correlation in the last couple decades?
Why does it have to be large cap? There are lots of good choices if your prefer to avoid that:

Schwab International Small-Cap Eq ETF (SCHC)
Avantis International Small Cap Val ETF (AVDV)
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)

Plus, a correlation coefficient of 0.70. or 0.8 is nothing to sneeze at: it's plenty low enough to make a significant difference in outcomes. However, it you want lower correlations just favor emerging markets instead.

Vanguard FTSE Emerging Markets ETF (VWO)
SPDR Portfolio Emerging Markets ETF (SPEM)
Avantis Emerging Markets Value ETF (AVES)
Dimensional Emerging Core Equity Mkt ETF (DFAE)

nigel_ht wrote: Sun Jan 16, 2022 1:58 pm And frankly recency bias is less dangerous than ignoring that 2020 is a different political and economic environment than 1920 or even 1970.
Recency bias is one force that allows people to pretend that "this time is different". It's smart to be aware of that.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Does "international" offer any diversification?

Post by bling »

Patzer wrote: Sun Jan 16, 2022 11:53 am
bling wrote: Sun Jan 16, 2022 11:48 am
Patzer wrote: Sun Jan 16, 2022 11:23 am Would you have been happy holding total world when Japan peaked, or would you have preferred to be able to rebalance a little bit out of that?
you can only know that in hindsight.
If in the next 5 years Sweden became half of the global stock market, would you want to keep half of your equity in Sweden or would you think Sweden might be mispriced and want to diversify out of that and back to something more balanced?
If you have invest only in a global market cap ETF to cover the market's it's very expensive to do that, especially in a taxable account.
how is it expensive? VT has a 0.08% expense ratio and it's tax efficient.

if Sweden ended up being 50% of the market i would be a very happy camper because i would have owned it for its entire duration to the top. and it doesn't matter if Sweden, or US, is the most allocated. the point is that whatever it happens to be, that is what the market values it to be. and if history is any indication, most people can't beat the market.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

vineviz wrote: Sun Jan 16, 2022 2:18 pm
nigel_ht wrote: Sun Jan 16, 2022 1:58 pm
40% international doesn’t do much for me given that it’s large cap and what? 70-80% correlation in the last couple decades?
Why does it have to be large cap? There are lots of good choices if your prefer to avoid that:

Schwab International Small-Cap Eq ETF (SCHC)
Avantis International Small Cap Val ETF (AVDV)
Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)

Plus, a correlation coefficient of 0.70. or 0.8 is nothing to sneeze at: it's plenty low enough to make a significant difference in outcomes. However, it you want lower correlations just favor emerging markets instead.

Vanguard FTSE Emerging Markets ETF (VWO)
SPDR Portfolio Emerging Markets ETF (SPEM)
Avantis Emerging Markets Value ETF (AVES)
Dimensional Emerging Core Equity Mkt ETF (DFAE)
Meh, beyond a certain point it becomes over complicated…I don’t see any need for VSS if I hold VIOV or VBR. Nor do I see a need for VWO when holding VXUS. A home bias works if you live in the US.

I would argue that adding VBR is as or more useful than adding VXUS so international isn’t necessary for diversification of outcome. Adding VSS or VWO is a distraction as to whether adding some other diversification is better than holding international at market weight.

Again, it’s a zero sum game. Capping VXUS at 20% is good enough to capture the majority of international diversification benefit to allow spending the other 20% on some other asset type.
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