VXUS [Why invest in Vanguard Total International Stock?]

[Taylor Larimore]

Loved your book. Your reasoning makes a lot of sense.

Any strong opinions on why Vanguard officially recommends 40% international instead of 20%?

FireGuy88:

I am pleased that you "Loved" my book.

Sorry, I don't have a strong opinion why Vanguard recommends 40% international. I only know they have been wrong for a very long time.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Holdings of non-U.S. stocks should be limited to no more than 20% of equities (which is my recommendation for "The Three Fund Portfolio").

[Nathan Drake]

Loved your book. Your reasoning makes a lot of sense.

Any strong opinions on why Vanguard officially recommends 40% international instead of 20%?

FireGuy88:

I am pleased that you "Loved" my book.

Sorry, I don't have a strong opinion why Vanguard recommends 40% international. I only know they have been wrong for a very long time.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Holdings of non-U.S. stocks should be limited to no more than 20% of equities (which is my recommendation for "The Three Fund Portfolio").

What have they been wrong about?

[smooth_rough]

I have read over and over that some portion of your asset allocation should be in VXUS. However, when I look at the performance over 5 years and the max as compared to VTI, I ask myself - why should I put any money into an international etf? Are we hoping for an international bear to come? Or if VTI crashes will VXUS hold the line? What is the logic behind investing in international - other than you should be diversified as much as possible?

If the US experiences its own self generated market crash, theoretically your international allocation would be less impacted and thereby bring some stability to your overall portfolio? However, its not conclusive as other countries have their own exposure to market crashes. Personally I'm not convinced that "you should be diversified as much as possible". The logical end result of that would be to hold all investments everywhere regardless of performance.

[donaldfair71]

Loved your book. Your reasoning makes a lot of sense.

Any strong opinions on why Vanguard officially recommends 40% international instead of 20%?

FireGuy88:

I am pleased that you "Loved" my book.

Sorry, I don't have a strong opinion why Vanguard recommends 40% international. I only know they have been wrong for a very long time.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Holdings of non-U.S. stocks should be limited to no more than 20% of equities (which is my recommendation for "The Three Fund Portfolio").

What have they been wrong about?

Yeah, "wrong" is a very strong word. Certainly doesn't fit in the context of diversification here.

Were bondholders "wrong" from 82-99? Of course not.

[Nathan Drake]

Loved your book. Your reasoning makes a lot of sense.

Any strong opinions on why Vanguard officially recommends 40% international instead of 20%?

FireGuy88:

I am pleased that you "Loved" my book.

Sorry, I don't have a strong opinion why Vanguard recommends 40% international. I only know they have been wrong for a very long time.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Holdings of non-U.S. stocks should be limited to no more than 20% of equities (which is my recommendation for "The Three Fund Portfolio").

What have they been wrong about?

Yeah, "wrong" is a very strong word. Certainly doesn't fit in the context of diversification here.

Were bondholders "wrong" from 82-99? Of course not.

Precisely, diversifying into an unknown future isn’t “wrong”.

Only in hindsight can you know what would have been best, but if we had hindsight none of us would be investing in index funds (US, exUS, or otherwise)

I.e., Bogle wasn’t “wrong” when he didn’t decide to chase TQQQ leading up to 2021 and instead held the lower returning S&P 500

[TacoLover]

Loved your book. Your reasoning makes a lot of sense.

Any strong opinions on why Vanguard officially recommends 40% international instead of 20%?

FireGuy88:

I am pleased that you "Loved" my book.

Sorry, I don't have a strong opinion why Vanguard recommends 40% international. I only know they have been wrong for a very long time.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Holdings of non-U.S. stocks should be limited to no more than 20% of equities (which is my recommendation for "The Three Fund Portfolio").

What have they been wrong about?

Yeah, "wrong" is a very strong word. Certainly doesn't fit in the context of diversification here.

Were bondholders "wrong" from 82-99? Of course not.

Precisely, diversifying into an unknown future isn’t “wrong”.

Only in hindsight can you know what would have been best, but if we had hindsight none of us would be investing in index funds (US, exUS, or otherwise)

I.e., Bogle wasn’t “wrong” when he didn’t decide to chase TQQQ leading up to 2021 and instead held the lower returning S&P 500

I think his point was they have predicted outperformance repeatedly for many years and that prediction failed. So they were wrong. He is not saying diversification is bad. He is saying they were wrong in predicting outperformance. Ex U.S. has now outperformed by a bit the last few months but someone who kept a us only portfolio for the past ten years - it an insignificant amount of time - would be happier not having ex U.S. in his portfolio. This is also completely different than saying “why not only invest in Tesla?” It is not home bias. It is that the USA is the largest economy in the world rivaled only by a totalitarian govt that has shown it not the market makes the decisions in its economy. So it’s not irrational to invest usa only. It’s also not irrational to invest total world.

[Nathan Drake]

FireGuy88:

I am pleased that you "Loved" my book.

Sorry, I don't have a strong opinion why Vanguard recommends 40% international. I only know they have been wrong for a very long time.

Best wishes.
Taylor

What have they been wrong about?

Yeah, "wrong" is a very strong word. Certainly doesn't fit in the context of diversification here.

Were bondholders "wrong" from 82-99? Of course not.

Precisely, diversifying into an unknown future isn’t “wrong”.

Only in hindsight can you know what would have been best, but if we had hindsight none of us would be investing in index funds (US, exUS, or otherwise)

I.e., Bogle wasn’t “wrong” when he didn’t decide to chase TQQQ leading up to 2021 and instead held the lower returning S&P 500

I think his point was they have predicted outperformance repeatedly for many years and that prediction failed. So they were wrong. He is not saying diversification is bad. He is saying they were wrong in predicting outperformance. Ex U.S. has now outperformed by a bit the last few months but someone who kept a us only portfolio for the past ten years - it an insignificant amount of time - would be happier not having ex U.S. in his portfolio. This is also completely different than saying “why not only invest in Tesla?” It is not home bias. It is that the USA is the largest economy in the world rivaled only by a totalitarian govt that has shown it not the market makes the decisions in its economy. So it’s not irrational to invest usa only. It’s also not irrational to invest total world.

Vanguard isn’t predicting exact performance, they are presenting probabilities for expected returns

A large driver of US returns were unexpected, speculatively driven returns through valuation expansion and Vanguard’s models reflect a moderately neutral stance on changes in valuation amongst asset classes, which is a rational position to take if you look at the long term data of valuations.

So in other words, if somebody wins the lottery that doesn’t mean that those that did not participate were “wrong”, to use a hyperbolic example of a similar phenomenon

[NiceUnparticularMan]

What have they been wrong about?

Yeah, "wrong" is a very strong word. Certainly doesn't fit in the context of diversification here.

Were bondholders "wrong" from 82-99? Of course not.

Precisely, diversifying into an unknown future isn’t “wrong”.

Only in hindsight can you know what would have been best, but if we had hindsight none of us would be investing in index funds (US, exUS, or otherwise)

I.e., Bogle wasn’t “wrong” when he didn’t decide to chase TQQQ leading up to 2021 and instead held the lower returning S&P 500

I think his point was they have predicted outperformance repeatedly for many years and that prediction failed. So they were wrong. He is not saying diversification is bad. He is saying they were wrong in predicting outperformance. Ex U.S. has now outperformed by a bit the last few months but someone who kept a us only portfolio for the past ten years - it an insignificant amount of time - would be happier not having ex U.S. in his portfolio. This is also completely different than saying “why not only invest in Tesla?” It is not home bias. It is that the USA is the largest economy in the world rivaled only by a totalitarian govt that has shown it not the market makes the decisions in its economy. So it’s not irrational to invest usa only. It’s also not irrational to invest total world.

Vanguard isn’t predicting exact performance, they are presenting probabilities for expected returns

A large driver of US returns were unexpected, speculatively driven returns through valuation expansion and Vanguard’s models reflect a moderately neutral stance on changes in valuation amongst asset classes, which is a rational position to take if you look at the long term data of valuations.

So in other words, if somebody wins the lottery that doesn’t mean that those that did not participate were “wrong”, to use a hyperbolic example of a similar phenomenon

And while this debate will never end, it remains a question why any obvious reasons to be relatively bullish on US stock earnings are not already priced into US stocks. Indeed, I think virtually everyone is agreeing some amount of bullishness on US stock earnings is warranted, meaning US stocks should have somewhat higher valuations than many other countries' stocks (maybe not quite all of them). But why would it always be the case stock investors were not yet bullish enough on US stock earnings?

We do know we went through a recent period where in fact US relative valuations went up rapidly. This does imply that at the beginning of this period, stock investors were less bullish on US stock earnings than they became by the end of the period.

We also know in the past, this has happened before and then at some point the trend has reversed and US stock valuations have converged for a while rather than diverged.

Of course if someone shows they can pick the times when US stock valuations are going to diverge (going all US stocks) and then ALSO pick the times when US stock valuations are going to converge (going all ex-US stocks)--well, they are going to be very wealthy and that will be very impressive.

But if all that happened is that a person is always betting on US stock valuations diverging and then in the recent period they did--that is in fact consistent with just getting lucky. Much like the person who claims "tails never fails" and then flips a tails. They may claim their proved they are right. I am just going to think they got lucky.

[TacoLover]

Yeah, "wrong" is a very strong word. Certainly doesn't fit in the context of diversification here.

Were bondholders "wrong" from 82-99? Of course not.

Precisely, diversifying into an unknown future isn’t “wrong”.

Only in hindsight can you know what would have been best, but if we had hindsight none of us would be investing in index funds (US, exUS, or otherwise)

I.e., Bogle wasn’t “wrong” when he didn’t decide to chase TQQQ leading up to 2021 and instead held the lower returning S&P 500

I think his point was they have predicted outperformance repeatedly for many years and that prediction failed. So they were wrong. He is not saying diversification is bad. He is saying they were wrong in predicting outperformance. Ex U.S. has now outperformed by a bit the last few months but someone who kept a us only portfolio for the past ten years - it an insignificant amount of time - would be happier not having ex U.S. in his portfolio. This is also completely different than saying “why not only invest in Tesla?” It is not home bias. It is that the USA is the largest economy in the world rivaled only by a totalitarian govt that has shown it not the market makes the decisions in its economy. So it’s not irrational to invest usa only. It’s also not irrational to invest total world.

Vanguard isn’t predicting exact performance, they are presenting probabilities for expected returns

A large driver of US returns were unexpected, speculatively driven returns through valuation expansion and Vanguard’s models reflect a moderately neutral stance on changes in valuation amongst asset classes, which is a rational position to take if you look at the long term data of valuations.

So in other words, if somebody wins the lottery that doesn’t mean that those that did not participate were “wrong”, to use a hyperbolic example of a similar phenomenon

And while this debate will never end, it remains a question why any obvious reasons to be relatively bullish on US stock earnings are not already priced into US stocks. Indeed, I think virtually everyone is agreeing some amount of bullishness on US stock earnings is warranted, meaning US stocks should have somewhat higher valuations than many other countries' stocks (maybe not quite all of them). But why would it always be the case stock investors were not yet bullish enough on US stock earnings?

We do know we went through a recent period where in fact US relative valuations went up rapidly. This does imply that at the beginning of this period, stock investors were less bullish on US stock earnings than they became by the end of the period.

We also know in the past, this has happened before and then at some point the trend has reversed and US stock valuations have converged for a while rather than diverged.

Of course if someone shows they can pick the times when US stock valuations are going to diverge (going all US stocks) and then ALSO pick the times when US stock valuations are going to converge (going all ex-US stocks)--well, they are going to be very wealthy and that will be very impressive.

But if all that happened is that a person is always betting on US stock valuations diverging and then in the recent period they did--that is in fact consistent with just getting lucky. Much like the person who claims "tails never fails" and then flips a tails. They may claim their proved they are right. I am just going to think they got lucky.

United States-only people would say there is a structural reason why the United States as compared to the other major economies will outperform. For political reasons, rule of law, taxation levels, and so on. People are encouraged to be more productive and are rewarded more for productivity. We see in demonstrations in France and England protesting increased work. the way the political system is and the national culture is - maximizing productivity is less there as compared to the United States. France is capped out at a small number of hours working per week and retirement begins at late middle age. When our economy and Europes economy were more equal we are talking the 60s and 70s before meaningful de regulation in USA . Personally, I just don’t see Europe outperforming. What other major economy is there to outperform usa ? Maybe South Korea? India?

[Nathan Drake]

Precisely, diversifying into an unknown future isn’t “wrong”.

Only in hindsight can you know what would have been best, but if we had hindsight none of us would be investing in index funds (US, exUS, or otherwise)

I.e., Bogle wasn’t “wrong” when he didn’t decide to chase TQQQ leading up to 2021 and instead held the lower returning S&P 500

I think his point was they have predicted outperformance repeatedly for many years and that prediction failed. So they were wrong. He is not saying diversification is bad. He is saying they were wrong in predicting outperformance. Ex U.S. has now outperformed by a bit the last few months but someone who kept a us only portfolio for the past ten years - it an insignificant amount of time - would be happier not having ex U.S. in his portfolio. This is also completely different than saying “why not only invest in Tesla?” It is not home bias. It is that the USA is the largest economy in the world rivaled only by a totalitarian govt that has shown it not the market makes the decisions in its economy. So it’s not irrational to invest usa only. It’s also not irrational to invest total world.

Vanguard isn’t predicting exact performance, they are presenting probabilities for expected returns

A large driver of US returns were unexpected, speculatively driven returns through valuation expansion and Vanguard’s models reflect a moderately neutral stance on changes in valuation amongst asset classes, which is a rational position to take if you look at the long term data of valuations.

So in other words, if somebody wins the lottery that doesn’t mean that those that did not participate were “wrong”, to use a hyperbolic example of a similar phenomenon

And while this debate will never end, it remains a question why any obvious reasons to be relatively bullish on US stock earnings are not already priced into US stocks. Indeed, I think virtually everyone is agreeing some amount of bullishness on US stock earnings is warranted, meaning US stocks should have somewhat higher valuations than many other countries' stocks (maybe not quite all of them). But why would it always be the case stock investors were not yet bullish enough on US stock earnings?

We do know we went through a recent period where in fact US relative valuations went up rapidly. This does imply that at the beginning of this period, stock investors were less bullish on US stock earnings than they became by the end of the period.

We also know in the past, this has happened before and then at some point the trend has reversed and US stock valuations have converged for a while rather than diverged.

Of course if someone shows they can pick the times when US stock valuations are going to diverge (going all US stocks) and then ALSO pick the times when US stock valuations are going to converge (going all ex-US stocks)--well, they are going to be very wealthy and that will be very impressive.

But if all that happened is that a person is always betting on US stock valuations diverging and then in the recent period they did--that is in fact consistent with just getting lucky. Much like the person who claims "tails never fails" and then flips a tails. They may claim their proved they are right. I am just going to think they got lucky.

United States-only people would say there is a structural reason why the United States as compared to the other major economies will outperform. For political reasons, rule of law, taxation levels, and so on. People are encouraged to be more productive and are rewarded more for productivity. We see in demonstrations in France and England protesting increased work. the way the political system is and the national culture is - maximizing productivity is less there as compared to the United States. France is capped out at a small number of hours working per week and retirement begins at late middle age. When our economy and Europes economy were more equal we are talking the 60s and 70s before meaningful de regulation in USA . Personally, I just don’t see Europe outperforming. What other major economy is there to outperform usa ? Maybe South Korea? India?

When people start talking about “structural reasons”, “geopolitics”, and so forth these are narratives to justify what happened in the past.

Investors are best suited ignoring narratives, because those change all the time. Sentiment is not static.

[burritoLover]

Precisely, diversifying into an unknown future isn’t “wrong”.

Only in hindsight can you know what would have been best, but if we had hindsight none of us would be investing in index funds (US, exUS, or otherwise)

I.e., Bogle wasn’t “wrong” when he didn’t decide to chase TQQQ leading up to 2021 and instead held the lower returning S&P 500

I think his point was they have predicted outperformance repeatedly for many years and that prediction failed. So they were wrong. He is not saying diversification is bad. He is saying they were wrong in predicting outperformance. Ex U.S. has now outperformed by a bit the last few months but someone who kept a us only portfolio for the past ten years - it an insignificant amount of time - would be happier not having ex U.S. in his portfolio. This is also completely different than saying “why not only invest in Tesla?” It is not home bias. It is that the USA is the largest economy in the world rivaled only by a totalitarian govt that has shown it not the market makes the decisions in its economy. So it’s not irrational to invest usa only. It’s also not irrational to invest total world.

Vanguard isn’t predicting exact performance, they are presenting probabilities for expected returns

A large driver of US returns were unexpected, speculatively driven returns through valuation expansion and Vanguard’s models reflect a moderately neutral stance on changes in valuation amongst asset classes, which is a rational position to take if you look at the long term data of valuations.

So in other words, if somebody wins the lottery that doesn’t mean that those that did not participate were “wrong”, to use a hyperbolic example of a similar phenomenon

And while this debate will never end, it remains a question why any obvious reasons to be relatively bullish on US stock earnings are not already priced into US stocks. Indeed, I think virtually everyone is agreeing some amount of bullishness on US stock earnings is warranted, meaning US stocks should have somewhat higher valuations than many other countries' stocks (maybe not quite all of them). But why would it always be the case stock investors were not yet bullish enough on US stock earnings?

We do know we went through a recent period where in fact US relative valuations went up rapidly. This does imply that at the beginning of this period, stock investors were less bullish on US stock earnings than they became by the end of the period.

We also know in the past, this has happened before and then at some point the trend has reversed and US stock valuations have converged for a while rather than diverged.

Of course if someone shows they can pick the times when US stock valuations are going to diverge (going all US stocks) and then ALSO pick the times when US stock valuations are going to converge (going all ex-US stocks)--well, they are going to be very wealthy and that will be very impressive.

But if all that happened is that a person is always betting on US stock valuations diverging and then in the recent period they did--that is in fact consistent with just getting lucky. Much like the person who claims "tails never fails" and then flips a tails. They may claim their proved they are right. I am just going to think they got lucky.

United States-only people would say there is a structural reason why the United States as compared to the other major economies will outperform. For political reasons, rule of law, taxation levels, and so on. People are encouraged to be more productive and are rewarded more for productivity. We see in demonstrations in France and England protesting increased work. the way the political system is and the national culture is - maximizing productivity is less there as compared to the United States. France is capped out at a small number of hours working per week and retirement begins at late middle age. When our economy and Europes economy were more equal we are talking the 60s and 70s before meaningful de regulation in USA . Personally, I just don’t see Europe outperforming. What other major economy is there to outperform usa ? Maybe South Korea? India?

So, if you had two companies that are in the same industry and selling the same products but company A had a bunch of structural reasons that lend itself to a high success of outperforming but company B did not, then you are saying that the market would price these companies exactly the same and you would simply pick company A - and wallah - like magic, you would continually outperform?

[NiceUnparticularMan]

United States-only people would say there is a structural reason why the United States as compared to the other major economies will outperform.

To be blunt, this is a very big part of the problem.

You said "the United States", meaning the country, will outperform. OK, sure, maybe--not maybe all countries, but plausibly a lot of them.

But we are not asking whether the country will outperform. We are asking whether stocks listed in that country will outperform.

I gather a lot of all-USA people think this is the same question. It is not. If stock investors understand the United States as a country will outperform, and if they understand that will, say, produce higher and/or less risky earnings growth for US-listed companies, then they will pay more for US-listed stocks.

And once stock investors pay higher prices for US-listed stocks, that will mean even though the United States as a country may outperform, and even though US-listed companies may experience higher and/or less risky earnings growth, US-listed stocks will not have higher returns. Indeed, they might be lower, because less risky assets generally generate lower returns.

Failing to understand the difference between these two questions--how the country will perform, versus how stocks listed in that country will perform--plagues these discussions, and helps explain why they never end.

For political reasons, rule of law, taxation levels, and so on. People are encouraged to be more productive and are rewarded more for productivity. We see in demonstrations in France and England protesting increased work. the way the political system is and the national culture is - maximizing productivity is less there as compared to the United States. France is capped out at a small number of hours working per week and retirement begins at late middle age. When our economy and Europes economy were more equal we are talking the 60s and 70s before meaningful de regulation in USA . Personally, I just don’t see Europe outperforming. What other major economy is there to outperform usa ? Maybe South Korea? India?

With the above understanding in mind--every single thing you said here was about the country. And nothing you said here is the sort of thing that stock investors would not know about.

So every single thing you said here could be true, and yet it could imply nothing about US stocks having higher returns. Indeed, if anything it could suggest they will have lower returns, as less risky assets.

But for whatever reason, that thought--that any widely known positive facts about the country does not mean stocks listed in that country will have higher returns, more the opposite actually--just never penetrates the all-USA camp.

[secondopinion]

United States-only people would say there is a structural reason why the United States as compared to the other major economies will outperform.

To be blunt, this is a very big part of the problem.

You said "the United States", meaning the country, will outperform. OK, sure, maybe--not maybe all countries, but plausibly a lot of them.

But we are not asking whether the country will outperform. We are asking whether stocks listed in that country will outperform.

I gather a lot of all-USA people think this is the same question. It is not. If stock investors understand the United States as a country will outperform, and if they understand that will, say, produce higher and/or less risky earnings growth for US-listed companies, then they will pay more for US-listed stocks.

And once stock investors pay higher prices for US-listed stocks, that will mean even though the United States as a country may outperform, and even though US-listed companies may experience higher and/or less risky earnings growth, US-listed stocks will not have higher returns. Indeed, they might be lower, because less risky assets generally generate lower returns.

Failing to understand the difference between these two questions--how the country will perform, versus how stocks listed in that country will perform--plagues these discussions, and helps explain why they never end.

For political reasons, rule of law, taxation levels, and so on. People are encouraged to be more productive and are rewarded more for productivity. We see in demonstrations in France and England protesting increased work. the way the political system is and the national culture is - maximizing productivity is less there as compared to the United States. France is capped out at a small number of hours working per week and retirement begins at late middle age. When our economy and Europes economy were more equal we are talking the 60s and 70s before meaningful de regulation in USA . Personally, I just don’t see Europe outperforming. What other major economy is there to outperform usa ? Maybe South Korea? India?

With the above understanding in mind--every single thing you said here was about the country. And nothing you said here is the sort of thing that stock investors would not know about.

So every single thing you said here could be true, and yet it could imply nothing about US stocks having higher returns. Indeed, if anything it could suggest they will have lower returns, as less risky assets.

But for whatever reason, that thought--that any widely known positive facts about the country does not mean stocks listed in that country will have higher returns, more the opposite actually--just never penetrates the all-USA camp.

Right. I think the US is unlikely to shift upwards with more hours required and continue to de-regulate; that is, do we honestly think people will want to work even longer? Eventually, I think we are more likely to see a shift towards less hours and more regulations. But in either case, it does not really matter. Stock investments are made on what the businesses will return of earnings, not whether their workers work 30 hours or 50 hours.

[FIREGuy88]

Sorry, I don't have a strong opinion why Vanguard recommends 40% international. I only know they have been wrong for a very long time.

Best wishes.
Taylor

Wow! Shots fired. Thanks for being super clear about it.

I'm quite torn, because I respect you, your book and your opinion enormously - but it also feels weird to disregard the advice and the portfolio that Vanguard has put me in.

[burritoLover]

Vanguard doesn't do their modeling of future returns and then tell you to allocate based on the highest estimated returns they came up with. Their 40% recommendation would still be 40%, even if their model showed US outperforming international over the next 10 years.

[visualguy]

Vanguard doesn't do their modeling of future returns and then tell you to allocate based on the highest estimated returns they came up with. Their 40% recommendation would still be 40%, even if their model showed US outperforming international over the next 10 years.

I think you're right, and a lot of people are missing this point.

Their goal is to optimize for diversification, not return, so they never really try to distinguish between diversification and diworsification. They'll recommend the same or similar allocation regardless of what their models show for return (which has been useless anyway).

[burritoLover]

Vanguard doesn't do their modeling of future returns and then tell you to allocate based on the highest estimated returns they came up with. Their 40% recommendation would still be 40%, even if their model showed US outperforming international over the next 10 years.

I think you're right, and a lot of people are missing this point.

Their goal is to optimize for diversification, not return, so they never really try to distinguish between diversification and diworsification. They'll recommend the same or similar allocation regardless of what their models show for return (which has been useless anyway).

96% of the US total stock market is diworsification.

[visualguy]

Vanguard doesn't do their modeling of future returns and then tell you to allocate based on the highest estimated returns they came up with. Their 40% recommendation would still be 40%, even if their model showed US outperforming international over the next 10 years.

I think you're right, and a lot of people are missing this point.

Their goal is to optimize for diversification, not return, so they never really try to distinguish between diversification and diworsification. They'll recommend the same or similar allocation regardless of what their models show for return (which has been useless anyway).

96% of the US total stock market is diworsification.

At least we get those few companies with a brilliant rise in the US. They don't get started/listed much in Europe, Japan, etc. As long as the US keeps attracting that talent, the outperformance will continue, and that's not something that is modelled by Vanguard. If and when the Elon Musks and Jensen Huangs of the world stop coming to the US to do their thing, or the talent that works for them stops flowing to the US, the picture may change a bit.

[burritoLover]

Vanguard doesn't do their modeling of future returns and then tell you to allocate based on the highest estimated returns they came up with. Their 40% recommendation would still be 40%, even if their model showed US outperforming international over the next 10 years.

I think you're right, and a lot of people are missing this point.

Their goal is to optimize for diversification, not return, so they never really try to distinguish between diversification and diworsification. They'll recommend the same or similar allocation regardless of what their models show for return (which has been useless anyway).

96% of the US total stock market is diworsification.

At least we get those few companies with a brilliant rise in the US. They don't get started/listed much in Europe, Japan, etc. As long as the US keeps attracting that talent, the outperformance will continue, and that's not something that is modelled by Vanguard. If and when the Elon Musks and Jensen Huangs of the world stop coming to the US to do their thing, or the talent that works for them stops flowing to the US, the picture may change a bit.

Perhaps that is behind the valuation gap currently - the rest of the world finally realizes how valuable the business environment is in the US. Which would mean, the status quo is not going to cut it anymore - the US has to exceed already lofty expectations.

[visualguy]

Vanguard doesn't do their modeling of future returns and then tell you to allocate based on the highest estimated returns they came up with. Their 40% recommendation would still be 40%, even if their model showed US outperforming international over the next 10 years.

I think you're right, and a lot of people are missing this point.

Their goal is to optimize for diversification, not return, so they never really try to distinguish between diversification and diworsification. They'll recommend the same or similar allocation regardless of what their models show for return (which has been useless anyway).

96% of the US total stock market is diworsification.

At least we get those few companies with a brilliant rise in the US. They don't get started/listed much in Europe, Japan, etc. As long as the US keeps attracting that talent, the outperformance will continue, and that's not something that is modelled by Vanguard. If and when the Elon Musks and Jensen Huangs of the world stop coming to the US to do their thing, or the talent that works for them stops flowing to the US, the picture may change a bit.

Perhaps that is behind the valuation gap currently - the rest of the world finally realizes how valuable the business environment is in the US. Which would mean, the status quo is not going to cut it anymore - the US has to exceed already lofty expectations.

Not really. You just need great companies like Google, Tesla, Nvidia, Amazon, etc. to continue getting listed mostly in the US. Future companies can't be priced in. Current companies are priced, not "the market". Google wasn't priced into IBM before Google existed, or some such thing.

[Da5id]

I think you're right, and a lot of people are missing this point.

Their goal is to optimize for diversification, not return, so they never really try to distinguish between diversification and diworsification. They'll recommend the same or similar allocation regardless of what their models show for return (which has been useless anyway).

96% of the US total stock market is diworsification.

At least we get those few companies with a brilliant rise in the US. They don't get started/listed much in Europe, Japan, etc. As long as the US keeps attracting that talent, the outperformance will continue, and that's not something that is modelled by Vanguard. If and when the Elon Musks and Jensen Huangs of the world stop coming to the US to do their thing, or the talent that works for them stops flowing to the US, the picture may change a bit.

Perhaps that is behind the valuation gap currently - the rest of the world finally realizes how valuable the business environment is in the US. Which would mean, the status quo is not going to cut it anymore - the US has to exceed already lofty expectations.

Not really. You just need great companies like Google, Tesla, Nvidia, Amazon, etc. to continue getting listed mostly in the US. Future companies can't be priced in. Current companies are priced, not "the market". Google wasn't priced into IBM before Google existed, or some such thing.

This goes in circles but I'll bite yet again. This argument suggests to me that you believe US IPOs, the first time these companies are available to most investors, are systematically underpriced. Is that what you think you are saying?

[intendi]

International as a value play has helped me stick with a global market cap weighted strategy (I'm increasingly tempted to tilt to SCV).

From one of Rick's recent podcasts:

"The P/E, price to earnings ratio, this is based on September 30th data of the Total U.S. Stock Market Fund is about, was about, 17 times earnings. It was only 10 times earnings in the Vanguard Total International. The price to book in the US market was about three times book. It was half that in the international fund, the Total International, and the earnings growth rate in the US was around 20 percent it was about half that internationally .So I always look at the international market and say if I ever wanted to buy a value index without buying a value index all I have to do is buy International stocks."



Reference: https://rickferri.com/podcast/episode-5 ... ael-perre/

[Florida Orange]

And once stock investors pay higher prices for US-listed stocks, that will mean even though the United States as a country may outperform, and even though US-listed companies may experience higher and/or less risky earnings growth, US-listed stocks will not have higher returns. Indeed, they might be lower, because less risky assets generally generate lower returns

So are you arguing for global cap weight?

[NateH]

I don’t think of VXUS as an “international fund” … instead I consider it a way to own the 7717 companies that aren’t in VTI.

The reason I invest in it is the same reason I own VTI instead of an S&P 500 fund, or a large cap growth fund - I’ve committed to total market index investing to the greatest extent I can with low expense easily available index funds.

If someone considers themselves a total market investor, but doesn’t own VXUS, they can rationalize it however they want, but they are no different than any other “tilter” who chooses to exclude a certain portion of the market in their investments.

If 100% of one's equity holdings isn't VT, they are tilting towards something. And that doesn't make it wrong.

[Triple digit golfer]

I don’t think of VXUS as an “international fund” … instead I consider it a way to own the 7717 companies that aren’t in VTI.

The reason I invest in it is the same reason I own VTI instead of an S&P 500 fund, or a large cap growth fund - I’ve committed to total market index investing to the greatest extent I can with low expense easily available index funds.

If someone considers themselves a total market investor, but doesn’t own VXUS, they can rationalize it however they want, but they are no different than any other “tilter” who chooses to exclude a certain portion of the market in their investments.

If 100% of one's equity holdings isn't VT, they are tilting towards something. And that doesn't make it wrong.

It makes it wrong if they claim to be total market equity investors.

[visualguy]

96% of the US total stock market is diworsification.

At least we get those few companies with a brilliant rise in the US. They don't get started/listed much in Europe, Japan, etc. As long as the US keeps attracting that talent, the outperformance will continue, and that's not something that is modelled by Vanguard. If and when the Elon Musks and Jensen Huangs of the world stop coming to the US to do their thing, or the talent that works for them stops flowing to the US, the picture may change a bit.

Perhaps that is behind the valuation gap currently - the rest of the world finally realizes how valuable the business environment is in the US. Which would mean, the status quo is not going to cut it anymore - the US has to exceed already lofty expectations.

Not really. You just need great companies like Google, Tesla, Nvidia, Amazon, etc. to continue getting listed mostly in the US. Future companies can't be priced in. Current companies are priced, not "the market". Google wasn't priced into IBM before Google existed, or some such thing.

This goes in circles but I'll bite yet again. This argument suggests to me that you believe US IPOs, the first time these companies are available to most investors, are systematically underpriced. Is that what you think you are saying?

Not "systematically". They are priced based on various factors and what is known at the time. Nvidia had a market cap of a bit over half a billion at IPO in 1999. It's over half a trillion now. Google had a market cap of $23B at IPO in 2004. It's over $1.3T now. Amazon was less than half a billion at IPO in 1997, and it's over $1T now. Tesla was at a bit over $2B at IPO in 2010, and it's $600B now.

Obviously, only a minority of IPOs evolve like this, and you may have to hold them for years before they really go ballistic, sometimes after a choppy ride, but if you invest in the US market you do get to ride these rocket ships, and the future ones aren't priced in today. Where are the rocket ships of Japan, Germany, or wherever (outside China)? Haven't seen much of that in decades.

We'll keep hearing about how come the US has higher returns, has a higher share of world market cap, etc. Well, there are reasons. Look at what is happening in the US vs other countries in terms of major company creation. Look at which countries attract world talent and which ones bleed it. Multi-trillion dollar nuclear fusion companies and AI companies listed in the US push things even further in the future? Surely, that would lead to "mean reversion" and outperformance of ex-US. No, it won't lead to that just like it didn't lead to that with the current batch of rocket ships.

[NiceUnparticularMan]

And once stock investors pay higher prices for US-listed stocks, that will mean even though the United States as a country may outperform, and even though US-listed companies may experience higher and/or less risky earnings growth, US-listed stocks will not have higher returns. Indeed, they might be lower, because less risky assets generally generate lower returns

So are you arguing for global cap weight?

So Vanguard has argued in the past a modest amount of home country bias can make sense for the purpose of optimizing the balance between currency risk and diversification.

I think US investors can heed that advice, and I have personally done so, meaning I set my US allocation higher than what at the time was global weight (recently global weight converged on my allocation).

I also think US investors should understand that if US valuations are higher, that means US investors overweighting US stocks should model lower expected returns than purely global weight investors. That was less relevant at the time I set my modest home country bias to US stocks (US versus ex-US developed was reasonably close in valuations, at least, less so US versus EM though, at the time I set my allocations). It has been more relevant recently as the runup in US stock global weight has coincided with a relative increase in US valuations.

[NiceUnparticularMan]

Obviously, only a minority of IPOs evolve like this, and you may have to hold them for years before they really go ballistic, sometimes after a choppy ride, but if you invest in the US market you do get to ride these rocket ships, and the future ones aren't priced in today.

Why not?

If out of ten tech IPOs, we would expect nine to flop and one to be a rocket ship, but you don't know which, then you would expect that each would be priced as 9/10th flop and 1/10th rocket ship.

If you were investing before they were IPOs, maybe you could apply a different logic. But if you only invest once they are IPOs, then you can't buy tech stocks before they are priced by the market to reflect their future growth prospects.

And if that wasn't true, you shouldn't be buying only US stocks, you should be buying only tech stocks. Indeed, you should only be buying small tech stocks, because that is how you would maximize your investment in these future "rocket ships" you are theorizing will be underpriced as IPOs.

We'll keep hearing about how come the US has higher returns, has a higher share of world market cap, etc. Well, there are reasons.

Consider three propositions:

(1) Stock markets are generally efficiently priced;

(2) US stocks have higher expected returns;

(3) US stocks have lower risks.

You can pick any two. You can't have all three.

[Northern Flicker]

I have read over and over that some portion of your asset allocation should be in VXUS. However, when I look at the performance over 5 years and the max as compared to VTI, I ask myself - why should I put any money into an international etf? Are we hoping for an international bear to come? Or if VTI crashes will VXUS hold the line? What is the logic behind investing in international - other than you should be diversified as much as possible?

The reason is that we have no way of knowing if the next 6 years will look like the last 6 years or these 6 years.

[pascalwager]

An investor may want to fully invest in all of the investment sectors, such as heavy industry.

Most of the heavy industry is overseas. India makes most of the heavy, traffic-rated manhole covers, for example, and does a lot of ship salvaging. I've seen them drive a ship at full-speed, at high-tide, onto a common sand beach and immediately begin dismantling (dangerous work).

[visualguy]

Obviously, only a minority of IPOs evolve like this, and you may have to hold them for years before they really go ballistic, sometimes after a choppy ride, but if you invest in the US market you do get to ride these rocket ships, and the future ones aren't priced in today.

Why not?

If out of ten tech IPOs, we would expect nine to flop and one to be a rocket ship, but you don't know which, then you would expect that each would be priced as 9/10th flop and 1/10th rocket ship.

If you were investing before they were IPOs, maybe you could apply a different logic. But if you only invest once they are IPOs, then you can't buy tech stocks before they are priced by the market to reflect their future growth prospects.

And if that wasn't true, you shouldn't be buying only US stocks, you should be buying only tech stocks. Indeed, you should only be buying small tech stocks, because that is how you would maximize your investment in these future "rocket ships" you are theorizing will be underpriced as IPOs.

We'll keep hearing about how come the US has higher returns, has a higher share of world market cap, etc. Well, there are reasons.

Consider three propositions:

(1) Stock markets are generally efficiently priced;

(2) US stocks have higher expected returns;

(3) US stocks have lower risks.

You can pick any two. You can't have all three.

In that case, what's your explanation for the huge gap in returns between US and ex-US? I described my explanation in my previous post. What's your explanation?

[Nathan Drake]

Obviously, only a minority of IPOs evolve like this, and you may have to hold them for years before they really go ballistic, sometimes after a choppy ride, but if you invest in the US market you do get to ride these rocket ships, and the future ones aren't priced in today.

Why not?

If out of ten tech IPOs, we would expect nine to flop and one to be a rocket ship, but you don't know which, then you would expect that each would be priced as 9/10th flop and 1/10th rocket ship.

If you were investing before they were IPOs, maybe you could apply a different logic. But if you only invest once they are IPOs, then you can't buy tech stocks before they are priced by the market to reflect their future growth prospects.

And if that wasn't true, you shouldn't be buying only US stocks, you should be buying only tech stocks. Indeed, you should only be buying small tech stocks, because that is how you would maximize your investment in these future "rocket ships" you are theorizing will be underpriced as IPOs.

We'll keep hearing about how come the US has higher returns, has a higher share of world market cap, etc. Well, there are reasons.

Consider three propositions:

(1) Stock markets are generally efficiently priced;

(2) US stocks have higher expected returns;

(3) US stocks have lower risks.

You can pick any two. You can't have all three.

In that case, what's your explanation for the huge gap in returns between US and ex-US? I described my explanation in my previous post. What's your explanation?

The huge gap, which is the last 10 years, is significantly driven by speculation and change in valuation.

Japan had better earnings growth than the US, but no valuation headwind to increase the returns over US, the opposite actually.

[NiceUnparticularMan]

In that case, what's your explanation for the huge gap in returns between US and ex-US?

Between 2012 and 2022, in terms of USD returns, US stocks versus ex-US stocks benefited from a combination of a strengthening USD and a relative increase in valuations.

[Blue456]

Because it seems like a good idea not to put all eggs in one basket.

[Da5id]

Obviously, only a minority of IPOs evolve like this, and you may have to hold them for years before they really go ballistic, sometimes after a choppy ride, but if you invest in the US market you do get to ride these rocket ships, and the future ones aren't priced in today.

Why not?

If out of ten tech IPOs, we would expect nine to flop and one to be a rocket ship, but you don't know which, then you would expect that each would be priced as 9/10th flop and 1/10th rocket ship.

If you were investing before they were IPOs, maybe you could apply a different logic. But if you only invest once they are IPOs, then you can't buy tech stocks before they are priced by the market to reflect their future growth prospects.

And if that wasn't true, you shouldn't be buying only US stocks, you should be buying only tech stocks. Indeed, you should only be buying small tech stocks, because that is how you would maximize your investment in these future "rocket ships" you are theorizing will be underpriced as IPOs.

We'll keep hearing about how come the US has higher returns, has a higher share of world market cap, etc. Well, there are reasons.

Consider three propositions:

(1) Stock markets are generally efficiently priced;

(2) US stocks have higher expected returns;

(3) US stocks have lower risks.

You can pick any two. You can't have all three.

In that case, what's your explanation for the huge gap in returns between US and ex-US? I described my explanation in my previous post. What's your explanation?

Hmm.

1) You appear to me to be arguing that US vs international Market stock prices aren't efficiently determined. That is possible (I've seen arguments for that), but why are you so sure this is the case? Within the US stock market do you believe the market is "efficient" in that you/most investors can't exploit any inefficiencies that exist, but that the efficiency stops when comparing US to Swiss stocks?

2) Said differently, you appear to me to be arguing in this post that past performance *is* a guarantee of future returns at least w.r.t. US vs Int'l stock performance. Does that belief only apply to this very specific domain? If so I don't understand why.

Am I misunderstanding your underlying arguments?

Personally, I have no idea whether US or int'l stocks will outperform in any particular future period, and believe moderately strongly that one can't know. Mostly this is just a belief that markets *will* be effectively efficient in the long run, and that obvious things like the US culture, legal/business climate, innovation, universities, etc will be reflected in valuations in the long run.

[visualguy]

In that case, what's your explanation for the huge gap in returns between US and ex-US?

Between 2012 and 2022, in terms of USD returns, US stocks versus ex-US stocks benefited from a combination of a strengthening USD and a relative increase in valuations.

Ok, so why is there an increase in valuations? Are you saying now that the market is mispricing US companies and isn't efficient after all?

[DeliberateDonkey]

In that case, what's your explanation for the huge gap in returns between US and ex-US?

Between 2012 and 2022, in terms of USD returns, US stocks versus ex-US stocks benefited from a combination of a strengthening USD and a relative increase in valuations.

Ok, so why is there an increase in valuations? Are you saying now that the market is mispricing US companies and isn't efficient after all?

Not the poster you replied to, but I would say that increased valuations are generally a reflection of future growth expectations. I wouldn't say that U.S. companies are mispriced so much as the expectations for profit growth are substantially higher than in other markets. That is to say, companies in the U.S. market (in aggregate) need to continue growing profits at a relatively more rapid pace in order to offer the same return to shareholders as companies in other markets (in aggregate) who may simply need to maintain their current level of profitability to offer a given level of return.

[Nathan Drake]

In that case, what's your explanation for the huge gap in returns between US and ex-US?

Between 2012 and 2022, in terms of USD returns, US stocks versus ex-US stocks benefited from a combination of a strengthening USD and a relative increase in valuations.

Ok, so why is there an increase in valuations? Are you saying now that the market is mispricing US companies and isn't efficient after all?

Not the poster you replied to, but I would say that increased valuations are generally a reflection of future growth expectations. I wouldn't say that U.S. companies are mispriced so much as the expectations for profit growth are substantially higher than in other markets. That is to say, companies in the U.S. market (in aggregate) need to continue growing profits at a relatively more rapid pace in order to offer the same return to shareholders as companies in other markets (in aggregate) who may simply need to maintain their current level of profitability to offer a given level of return.

It doesn't need to be fundamental expectations either.

The period of 2010-2021 could have simply been institutional money chasing "least bad" markets (EU Debt crisis, Brexit, China stifling big business, etc), which is narrative based rather than fundamentally based. Additionally, it could have been the decline in interest rates favoring certain sectors, although this has been disputed.

Regardless of the reason, we know from history that valuations aren't static. US has had a 30 year period marked by rising valuations. DM/EM markets have had the opposite. And there is a relationship between valuations and expected returns. Reversion to the mean for any of these countries means a valuation headwind for US socks and a tailwind for exUS stocks.

For stock returns to be better in exUS markets, it doesn't mean that exUS markets need to grow their profits better. They simply need to have better than expected outcomes relative to market expectations.

[visualguy]

In that case, what's your explanation for the huge gap in returns between US and ex-US?

Between 2012 and 2022, in terms of USD returns, US stocks versus ex-US stocks benefited from a combination of a strengthening USD and a relative increase in valuations.

Ok, so why is there an increase in valuations? Are you saying now that the market is mispricing US companies and isn't efficient after all?

Not the poster you replied to, but I would say that increased valuations are generally a reflection of future growth expectations. I wouldn't say that U.S. companies are mispriced so much as the expectations for profit growth are substantially higher than in other markets. That is to say, companies in the U.S. market (in aggregate) need to continue growing profits at a relatively more rapid pace in order to offer the same return to shareholders as companies in other markets (in aggregate) who may simply need to maintain their current level of profitability to offer a given level of return.

Right, so the question is whether the US can continue to beat ex-US in terms of producing these rocket ship growth companies like I mentioned above. I believe the answer is yes. The next AI powerhouse company will be in the US, while in Japan we'll still have Hitachi.

[NiceUnparticularMan]

Are you saying now that the market is mispricing US companies and isn't efficient after all?

No.

Efficient markets just imply asset prices reflect all of the information/analysis available at the time. Over time we definitely gain new information, and for that matter things actually change.

So the increase in valuations for US stocks between 2012 and 2022 could have represented new information, relevant changes, or both, without any sort of violation of the efficient market hypothesis.

And for that matter, the even more recent partial convergence of valuations could represent the same.

I note that because of the sensitivity of present stock valuations to changes in expectations compounded over long times, stock valuations can change significantly in the short term due to relatively modest expectation changes. Indeed, the history of US stock returns has reflected some rather large valuation changes over time contributing to its various boom and bust periods:



OK, so the bottom line is the observed booms and busts in US stock valuation history isn't indicative of a violation of the efficient market hypothesis, just a demonstration of the sensitivity of stock valuations to even modest changes in long-term expectations.

As a final observation, the idea that this time valuations will keep increasing and never even level off, let alone go back down, has never made any sense to me, and certainly is inconsistent with the observed history of US stocks.

But those assuming 2012-2022 represents a US versus ex-US trend that will continue indefinitely are implicitly assuming just that.

Which is a rather ambitious assumption, and again not actually supported by history.

[NiceUnparticularMan]

Right, so the question is whether the US can continue to beat ex-US in terms of producing these rocket ship growth companies like I mentioned above.

Again, that is quite wrong.

The question would have to be whether stock investors will continue to misprice the stock of tech companies in advance of their predictable rocket ship behavior.

By the way, if you actually believed that, it would make little sense to be talking about US stocks generally.

Just as you can argue that ex-US stocks in the last 10 years have watered down the returns of US "rocket ship" stocks, you can also argue that non-tech US stocks have watered down the returns of US "rocket ship" stocks.

As a simple demonstration, here is a comparison between VTI and QQQ, a NASDAQ 100 ETF, from 2012 to the end of 2021:

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

Anyone who truly believes this "rocket ship" theory absolutely should not be diluting their rocket ships with all the other boring and relatively unrewarding US stocks. Just dump everything in QQQ and be confident the party will never end, because US "rocket ship" stocks will always provide higher returns . . . .

[visualguy]

But those assuming 2012-2022 represents a US versus ex-US trend that will continue indefinitely are implicitly assuming just that.

Which is a rather ambitious assumption, and again not actually supported by history.

Sorry, it's actually 1900-2022. 122 years is a long time. It's actually a heck of a long time.

[Nathan Drake]

But those assuming 2012-2022 represents a US versus ex-US trend that will continue indefinitely are implicitly assuming just that.

Which is a rather ambitious assumption, and again not actually supported by history.

Sorry, it's actually 1900-2022. 122 years is a long time. It's actually a heck of a long time.

It's not. I don't know why you continue repeating this misinformation.

There is not a continuous 122 year span of constant outperformance. US has been one of the better performing markets, largely in part due to this ending decade, but it does not always outperform all the time. There are plenty of periods spanning several decades depending on the start/end date where exUS meaningfully outperforms.

Please stop repeating factual inaccuracies.

[visualguy]

Right, so the question is whether the US can continue to beat ex-US in terms of producing these rocket ship growth companies like I mentioned above.

Again, that is quite wrong.

The question would have to be whether stock investors will continue to misprice the stock of tech companies in advance of their predictable rocket ship behavior.

By the way, if you actually believed that, it would make little sense to be talking about US stocks generally.

Just as you can argue that ex-US stocks in the last 10 years have watered down the returns of US "rocket ship" stocks, you can also argue that non-tech US stocks have watered down the returns of US "rocket ship" stocks.

As a simple demonstration, here is a comparison between VTI and QQQ, a NASDAQ 100 ETF, from 2012 to the end of 2021:

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

Anyone who truly believes this "rocket ship" theory absolutely should not be diluting their rocket ships with all the other boring and relatively unrewarding US stocks. Just dump everything in QQQ and be confident the party will never end, because US "rocket ship" stocks will always provide higher returns . . . .

Now you're talking about the best way to invest in the US market (QQQ vs VTI), and already moved away from ex-US. That's the problem - ex-US (other than possibly China) isn't where the action is on the formation of the next generation of hyper growth companies. Ex-US hasn't been there in decades.

[visualguy]

But those assuming 2012-2022 represents a US versus ex-US trend that will continue indefinitely are implicitly assuming just that.

Which is a rather ambitious assumption, and again not actually supported by history.

Sorry, it's actually 1900-2022. 122 years is a long time. It's actually a heck of a long time.

It's not. I don't know why you continue repeating this misinformation.

There is not a continuous 122 year span of constant outperformance. US has been one of the better performing markets, largely in part due to this ending decade, but it does not always outperform all the time. There are plenty of periods spanning several decades depending on the start/end date where exUS meaningfully outperforms.

Please stop repeating factual inaccuracies.

The US outperformed very significantly even during 1900-2012 as you well know by looking at the Credit Suisse yearbook.

[Nathan Drake]

But those assuming 2012-2022 represents a US versus ex-US trend that will continue indefinitely are implicitly assuming just that.

Which is a rather ambitious assumption, and again not actually supported by history.

Sorry, it's actually 1900-2022. 122 years is a long time. It's actually a heck of a long time.

It's not. I don't know why you continue repeating this misinformation.

There is not a continuous 122 year span of constant outperformance. US has been one of the better performing markets, largely in part due to this ending decade, but it does not always outperform all the time. There are plenty of periods spanning several decades depending on the start/end date where exUS meaningfully outperforms.

Please stop repeating factual inaccuracies.

The US outperformed very significantly even during 1900-2012 as you well know by looking at the Credit Suisse yearbook.

And I have an "equal weighted" country index that outperformed a 100% US only portfolio throughout the same period. Why didn't you invest equal weighted by country instead of US only?

US stocks do not outperform all the time through every single period. That's why you diversify. Even a lower performing asset in general has sequence and rebalancing benefits which can mean a higher return than just the best outeprforming market alone. Credit Suisse certainly DOES NOT recommend a 100% US only portfolio, so maybe you should do a deeper dive into the data and portfolio management from the professionals you defer to than simply looking at a start and end date.

[Nathan Drake]

Right, so the question is whether the US can continue to beat ex-US in terms of producing these rocket ship growth companies like I mentioned above.

Again, that is quite wrong.

The question would have to be whether stock investors will continue to misprice the stock of tech companies in advance of their predictable rocket ship behavior.

By the way, if you actually believed that, it would make little sense to be talking about US stocks generally.

Just as you can argue that ex-US stocks in the last 10 years have watered down the returns of US "rocket ship" stocks, you can also argue that non-tech US stocks have watered down the returns of US "rocket ship" stocks.

As a simple demonstration, here is a comparison between VTI and QQQ, a NASDAQ 100 ETF, from 2012 to the end of 2021:

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

Anyone who truly believes this "rocket ship" theory absolutely should not be diluting their rocket ships with all the other boring and relatively unrewarding US stocks. Just dump everything in QQQ and be confident the party will never end, because US "rocket ship" stocks will always provide higher returns . . . .

Now you're talking about the best way to invest in the US market (QQQ vs VTI), and already moved away from ex-US. That's the problem - ex-US (other than possibly China) isn't where the action is on the formation of the next generation of hyper growth companies. Ex-US hasn't been there in decades.

Logical fallacy #256 - next-generation hypergrowth companies are not required for stock outperformance. Some of the best investments are in dinosaur industries like railroads and cigarettes.

[visualguy]

Right, so the question is whether the US can continue to beat ex-US in terms of producing these rocket ship growth companies like I mentioned above.

Again, that is quite wrong.

The question would have to be whether stock investors will continue to misprice the stock of tech companies in advance of their predictable rocket ship behavior.

By the way, if you actually believed that, it would make little sense to be talking about US stocks generally.

Just as you can argue that ex-US stocks in the last 10 years have watered down the returns of US "rocket ship" stocks, you can also argue that non-tech US stocks have watered down the returns of US "rocket ship" stocks.

As a simple demonstration, here is a comparison between VTI and QQQ, a NASDAQ 100 ETF, from 2012 to the end of 2021:

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

Anyone who truly believes this "rocket ship" theory absolutely should not be diluting their rocket ships with all the other boring and relatively unrewarding US stocks. Just dump everything in QQQ and be confident the party will never end, because US "rocket ship" stocks will always provide higher returns . . . .

Now you're talking about the best way to invest in the US market (QQQ vs VTI), and already moved away from ex-US. That's the problem - ex-US (other than possibly China) isn't where the action is on the formation of the next generation of hyper growth companies. Ex-US hasn't been there in decades.

Logical fallacy #256 - next-generation hypergrowth companies are not required for stock outperformance. Some of the best investments are in dinosaur industries like railroads and cigarettes.

Then why has ex-US been so horrible if dinosaurs are so remunerative?

[Nathan Drake]

Right, so the question is whether the US can continue to beat ex-US in terms of producing these rocket ship growth companies like I mentioned above.

Again, that is quite wrong.

The question would have to be whether stock investors will continue to misprice the stock of tech companies in advance of their predictable rocket ship behavior.

By the way, if you actually believed that, it would make little sense to be talking about US stocks generally.

Just as you can argue that ex-US stocks in the last 10 years have watered down the returns of US "rocket ship" stocks, you can also argue that non-tech US stocks have watered down the returns of US "rocket ship" stocks.

As a simple demonstration, here is a comparison between VTI and QQQ, a NASDAQ 100 ETF, from 2012 to the end of 2021:

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

Anyone who truly believes this "rocket ship" theory absolutely should not be diluting their rocket ships with all the other boring and relatively unrewarding US stocks. Just dump everything in QQQ and be confident the party will never end, because US "rocket ship" stocks will always provide higher returns . . . .

Now you're talking about the best way to invest in the US market (QQQ vs VTI), and already moved away from ex-US. That's the problem - ex-US (other than possibly China) isn't where the action is on the formation of the next generation of hyper growth companies. Ex-US hasn't been there in decades.

Logical fallacy #256 - next-generation hypergrowth companies are not required for stock outperformance. Some of the best investments are in dinosaur industries like railroads and cigarettes.

Then why has ex-US been so horrible if dinosaurs are so remunerative?

Why was US horrible compared to exUS from 1966-1996 despite the Nifty Fifty and go-go stocks of that era that are the Hypergrowth winners you talk about?

Because not all periods of time favor the same composite industries or companies.

Value companies tend to outperform Growth over the long-term because they are riskier and you are getting a discount for an equivalent amount of earnings. We will eventually see that play out with exUS vs. US, but in the short term it can seem as though Growth outperforms when in reality it just became more expensive in the short-term. You can't bank on things getting more expensive forever. Eventually fundamendals do matter.

[Beensabu]

If you pay more for something based on expected growth, and that growth does not materialize to the extent expected, then that something will underperform your expectations.

If you pay less for something based on expected growth, and growth happens to exceed those expectations, then that something will outperform your expectations.

The reason that US and exUS have demonstrated a cycle with several years or a decade (or two) in favor of one or another is because at some point, one was more expensive and expected growth did not materialize while the other was less expensive and exceeded growth expectations.

It really is that simple.

Valuations always matter eventually. There's just no way of knowing exactly when. But the longer you see outperformance due to multiple expansion, the likelier it is that it's coming up sooner rather than later.