International (Non-US) versus US Equities (The "Arguments")

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Nathan Drake
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by Nathan Drake »

unwitting_gulag wrote: Wed Sep 18, 2024 1:52 pm I freely acknowledge the benefits of "hedging", which is why I've not sold-off my ex-US holdings, and have no intention of doing so. It's akin to buying car insurance. I don't expect for my car insurance to result in profit. It won't raise my net worth. It's dead money. But it does, one hopes, protect against catastrophe. Similarly, I don't expect for my ex-US holdings to ever again consistently outperform the US holdings. Seriously... I don't. Thus I view my ex-US holdings both as dead money and simultaneously an insurance-type of hedge.
This isn't logical.

You should expect exUS to make a profit. You should expect it to give you a return. You should expect that return sequence and magnitude to be different from US stocks.

But it is not insurance in the strictest sense of the term. You are not paying a premium and only collecting when something bad happens to the US market. You are getting a return. That return MAY end up being less than the US market, but historically the difference over the long-term has been around 2% less when taking into account very short periods of a few years where the US has commanded a large premium (world wars, etc).

Many other periods where exUS has significantly outperformed the US stock market, for many decades. Ultimately, calling it "dead money" or insurance is not accurate whatsoever.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by retireIn2020 »

Nathan Drake wrote: Wed Sep 18, 2024 11:36 pm
unwitting_gulag wrote: Wed Sep 18, 2024 1:52 pm I freely acknowledge the benefits of "hedging", which is why I've not sold-off my ex-US holdings, and have no intention of doing so. It's akin to buying car insurance. I don't expect for my car insurance to result in profit. It won't raise my net worth. It's dead money. But it does, one hopes, protect against catastrophe. Similarly, I don't expect for my ex-US holdings to ever again consistently outperform the US holdings. Seriously... I don't. Thus I view my ex-US holdings both as dead money and simultaneously an insurance-type of hedge.
This isn't logical.

You should expect exUS to make a profit. You should expect it to give you a return. You should expect that return sequence and magnitude to be different from US stocks.

But it is not insurance in the strictest sense of the term. You are not paying a premium and only collecting when something bad happens to the US market. You are getting a return. That return MAY end up being less than the US market, but historically the difference over the long-term has been around 2% less when taking into account very short periods of a few years where the US has commanded a large premium (world wars, etc).

Many other periods where exUS has significantly outperformed the US stock market, for many decades. Ultimately, calling it "dead money" or insurance is not accurate whatsoever.
I agree.
VEU has a 1-year return of 21% not including the div. Today alone it's up 2.4%. I certainly wouldn't call that "dead money" or "car insurance" that's just nonsense.

I'll keep my 20% EX-US portion of my equities and check it in 10 years. Perhaps by then it may be much less than 20% or maybe it will be more. I don't rebalance between Ex US and Total US.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by Nathan Drake »

retireIn2020 wrote: Thu Sep 26, 2024 12:56 pm
Nathan Drake wrote: Wed Sep 18, 2024 11:36 pm
unwitting_gulag wrote: Wed Sep 18, 2024 1:52 pm I freely acknowledge the benefits of "hedging", which is why I've not sold-off my ex-US holdings, and have no intention of doing so. It's akin to buying car insurance. I don't expect for my car insurance to result in profit. It won't raise my net worth. It's dead money. But it does, one hopes, protect against catastrophe. Similarly, I don't expect for my ex-US holdings to ever again consistently outperform the US holdings. Seriously... I don't. Thus I view my ex-US holdings both as dead money and simultaneously an insurance-type of hedge.
This isn't logical.

You should expect exUS to make a profit. You should expect it to give you a return. You should expect that return sequence and magnitude to be different from US stocks.

But it is not insurance in the strictest sense of the term. You are not paying a premium and only collecting when something bad happens to the US market. You are getting a return. That return MAY end up being less than the US market, but historically the difference over the long-term has been around 2% less when taking into account very short periods of a few years where the US has commanded a large premium (world wars, etc).

Many other periods where exUS has significantly outperformed the US stock market, for many decades. Ultimately, calling it "dead money" or insurance is not accurate whatsoever.
I agree.
VEU has a 1-year return of 21% not including the div. Today alone it's up 2.4%. I certainly wouldn't call that "dead money" or "car insurance" that's just nonsense.

I'll keep my 20% EX-US portion of my equities and check it in 10 years. Perhaps by then it may be much less than 20% or maybe it will be more. I don't rebalance between Ex US and Total US.
Definitely a good few months for international, it has outperformed US since around June.

EM markets the last week have gone up considerably. Today was a 3.5% day for EM Value.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by km91 »

[*]US Government has proven its willingness and ability to support its interests with massive cash infusions. (Translates to US Stock support)
Should this argument be scratched from 100% US, or should "Ex-US government has proven its willingness and ability to support its interests with massive cash infusions" be added to all the international arguments. Seems like government support of the economy is not exclusive to the US

Stocks in China had their biggest single-week jump since 2008 after an abrupt move by leaders to prime the economy with stimulus
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International stocks

Post by PGHunt24 »

[topic merged by admin alex]

I have owned both International stock ETF's and Domestic stock ETF's with Vanguard for 9 years. International's performance is 1/3 that of Domestic over this time period. Why should I keep Intn'l stock ETF's?
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Re: International stocks

Post by mamster »

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Re: International stocks

Post by cosmos »

It's 106 miles to Chicago, we've got a full tank of gas, half a pack of cigarettes, it's dark... and we're wearing sunglasses. Hit it.
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Re: International stocks

Post by Coastingthrulife »

I avoid international exposure for the reason you mention and am one of the 100%ers on viewtopic..
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Re: International stocks

Post by Beensabu »

PGHunt24 wrote: Sat Oct 12, 2024 10:10 pmWhy should I keep Intn'l stock ETF's?
Why should you stay the course with a diversified portfolio?

From the wiki:
A Bogleheads investor will

save a lot,
select an asset allocation containing both stock and bond asset classes,
buy low cost, widely diversified funds,
allocate funds tax-efficiently,
and stick closely to a plan.
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Re: International stocks

Post by my2p »

The good news is you don't need anyone's approval to get out of INTL and go all US :D. At least don't expect approval from the Bogleheads because the fundamental framework here is diversification.

With that said, even though I mostly follow the simple path by JL Collins, I have about 15% of my stock portion in VTIAX. I am also slowly incorporating Paul Merriman's recommendation on keeping about 20% small cap value (AVUV) in stock portion for better diversification within the US stocks. VTI is heavily concentrated on large cap growth.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by blimp »

Arguments for owning international:

1) The idea that US stocks outperform international stocks is merely a recent trend. Historically, there are long periods of international outperformance as shown here: https://www.hartfordfunds.com/dam/en/do ... CWP014.pdf If you want something which went up recently, just buy bitcoin.
2) Valuations for US stocks are currently high (PE ratio of 21.45 for VTI [US] vs. 15.7 for VXUS [international]). Even by buying a capitalization weighted portfolio (about 40% international right now), you are "betting" that US companies will grow faster.
3) Owning only companies in one country is inherently riskier. There are some [unlikely but possible] black swan scenarios which would disproportionately affect the US like a war or natural disaster.
4) Do you really believe the US will outperform international always and forever? So the US will become 80% of the world economy? Then 90%. Then 99%. Then 99.9%. Really?
5) There are experts constantly analyzing companies in different countries along with political and economic changes, and this analysis drives the current stock price. This likely results in a roughly "fair" stock price most of the time. Why do you think you know more than the market? Why take on additional risk and reduced diversity to try to beat the market?

-Blimp
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by Jeroen »

Nathan Drake wrote: Wed Sep 18, 2024 11:36 pmMany other periods where exUS has significantly outperformed the US stock market, for many decades.
When?
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Re: International stocks

Post by abuss368 »

PGHunt24 wrote: Sat Oct 12, 2024 10:10 pm [topic merged by admin alex]

I have owned both International stock ETF's and Domestic stock ETF's with Vanguard for 9 years. International's performance is 1/3 that of Domestic over this time period. Why should I keep Intn'l stock ETF's?
Hi PGHunt24 -

This is the most debated topic on the forum and may very well be into the future.

There are those investors who prefer a US only portfolio while others prefer a global portfolio.

In my opinion, it is important to understand the positives and negatives of both strategies and to move in the direction of the strategy that allows the investor to best sleep well at night.

An alternative is to engage a reputable investment advisor such as Vanguard PAS.

Best.
Tony
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by Nathan Drake »

Jeroen wrote: Sun Oct 13, 2024 11:37 am
Nathan Drake wrote: Wed Sep 18, 2024 11:36 pmMany other periods where exUS has significantly outperformed the US stock market, for many decades.
When?
60s through early 90s

2000-2013

From 1950-2018 the EU outperformed the US
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by unwitting_gulag »

blimp wrote: Sun Oct 13, 2024 12:49 am 4) Do you really believe the US will outperform international always and forever? So the US will become 80% of the world economy? Then 90%. Then 99%. Then 99.9%. Really?
As a person who still has a sizeable (but shrinking) portfolio-portion allocated to ex-US, my qualified answer to the above, is "yes". The percentage-numbers can be concocted to render the conclusion ridiculous, but even a shift from the current 60/40 US/ex-US, to 65/35, would mean an enormous outperformance by the US (run the numbers to see this). I continue holding ex-US from mixture of inertia, humility and skepticism of my own convictions. But I don't expect for the ex-US portion to be any substantial engine of growth... and instead, barring some calamity, to remain a perpetual ballast.

The recency argument is also getting a bit shopworn. Suppose that it's the year 2099, and the US has been outperforming ex-US for essentially the entire 21st century. Would commentators at that point remind us, that the 20th and 19th centuries were different, that the 21st is only one measly century and hence "recent", and that hey, fundamentals can't support the US outperforming forever?
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by cosmos »

blimp wrote: Sun Oct 13, 2024 12:49 am Arguments for owning international:


4) Do you really believe the US will outperform international always and forever? So the US will become 80% of the world economy? Then 90%. Then 99%. Then 99.9%. Really?

-Blimp
I guess the irony here would be that if you hold VT/VTWAX tracking the FTSE Global All Cap Index would it not then also become 99% US Stocks as well? IE, a moot point if you think US is the only game in town. :)
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by OhioGozaimas »

Bill Bernstein says:
"... There are a bunch of total world market funds out there. I used to not be too fond of them because until a couple of years ago they were too heavy on non-U.S. stocks. If you’re in the U.S., your expenses are going to be in U.S. dollars, so it makes sense to have the bulk of your assets in U.S. dollars. But now it’s about 60% U.S. and 40% international, which, given how relatively inexpensive international stocks are is not a bad allocation. ..."
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by unwitting_gulag »

cosmos wrote: Sun Oct 13, 2024 8:11 pm
blimp wrote: Sun Oct 13, 2024 12:49 am 4) Do you really believe the US will outperform international always and forever? So the US will become 80% of the world economy? Then 90%. Then 99%. Then 99.9%. Really?

-Blimp
I guess the irony here would be that if you hold VT/VTWAX tracking the FTSE Global All Cap Index would it not then also become 99% US Stocks as well? IE, a moot point if you think US is the only game in town. :)
Not quite... because for all of those times while the US portion of global market cap is only 60%, 70% and so on, the US-only fund will grow faster than the total global fund. They will only converge once the US portion becomes overwhelmingly dominant.

Put another way, we can't say that an S&P 500 fund captures Nvidia's performance. I mean, of course it does, because Nvidia is part of the S&P 500. But Nvidia can still double or triple or whatever, while the whole S&P 500 can stay stagnant.

A very un-BH thing to do, which I wouldn't recommend, and wouldn't try, but which is fun to ponder... would be to short the ex-US market, putting the proceeds into an a leverage ultra-long S&P 500 fund. Again, this is patently silly... but it wouldn't surprise me if 100 years from now... well, you know, I defer to the various "hedge fund" threads that we already have here.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by cosmos »

unwitting_gulag wrote: Sun Oct 13, 2024 9:38 pm
cosmos wrote: Sun Oct 13, 2024 8:11 pm

I guess the irony here would be that if you hold VT/VTWAX tracking the FTSE Global All Cap Index would it not then also become 99% US Stocks as well? IE, a moot point if you think US is the only game in town. :)
Not quite... because for all of those times while the US portion of global market cap is only 60%, 70% and so on, the US-only fund will grow faster than the total global fund. They will only converge once the US portion becomes overwhelmingly dominant.

Put another way, we can't say that an S&P 500 fund captures Nvidia's performance. I mean, of course it does, because Nvidia is part of the S&P 500. But Nvidia can still double or triple or whatever, while the whole S&P 500 can stay stagnant.

A very un-BH thing to do, which I wouldn't recommend, and wouldn't try, but which is fun to ponder... would be to short the ex-US market, putting the proceeds into an a leverage ultra-long S&P 500 fund. Again, this is patently silly... but it wouldn't surprise me if 100 years from now... well, you know, I defer to the various "hedge fund" threads that we already have here.
lol yeah i get that but I was trying to say the irony would be for those who went heavy in ex-us via the global index funds would in a round about way end up becoming 100% US over time.

then there is stuff like this: https://www.goldmansachs.com/insights/a ... us-by-2030

The difference may also be a 100% US-er who started in 1990 vs a new investor starting today may end up in completely different situations with the same portfolio. The undiscovered country is indeed the future. :)
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by watchnerd »

unwitting_gulag wrote: Sun Oct 13, 2024 9:38 pm Again, this is patently silly... but it wouldn't surprise me if 100 years from now... well, you know, I defer to the various "hedge fund" threads that we already have here.
100 years from now I wouldn't even assume that publicly traded stocks are a preferred form of capital ownership.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by Nathan Drake »

unwitting_gulag wrote: Sun Oct 13, 2024 7:52 pm
blimp wrote: Sun Oct 13, 2024 12:49 am 4) Do you really believe the US will outperform international always and forever? So the US will become 80% of the world economy? Then 90%. Then 99%. Then 99.9%. Really?
As a person who still has a sizeable (but shrinking) portfolio-portion allocated to ex-US, my qualified answer to the above, is "yes". The percentage-numbers can be concocted to render the conclusion ridiculous, but even a shift from the current 60/40 US/ex-US, to 65/35, would mean an enormous outperformance by the US (run the numbers to see this). I continue holding ex-US from mixture of inertia, humility and skepticism of my own convictions. But I don't expect for the ex-US portion to be any substantial engine of growth... and instead, barring some calamity, to remain a perpetual ballast.

The recency argument is also getting a bit shopworn. Suppose that it's the year 2099, and the US has been outperforming ex-US for essentially the entire 21st century. Would commentators at that point remind us, that the 20th and 19th centuries were different, that the 21st is only one measly century and hence "recent", and that hey, fundamentals can't support the US outperforming forever?
Your argument is not consistent with history which shows periods of oscillation where US has been anywhere from 35% to 65% market cap. To assume US would command 100+% of the world means that the rest of the world would have virtually no real economic value.

Does that make any bit of sense when the US doesn't manufacture much at all relative to the world?
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Rick Ferri on International Investing

Post by Agitated_Analyst »

[merge here - mod mkc]

I recently read a post by Rick Ferri where he was writing about international investing and said "The value of investing internationally is diversification. Non-US stocks are mutually exclusive from US stocks, and they're priced in their native currency. These two factors provide diversification to a portfolio. I'll also add that the industry groups that make up non-US stocks are much more heavily weighted to industrials, materials, and energy than the US market, which is tech-heavy. I've often said that investing internationally is like adding a mid-cap value stock allocation, only with more diversification."viewtopic.php?t=384183&start=100.

This piqued my interest and I decided to determine what a Morningstar style box would look like for an internationally-diversified portfolio if we put the international stocks on the same market-cap scale as the United States. I used VTI and VEA in 50/50 proportions for both the original scale and the updated scale. I used 50/50 because that's my allocation and I used VEA because that's what I invest in. I used the holdings data provided on Vanguard's website and the Morningstar style box data is as of 7-31-24. I thought others might find these results interesting, even if it's not terribly important. If you're thinking about investing in small-cap value and you are already investing in a total international fund, you may find that the international fund provides enough of the exposure for you. The components of a total international fund are currently quite different from total domestic funds (they are smaller and more valuey). Hopefully these findings shed a little more light on the situation. I think Rick makes a great point with the comparison. Sometimes simple is enough.

VTI 9-Box (As of 7-31-24):
13 | 24 | 35
06 | 09 | 05
03 | 03 | 02

VEA 9-Box (As of 7-31-24):
25 | 25 | 29
05 | 07 | 05
01 | 02 | 01

Original 50/50 9-Box:
19 | 25 | 32
05 | 08 | 05
02 | 02 | 02

Updated 50/50 9-box on US Market-Cap Scale:
08 | 14 | 20
09 | 12 | 10
09 | 09 | 09
Last edited by Agitated_Analyst on Wed Oct 16, 2024 4:37 pm, edited 11 times in total.
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Re: International investing is like adding mid-cap value

Post by Florida Orange »

Interesting, although not terribly surprising, but I'm not sure what to do with that information. To state the obvious, mid-cap value is still U.S. so you'd be missing out on most of the diversification benefit.
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Re: International investing is like adding mid-cap value

Post by Agitated_Analyst »

Florida Orange wrote: Mon Oct 14, 2024 11:06 am Interesting, although not terribly surprising, but I'm not sure what to do with that information. To state the obvious, mid-cap value is still U.S. so you'd be missing out on most of the diversification benefit.
I agree. It's merely interesting. I'm not changing anything based on the knowledge. If anything, I would think it would promote the idea of international diversification.
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Re: International investing is like adding mid-cap value

Post by nisiprius »

I used investor shares mutual funds to get the longest possible history. I didn't look at factor exposure. The performance of 50/50 US Total Stock/International has not been similar to 50/50 US Total Stock/US Mid-cap Value. (VTSMX/VGTSX, VTSMX/VMVIX).

Source

Image
Last edited by nisiprius on Mon Oct 14, 2024 11:35 am, edited 2 times in total.
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Re: International investing is like adding mid-cap value

Post by Agitated_Analyst »

nisiprius wrote: Mon Oct 14, 2024 11:20 am I used investor shares mutual funds to get the longest possible history. I didn't look at factor exposure. The performance of 50/50 US Total Stock/International has not been similar to 50/50 US Total Stock/US Mid-cap Value. (VTSMX/VGTSX, VTSMX/VMVIX).

Source

Image
I never said the returns would be similar. Obviously, currency fluctuations have an impact on international investments. The post was meant to be merely interesting and to promote the idea of additional forms of diversification.
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Re: International investing is like adding mid-cap value

Post by nisiprius »

But is it more diversified? Oddly, the definition of the diversification ratio varies as to which is numerator and which is denominator. I will follow this source in which the weighted average of the standard deviations of the parts is divided by the standard deviation of the whole. That means that higher numbers represent higher diversification.

All numbers are standard deviations 2006-08-24 - 2024-10-10, as calculated by testfol.io.

Using international stocks: standard deviations
VTSMX 20.18%
VGTSX 20.08%
Weighted average 20.13%
Portfolio 19.56%
Diversification ratio 1.03

Using mid-cap value stocks:
VTSMX 20.18%
VMVIX 21.88%
Weighted average 21.03%
Portfolio 20.76%
Diversification ratio 1.01

Diversification ratio mavens can opine on whether they are meaningfully different... and whether each one represents a meaningful difference from 1.00 (no added diversification).
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Re: International investing is like adding mid-cap value

Post by Agitated_Analyst »

nisiprius wrote: Mon Oct 14, 2024 11:36 am But is it more diversified? Oddly, the definition of the diversification ratio varies as to which is numerator and which is denominator. I will follow this source in which the weighted average of the standard deviations of the parts is divided by the standard deviation of the whole. That means that higher numbers represent higher diversification.

All numbers are standard deviations 2006-08-24 - 2024-10-10, as calculated by testfol.io.

Using international stocks: standard deviations
VTSMX 20.18%
VGTSX 20.08%
Weighted average 20.13%
Portfolio 19.56%
Diversification ratio 1.03

Using mid-cap value stocks:
VTSMX 20.18%
VMVIX 21.88%
Weighted average 21.03%
Portfolio 20.76%
Diversification ratio 1.01

Diversification ratio mavens can opine on whether they are meaningfully different... and whether each one represents a meaningful difference from 1.00 (no added diversification).
Let me be clear, I'm in no way advocating for replacing international stocks with US mid cap value. I'm advocating for the opposite. By investing in international equities, an investor is moving away from the large-cap growth concentration in the US AND investing in other countries and currencies. The information might also give pause and additional context to those that tilt their portfolio even further to value through small-cap value funds. By investing internationally, an investor is already moving in that direction. The information could be useful to those folks as they decide if they really want to do that.
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Re: International investing is like adding mid-cap value

Post by nisiprius »

Agitated_Analyst wrote: Mon Oct 14, 2024 11:47 am ...Let me be clear, I'm in no way advocating for replacing international stocks with US mid cap value. I'm advocating for the opposite...
And that's what I'm asking about. Are international stocks really much of a diversifier? In my example, the diversification ratio using for US total market + international was only microscopically higher it was for US total market plus mid-cap value.

I don't think international stocks are a very powerful or a very important diversifier.

Look at 2008-2009:
Source

Image

Total Stock is second from the bottom at the right end. Neither international stocks (VGTSX) nor mid-cap value (VMVIX) behaved very differently or provided much diversification. Holding international stocks (red) actually made things worse. By comparison, two very different bond funds--Total Bond (VBTLX) and Long-Term Treasury (VUSTX) really were different from Total Stock and really did provide meaningful diversification.
Last edited by nisiprius on Mon Oct 14, 2024 5:00 pm, edited 1 time in total.
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Re: International investing is like adding mid-cap value

Post by dkturner »

nisiprius wrote: Mon Oct 14, 2024 3:00 pm
I don't think international stocks are a very powerful or a very important diversifier.
But international stocks are a good tax shelter - if you need to reduce equity exposure in your taxable account. 😄
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Re: International investing is like adding mid-cap value

Post by Ferdinand2014 »

nisiprius wrote: Mon Oct 14, 2024 3:00 pm
Agitated_Analyst wrote: Mon Oct 14, 2024 11:47 am ...Let me be clear, I'm in no way advocating for replacing international stocks with US mid cap value. I'm advocating for the opposite...
And that's what I'm asking about. Are international stocks really much of a diversifier? In my example, the diversification ratio using for US total market + international was only microscopically higher it was for US total market plus mid-cap value.

I don't think international stocks are a very powerful or a very important diversifier.

Look at 2008-2009:
Source

Image

Total Stock is the green curve. Neither international stocks (VGTSX) nor mid-cap value (VMVIX) behaved very differently or provided much diversification. Holding international stocks (red) actually made things worse. By comparison, two very different bond funds--Total Bond (VBTLX) and Long-Term Treasury (VUSTX) really were different from Total Stock and really did provide meaningful diversification.
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Re: International investing is like adding mid-cap value

Post by nisiprius »

My bad. I was looking at where it was crossing the yellow curve. Testfol.io's color choices aren't great, and I'm not sure just what color name to put to it, so I'll just say "second from the bottom at the right end." If you click the link, you can click on the little boxes next to the ticker symbols to show or hide the individual curves.
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Re: International investing is like adding mid-cap value

Post by Agitated_Analyst »

nisiprius wrote: Mon Oct 14, 2024 3:00 pm
Agitated_Analyst wrote: Mon Oct 14, 2024 11:47 am ...Let me be clear, I'm in no way advocating for replacing international stocks with US mid cap value. I'm advocating for the opposite...
And that's what I'm asking about. Are international stocks really much of a diversifier? In my example, the diversification ratio using for US total market + international was only microscopically higher it was for US total market plus mid-cap value.

I don't think international stocks are a very powerful or a very important diversifier.

Look at 2008-2009:
Source

Image

Total Stock is second from the bottom at the right end. Neither international stocks (VGTSX) nor mid-cap value (VMVIX) behaved very differently or provided much diversification. Holding international stocks (red) actually made things worse. By comparison, two very different bond funds--Total Bond (VBTLX) and Long-Term Treasury (VUSTX) really were different from Total Stock and really did provide meaningful diversification.
Are international stocks a worthwhile and important diversifier in the equity portion of a portfolio? In my opinion, the answer is yes. This thread was not meant to be another "should I invest internationally?" discussion. However, we need to take a step back. This was a post about the stock portion of a portfolio and you injected fixed income into the discussion. Most (if not all) fixed income products are going to be less correlated with equity products than equity products are with each other. We can talk about the attributes of fixed income and when to add it to a portfolio in a different thread. Fixed income is an important tool, but it's not relevant here (At least based on my original intent. I guess I can't control where the thread goes).

I'm not here to convince anyone to invest internationally. Everyone should do what they're comfortable with. This post was more for people that already invest internationally and are thinking about tilting to small-cap value. They should know they're already moving in that direction by investing internationally (based on US market cap). Not only that, but I thought the nerdy among us might find it interesting, even if it's not terribly important.

As for international stocks being a diversifier for the equity portion of a portfolio, I think if you're going to back test to prove a point, you better be back testing for EXTENDED periods of time. We're talking 50 years at a minimum. Even then, it's statistically insignificant. The time frames you're using, respectfully, aren't long enough to prove a point. I do realize it's the data we have. However, even if we agree the time frame is long enough, there are limitations to using volatility as a measure of risk and recent correlations as a measure of diversification. Especially when one takes deep risk into account (credit to Bill Bernstein for that idea). As someone who loves studying history, there is no way I feel comfortable enough having the equity portion of my nest egg in one country. The US is not immune to bad things happening.
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Re: International investing is like adding mid-cap value

Post by Nathan Drake »

nisiprius wrote: Mon Oct 14, 2024 3:00 pm
Agitated_Analyst wrote: Mon Oct 14, 2024 11:47 am ...Let me be clear, I'm in no way advocating for replacing international stocks with US mid cap value. I'm advocating for the opposite...
And that's what I'm asking about. Are international stocks really much of a diversifier? In my example, the diversification ratio using for US total market + international was only microscopically higher it was for US total market plus mid-cap value.

I don't think international stocks are a very powerful or a very important diversifier.

Look at 2008-2009:
Source

Image

Total Stock is second from the bottom at the right end. Neither international stocks (VGTSX) nor mid-cap value (VMVIX) behaved very differently or provided much diversification. Holding international stocks (red) actually made things worse. By comparison, two very different bond funds--Total Bond (VBTLX) and Long-Term Treasury (VUSTX) really were different from Total Stock and really did provide meaningful diversification.
You've brought up this argument a lot, and I always respond, yet you never really address my response.

The point of equity diversification isn't to protect against short term outcomes. It's to protect against worst case long-term outcomes. We can see this play out with the Cederburg study (50% domestic, 50% intl reduced worst case outcome risk in half). It was a far better diversifier than bonds when it comes to SWR risk, despite bonds generally being less correlated in the short term (but more correlated in the long term; which is the opposite effect seen in domestic vs. intl equities).

A SWR scenario won't manifest overnight, it takes many years of poor sequences to show up - and indeed, the only time in US history where a 4% SWR failed it just so happens that holding international equities for the long term prevented it from occurring.
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Re: International investing is like adding mid-cap value

Post by Agitated_Analyst »

Nathan Drake wrote: Mon Oct 14, 2024 10:00 pm
The point of equity diversification isn't to protect against short term outcomes. It's to protect against worst case long-term outcomes.
Exactly. Because equity investors should have a relatively long-term time horizon, avoiding worst case long-term outcomes is prudent and, arguably, much more important.
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Re: International investing is like adding mid-cap value

Post by sid hartha »

nisiprius wrote: Mon Oct 14, 2024 3:00 pm
Agitated_Analyst wrote: Mon Oct 14, 2024 11:47 am ...Let me be clear, I'm in no way advocating for replacing international stocks with US mid cap value. I'm advocating for the opposite...
And that's what I'm asking about. Are international stocks really much of a diversifier? In my example, the diversification ratio using for US total market + international was only microscopically higher it was for US total market plus mid-cap value.

I don't think international stocks are a very powerful or a very important diversifier.

Look at 2008-2009:
Source

Image

Total Stock is second from the bottom at the right end. Neither international stocks (VGTSX) nor mid-cap value (VMVIX) behaved very differently or provided much diversification. Holding international stocks (red) actually made things worse. By comparison, two very different bond funds--Total Bond (VBTLX) and Long-Term Treasury (VUSTX) really were different from Total Stock and really did provide meaningful diversification.
It would appear international doesn't add much diversification at all. I guess the question is do you know why? Is it because US companies have global revenue streams, so you are already pretty globally diversified? In any event it's a subject that people seem to argue about that in the end probably doesn't make much difference.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by Circle the Wagons »

Relevant article for those interested:

https://www.advisorperspectives.com/art ... ernational

He seems to argue for a position in international only large enough to capture meaningful diversification benefit. Certainly no more. Perhaps Taylor's compromise.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by watchnerd »

Circle the Wagons wrote: Tue Oct 15, 2024 1:07 pm Relevant article for those interested:

https://www.advisorperspectives.com/art ... ernational

He seems to argue for a position in international only large enough to capture meaningful diversification benefit. Certainly no more. Perhaps Taylor's compromise.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by Tamalak »

US stocks could continue to outperform without increasing their % of world capitalization.

IPOs add to capitalization but not performance.

Dividends and buybacks subtract from capitalization but not performance.

So all we need is a trend of e.g. overseas opening worthless IPOs, and of US stocks going hard on buybacks.. and this tree could indeed grow to the sky.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by unwitting_gulag »

watchnerd wrote: Tue Oct 15, 2024 2:53 pm
Circle the Wagons wrote: Tue Oct 15, 2024 1:07 pm Relevant article for those interested:

https://www.advisorperspectives.com/art ... ernational

He seems to argue for a position in international only large enough to capture meaningful diversification benefit. Certainly no more. Perhaps Taylor's compromise.
Who is he?
I came across the same article via a Google search along the lines of "musing on when and why ex-US stocks might start out-performing". Without debating the article or its consequences, I wanted to make the point, that the author asserts that over 150 years, the US stock market has outperformed ex-US. However, we have plots here in our thread, maybe 100 pages ago, asserting the contrary... that US and ex-US are roughly even.

So, folks, here is my problem... we are - as goes the adage - entitled to our own opinions, but not to our own facts. So, which is it? Did the US in fact outperform, noticeably, over 150 years? Or didn't it?
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by Beensabu »

unwitting_gulag wrote: Tue Oct 15, 2024 10:18 pm Did the US in fact outperform, noticeably, over 150 years? Or didn't it?
The last 150 years? It sure did.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by CraigTester »

unwitting_gulag wrote: Tue Oct 15, 2024 10:18 pm
watchnerd wrote: Tue Oct 15, 2024 2:53 pm

Who is he?
I came across the same article via a Google search along the lines of "musing on when and why ex-US stocks might start out-performing". Without debating the article or its consequences, I wanted to make the point, that the author asserts that over 150 years, the US stock market has outperformed ex-US. However, we have plots here in our thread, maybe 100 pages ago, asserting the contrary... that US and ex-US are roughly even.

So, folks, here is my problem... we are - as goes the adage - entitled to our own opinions, but not to our own facts. So, which is it? Did the US in fact outperform, noticeably, over 150 years? Or didn't it?
I believe all the links captured in the OP reference periods subsequent to WW2…

You can review the multiple times the question was raised whether we should look before/during the wars, but it ultimately seemed a bit silly to compare performance during periods of complete destruction….
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by comeinvest »

CraigTester wrote: Tue Oct 15, 2024 11:15 pm
unwitting_gulag wrote: Tue Oct 15, 2024 10:18 pm

I came across the same article via a Google search along the lines of "musing on when and why ex-US stocks might start out-performing". Without debating the article or its consequences, I wanted to make the point, that the author asserts that over 150 years, the US stock market has outperformed ex-US. However, we have plots here in our thread, maybe 100 pages ago, asserting the contrary... that US and ex-US are roughly even.

So, folks, here is my problem... we are - as goes the adage - entitled to our own opinions, but not to our own facts. So, which is it? Did the US in fact outperform, noticeably, over 150 years? Or didn't it?
I believe all the links captured in the OP reference periods subsequent to WW2…

You can review the multiple times the question was raised whether we should look before/during the wars, but it ultimately seemed a bit silly to compare performance during periods of complete destruction….
The article is based on three different reference periods; but 1-2 are directly affected by the world wars which were singular events as we discussed at length, and the results of the third are mostly controlled by the ca. 2013-2024 period and at least in part explained by multiples expansion. You could read this sentence as a continued search for "excuses" of ex-U.S. underperformance; however I have no bias or personal interest in any one theory. I personally see no statistical evidence of consistent or predictable outperformance of any one country. The U.S. was not even the best performing during any one period. I think the argument of diversification of long-run performance outcomes prevails.
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Re: International investing is like adding mid-cap value

Post by rushrocker »

What about correlation as it relates to diversification?

International developed is closely correlated to the US. If you compare the fund VTI (USA) to VEA (Dev Intl) they have had a 0.88 correlation over past 10 years.

But VTI to VWO (Emerging) has been 0.70.

If you held QQQ (US growth) and VWO that drops to 0.62 over past 10 years.

Then a factor fund like SPMO (US momentum) and VWO only had a 0.55 correlation.

Back to mid cap value. VTI and IJJ (mid value) have had a 0.9 correlation, so you can see it relatively similar to international developed.
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Re: International investing is like adding mid-cap value

Post by nisiprius »

Nathan Drake wrote: Mon Oct 14, 2024 10:00 pm ...The point of equity diversification isn't to protect against short term outcomes. It's to protect against worst case long-term outcomes...

A SWR scenario won't manifest overnight, it takes many years of poor sequences to show up - and indeed, the only time in US history where a 4% SWR failed it just so happens that holding international equities for the long term prevented it from occurring.
The problem is that investment vehicles for passive investing in international stocks have only existed since 1996. It wasn't possible to invest in "Triumph of the Optimists" data or Scott Cederburg's data. You say
the only time in US history where a 4% SWR failed it just so happens that holding international equities for the long term prevented it from occurring.
I assume you're referring to periods beginning around 1966. Since the Vanguard 500 Index Fund didn't exist, let's say a hypothetical retiree was using MITTX (Massachusetts Investors Trust) as a core US holding. So please give me the ticker symbol for a fund the investor could have used as a core holding for "international stocks" for 1966-1995. Not an index fund, since they didn't exist, but a broadly diversified, not-too-actively-managed international stock fund.

There is a difference between analyzing research data and looking that the actual results real investors have obtained using real money. And, unfortunately, there is a surprisingly large number of examples of research data and indexes mysteriously turning a corner and bending down a couple of years after they became embodied in investable products.

I don't think there's any good answer to this. When you extend time periods back far enough to damp down recency and sampling error, you run into problems due to lack of data on real investable products, and problems with the idea that the data may not be stationary and you may be stepping into a different river.

With international stocks you see this clearly in the problem of trying to decide whether or not to extend the time period back far enough to include World War II. I recoil at this. It seems just plain wrong to include it, and just plain wrong to exclude it.
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Re: International investing is like adding mid-cap value

Post by Agitated_Analyst »

nisiprius wrote: Wed Oct 16, 2024 10:48 am There is a difference between analyzing research data and looking that the actual results real investors have obtained using real money. And, unfortunately, there is a surprisingly large number of examples of research data and indexes mysteriously turning a corner and bending down a couple of years after they became embodied in investable products.

I don't think there's any good answer to this. When you extend time periods back far enough to damp down recency and sampling error, you run into problems due to lack of data on real investable products, and problems with the idea that the data may not be stationary and you may be stepping into a different river.

With international stocks you see this clearly in the problem of trying to decide whether or not to extend the time period back far enough to include World War II. I recoil at this. It seems just plain wrong to include it, and just plain wrong to exclude it.
In the absence of robust and reliable data that is statistically significant and relevant to our modern-day paradigm, where does that leave us? What else can a prudent investor do if they're looking to securely fund their future consumption? In a world where we know less than nothing, the past is useless, and the future is unknown, maintaining a high savings rate and spreading out one's investments seems to be the only solution. In addition, there's no good way to measure meaningful risk. Volatility is an important risk for those with short horizons, but not as much for those with long horizons. Heck, during accumulation, volatility might make one's ability to meet future consumption easier due to opportunities to invest at depressed prices. Does the domestic / international question just boil down to mere preference, comfort, and what an investor can stick with? I'm having trouble determining what you're advocating. Are you advocating 100% domestic stocks? Did you dislike the market cap comparison between the US and international? Are you advocating for the larger use of fixed income? Or something else?
Last edited by Agitated_Analyst on Wed Oct 16, 2024 12:27 pm, edited 2 times in total.
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Re: International investing is like adding mid-cap value

Post by Flashes1 »

The OP presents a convincing case that Intl equities are crap for US investors seeking gains on their equities. :D
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Re: International investing is like adding mid-cap value

Post by Agitated_Analyst »

Flashes1 wrote: Wed Oct 16, 2024 11:56 am The OP presents a convincing case that Intl equities are crap for US investors seeking gains on their equities. :D
How did you come to that conclusion? I merely put domestic and international equities on the same market-cap scale.
Last edited by Agitated_Analyst on Wed Oct 16, 2024 4:09 pm, edited 1 time in total.
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Re: International investing is like adding mid-cap value

Post by rkhusky »

Increasing diversification means adding things I don’t have, rather than adding more stuff that I already have.

And comparing Morningstar grids is meaningless by itself. One can obtain the same by adding a stock or two.
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Re: International (Non-US) versus US Equities (The "Arguments")

Post by unwitting_gulag »

comeinvest wrote: Wed Oct 16, 2024 2:01 am The article is based on three different reference periods; but 1-2 are directly affected by the world wars which were singular events as we discussed at length, and the results of the third are mostly controlled by the ca. 2013-2024 period and at least in part explained by multiples expansion. You could read this sentence as a continued search for "excuses" of ex-U.S. underperformance; however I have no bias or personal interest in any one theory. I personally see no statistical evidence of consistent or predictable outperformance of any one country. The U.S. was not even the best performing during any one period. I think the argument of diversification of long-run performance outcomes prevails.
If the US has indeed prevailed over the proverbial "long run", then whether this is because of a few concentrated very-bad runs for ex-US (WW1, WW2, GFC) or a steady and continuous bleeding, is to me irrelevant. We might perchance see another disaster, hopefully less caustic than world wars, but nonetheless just as economically significant, giving the US yet another positive jolt. This is another form of the Exceptionalism argument.

That any one particular country handily beats the US, over short term or long, is also irrelevant... unless the investor happens to be a resident of said country. Then home-country bias obtrudes, in this case favorably. For US-based investors, we have to look at the aggregate ex-US, from Albania to Zimbabwe.

What we do have to mind, is US idiosyncratic risk, which according to Exceptionalism, is extremely unlikely... but not zero. So once again, I find ex-US investment to be more of an insurance policy than a route towards higher cumulative returns, whether absolute or volatility-adjusted. My personal conclusion is to always keep a portion of ex-US, but probably a small one.
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