Does "international" offer any diversification?

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steve r
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Re: Does "international" offer any diversification?

Post by steve r »

Nathan Drake,

Interesting. You are someone I typically agree with ... (so I am curious)

Do you think the benefit of international equities in terms of diversification is the same or greater than the benefit from SCV or commodities or bonds? What is your pecking order if you will?
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

steve r wrote: Tue Jan 25, 2022 11:25 am Nathan Drake,

Interesting. You are someone I typically agree with ... (so I am curious)

Do you think the benefit of international equities in terms of diversification is the same or greater than the benefit from SCV or commodities or bonds? What is your pecking order if you will?
It depends on how you define diversification benefit.

I take a longer term view, as my main objective is generating investment returns to reach my goals.

Commodities may have some place in a portfolio to smooth short term outcomes (perhaps during withdrawal), but I personally find it will not provide any diversification benefit over the long term as expected returns are low.

Equities across regions have similar long term returns with dispersions they can vary widely over medium term horizons, and as such provide a large diversification benefit over and above commodities or RE.

SCV is a meaningful diversifier but it can be obtained internationally for even more meaningful diversification
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Re: Does "international" offer any diversification?

Post by steve r »

Nathan Drake wrote: Tue Jan 25, 2022 11:43 am
steve r wrote: Tue Jan 25, 2022 11:25 am Nathan Drake,

Interesting. You are someone I typically agree with ... (so I am curious)

Do you think the benefit of international equities in terms of diversification is the same or greater than the benefit from SCV or commodities or bonds? What is your pecking order if you will?
It depends on how you define diversification benefit.

I take a longer term view, as my main objective is generating investment returns to reach my goals.

Commodities may have some place in a portfolio to smooth short term outcomes (perhaps during withdrawal), but I personally find it will not provide any diversification benefit over the long term as expected returns are low.

Equities across regions have similar long term returns with dispersions they can vary widely over medium term horizons, and as such provide a large diversification benefit over and above commodities or RE.

SCV is a meaningful diversifier but it can be obtained internationally for even more meaningful diversification
Got it. Thanks.

Not as much disagreement as I first thought. Perhaps a little on the US TSM diversification benefit from RE vs. large cap international. But that is trivial. Int. SCV, I would fully agree, is likely better/best among solid return generating assets (versus US TSM).
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Re: Does "international" offer any diversification?

Post by 3CT_Paddler »

willthrill81 wrote: Tue Jan 18, 2022 12:08 pm
nigel_ht wrote: Tue Jan 18, 2022 11:58 am
willthrill81 wrote: Tue Jan 18, 2022 11:27 am
Marseille07 wrote: Tue Jan 18, 2022 11:20 am
willthrill81 wrote: Tue Jan 18, 2022 11:10 am And that argument (i.e., 'I don't need U.S. stocks because much of ex-U.S.'s revenue comes from the U.S.') falls apart when you look at the 7% annualized divergence between U.S. and ex-U.S. stock returns over the last 15 years.
Well, falling apart or not isn't the issue though. The argument of not needing XYZ because rev comes from ABC is just incorrect whether you're on the right side of the coin or not.
My point was just that the last 15 years of returns for U.S. and ex-U.S. stocks demonstrates that there is much more going on with returns than revenue alone or else ex-U.S. wouldn't have underperformed the U.S. so much for so long.
Why? Where are FAANG from? US. For tech TINA for US. The outliers are TSMC and Tencent.
The above argument that much of the S&P 500's revenues come from ex-U.S. is built on a faulty assumption, namely, that returns are primarily driven by revenues. But the fact that much of ex-U.S. stocks' revenues from the U.S. didn't seem to matter over the last 15 years as ex-U.S. stocks far underperformed those of U.S. stocks. As such, we can conclude that there is a lot more driving stock returns than revenues alone.

However, you've actually hit the nail on the head: a very significant, possibly the single largest factor, in the outperformance of U.S. stocks over the last 15 years has been due to the huge returns produced by large-cap tech companies. No one knows how long that dominance will last.
Don't know that this needs to be continued to be harped on, but for large cap international companies, you see very little difference for similar companies in similar industries that have similar growth prospects - whether they are in the US or Europe or Japan. Its why Hershey and Nestle have similar PEs and you will see similar comparisons across other industries.

The reason international stocks as a whole underperformed has everything to do with developed countries in Europe and Japan not having an equivalent competitor to large cap tech companies like Google, Facebook, Microsoft and Apple as well as all of the fast growing tech companies like Uber, Netflix, AirBnB, Tesla, etc. Those tech companies can scale quickly globally without the capital requirements of an energy or manufacturing company.

That doesn't mean the trend will continue, but only that these recent global returns have nothing to do with bias against international.
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Re: Does "international" offer any diversification?

Post by steve r »

3CT_Paddler wrote: Tue Jan 25, 2022 1:04 pm ...
The reason international stocks as a whole underperformed has everything to do with developed countries in Europe and Japan not having an equivalent competitor to large cap tech companies like Google, Facebook, Microsoft and Apple as well as all of the fast growing tech companies like Uber, Netflix, AirBnB, Tesla, etc. Those tech companies can scale quickly globally without the capital requirements of an energy or manufacturing company.
...
I mostly agree. (OTOH Samsung, Taiwan Semi, etc.)

So is a U.S. only play essentially a tilt in favor of Google, Facebook, Apple, Microsoft, Tesla. etc. in the context of an overall global marketplace?
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Re: Does "international" offer any diversification?

Post by 3CT_Paddler »

steve r wrote: Tue Jan 25, 2022 4:36 pm
3CT_Paddler wrote: Tue Jan 25, 2022 1:04 pm ...
The reason international stocks as a whole underperformed has everything to do with developed countries in Europe and Japan not having an equivalent competitor to large cap tech companies like Google, Facebook, Microsoft and Apple as well as all of the fast growing tech companies like Uber, Netflix, AirBnB, Tesla, etc. Those tech companies can scale quickly globally without the capital requirements of an energy or manufacturing company.
...
I mostly agree. (OTOH Samsung, Taiwan Semi, etc.)

So is a U.S. only play essentially a tilt in favor of Google, Facebook, Apple, Microsoft, Tesla. etc. in the context of an overall global marketplace?
Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.

Yes the US stock market may very well underperform the rest of the developed world over the next decade, but if it does it will be because the large tech growth experiences slower growth than the rest of the economy or other countries start building more technology success stories that can compete with Apple/Google/Microsoft/Amazon. It won't come from China (not due to lack of talent). If it comes from anywhere it will be from Europe, South Korea, Australia and India.
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Re: Does "international" offer any diversification?

Post by Da5id »

3CT_Paddler wrote: Tue Jan 25, 2022 8:28 pm
steve r wrote: Tue Jan 25, 2022 4:36 pm
3CT_Paddler wrote: Tue Jan 25, 2022 1:04 pm ...
The reason international stocks as a whole underperformed has everything to do with developed countries in Europe and Japan not having an equivalent competitor to large cap tech companies like Google, Facebook, Microsoft and Apple as well as all of the fast growing tech companies like Uber, Netflix, AirBnB, Tesla, etc. Those tech companies can scale quickly globally without the capital requirements of an energy or manufacturing company.
...
I mostly agree. (OTOH Samsung, Taiwan Semi, etc.)

So is a U.S. only play essentially a tilt in favor of Google, Facebook, Apple, Microsoft, Tesla. etc. in the context of an overall global marketplace?
Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.
It is also a bet that markets don't have those factors priced in adequately.
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Re: Does "international" offer any diversification?

Post by Random Walker »

Da5id wrote: Tue Jan 25, 2022 8:32 pm
3CT_Paddler wrote: Tue Jan 25, 2022 8:28 pm
steve r wrote: Tue Jan 25, 2022 4:36 pm
3CT_Paddler wrote: Tue Jan 25, 2022 1:04 pm ...
The reason international stocks as a whole underperformed has everything to do with developed countries in Europe and Japan not having an equivalent competitor to large cap tech companies like Google, Facebook, Microsoft and Apple as well as all of the fast growing tech companies like Uber, Netflix, AirBnB, Tesla, etc. Those tech companies can scale quickly globally without the capital requirements of an energy or manufacturing company.
...
I mostly agree. (OTOH Samsung, Taiwan Semi, etc.)

So is a U.S. only play essentially a tilt in favor of Google, Facebook, Apple, Microsoft, Tesla. etc. in the context of an overall global marketplace?
Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.
It is also a bet that markets don't have those factors priced in adequately.
+1. Boy did you say that succinctly or what?!!!

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Re: Does "international" offer any diversification?

Post by Northern Flicker »

nigel_ht wrote: Tue Jan 18, 2022 1:29 pm
vineviz wrote: Tue Jan 18, 2022 1:26 pm
nigel_ht wrote: Tue Jan 18, 2022 1:16 pm Its possible but unlikely without warning. There may be a scenario or two that would be more rapid but we can't discuss them in this forum.
Because assets always provide early alerts before they outperform? How do I sign up for those emails?
The collapse of empires generally have precursor events. If you pay me $1999 a year I can send you an email when it happens. Or you can just watch the news...
The equity market is a leading indicator. The news is a trailing indicator, like this famous example was from August 1979:

https://ritholtz.com/1979/08/the-death-of-equities/
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Re: Does "international" offer any diversification?

Post by 3CT_Paddler »

Da5id wrote: Tue Jan 25, 2022 8:32 pm
3CT_Paddler wrote: Tue Jan 25, 2022 8:28 pm
steve r wrote: Tue Jan 25, 2022 4:36 pm
3CT_Paddler wrote: Tue Jan 25, 2022 1:04 pm ...
The reason international stocks as a whole underperformed has everything to do with developed countries in Europe and Japan not having an equivalent competitor to large cap tech companies like Google, Facebook, Microsoft and Apple as well as all of the fast growing tech companies like Uber, Netflix, AirBnB, Tesla, etc. Those tech companies can scale quickly globally without the capital requirements of an energy or manufacturing company.
...
I mostly agree. (OTOH Samsung, Taiwan Semi, etc.)

So is a U.S. only play essentially a tilt in favor of Google, Facebook, Apple, Microsoft, Tesla. etc. in the context of an overall global marketplace?
Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.
It is also a bet that markets don't have those factors priced in adequately.
Agreed.

But that doesn’t mean it can’t be wrong. The market was way wrong about 10 year revenue growth expectations for US large cap vs developed large cap a decade ago (mostly in tech). We don’t know if that will continue or not.
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Re: Does "international" offer any diversification?

Post by Da5id »

3CT_Paddler wrote: Tue Jan 25, 2022 9:15 pm
Da5id wrote: Tue Jan 25, 2022 8:32 pm
3CT_Paddler wrote: Tue Jan 25, 2022 8:28 pm
steve r wrote: Tue Jan 25, 2022 4:36 pm
3CT_Paddler wrote: Tue Jan 25, 2022 1:04 pm ...
The reason international stocks as a whole underperformed has everything to do with developed countries in Europe and Japan not having an equivalent competitor to large cap tech companies like Google, Facebook, Microsoft and Apple as well as all of the fast growing tech companies like Uber, Netflix, AirBnB, Tesla, etc. Those tech companies can scale quickly globally without the capital requirements of an energy or manufacturing company.
...
I mostly agree. (OTOH Samsung, Taiwan Semi, etc.)

So is a U.S. only play essentially a tilt in favor of Google, Facebook, Apple, Microsoft, Tesla. etc. in the context of an overall global marketplace?
Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.
It is also a bet that markets don't have those factors priced in adequately.
Agreed.

But that doesn’t mean it can’t be wrong. The market was way wrong about 10 year revenue growth expectations for US large cap vs developed large cap a decade ago (mostly in tech). We don’t know if that will continue or not.
Of course it can be wrong. It is just my default assumption. And in fact it is the default assumption of most bogleheads that at least the US market is pretty efficient, or else nobody would be owning index funds. We don't know leads me to not make such a bet. It isn't like I'm betting for ex-US, I only own 40% of it.
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Re: Does "international" offer any diversification?

Post by visualguy »

Da5id wrote: Tue Jan 25, 2022 8:32 pm
3CT_Paddler wrote: Tue Jan 25, 2022 8:28 pm Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.
It is also a bet that markets don't have those factors priced in adequately.
How can the markets price in new companies that aren't there yet? Google, Tesla, nVidia, etc. weren't priced in before they emerged. Similarly, future major companies aren't priced in today.
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Re: Does "international" offer any diversification?

Post by Da5id »

visualguy wrote: Tue Jan 25, 2022 9:34 pm
Da5id wrote: Tue Jan 25, 2022 8:32 pm
3CT_Paddler wrote: Tue Jan 25, 2022 8:28 pm Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.
It is also a bet that markets don't have those factors priced in adequately.
How can the markets price in new companies that aren't there yet? Google, Tesla, nVidia, etc. weren't priced in before they emerged. Similarly, future major companies aren't priced in today.
If US companies have better prospects and we know that in advance, OK. Before they IPO, they aren't relevant to me. I assume investible stocks, once on the market, will be priced to reflect their prospects as understood by investors. I choose to invest as if markets are efficient, as I don't think there is a better way.
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Re: Does "international" offer any diversification?

Post by visualguy »

Da5id wrote: Tue Jan 25, 2022 9:49 pm
visualguy wrote: Tue Jan 25, 2022 9:34 pm
Da5id wrote: Tue Jan 25, 2022 8:32 pm
3CT_Paddler wrote: Tue Jan 25, 2022 8:28 pm Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.
It is also a bet that markets don't have those factors priced in adequately.
How can the markets price in new companies that aren't there yet? Google, Tesla, nVidia, etc. weren't priced in before they emerged. Similarly, future major companies aren't priced in today.
If US companies have better prospects and we know that in advance, OK. Before they IPO, they aren't relevant to me. I assume investible stocks, once on the market, will be priced to reflect their prospects as understood by investors. I choose to invest as if markets are efficient, as I don't think there is a better way.
If the next batch of high-flying companies gets listed in the US (rather than Europe/Japan/etc.) as happened with the previous batch, this will add to the value of the US index in a way that isn't priced in today. This doesn't mean the market isn't efficient - the market is pricing only existing companies.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Northern Flicker wrote: Tue Jan 25, 2022 8:42 pm
nigel_ht wrote: Tue Jan 18, 2022 1:29 pm
vineviz wrote: Tue Jan 18, 2022 1:26 pm
nigel_ht wrote: Tue Jan 18, 2022 1:16 pm Its possible but unlikely without warning. There may be a scenario or two that would be more rapid but we can't discuss them in this forum.
Because assets always provide early alerts before they outperform? How do I sign up for those emails?
The collapse of empires generally have precursor events. If you pay me $1999 a year I can send you an email when it happens. Or you can just watch the news...
The equity market is a leading indicator. The news is a trailing indicator, like this famous example was from August 1979:

https://ritholtz.com/1979/08/the-death-of-equities/
The context is the loss of American advantages as the dominant empire…equity markets rise and fall but for the dominant empire the trend line is upwards…until it’s no longer the dominant empire anyway.

It’s moderately hard to untangle the impact of the Great Depression on British stocks from the fall of their empire which started with the broad impacts of WWI and the dissolution of their empire after WWII but the markers are there.

One of the clearer markers were the 1920-1935 naval treaties where the RN and USN were allowed equal numbers with Japan coming in third.

The final indicators of the loss of dominance to the US was the loss of reserve currency of the pound and forced withdrawal at Suez.

Arguably the PLAN exceeding numerical parity with the USN is presaging the decline of the US empire and that our sun is setting. Still though…we probably have another 50 good years to run if there are no equivalents to the world wars. A civil war is likely the only real risk to a more rapid decline given world wars are unlikely between nuclear powers…
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Re: Does "international" offer any diversification?

Post by balbrec2 »

Diversification yes, correlation no.
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Re: Does "international" offer any diversification?

Post by vineviz »

balbrec2 wrote: Wed Jan 26, 2022 6:44 am Diversification yes, correlation no.
Diversification = low correlation + high variance. It's all related.
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Re: Does "international" offer any diversification?

Post by Da5id »

visualguy wrote: Wed Jan 26, 2022 12:12 am
Da5id wrote: Tue Jan 25, 2022 9:49 pm
visualguy wrote: Tue Jan 25, 2022 9:34 pm
Da5id wrote: Tue Jan 25, 2022 8:32 pm
3CT_Paddler wrote: Tue Jan 25, 2022 8:28 pm Tilting towards the US (vs global market cap weight) is a bet on this economy being more fertile ground for entrepreneurial activity that allows businesses to innovate and outcompete. Fertile ground means strong property rights, rule of law, lower taxation, ability to easily hire and fire people and lack of red tape. There is plenty of talent globally, but there is not equal footing in that respect for all countries.
It is also a bet that markets don't have those factors priced in adequately.
How can the markets price in new companies that aren't there yet? Google, Tesla, nVidia, etc. weren't priced in before they emerged. Similarly, future major companies aren't priced in today.
If US companies have better prospects and we know that in advance, OK. Before they IPO, they aren't relevant to me. I assume investible stocks, once on the market, will be priced to reflect their prospects as understood by investors. I choose to invest as if markets are efficient, as I don't think there is a better way.
If the next batch of high-flying companies gets listed in the US (rather than Europe/Japan/etc.) as happened with the previous batch, this will add to the value of the US index in a way that isn't priced in today. This doesn't mean the market isn't efficient - the market is pricing only existing companies.
3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Da5id wrote: Wed Jan 26, 2022 7:02 am
visualguy wrote: Wed Jan 26, 2022 12:12 am
Da5id wrote: Tue Jan 25, 2022 9:49 pm
visualguy wrote: Tue Jan 25, 2022 9:34 pm
Da5id wrote: Tue Jan 25, 2022 8:32 pm

It is also a bet that markets don't have those factors priced in adequately.
How can the markets price in new companies that aren't there yet? Google, Tesla, nVidia, etc. weren't priced in before they emerged. Similarly, future major companies aren't priced in today.
If US companies have better prospects and we know that in advance, OK. Before they IPO, they aren't relevant to me. I assume investible stocks, once on the market, will be priced to reflect their prospects as understood by investors. I choose to invest as if markets are efficient, as I don't think there is a better way.
If the next batch of high-flying companies gets listed in the US (rather than Europe/Japan/etc.) as happened with the previous batch, this will add to the value of the US index in a way that isn't priced in today. This doesn't mean the market isn't efficient - the market is pricing only existing companies.
3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
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Re: Does "international" offer any diversification?

Post by Da5id »

nigel_ht wrote: Wed Jan 26, 2022 7:06 am
Da5id wrote: Wed Jan 26, 2022 7:02 am 3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
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Re: Does "international" offer any diversification?

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Re: Does "international" offer any diversification?

Post by GaryA505 »

balbrec2 wrote: Wed Jan 26, 2022 6:44 am Diversification yes, correlation no.
Diversification yes, outperformance maybe.
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Re: Does "international" offer any diversification?

Post by Northern Flicker »

nigel_ht wrote: It’s moderately hard to untangle the impact of the Great Depression on British stocks from the fall of their empire which started with the broad impacts of WWI and the dissolution of their empire after WWII but the markers are there.
It is moderately hard even looking back with 20-20 hindsight. And there was no clear indicator that the US would rise from the ashes of the great depression with the strength it displayed.
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Re: Does "international" offer any diversification?

Post by vanbogle59 »

Is there any robust description of what it was like for a retail investor, living in London during the "Fall of the British Empire"?
Like maybe a chart of some Bogle-ish TSM (defined as British Imperial TSM, I guess).
If specifics are required, let's say 1940-1980, but I'm completely flexible if someone has reasonable analysis around a different time frame.

I feel ignorant. I don't even know if fortunes were lost, the common man's portfolios collapsed, or if they just lost political power.
From my limited knowledge, it's still a pretty rich country, so maybe the whole empire-falling thing isn't so bad (at least for retail investment portfolios)???
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Northern Flicker wrote: Wed Jan 26, 2022 3:21 pm
nigel_ht wrote: It’s moderately hard to untangle the impact of the Great Depression on British stocks from the fall of their empire which started with the broad impacts of WWI and the dissolution of their empire after WWII but the markers are there.
It is moderately hard even looking back with 20-20 hindsight. And there was no clear indicator that the US would rise from the ashes of the great depression with the strength it displayed.
The co-equal standing with the British in the interwar years was an indicator.

The Chinese aren’t there yet.
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Re: Does "international" offer any diversification?

Post by Northern Flicker »

nigel_ht wrote: Wed Jan 26, 2022 7:09 pm
Northern Flicker wrote: Wed Jan 26, 2022 3:21 pm
nigel_ht wrote: It’s moderately hard to untangle the impact of the Great Depression on British stocks from the fall of their empire which started with the broad impacts of WWI and the dissolution of their empire after WWII but the markers are there.
It is moderately hard even looking back with 20-20 hindsight. And there was no clear indicator that the US would rise from the ashes of the great depression with the strength it displayed.
The co-equal standing with the British in the interwar years was an indicator.
Co-equal standing during the depression?
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Re: Does "international" offer any diversification?

Post by atdharris »

International seems to fall with US markets and then stays stagnant when US markets rebound these days
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Northern Flicker wrote: Wed Jan 26, 2022 10:25 pm
nigel_ht wrote: Wed Jan 26, 2022 7:09 pm
Northern Flicker wrote: Wed Jan 26, 2022 3:21 pm
nigel_ht wrote: It’s moderately hard to untangle the impact of the Great Depression on British stocks from the fall of their empire which started with the broad impacts of WWI and the dissolution of their empire after WWII but the markers are there.
It is moderately hard even looking back with 20-20 hindsight. And there was no clear indicator that the US would rise from the ashes of the great depression with the strength it displayed.
The co-equal standing with the British in the interwar years was an indicator.
Co-equal standing during the depression?
In the primary metric of the day: number of battleships and carriers. We finally starting rebuilding in the mid-30s during the depression. In 1933 the contracts for the Enterprise and Yorktown was awarded, WWI battleships got some modernization (mostly AA) and new hulls laid down.
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Re: Does "international" offer any diversification?

Post by 3CT_Paddler »

Da5id wrote: Wed Jan 26, 2022 7:12 am
nigel_ht wrote: Wed Jan 26, 2022 7:06 am
Da5id wrote: Wed Jan 26, 2022 7:02 am 3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
A lot of Bogleheads follow the belief that the efficient market hypothesis = all risks are accounted for. We know that in reality that cannot be true absent a time machine. For many of us the reality is that it's the best estimate based on current conditions and it ends there. It's not perfect, but over the long run it's a very good strategy that minimizes expenses. You can just as easily say costs matter and diversification across an asset class is a free lunch. Those two simple facts can also explain why Bogle's approach is so effective.

The market is made up of many different kinds of investors with different investment holding time windows. Depending on your time window, different investments may look more or less attractive to you to buy more or sell what you currently have. So the market is not a perfect pricing mechanism, but a weighing mechanism of many different participants.

This doesn't mean that US will persistently beat international ex-US. At different times the market may overestimate the growth prospects of large cap growth stocks (which is dominated by the US currently). But it also means that markets do not have future risks and growth perfectly priced in for any country. Unforeseen upside events and downside risks show up all the time.
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Re: Does "international" offer any diversification?

Post by asif408 »

atdharris wrote: Thu Jan 27, 2022 8:37 am International seems to fall with US markets and then stays stagnant when US markets rebound these days
Always has been true, always will be true. I prefer to ignore 2002-2007, when that didn't happen, as an anomaly: https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Does "international" offer any diversification?

Post by atdharris »

asif408 wrote: Thu Jan 27, 2022 9:18 am
atdharris wrote: Thu Jan 27, 2022 8:37 am International seems to fall with US markets and then stays stagnant when US markets rebound these days
Always has been true, always will be true. I prefer to ignore 2002-2007, when that didn't happen, as an anomaly: https://www.portfoliovisualizer.com/bac ... ion2_2=100
I think exUS benefitted from a weak dollar during those years and that led to its outperformance. So long as we have a strong dollar, exUS isn't going to outperform.
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Re: Does "international" offer any diversification?

Post by Da5id »

atdharris wrote: Thu Jan 27, 2022 9:27 am
asif408 wrote: Thu Jan 27, 2022 9:18 am
atdharris wrote: Thu Jan 27, 2022 8:37 am International seems to fall with US markets and then stays stagnant when US markets rebound these days
Always has been true, always will be true. I prefer to ignore 2002-2007, when that didn't happen, as an anomaly: https://www.portfoliovisualizer.com/bac ... ion2_2=100
I think exUS benefitted from a weak dollar during those years and that led to its outperformance. So long as we have a strong dollar, exUS isn't going to outperform.
If one can predict the future of the dollar, one can presumably make money in currency markets as well. And to your point, if one can determine what currencies will do and when US or ex-US stocks will benefit one could also time switches between US vs ex-US stocks. I can't do any of those things personally though.
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Re: Does "international" offer any diversification?

Post by atdharris »

Da5id wrote: Thu Jan 27, 2022 9:31 am
atdharris wrote: Thu Jan 27, 2022 9:27 am
asif408 wrote: Thu Jan 27, 2022 9:18 am
atdharris wrote: Thu Jan 27, 2022 8:37 am International seems to fall with US markets and then stays stagnant when US markets rebound these days
Always has been true, always will be true. I prefer to ignore 2002-2007, when that didn't happen, as an anomaly: https://www.portfoliovisualizer.com/bac ... ion2_2=100
I think exUS benefitted from a weak dollar during those years and that led to its outperformance. So long as we have a strong dollar, exUS isn't going to outperform.
If one can predict the future of the dollar, one can presumably make money in currency markets as well. And to your point, if one can determine what currencies will do and when US or ex-US stocks will benefit one could also time switches between US vs ex-US stocks. I can't do any of those things personally though.
Neither can I, which is why I invest in ex-US along with US equities.
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Re: Does "international" offer any diversification?

Post by Da5id »

atdharris wrote: Thu Jan 27, 2022 9:33 am
Da5id wrote: Thu Jan 27, 2022 9:31 am
atdharris wrote: Thu Jan 27, 2022 9:27 am
asif408 wrote: Thu Jan 27, 2022 9:18 am
atdharris wrote: Thu Jan 27, 2022 8:37 am International seems to fall with US markets and then stays stagnant when US markets rebound these days
Always has been true, always will be true. I prefer to ignore 2002-2007, when that didn't happen, as an anomaly: https://www.portfoliovisualizer.com/bac ... ion2_2=100
I think exUS benefitted from a weak dollar during those years and that led to its outperformance. So long as we have a strong dollar, exUS isn't going to outperform.
If one can predict the future of the dollar, one can presumably make money in currency markets as well. And to your point, if one can determine what currencies will do and when US or ex-US stocks will benefit one could also time switches between US vs ex-US stocks. I can't do any of those things personally though.
Neither can I, which is why I invest in ex-US along with US equities.
Ah, got it, I thought you were implying otherwise.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Da5id wrote: Wed Jan 26, 2022 7:12 am
nigel_ht wrote: Wed Jan 26, 2022 7:06 am
Da5id wrote: Wed Jan 26, 2022 7:02 am 3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
EM has more risk which isn't the same as volatility. Ask the investors of the Didi IPO...did the market misprice political risks? It sure did that time.
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

nigel_ht wrote: Thu Jan 27, 2022 9:36 am
Da5id wrote: Wed Jan 26, 2022 7:12 am
nigel_ht wrote: Wed Jan 26, 2022 7:06 am
Da5id wrote: Wed Jan 26, 2022 7:02 am 3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
EM has more risk which isn't the same as volatility. Ask the investors of the Didi IPO...did the market misprice political risks? It sure did that time.
Nothing which is exclusive to EM markets
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Re: Does "international" offer any diversification?

Post by Da5id »

nigel_ht wrote: Thu Jan 27, 2022 9:36 am
Da5id wrote: Wed Jan 26, 2022 7:12 am
nigel_ht wrote: Wed Jan 26, 2022 7:06 am
Da5id wrote: Wed Jan 26, 2022 7:02 am 3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
EM has more risk which isn't the same as volatility. Ask the investors of the Didi IPO...did the market misprice political risks? It sure did that time.

And of course markets misprice risks, political and otherwise, *all the time*. The question isn't whether the market is mystically always right, of course it isn't. The question is whether I can arrive at a better price than the market given what is known at the time. I don't invest as if I can. I have opinions, like "Tesla is overpriced", but I don't act on those opinions.

Examples of risks coming about, such as Didi, or Enron, or whatever, should be incorporated into pricing of investments in the future. That is true in the US and in international investments.
Last edited by Da5id on Thu Jan 27, 2022 9:43 am, edited 1 time in total.
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Re: Does "international" offer any diversification?

Post by burritoLover »

The market can't predict the future - that's not what "priced in" means.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Da5id wrote: Thu Jan 27, 2022 9:42 am
nigel_ht wrote: Thu Jan 27, 2022 9:36 am
Da5id wrote: Wed Jan 26, 2022 7:12 am
nigel_ht wrote: Wed Jan 26, 2022 7:06 am
Da5id wrote: Wed Jan 26, 2022 7:02 am 3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
EM has more risk which isn't the same as volatility. Ask the investors of the Didi IPO...did the market misprice political risks? It sure did that time.

And of course markets misprice risks, political and otherwise, *all the time*. The question isn't whether the market is mystically always right, of course it isn't. It is whether I can arrive at a better price than the market given what is known at the time. I don't invest as if I can. I have opinions, like "Tesla is overpriced", but I don't act on those opinions.

Examples of risks coming about, such as Didi, or Enron, or whatever, should be incorporated into pricing of investments in the future. That is true in the US and in international investments.
Your question is whether they would have the same risk adjusted return. The risk for EM is higher. Turkish companies have to return more to offset the risk and for three equivalent companies that differ only in terms of their country there's no reason to believe that Turkish companies will do so. Why should they if everything else is the same?
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Nathan Drake wrote: Thu Jan 27, 2022 9:42 am
nigel_ht wrote: Thu Jan 27, 2022 9:36 am
Da5id wrote: Wed Jan 26, 2022 7:12 am
nigel_ht wrote: Wed Jan 26, 2022 7:06 am
Da5id wrote: Wed Jan 26, 2022 7:02 am 3 companies, A, B, and C enter the exchanges of the US, Israel, and Turkey at a given valuation. Your position is that they won't have the same risk adjusted return (as far as one can know in advance) but rather that the US company will have a better risk adjusted return? If one can know in advance that US companies inherently have better prospects, one can include that in the valuation.
Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
EM has more risk which isn't the same as volatility. Ask the investors of the Didi IPO...did the market misprice political risks? It sure did that time.
Nothing which is exclusive to EM markets
Some risks are exclusive to EM markets short of catastrophic outcomes for developed nations like World War.
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Re: Does "international" offer any diversification?

Post by burritoLover »

The markets are obviously efficient enough that if the US was a "sure bet" money would rush in and returns would decrease going forward. In order for you to believe that the US will outperform ex-US going forward, you have to believe that the market is underpricing the US for some reason and/or overpricing ex-US for some reason. That puts you in the camp of Mr. Active Manager who attempts to predict the future and generate alpha and you should really be trading more concentrated portfolios if you think you have that ability - not boring old US TSM.
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Re: Does "international" offer any diversification?

Post by Da5id »

nigel_ht wrote: Thu Jan 27, 2022 9:51 am Your question is whether they would have the same risk adjusted return. The risk for EM is higher. Turkish companies have to return more to offset the risk and for three equivalent companies that differ only in terms of their country there's no reason to believe that Turkish companies will do so. Why should they if everything else is the same?
Given the scenario, the equivalent company in Turkey would be valued less than its US counterpart due to the risks. But if it then produced the same profits its return for the amount invested would be correspondingly more.

Do you agree with the statement that

"There exists a price at which an ex-US investment has equal risk adjusted returns to a US investment"?

Even if that price isn't knowable? At least it is not knowable by me...
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

nigel_ht wrote: Thu Jan 27, 2022 9:51 am
Da5id wrote: Thu Jan 27, 2022 9:42 am
nigel_ht wrote: Thu Jan 27, 2022 9:36 am
Da5id wrote: Wed Jan 26, 2022 7:12 am
nigel_ht wrote: Wed Jan 26, 2022 7:06 am

Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
EM has more risk which isn't the same as volatility. Ask the investors of the Didi IPO...did the market misprice political risks? It sure did that time.

And of course markets misprice risks, political and otherwise, *all the time*. The question isn't whether the market is mystically always right, of course it isn't. It is whether I can arrive at a better price than the market given what is known at the time. I don't invest as if I can. I have opinions, like "Tesla is overpriced", but I don't act on those opinions.

Examples of risks coming about, such as Didi, or Enron, or whatever, should be incorporated into pricing of investments in the future. That is true in the US and in international investments.
Your question is whether they would have the same risk adjusted return. The risk for EM is higher. Turkish companies have to return more to offset the risk and for three equivalent companies that differ only in terms of their country there's no reason to believe that Turkish companies will do so. Why should they if everything else is the same?
Because the price isn’t the same?

If you pay less for the same earnings you get more.
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

nigel_ht wrote: Thu Jan 27, 2022 9:52 am
Nathan Drake wrote: Thu Jan 27, 2022 9:42 am
nigel_ht wrote: Thu Jan 27, 2022 9:36 am
Da5id wrote: Wed Jan 26, 2022 7:12 am
nigel_ht wrote: Wed Jan 26, 2022 7:06 am

Yes in terms of access to capital, geopolitical safety and rule of law.

[OT comment removed by admin LadyGeek]
You believe the market is mispricing political risks. Sure. Could be. I don't know that to be true though, and don't personally assume it.
EM has more risk which isn't the same as volatility. Ask the investors of the Didi IPO...did the market misprice political risks? It sure did that time.
Nothing which is exclusive to EM markets
Some risks are exclusive to EM markets short of catastrophic outcomes for developed nations like World War.
The risk that certain aspects of a business aren’t adequately priced in are not unique to EM markets
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Re: Does "international" offer any diversification?

Post by nigel_ht »

burritoLover wrote: Thu Jan 27, 2022 10:01 am The markets are obviously efficient enough that if the US was a "sure bet" money would rush in and returns would decrease going forward. In order for you to believe that the US will outperform ex-US going forward, you have to believe that the market is underpricing the US for some reason and/or overpricing ex-US for some reason. That puts you in the camp of Mr. Active Manager who attempts to predict the future and generate alpha and you should really be trading more concentrated portfolios if you think you have that ability - not boring old US TSM.
Outperformance isn't my goal. US TSM plus some US SCV and large cap International diversification meets my goal of reasonable returns at reasonable risk. EM doesn't meet that objective from a risk perspective because I can't quantify that risk. Neither can anyone else because the largest component of EM growth is essentially based on the whims of one individual.
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

nigel_ht wrote: Thu Jan 27, 2022 10:30 am
burritoLover wrote: Thu Jan 27, 2022 10:01 am The markets are obviously efficient enough that if the US was a "sure bet" money would rush in and returns would decrease going forward. In order for you to believe that the US will outperform ex-US going forward, you have to believe that the market is underpricing the US for some reason and/or overpricing ex-US for some reason. That puts you in the camp of Mr. Active Manager who attempts to predict the future and generate alpha and you should really be trading more concentrated portfolios if you think you have that ability - not boring old US TSM.
Outperformance isn't my goal. US TSM plus some US SCV and large cap International diversification meets my goal of reasonable returns at reasonable risk. EM doesn't meet that objective from a risk perspective because I can't quantify that risk. Neither can anyone else because the largest component of EM growth is essentially based on the whims of one individual.
EM provides the best diversification for a largely US investor
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Re: Does "international" offer any diversification?

Post by burritoLover »

nigel_ht wrote: Thu Jan 27, 2022 10:30 am
burritoLover wrote: Thu Jan 27, 2022 10:01 am The markets are obviously efficient enough that if the US was a "sure bet" money would rush in and returns would decrease going forward. In order for you to believe that the US will outperform ex-US going forward, you have to believe that the market is underpricing the US for some reason and/or overpricing ex-US for some reason. That puts you in the camp of Mr. Active Manager who attempts to predict the future and generate alpha and you should really be trading more concentrated portfolios if you think you have that ability - not boring old US TSM.
Outperformance isn't my goal. US TSM plus some US SCV and large cap International diversification meets my goal of reasonable returns at reasonable risk. EM doesn't meet that objective from a risk perspective because I can't quantify that risk. Neither can anyone else because the largest component of EM growth is essentially based on the whims of one individual.
It may not be for you (outperformance) but for many that are divesting themselves of international based on the last 10 years or never adding international, it is the primary reason being stated.
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Re: Does "international" offer any diversification?

Post by nigel_ht »

Nathan Drake wrote: Thu Jan 27, 2022 10:39 am
nigel_ht wrote: Thu Jan 27, 2022 10:30 am
burritoLover wrote: Thu Jan 27, 2022 10:01 am The markets are obviously efficient enough that if the US was a "sure bet" money would rush in and returns would decrease going forward. In order for you to believe that the US will outperform ex-US going forward, you have to believe that the market is underpricing the US for some reason and/or overpricing ex-US for some reason. That puts you in the camp of Mr. Active Manager who attempts to predict the future and generate alpha and you should really be trading more concentrated portfolios if you think you have that ability - not boring old US TSM.
Outperformance isn't my goal. US TSM plus some US SCV and large cap International diversification meets my goal of reasonable returns at reasonable risk. EM doesn't meet that objective from a risk perspective because I can't quantify that risk. Neither can anyone else because the largest component of EM growth is essentially based on the whims of one individual.
EM provides the best diversification for a largely US investor
I prefer US SCV.
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Re: Does "international" offer any diversification?

Post by Nathan Drake »

nigel_ht wrote: Thu Jan 27, 2022 11:37 am
Nathan Drake wrote: Thu Jan 27, 2022 10:39 am
nigel_ht wrote: Thu Jan 27, 2022 10:30 am
burritoLover wrote: Thu Jan 27, 2022 10:01 am The markets are obviously efficient enough that if the US was a "sure bet" money would rush in and returns would decrease going forward. In order for you to believe that the US will outperform ex-US going forward, you have to believe that the market is underpricing the US for some reason and/or overpricing ex-US for some reason. That puts you in the camp of Mr. Active Manager who attempts to predict the future and generate alpha and you should really be trading more concentrated portfolios if you think you have that ability - not boring old US TSM.
Outperformance isn't my goal. US TSM plus some US SCV and large cap International diversification meets my goal of reasonable returns at reasonable risk. EM doesn't meet that objective from a risk perspective because I can't quantify that risk. Neither can anyone else because the largest component of EM growth is essentially based on the whims of one individual.
EM provides the best diversification for a largely US investor
I prefer US SCV.
You can prefer it, but doesn’t mean you should exclude EM
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Re: Does "international" offer any diversification?

Post by Northern Flicker »

nigel_ht wrote: Thu Jan 27, 2022 9:12 am
Northern Flicker wrote: Wed Jan 26, 2022 10:25 pm
nigel_ht wrote: Wed Jan 26, 2022 7:09 pm
Northern Flicker wrote: Wed Jan 26, 2022 3:21 pm
nigel_ht wrote: It’s moderately hard to untangle the impact of the Great Depression on British stocks from the fall of their empire which started with the broad impacts of WWI and the dissolution of their empire after WWII but the markers are there.
It is moderately hard even looking back with 20-20 hindsight. And there was no clear indicator that the US would rise from the ashes of the great depression with the strength it displayed.
The co-equal standing with the British in the interwar years was an indicator.
Co-equal standing during the depression?
In the primary metric of the day: number of battleships and carriers. We finally starting rebuilding in the mid-30s during the depression. In 1933 the contracts for the Enterprise and Yorktown was awarded, WWI battleships got some modernization (mostly AA) and new hulls laid down.
This is the first time I've heard the idea that the number of battleships and carriers in a nation's navy was a signal predictive of the prospects for the nation's equity market to outperform relative to that of other nations.
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