Why do we market weight USA equity but not global equity?

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Mother Biggles
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

asif408 wrote: Wed Aug 17, 2022 8:15 am
Florida Orange wrote: Tue Aug 16, 2022 3:45 pm Asif408, intellectually your position makes a lot of sense but I would need a powerful reason to adopt a strategy so far out of the mainstream. To me, your rational, although entirely reasonable, isn't quite powerful enough to justify taking such a contrarian position. You're making a pretty big bet that even something as conventional as global cap weight is likely to be substantially off the mark. And you may be right. I guess I'm just afraid to go that much against the grain unless I'm very sure that I'm right, which would mean that almost everybody else is wrong. But I admire your courage. It's independent spirits like you that make this forum interesting. You've definitely given me food for thought. Thanks.
I actually wouldn't recommend my position. My goal with all of this is just to persuade those who might be open to convincing that a US only or mostly US strategy is risky in the sense that you are likely to have to live through a lost decade or two. With a globally diversified portfolio that is less so the case, at least historically. Look at something like a 1/3 US, 1/3 developed ex-US, and 1/3 emerging markets allocation during 2 time periods. I imagine most people would say this a risky portfolio, with 1/3 in emerging markets and only 1/3 in US stocks. Here's how that fared over the last 2 decades.

2000-2011: https://www.portfoliovisualizer.com/bac ... tion3_1=33

2011-present: https://www.portfoliovisualizer.com/bac ... tion3_1=33

Sure, it would have been nice to be 100% EM in the 2000s and 100% US in the 2010s. But without knowing what was going to happen, with a 1/3 mix of each over the whole time frame you underperformed a US only portfolio by a little more than 1%, will all of that underperformance coming in the last few years: https://www.portfoliovisualizer.com/bac ... tion3_1=33

You got a low but positive real return over both decades with a diversified portfolio (actually almost the same exact return! 3,14% and 3.15% real), and you avoided the negative decade in the 2000s for the US only portfolio. I'll reiterate that the greatest risk to me is negative real returns over a decade or two, not low but positive real returns over a decade or two. FWIW, my 90% international is split into half foreign developed and half emerging.

You are correct I'm making a big bet against the US. But I also have a pension that is US heavy, which mitigates some of that risk if the US continues to do well. If I didn't have the pension I might be closer to a global market cap allocation, but still probably overweight international. Or even something like the 1/3 US, 1/3 ex US developed, and 1/3 emerging is pretty appealing.
I appreciate the reason that you give but it’s not enough yet to convince me. The world economies are so interdependent that many economies affect many other economies. I don’t for see a situation where the United States is badly for 10 years but another segment of the world does well for 10 years. The correlations seem similar. They go up and down together some a little more and some a little less than the others. I don’t see international as protecting in a meaningful way from a United States downturn over a long period of time. I do see a downside of decreased return on investment. So for me I’m still 100 pctusa. I don’t think you can really criticize either position. 100% USA has a very reasonable very rational argument. Weighting globally has a very reasonable rational argument. You could even make a reasonable rational argument for overweighting international because the PE is generally more attractive. Unfortunately people in each side at some point in these threads make it personal which is no fun.
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Re: Why do we market weight USA equity but not global equity?

Post by Valuethinker »

Mother Biggles wrote: Thu Aug 18, 2022 3:40 am
Dontridetheindexdown wrote: Tue Aug 16, 2022 1:22 pm Having been deployed, and employed, world-wide, I suggest the following answer:

There are no equities, or securities, markets that are as stable, as transparent, and as liquid, as those in the United States.

Even markets that appear similar to our own have far more investment, and control, by governments, and by government-sanctioned actors.

In short, we are the "cleanest dirty shirt in the laundry basket."

This is also the reason the rest of the world bids, every business day, to loan money to the United States Treasury for 30 years at 3% nominal rate.

Certainly, no one can predict the future.

The best we can do is allocate assets based on our perceptions of risk and reward.

For the record, we are 57% equities, 43% securities, 100% invested in U.S. corporations, and obligations of the U.S. Treasury.
Those are exactly some of the reasons why I am one of the 100% USA guys. Also if no one has a stronger protection of private property as us and no one enforces the rule of law objectively more than us. As far as any major economy goes I look around and I just don’t see any other major economy it is more dynamic than ours. I think you can rule out the communist countries for obvious reasons. There’s no real rule of law and no transparency and at the end of the day the government controls the economy. Maybe South Korea and Taiwan can out perform us but are obviously much smaller economies than are we. Looking to see where dynamic growth will come from Europe’s economies are more sclerotic than are ours. And they are losing population or replacing their population with large numbers of people with little formal education and western values of freedom and equality. So I just don’t see that they will up perform over the next 20 years. Where does that leave? South America? Central America? I don’t see those areas as having a strong educated middle-class that will outperform the United States over the next 20 years. So for me I look at the rest of the world and not right right USA but I just don’t see another segment of the world that looks like it will outperform us. And if one comes up I will alter my asset allocation appropriately.
Maybe India? I don’t know enough about India to comment. I suspect that a lot of the highly educated people – engineers and doctors - come here. But I don’t know enough to comment intelligently.
The problem is always the same.

If markets are informationally efficient, all publicly known information is priced into stock values.

Thus, what about the above paragraph do we (as US-based investors) know that the market does not know?
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Re: Why do we market weight USA equity but not global equity?

Post by nisiprius »

It just occurs to me that there is a problem I'm not sure I've heard discussed explicitly with respect to riskier investments.

The advocates of investing in riskier markets say, in effect "who cares if X is riskier then Y, if the risk is priced in?" And the problem is that we don't know how risky is risky. The riskier something is, the more difficult it may be to assess the amount of risk. Or rather it isn't not just amount of risk, it's "mediocristan versus extremistan," to use Nassim Nicholas Taleb's coinage.

You aren't just taking a normal distribution and increasing the standard deviation and making it spread out while keeping the same shape.

In the tamer markets, the risk may be more reliably priced in than in the wilder markets.
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Re: Why do we market weight USA equity but not global equity?

Post by vineviz »

Mother Biggles wrote: Thu Aug 18, 2022 3:45 am
I appreciate the reason that you give but it’s not enough yet to convince me. The world economies are so interdependent that many economies affect many other economies. I don’t for see a situation where the United States is badly for 10 years but another segment of the world does well for 10 years. The correlations seem similar.
I'm not sure why that situation is so hard to imagine: we've seen SEVERAL such periods in the last 50 years.

In fact, international stocks have outperformed US stocks in nearly 2/3 of rolling 10-year periods since 1961.
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Re: Why do we market weight USA equity but not global equity?

Post by nisiprius »

What I don't understand is the push for international stocks that began more or less circa 1990. People have been investing internationally for centuries. Mutual funds that invested in international stocks have been available at least since the 1960s and the expense ratios, though high, were no higher than for US stock funds. And yet something happened.

You can see it in the model portfolios which Burton Malkiel published in A Random Walk Down Wall Street.

1990:

Image

2020:

Image

The suggested allocation to international has more than doubled, from 15/70 = 21% of stocks invested internationally, to 50% of stocks.

He doesn't happen to mention the change or give a reason for it.

I find it very hard to see to anything objective about global markets that has changed in such a way as to justify more than doubling international allocation. I hope I don't need to say that, no, international stocks as share of global stocks has not been declining since 1990. That used to be asserted, but it wasn't so, and I don't think anyone thinks it's so now. NiceUnparticularMan found this chart:

Image
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Re: Why do we market weight USA equity but not global equity?

Post by asif408 »

Mother Biggles wrote: Thu Aug 18, 2022 3:45 am I don’t for see a situation where the United States is badly for 10 years but another segment of the world does well for 10 years. The correlations seem similar. They go up and down together some a little more and some a little less than the others. I don’t see international as protecting in a meaningful way from a United States downturn over a long period of time. I do see a downside of decreased return on investment. So for me I’m still 100 pctusa.
Luckily, you don't have to imagine, it happened from 2000-2011. Look at the US vs. EM and particularly EM value (using actual funds you could invest in): https://www.portfoliovisualizer.com/bac ... ion3_3=100

During this period, correlations were approximately 0.82-0.84 between US and EM, yet the return difference was 10-14%, and US stocks had a negative real returns: https://www.portfoliovisualizer.com/ass ... &months=36. That included EM stocks falling just as much during the dot-com bubble and more during the GFC.

Interestingly, since 2011 comparing US and EM you see the opposite, with the US outperforming by 11%, but the correlations have actually been slightly lower this decade: https://www.portfoliovisualizer.com/ass ... &months=36
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Re: Why do we market weight USA equity but not global equity?

Post by mikep »

Recency bias. 10 years ago, Market weight was 55-60% international and a lot of portfolios here reflected that. Emerging Markets, commodities, precious metals and mining, etc were all the trends.
I still hold 50/50 and not planning to chase US performance.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

Valuethinker wrote: Thu Aug 18, 2022 5:10 am
Mother Biggles wrote: Thu Aug 18, 2022 3:40 am
Dontridetheindexdown wrote: Tue Aug 16, 2022 1:22 pm Having been deployed, and employed, world-wide, I suggest the following answer:

There are no equities, or securities, markets that are as stable, as transparent, and as liquid, as those in the United States.

Even markets that appear similar to our own have far more investment, and control, by governments, and by government-sanctioned actors.

In short, we are the "cleanest dirty shirt in the laundry basket."

This is also the reason the rest of the world bids, every business day, to loan money to the United States Treasury for 30 years at 3% nominal rate.

Certainly, no one can predict the future.

The best we can do is allocate assets based on our perceptions of risk and reward.

For the record, we are 57% equities, 43% securities, 100% invested in U.S. corporations, and obligations of the U.S. Treasury.
Those are exactly some of the reasons why I am one of the 100% USA guys. Also if no one has a stronger protection of private property as us and no one enforces the rule of law objectively more than us. As far as any major economy goes I look around and I just don’t see any other major economy it is more dynamic than ours. I think you can rule out the communist countries for obvious reasons. There’s no real rule of law and no transparency and at the end of the day the government controls the economy. Maybe South Korea and Taiwan can out perform us but are obviously much smaller economies than are we. Looking to see where dynamic growth will come from Europe’s economies are more sclerotic than are ours. And they are losing population or replacing their population with large numbers of people with little formal education and western values of freedom and equality. So I just don’t see that they will up perform over the next 20 years. Where does that leave? South America? Central America? I don’t see those areas as having a strong educated middle-class that will outperform the United States over the next 20 years. So for me I look at the rest of the world and not right right USA but I just don’t see another segment of the world that looks like it will outperform us. And if one comes up I will alter my asset allocation appropriately.
Maybe India? I don’t know enough about India to comment. I suspect that a lot of the highly educated people – engineers and doctors - come here. But I don’t know enough to comment intelligently.
The problem is always the same.

If markets are informationally efficient, all publicly known information is priced into stock values.

Thus, what about the above paragraph do we (as US-based investors) know that the market does not know?
This is going to turn into the same argument rehash on every other USA versus international thread. I don’t think the market is as efficient as people think. I think it is sticky. People see things happening and don’t act promptly. Then sometimes something sparks something and everyone Acts suddenly. I think there is some emotional bias also. USA versus international always degenerates into religion for people. Personally I am religious. I don’t mean religious in a negative way. I mean people come in with their own biases and cannot see the other side.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

vineviz wrote: Thu Aug 18, 2022 6:26 am
Mother Biggles wrote: Thu Aug 18, 2022 3:45 am
I appreciate the reason that you give but it’s not enough yet to convince me. The world economies are so interdependent that many economies affect many other economies. I don’t for see a situation where the United States is badly for 10 years but another segment of the world does well for 10 years. The correlations seem similar.
I'm not sure why that situation is so hard to imagine: we've seen SEVERAL such periods in the last 50 years.

In fact, international stocks have outperformed US stocks in nearly 2/3 of rolling 10-year periods since 1961.
I think the worlds economy and the politics of the world is different today than it was 50 years ago. There has been a lot of cultural change as well. It’s not right right USA. I have a sense as to what is the United States economy having been born and raised here and living here. So I look around and I see to ask myself what economy is unambiguously more dynamic and more free than ours? I just don’t see another region of a large economy it seems poised to a performance. For me how I look at it is let’s just rule out all of the communist countries. Who is left? South America and Central America and Africa don’t have a thriving middle-class with a large educated population. Same for the Middle East. What does that leave us? Taiwan South Korea and possibly India and Australia. And Europe. Europe is dying. They are not reproducing themselves. Their academies are much more sclerotic than ours. So wow I think United States is amazing it’s not like I am saying every place in the world is amazing but we are so much better than everyone else. It is that I am looking at our economy and looking to see who is set up to be more free and dynamic than us? Outside of the very narrow range of countries I listed I just don’t see others economies poised to outgrow us. And whoever is going to make the next Google or the next Facebook or whatever it’s probably going to come here to release it in an IPO or be bought by Google or Facebook. I guess I would ask what other countries do you see outperforming the United States and why? Other people argue about past return on investment and I appreciate that. For me my argument is more persuasive. For others not. Hopefully in contrast to all the other international versus USA prejudice does not degenerate into name-calling.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

asif408 wrote: Thu Aug 18, 2022 8:49 am
Mother Biggles wrote: Thu Aug 18, 2022 3:45 am I don’t for see a situation where the United States is badly for 10 years but another segment of the world does well for 10 years. The correlations seem similar. They go up and down together some a little more and some a little less than the others. I don’t see international as protecting in a meaningful way from a United States downturn over a long period of time. I do see a downside of decreased return on investment. So for me I’m still 100 pctusa.
Luckily, you don't have to imagine, it happened from 2000-2011. Look at the US vs. EM and particularly EM value (using actual funds you could invest in): https://www.portfoliovisualizer.com/bac ... ion3_3=100

During this period, correlations were approximately 0.82-0.84 between US and EM, yet the return difference was 10-14%, and US stocks had a negative real returns: https://www.portfoliovisualizer.com/ass ... &months=36. That included EM stocks falling just as much during the dot-com bubble and more during the GFC.

Interestingly, since 2011 comparing US and EM you see the opposite, with the US outperforming by 11%, but the correlations have actually been slightly lower this decade: https://www.portfoliovisualizer.com/ass ... &months=36
That’s exactly my point though. They were highly correlated. USA went down and international got crushed. This is what I got for comparing USA versus international versus emerging market. So being in International during that. Not only did not help but you still would’ve been better off in USA only. I don’t remember the exact saying but something like when the USA gets a cold the rest of the world it’s the flu. Maybe go to the ICU? I don’t remember the exact saying but for the last a lot of years the United States has been the most influential economy and affects the rest of the world a lot more than the rest of the world affects us.

https://www.portfoliovisualizer.com/bac ... sisResults

Well it looks like I did not save my portfolio visualizer correctly. I plugged in vtsax and V X US and VWO and plugged in your dates.
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Re: Why do we market weight USA equity but not global equity?

Post by vineviz »

Mother Biggles wrote: Thu Aug 18, 2022 10:25 am For me my argument is more persuasive. For others not.
It’s not about “arguments” so much as it seeing the facts in front of us.

You dont have to “imagine” decades in which the US underperforms global stocks: we gave multiple examples, including some that just ended recently, in which it actually happened.

We can see that smart people with copious amounts of information have demonstrated no ability to predict which stocks will outperform in the future. What, besides hubris, suggests we can do better?
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Re: Why do we market weight USA equity but not global equity?

Post by Robot Monster »

I used to keep a list of all these international threads. I got tired of maintaining it, but here it is for reference. link
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

Robot Monster wrote: Thu Aug 18, 2022 11:41 am I used to keep a list of all these international threads. I got tired of maintaining it, but here it is for reference. link
It always turns out the same. Every time. Are you smarter than the market? Then why do you think you can tell which segment will I’ll perform? That’s the one side. Jack Vogel said you don’t need International. USA alone gives you enough exposure. Then make the same argument with slight variations for 6 to 8 pages until everyone gets bored and starts it again a week or two later. I think there are perfectly valid reasons to invest international and I think there are perfectly valid reasons to invest USA only. So act based on which arguments resonate with you and reap the rewards of your decision. Very rarely a commentor will make an astute observation that whatever the market did 100 years ago or 50 years ago that is not realistically relevant to an individual‘s timeline. You need to grow your money as much as possible until let’s say 10 years out from retirement. Your sweat equity is the most valuable part of your portfolio at that time. As your portfolio grows that becomes a greater part of your equity and your sweat equity less. Approaching retirement age you don’t have very much sweat equity left so you better Have grown your portfolio as much as possible until then. Use your sweat equity to grow your portfolio as much as possible until about 10 years or so out from retirement then you need to make sure that it grows enough to last you through retirement but is stable enough not to crash. So invest aggressively until 10 or 15 years out from retirement then gradually decrease the volatility in your portfolio but maintain the ability still to grow. At that .50 years is not a realistic time window. Maybe 20 or 30 years is. So we’re talking about how the world was 50 years ago might not be super relevant. Seeing what the world looks like today may be more relevant. That’s not saying this time it’s different. That means just making simple observations like an economy that is more free is expected to a perform in economy that is more government controlled. And making choices based on Rational evaluation of the way the world is not the way it was 50 years ago.
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Re: Why do we market weight USA equity but not global equity?

Post by Valuethinker »

Mother Biggles wrote: Thu Aug 18, 2022 12:04 pm
Robot Monster wrote: Thu Aug 18, 2022 11:41 am I used to keep a list of all these international threads. I got tired of maintaining it, but here it is for reference. link
It always turns out the same. Every time. Are you smarter than the market? Then why do you think you can tell which segment will I’ll perform? That’s the one side. Jack Vogel said you don’t need International.
John Bogle?

There is no Jack Vogel.
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Re: Why do we market weight USA equity but not global equity?

Post by asif408 »

Mother Biggles wrote: Thu Aug 18, 2022 10:36 am That’s exactly my point though. They were highly correlated. USA went down and international got crushed. This is what I got for comparing USA versus international versus emerging market. So being in International during that. Not only did not help but you still would’ve been better off in USA only.
And my point is that even with high correlations there has been a 10% difference in returns between US and EM in the 2000s and 10% difference between and US and ex-US/EM in the 2010s. How do you explain that? High correlations do not mean the correlation is 1 or anywhere near equal returns, as illustrated.
Mother Biggles wrote: Thu Aug 18, 2022 10:36 amI don’t remember the exact saying but something like when the USA gets a cold the rest of the world it’s the flu. Maybe go to the ICU? I don’t remember the exact saying but for the last a lot of years the United States has been the most influential economy and affects the rest of the world a lot more than the rest of the world affects us.
Try this link: https://www.portfoliovisualizer.com/bac ... ion3_3=100

Your analogy would be good it if was always true. In the 2000-2002 bear market, EM fell as much but the fall was shorter and recovery was quicker, 2003 vs 2006 for the US. So in 2000-2002, a better analogy would be to say they all caught the flu but EM and developed ex-US cleared the flu out of their systems faster. In the more recent falls you statement has been true, but extrapolating the recent past falls to the future is the one constant mistake that gets repeated here over and over. You only have to look at the performance this year (2022) to see that foreign stocks have fallen less this year.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

Valuethinker wrote: Thu Aug 18, 2022 12:38 pm
Mother Biggles wrote: Thu Aug 18, 2022 12:04 pm
Robot Monster wrote: Thu Aug 18, 2022 11:41 am I used to keep a list of all these international threads. I got tired of maintaining it, but here it is for reference. link
It always turns out the same. Every time. Are you smarter than the market? Then why do you think you can tell which segment will I’ll perform? That’s the one side. Jack Vogel said you don’t need International.
John Bogle?

There is no Jack Vogel.
Voice recognition.
I knew him when he was Jack.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

asif408 wrote: Thu Aug 18, 2022 12:55 pm
Mother Biggles wrote: Thu Aug 18, 2022 10:36 am That’s exactly my point though. They were highly correlated. USA went down and international got crushed. This is what I got for comparing USA versus international versus emerging market. So being in International during that. Not only did not help but you still would’ve been better off in USA only.
And my point is that even with high correlations there has been a 10% difference in returns between US and EM in the 2000s and 10% difference between and US and ex-US/EM in the 2010s. How do you explain that? High correlations do not mean the correlation is 1 or anywhere near equal returns, as illustrated.
Mother Biggles wrote: Thu Aug 18, 2022 10:36 amI don’t remember the exact saying but something like when the USA gets a cold the rest of the world it’s the flu. Maybe go to the ICU? I don’t remember the exact saying but for the last a lot of years the United States has been the most influential economy and affects the rest of the world a lot more than the rest of the world affects us.
Try this link: https://www.portfoliovisualizer.com/bac ... ion3_3=100

Your analogy would be good it if was always true. In the 2000-2002 bear market, EM fell as much but the fall was shorter and recovery was quicker, 2003 vs 2006 for the US. So in 2000-2002, a better analogy would be to say they all caught the flu but EM and developed ex-US cleared the flu out of their systems faster. In the more recent falls you statement has been true, but extrapolating the recent past falls to the future is the one constant mistake that gets repeated here over and over. You only have to look at the performance this year (2022) to see that foreign stocks have fallen less this year.
Hi. I don't know how to put my response directly under your comment.

Diversification is supposed to be to smoothe extremes. So you would diversify so that when one goes down you are saved because the other goes up. The different assets are supposed to be non-correlated. But if the correlation is 0.82 or so ... well you aren't getting much benefit or you are not as diversified as you planned.

For the times you gave, I think 2001 to 2011?, there was high correlation and USA outperformed. RE 2000-2002 OK. For me at least any two year period is not something I would consider in my calculations. The smallest period I would consider meaningful would be probably 10 years or preferably longer. Any given week EM or ex-USA certainly could outperform. Even for a few years. But personally I don't hold equities for <10Y. So for me at least only at minimum 10Y blocks would be the minimum relevant to me.

The beginning of the year ex-US outperformed US for a few months. But again a few months is not meaningful amount of time. Since then US again outperforms as per portfolio visualizer.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
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Re: Why do we market weight USA equity but not global equity?

Post by asif408 »

Mother Biggles wrote: Thu Aug 18, 2022 1:05 pm Diversification is supposed to be to smoothe extremes. So you would diversify so that when one goes down you are saved because the other goes up. The different assets are supposed to be non-correlated. But if the correlation is 0.82 or so ... well you aren't getting much benefit or you are not as diversified as you planned.
Our view of diversification is different then. That's one view, but I don't necessarily care if one goes down when the other goes up. That type of diversification doesn't really exist much anymore when you can buy and sell almost any asset with a simple keystroke of a computer or phone. I'm showing you that even though they all fell during the same bad periods the returns were dramatically different over long periods, 10+ years.
Mother Biggles wrote: Thu Aug 18, 2022 1:05 pmFor the times you gave, I think 2001 to 2011?, there was high correlation and USA outperformed.
Not, the exact opposite happened. Look again.
Mother Biggles wrote: Thu Aug 18, 2022 1:05 pmRE 2000-2002 OK. For me at least any two year period is not something I would consider in my calculations. The smallest period I would consider meaningful would be probably 10 years or preferably longer. Any given week EM or ex-USA certainly could outperform. Even for a few years. But personally I don't hold equities for <10Y. So for me at least only at minimum 10Y blocks would be the minimum relevant to me.
The point is there was a 5-6 year period where foreign stocks both fell less and rose faster (2000-2007 for EM and 2002-2007 for developed ex-US), and over the 11 year period they did better overall, mainly due to their performance during that 5-6 year period.
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Re: Why do we market weight USA equity but not global equity?

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Re: Why do we market weight USA equity but not global equity?

Post by junior »

Mother Biggles wrote: Thu Aug 18, 2022 1:05 pm But if the correlation is 0.82 or so ... well you aren't getting much benefit or you are not as diversified as you planned.
Correlation measures only direction, not magnitude, so I don't think the correlation tells you much.
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Re: Why do we market weight USA equity but not global equity?

Post by Beensabu »

nisiprius wrote: Thu Aug 18, 2022 8:13 am What I don't understand is the push for international stocks that began more or less circa 1990...something happened.
International stocks outperformed US stocks for a couple decades prior to when the push for them began.

According to that chart, US share of global market cap in 1990 was the lowest it had been since the 1920s.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

junior wrote: Thu Aug 18, 2022 4:14 pm
Mother Biggles wrote: Thu Aug 18, 2022 1:05 pm But if the correlation is 0.82 or so ... well you aren't getting much benefit or you are not as diversified as you planned.
Correlation measures only direction, not magnitude, so I don't think the correlation tells you much.
True. But the point of diversification is negative correlation. Which is the opposite of this. And even so in the last quite a long time US has outperformed. That is as long as I've been investing. And the factors for that outperformance that I see ... I just don't see other regions outperforming US. That's me. I totally get why people invest international and I totally get why others are all US. Pick your poison. Arguments can be made for both. I like the US argument more than the ex-US argument. Others feel the opposite.
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Re: Why do we market weight USA equity but not global equity?

Post by vineviz »

Mother Biggles wrote: Thu Aug 18, 2022 6:59 pm
junior wrote: Thu Aug 18, 2022 4:14 pm
Mother Biggles wrote: Thu Aug 18, 2022 1:05 pm But if the correlation is 0.82 or so ... well you aren't getting much benefit or you are not as diversified as you planned.
Correlation measures only direction, not magnitude, so I don't think the correlation tells you much.
True. But the point of diversification is negative correlation.
That is definitely NOT “the point” of diversification.

At the very least, the relevant metric would be covariance but only when measured on time intervals corresponding to the investment horizon.

Measuring it using monthly or even annual returns will provide only limited utility.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

vineviz wrote: Thu Aug 18, 2022 8:05 pm
Mother Biggles wrote: Thu Aug 18, 2022 6:59 pm
junior wrote: Thu Aug 18, 2022 4:14 pm
Mother Biggles wrote: Thu Aug 18, 2022 1:05 pm But if the correlation is 0.82 or so ... well you aren't getting much benefit or you are not as diversified as you planned.
Correlation measures only direction, not magnitude, so I don't think the correlation tells you much.
True. But the point of diversification is negative correlation.
That is definitely NOT “the point” of diversification.

At the very least, the relevant metric would be covariance but only when measured on time intervals corresponding to the investment horizon.

Measuring it using monthly or even annual returns will provide only limited utility.
That has always been my understanding. When one asset goes down the other is there to save you. That's why we balance bonds and equities. They often have negative correlation. Certainly in general their volatility negatively correlates. That is why they act as ballast. Same for holding gold. They are supposed to zig when equities zag. That at least has been my understanding. There is also what the international people will say which is "buy the world haystack." When the USA crashes hard, the factors that affect the USA crash will not meaningfully affect the rest of the world so the International portion of the portfolio will outperform.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

vineviz wrote: Thu Aug 18, 2022 8:05 pm
Mother Biggles wrote: Thu Aug 18, 2022 6:59 pm
junior wrote: Thu Aug 18, 2022 4:14 pm
Mother Biggles wrote: Thu Aug 18, 2022 1:05 pm But if the correlation is 0.82 or so ... well you aren't getting much benefit or you are not as diversified as you planned.
Correlation measures only direction, not magnitude, so I don't think the correlation tells you much.
True. But the point of diversification is negative correlation.
That is definitely NOT “the point” of diversification.

At the very least, the relevant metric would be covariance but only when measured on time intervals corresponding to the investment horizon.

Measuring it using monthly or even annual returns will provide only limited utility.
I mean if you diversify so that when the market goes down in one asset class it also goes down in your other asset class you chose for diversification ... that's not the best choice to diversify. I get the alternative argument for international - USA will not always be the most powerful economy (I agree with that) so you diversify to include the world to get their returns to dilute the USA returns for when the USA underperforms. For me it has always been USA is all the diversification I need with equities. For the reason Jack Bogle says. So I would use diversification to mean an asset class not correlated with the USA equities market.
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Re: Why do we market weight USA equity but not global equity?

Post by Beensabu »

Mother Biggles wrote: Thu Aug 18, 2022 8:19 pm I mean if you diversify so that when the market goes down in one asset class it also goes down in your other asset class you chose for diversification ... that's not the best choice to diversify.
You mean like stocks and bonds in 2022?

Sometimes diversification means that even if both things go down, one thing does not go down so much as the other.
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Re: Why do we market weight USA equity but not global equity?

Post by Northern Flicker »

Trance wrote: A key tenant of Boglehead philosophy is that you can't beat the market. Alpha is king. But why does alpha not win globally?
A market index fund diversifies away all alpha in that market. You have no exposure to alpha with a total market index fund.

The US and ex-US markets have some different drivers of risk and thus are different asset classes. Using market weight for the individual securities in an asset class has some desirable properties, but that does not mean that your allocation to different asset classes must conform to the relative capitalization weights of the asset classes. Taking such a view of an asset allocation also would lock in your stock/bond ratio, which would constrain portfolio risk to a particular level.
Last edited by Northern Flicker on Fri Aug 19, 2022 12:01 pm, edited 2 times in total.
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Re: Why do we market weight USA equity but not global equity?

Post by ScubaHogg »

Mother Biggles wrote: Thu Aug 18, 2022 3:45 am
I appreciate the reason that you give but it’s not enough yet to convince me. The world economies are so interdependent that many economies affect many other economies. I don’t for see a situation where the United States is badly for 10 years but another segment of the world does well for 10 years.
Because the stock market isn’t the economy and the economy isn’t the stock market. For the last 30 years the Japanese economy has been fine (not amazing, but not dystopian). The Japanese stock market has been a disaster.
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Re: Why do we market weight USA equity but not global equity?

Post by vineviz »

Mother Biggles wrote: Thu Aug 18, 2022 8:13 pm
That has always been my understanding. When one asset goes down the other is there to save you. That's why we balance bonds and equities. They often have negative correlation. Certainly in general their volatility negatively correlates.
This is a common misunderstanding about portfolio diversification, one which leads to excessive obsession about correlation coefficients which are an incomplete (and, when inappropriately calculated, outright misleading) indicator of diversification benefits.
"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: Why do we market weight USA equity but not global equity?

Post by Nathan Drake »

nisiprius wrote: Thu Aug 18, 2022 8:13 am What I don't understand is the push for international stocks that began more or less circa 1990. People have been investing internationally for centuries. Mutual funds that invested in international stocks have been available at least since the 1960s and the expense ratios, though high, were no higher than for US stock funds. And yet something happened.
What about the push for US only circa 2018? There's a lot of recency bias and performance chasing baked into recommendations. 1990 happened to coincide with a very strong period for international and Japanese stocks in particular.
nisiprius wrote: Thu Aug 18, 2022 8:13 am I find it very hard to see to anything objective about global markets that has changed in such a way as to justify more than doubling international allocation. I hope I don't need to say that, no, international stocks as share of global stocks has not been declining since 1990. That used to be asserted, but it wasn't so, and I don't think anyone thinks it's so now. NiceUnparticularMan found this chart:
That chart is a clear example of why there may have been an objective change - maybe recommended allocations of only 20% back then were grossly underweight the global allocation? US is certainly not 80%+ of the market, as that chart showcases.
nisiprius wrote: Thu Aug 18, 2022 6:23 am It just occurs to me that there is a problem I'm not sure I've heard discussed explicitly with respect to riskier investments.

The advocates of investing in riskier markets say, in effect "who cares if X is riskier then Y, if the risk is priced in?" And the problem is that we don't know how risky is risky. The riskier something is, the more difficult it may be to assess the amount of risk. Or rather it isn't not just amount of risk, it's "mediocristan versus extremistan," to use Nassim Nicholas Taleb's coinage.

You aren't just taking a normal distribution and increasing the standard deviation and making it spread out while keeping the same shape.

In the tamer markets, the risk may be more reliably priced in than in the wilder markets.
How do we know US is any LESS risky than exUS markets other than the VALUATIONS? Currency risk isn't exclusive to exUS markets - there is currency risk for domestic US investors. US is also not free of geopolitical or civil risks.

My belief is that a portfolio that combines multiple independent sources of risk is LESS risky over the long term precisely because it doesn't concentrate into singular risks. That's the entire point of diversification.
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Re: Why do we market weight USA equity but not global equity?

Post by Keenobserver »

Nathan Drake wrote: Fri Aug 19, 2022 10:08 pm
nisiprius wrote: Thu Aug 18, 2022 8:13 am What I don't understand is the push for international stocks that began more or less circa 1990. People have been investing internationally for centuries. Mutual funds that invested in international stocks have been available at least since the 1960s and the expense ratios, though high, were no higher than for US stock funds. And yet something happened.
What about the push for US only circa 2018? There's a lot of recency bias and performance chasing baked into recommendations. 1990 happened to coincide with a very strong period for international and Japanese stocks in particular.
nisiprius wrote: Thu Aug 18, 2022 8:13 am I find it very hard to see to anything objective about global markets that has changed in such a way as to justify more than doubling international allocation. I hope I don't need to say that, no, international stocks as share of global stocks has not been declining since 1990. That used to be asserted, but it wasn't so, and I don't think anyone thinks it's so now. NiceUnparticularMan found this chart:
That chart is a clear example of why there may have been an objective change - maybe recommended allocations of only 20% back then were grossly underweight the global allocation? US is certainly not 80%+ of the market, as that chart showcases.
nisiprius wrote: Thu Aug 18, 2022 6:23 am It just occurs to me that there is a problem I'm not sure I've heard discussed explicitly with respect to riskier investments.

The advocates of investing in riskier markets say, in effect "who cares if X is riskier then Y, if the risk is priced in?" And the problem is that we don't know how risky is risky. The riskier something is, the more difficult it may be to assess the amount of risk. Or rather it isn't not just amount of risk, it's "mediocristan versus extremistan," to use Nassim Nicholas Taleb's coinage.

You aren't just taking a normal distribution and increasing the standard deviation and making it spread out while keeping the same shape.

In the tamer markets, the risk may be more reliably priced in than in the wilder markets.
How do we know US is any LESS risky than exUS markets other than the VALUATIONS? Currency risk isn't exclusive to exUS markets - there is currency risk for domestic US investors. US is also not free of geopolitical or civil risks.

My belief is that a portfolio that combines multiple independent sources of risk is LESS risky over the long term precisely because it doesn't concentrate into singular risks. That's the entire point of diversification.
US is impossible to successfuly invade, the army is the strongest in the world, governemnt is relatively stable, stock market relatively efficient and transparent, the whole world wants a piece of sp 500, the dollar is the currency of the world, US is the center of innovation and hosts most of the top educational institutions on the planet, is open to welcoming all the top talent of the world and indeed has been an attractive destination for for great minds the world over, hosts the position known as the " leader of the free world" I think thats a pretty good start for why US is unique and cannot really be compared to any other nation. What other countries have all the attributes listed above? International does.not offer added protection against catastrophic events and tends to fall deeper than US, even if the said event originated in the US. US housing market crash being one example, the dot com ( mostly US internet companies crashing) is another. All international does is allow people to scratch the " diversifation" itch. So in the long, international does not offer anything extra despite the added risk.
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Re: Why do we market weight USA equity but not global equity?

Post by Nathan Drake »

Keenobserver wrote: Fri Aug 19, 2022 11:09 pm
Nathan Drake wrote: Fri Aug 19, 2022 10:08 pm
nisiprius wrote: Thu Aug 18, 2022 8:13 am What I don't understand is the push for international stocks that began more or less circa 1990. People have been investing internationally for centuries. Mutual funds that invested in international stocks have been available at least since the 1960s and the expense ratios, though high, were no higher than for US stock funds. And yet something happened.
What about the push for US only circa 2018? There's a lot of recency bias and performance chasing baked into recommendations. 1990 happened to coincide with a very strong period for international and Japanese stocks in particular.
nisiprius wrote: Thu Aug 18, 2022 8:13 am I find it very hard to see to anything objective about global markets that has changed in such a way as to justify more than doubling international allocation. I hope I don't need to say that, no, international stocks as share of global stocks has not been declining since 1990. That used to be asserted, but it wasn't so, and I don't think anyone thinks it's so now. NiceUnparticularMan found this chart:
That chart is a clear example of why there may have been an objective change - maybe recommended allocations of only 20% back then were grossly underweight the global allocation? US is certainly not 80%+ of the market, as that chart showcases.
nisiprius wrote: Thu Aug 18, 2022 6:23 am It just occurs to me that there is a problem I'm not sure I've heard discussed explicitly with respect to riskier investments.

The advocates of investing in riskier markets say, in effect "who cares if X is riskier then Y, if the risk is priced in?" And the problem is that we don't know how risky is risky. The riskier something is, the more difficult it may be to assess the amount of risk. Or rather it isn't not just amount of risk, it's "mediocristan versus extremistan," to use Nassim Nicholas Taleb's coinage.

You aren't just taking a normal distribution and increasing the standard deviation and making it spread out while keeping the same shape.

In the tamer markets, the risk may be more reliably priced in than in the wilder markets.
How do we know US is any LESS risky than exUS markets other than the VALUATIONS? Currency risk isn't exclusive to exUS markets - there is currency risk for domestic US investors. US is also not free of geopolitical or civil risks.

My belief is that a portfolio that combines multiple independent sources of risk is LESS risky over the long term precisely because it doesn't concentrate into singular risks. That's the entire point of diversification.
US is impossible to successfuly invade, the army is the strongest in the world, governemnt is relatively stable, stock market relatively efficient and transparent, the whole world wants a piece of sp 500, the dollar is the currency of the world, US is the center of innovation and hosts most of the top educational institutions on the planet, is open to welcoming all the top talent of the world and indeed has been an attractive destination for for great minds the world over, hosts the position known as the " leader of the free world" I think thats a pretty good start for why US is unique and cannot really be compared to any other nation. What other countries have all the attributes listed above? International does.not offer added protection against catastrophic events and tends to fall deeper than US, even if the said event originated in the US. US housing market crash being one example, the dot com ( mostly US internet companies crashing) is another. All international does is allow people to scratch the " diversifation" itch. So in the long, international does not offer anything extra despite the added risk.
War is not the only risk, in fact I’d be less concerned about external war as I would a civil conflict within.

And of course, war is not a requirement for poor equity returns - Japan has had three decades of poor returns despite having a very stable society and rule of law.

International offers you protection against periods that are unfavorable to US investors, as it has historically

An international investor is not avoiding US, it’s still a large part of a well diversified portfolio.
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Re: Why do we market weight USA equity but not global equity?

Post by Northern Flicker »

nisiprius wrote: What I don't understand is the push for international stocks that began more or less circa 1990. People have been investing internationally for centuries. Mutual funds that invested in international stocks have been available at least since the 1960s and the expense ratios, though high, were no higher than for US stock funds. And yet something happened.
The "somethings" that happened were the fall of the Berlin Wall in 1989 and the dissolution of the USSR in 1991. This opened up opportunities for capital flows, and led to the perception of less geopolitical risk. The ongoing market reforms in China also were well underway by then.
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Re: Why do we market weight USA equity but not global equity?

Post by Northern Flicker »

Mother Biggles wrote: Thu Aug 18, 2022 10:19 am I don’t think the market is as efficient as people think. I think it is sticky....

I mean people come in with their own biases and cannot see the other side.
You certainly are entitled to have your own bias about market efficiency.
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Re: Why do we market weight USA equity but not global equity?

Post by Trance »

Northern Flicker wrote: Sat Aug 20, 2022 12:12 am
nisiprius wrote: What I don't understand is the push for international stocks that began more or less circa 1990. People have been investing internationally for centuries. Mutual funds that invested in international stocks have been available at least since the 1960s and the expense ratios, though high, were no higher than for US stock funds. And yet something happened.
The "somethings" that happened were the fall of the Berlin Wall in 1989 and the dissolution of the USSR in 1991. This opened up opportunities for capital flows, and led to the perception of less geopolitical risk. The ongoing market reforms in China also were well underway by then.
Isn't it possible the real estate and banking crisis in China could another example of a geopolitical event that could cause global stocks and growth to shift again?
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Re: Why do we market weight USA equity but not global equity?

Post by Northern Flicker »

Major events with global consequences often cause shifts in investment and trade.
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Re: Why do we market weight USA equity but not global equity?

Post by Keenobserver »

Northern Flicker wrote: Sun Aug 21, 2022 1:06 am Major events with global consequences often cause shifts in investment and trade.
Yes they do. For example, any kind of global instability means more people securing their assests by investing in the US for which there is no equivalent/ subsitute anywhere.
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Re: Why do we market weight USA equity but not global equity?

Post by Valuethinker »

Keenobserver wrote: Fri Aug 19, 2022 11:09 pm
US is impossible to successfuly invade, the army is the strongest in the world, governemnt is relatively stable, stock market relatively efficient and transparent, the whole world wants a piece of sp 500, the dollar is the currency of the world, US is the center of innovation and hosts most of the top educational institutions on the planet, is open to welcoming all the top talent of the world and indeed has been an attractive destination for for great minds the world over, hosts the position known as the " leader of the free world" I think thats a pretty good start for why US is unique and cannot really be compared to any other nation. What other countries have all the attributes listed above? International does.not offer added protection against catastrophic events and tends to fall deeper than US, even if the said event originated in the US. US housing market crash being one example, the dot com ( mostly US internet companies crashing) is another. All international does is allow people to scratch the " diversifation" itch. So in the long, international does not offer anything extra despite the added risk.
https://www.youtube.com/watch?v=1vh-wEXvdW8

The English are Best (Flanders & Swan)

"The English, the English are best
I wouldn't give a tuppence for all the rest"

The enumeration of singular national virtues causes me great amusement, living as I do in a country that is, at times, convinced that it is something other than a middling economy in a middle sized economic power that once happened to rule more of the globe than any Empire has before or since.

There's nothing in the above paragraph that the market doesn't know and incorporates into its valuation estimate of future prospects.

So what do we know that the market doesn't know?
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Re: Why do we market weight USA equity but not global equity?

Post by Keenobserver »

Valuethinker wrote: Thu Aug 25, 2022 12:08 pm
Keenobserver wrote: Fri Aug 19, 2022 11:09 pm
US is impossible to successfuly invade, the army is the strongest in the world, governemnt is relatively stable, stock market relatively efficient and transparent, the whole world wants a piece of sp 500, the dollar is the currency of the world, US is the center of innovation and hosts most of the top educational institutions on the planet, is open to welcoming all the top talent of the world and indeed has been an attractive destination for for great minds the world over, hosts the position known as the " leader of the free world" I think thats a pretty good start for why US is unique and cannot really be compared to any other nation. What other countries have all the attributes listed above? International does.not offer added protection against catastrophic events and tends to fall deeper than US, even if the said event originated in the US. US housing market crash being one example, the dot com ( mostly US internet companies crashing) is another. All international does is allow people to scratch the " diversifation" itch. So in the long, international does not offer anything extra despite the added risk.
https://www.youtube.com/watch?v=1vh-wEXvdW8

The English are Best (Flanders & Swan)

"The English, the English are best
I wouldn't give a tuppence for all the rest"

The enumeration of singular national virtues causes me great amusement, living as I do in a country that is, at times, convinced that it is something other than a middling economy in a middle sized economic power that once happened to rule more of the globe than any Empire has before or since.

There's nothing in the above paragraph that the market doesn't know and incorporates into its valuation estimate of future prospects.

So what do we know that the market doesn't know?
There is simply no comparison between the British Imperial Empire and the economic powerhouse that is the US. That is the fallacy many people dont recognize. How many other nations globally were invested to the teeth in Britian when they were a super power? How much access did the world have to their markets to invest? Were people across the globe part owners of the East India company? Were other nations like Germany storing their National gold reserves in England ? The economics have completely changed. Will the US fall one day? Of course it will, no nation is impervious to that. The Egyptians were the supreme civilization for 3000 years, did people leave Egypt and start living in Amazon due to the fact that Egypt might ONE DAY fall? There is simply NO scenario where the US market crashes for an extended period of time and the rest of the world does not for equally as much or even greater. Europe is a mess and has been for a while, little to no innovation coming from there. There are no indicators that that will flip anytime soon. Yes things will change but I only have one life time cycle to worry aboutz and that is MY own lifetime cycle. Again, international does not.offer any protection during a catastrophe/ crash.
Last edited by Keenobserver on Thu Aug 25, 2022 1:34 pm, edited 1 time in total.
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Re: Why do we market weight USA equity but not global equity?

Post by Keenobserver »

Keenobserver wrote: Thu Aug 25, 2022 1:31 pm
Valuethinker wrote: Thu Aug 25, 2022 12:08 pm
Keenobserver wrote: Fri Aug 19, 2022 11:09 pm
US is impossible to successfuly invade, the army is the strongest in the world, governemnt is relatively stable, stock market relatively efficient and transparent, the whole world wants a piece of sp 500, the dollar is the currency of the world, US is the center of innovation and hosts most of the top educational institutions on the planet, is open to welcoming all the top talent of the world and indeed has been an attractive destination for for great minds the world over, hosts the position known as the " leader of the free world" I think thats a pretty good start for why US is unique and cannot really be compared to any other nation. What other countries have all the attributes listed above? International does.not offer added protection against catastrophic events and tends to fall deeper than US, even if the said event originated in the US. US housing market crash being one example, the dot com ( mostly US internet companies crashing) is another. All international does is allow people to scratch the " diversifation" itch. So in the long, international does not offer anything extra despite the added risk.
https://www.youtube.com/watch?v=1vh-wEXvdW8

The English are Best (Flanders & Swan)

"The English, the English are best
I wouldn't give a tuppence for all the rest"

The enumeration of singular national virtues causes me great amusement, living as I do in a country that is, at times, convinced that it is something other than a middling economy in a middle sized economic power that once happened to rule more of the globe than any Empire has before or since.

There's nothing in the above paragraph that the market doesn't know and incorporates into its valuation estimate of future prospects.

So what do we know that the market doesn't know?
There is simply no comparison between the British Imperial Empire and the economic powerhouse that is the US. That is the fallacy many people dont recognize. How many other nations globally were invested to the teeth in Britian when they were a super power? How much access did the world have to their markets to invest? Were people across the globe part owners of the East India company? Were other nations like Germany storing their National gold reserves in England ? The economics have completely changed. Will the US fall one day? Of course it will, no nation is impervious to that. The Egyptians were the supreme civilization for 3000 years, did people leave Egypt and start living in Amazon due to the fact that Egypt might ONE DAY fall? There is simply NO scenario where the US market crashes for an extended period of time and the rest of the world does not for equally as much or even greater. Europe is a mess and has been for a while, little to no innovation coming from there. There are no indicators that that will flip anytime soon. Yes things will change I only have one life time cycle to worry about and that is MY own lifetime cycle. Again, international does not offer any added protection during a catastrope or crash.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

Valuethinker wrote: Thu Aug 25, 2022 12:08 pm
Keenobserver wrote: Fri Aug 19, 2022 11:09 pm
US is impossible to successfuly invade, the army is the strongest in the world, governemnt is relatively stable, stock market relatively efficient and transparent, the whole world wants a piece of sp 500, the dollar is the currency of the world, US is the center of innovation and hosts most of the top educational institutions on the planet, is open to welcoming all the top talent of the world and indeed has been an attractive destination for for great minds the world over, hosts the position known as the " leader of the free world" I think thats a pretty good start for why US is unique and cannot really be compared to any other nation. What other countries have all the attributes listed above? International does.not offer added protection against catastrophic events and tends to fall deeper than US, even if the said event originated in the US. US housing market crash being one example, the dot com ( mostly US internet companies crashing) is another. All international does is allow people to scratch the " diversifation" itch. So in the long, international does not offer anything extra despite the added risk.
https://www.youtube.com/watch?v=1vh-wEXvdW8

The English are Best (Flanders & Swan)

"The English, the English are best
I wouldn't give a tuppence for all the rest"

The enumeration of singular national virtues causes me great amusement, living as I do in a country that is, at times, convinced that it is something other than a middling economy in a middle sized economic power that once happened to rule more of the globe than any Empire has before or since.

There's nothing in the above paragraph that the market doesn't know and incorporates into its valuation estimate of future prospects.

So what do we know that the market doesn't know?
I would say keenobserver lists a lot of principles I also believe and have posted ad nauseum before - and there are others like yourself who do not feel these are legitimate avenues of argument. The market is like us. There are a bunch of people who believe in USA-only portfolios and a lot who believe international is preferred. We can argue the principles all day long (and ad nauseum like every other USA v Intl thread) - but at the end of the day we each need to make a choice. Thus the USA people believe more in the USA argument and the non-USA people believe more in the Intl argument. What we know that the market does not know isn't knowledge. It is that we feel our "religious belief" supports USA only and your "religious belief" supports Intl. Just like all the other threads that degenerate into the same arguments we always have - it's not that we or you have superior knowledge - we just look at the world differently. So far I've been happy not having International for the last 20 years. Obviously you are happy having been in international for the peace of mind it provides that if the USA goes down hard the belief is Intl will not go down as hard and so should be less volatile. It's almost like say the Frankfurt vs Austrian schools (?) of economics - they believe in different things just like the USA v Intl people. They have access to the same data but come to different conclusions.
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

Beensabu wrote: Thu Aug 18, 2022 10:33 pm
Mother Biggles wrote: Thu Aug 18, 2022 8:19 pm I mean if you diversify so that when the market goes down in one asset class it also goes down in your other asset class you chose for diversification ... that's not the best choice to diversify.
You mean like stocks and bonds in 2022?

Sometimes diversification means that even if both things go down, one thing does not go down so much as the other.
True. Obviously. But the international equity market and the USA equity market seem to correlate much more than the equity and bond markets ... so is there a situation where USA crashes and Intl does signif better? I just don't see that happening. Again - I'm content with my all USA portfolio the last 20 Y understanding there should be more volatility than a portfolio with signif intl equities. The intl people prefer less volatility. I've posted ad nauseum the logic behind why I invest USA only and the intl people post their logic. I find the USA logic more convincing and they find the intl more convincing. One day, hopefully not in our lifetimes, USA will lose its dominance and when that is happening I would open up to investing in whatever non-communist power that replaces us. I just don't see anyone on the horizon that has the advantages we have and so remain USA. But I don't begrudge the intl people their logic and their values. Valid arguments on both sides. I just think the USA argument is stronger.
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Re: Why do we market weight USA equity but not global equity?

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Mother Biggles wrote: Thu Aug 25, 2022 2:21 pm But the international equity market and the USA equity market seem to correlate much more than the equity and bond markets ... so is there a situation where USA crashes and Intl does signif better? I just don't see that happening.
It already HAS happened. Many times.

International stocks have outperformed US stocks 30 years out of the last 62, and 25 of those years the outperformance was more than 500 bps.
"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: Why do we market weight USA equity but not global equity?

Post by Beensabu »

Mother Biggles wrote: Thu Aug 25, 2022 2:21 pm Again - I'm content with my all USA portfolio the last 20 Y understanding there should be more volatility than a portfolio with signif intl equities.
That's good.
The intl people prefer less volatility.
Not exactly. It's more about narrowing the range of potential outcomes, which is what diversification achieves.

An example would be if someone invested everything in TSLA in the first couple years the stock became publicly traded. The range was between "unlimited potential" and zero. It turned out really, really, really well for whoever did that and stuck it out. They turned $10k into $1.5m. But that doesn't change the fact that the bottom of the potential range was zero. And that's what happens when investing only in a single stock.

The more and more diverse a portfolio becomes (assets, stocks, sectors, geographies, size, style, etc.) the more and more you narrow that range. It reduces risk/uncertainty and also potential return. It's a trade-off.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: Why do we market weight USA equity but not global equity?

Post by Mother Biggles »

vineviz wrote: Thu Aug 25, 2022 2:41 pm
Mother Biggles wrote: Thu Aug 25, 2022 2:21 pm But the international equity market and the USA equity market seem to correlate much more than the equity and bond markets ... so is there a situation where USA crashes and Intl does signif better? I just don't see that happening.
It already HAS happened. Many times.

International stocks have outperformed US stocks 30 years out of the last 62, and 25 of those years the outperformance was more than 500 bps.
I've already written my response many times. I just don't have the energy to write the same responses again. The outperformance in the 80's to early 90's is Japan. But Japan didn't really end that well. Prior to that - say in the 1950's and '60's - the world was enough of a different place that I don't think we can compare Europe's, Asia's, and USA economy the same as we can today.
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Re: Why do we market weight USA equity but not global equity?

Post by Beensabu »

Mother Biggles wrote: Thu Aug 25, 2022 3:51 pm
vineviz wrote: Thu Aug 25, 2022 2:41 pm
Mother Biggles wrote: Thu Aug 25, 2022 2:21 pm But the international equity market and the USA equity market seem to correlate much more than the equity and bond markets ... so is there a situation where USA crashes and Intl does signif better? I just don't see that happening.
It already HAS happened. Many times.

International stocks have outperformed US stocks 30 years out of the last 62, and 25 of those years the outperformance was more than 500 bps.
I've already written my response many times. I just don't have the energy to write the same responses again. The outperformance in the 80's to early 90's is Japan. But Japan didn't really end that well. Prior to that - say in the 1950's and '60's - the world was enough of a different place that I don't think we can compare Europe's, Asia's, and USA economy the same as we can today.
What about the 70s?
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Re: Why do we market weight USA equity but not global equity?

Post by vineviz »

Mother Biggles wrote: Thu Aug 25, 2022 3:51 pm
vineviz wrote: Thu Aug 25, 2022 2:41 pm
Mother Biggles wrote: Thu Aug 25, 2022 2:21 pm But the international equity market and the USA equity market seem to correlate much more than the equity and bond markets ... so is there a situation where USA crashes and Intl does signif better? I just don't see that happening.
It already HAS happened. Many times.

International stocks have outperformed US stocks 30 years out of the last 62, and 25 of those years the outperformance was more than 500 bps.
I've already written my response many times. I just don't have the energy to write the same responses again. The outperformance in the 80's to early 90's is Japan. But Japan didn't really end that well. Prior to that - say in the 1950's and '60's - the world was enough of a different place that I don't think we can compare Europe's, Asia's, and USA economy the same as we can today.
This kind of hand-waving rationalization conveniently overlooks the fact that international stocks also outperformed the US in 9 of the past 20 years. This isn't a phenomenon that is limited to the distant past.

It's simply NOT unusual in the least, which is why it shouldn't be hard to imagine happening again.
"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: Why do we market weight USA equity but not global equity?

Post by Parkinglotracer »

Very few companies worldwide and no countries worldwide that can compete with our capitalism and ability to raise venture capital. I’m only 20% in international equities now but if I was starting over I would do a zero in an international allocation. If I sold now I’d be a loser so I am going to hang on so it sucks down my portfolio more. Some truth and some sarcasm (or scarsasm) in what I wrote.
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Re: Why do we market weight USA equity but not global equity?

Post by Parkinglotracer »

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Nathan Drake
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Re: Why do we market weight USA equity but not global equity?

Post by Nathan Drake »

Parkinglotracer wrote: Thu Aug 25, 2022 4:10 pm Very few companies worldwide and no countries worldwide that can compete with our capitalism and ability to raise venture capital. I’m only 20% in international equities now but if I was starting over I would do a zero in an international allocation. If I sold now I’d be a loser so I am going to hang on so it sucks down my portfolio more. Some truth and some sarcasm (or scarsasm) in what I wrote.
Japanese stocks this past decade had better earnings performance than the US
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