Why do we market weight USA equity but not global equity?
Why do we market weight USA equity but not global equity?
A key tenant of Boglehead philosophy is that you can't beat the market. Beta is king. But why does beta not win globally? The global market can easily be outperformed if you invest more in America than globally. And I know that a lot of Bogleheads will hold international still, but it's usually much lower than the current 55/45 global market weight. It's consistently tilted towards America. Even John Bogle argued against it.
Is this just because of the difficulty of international investing or bad indices? Or is this just a skewed view of historical data? Can we expect etfs that are globally weighted to eventually outperform?
EDIT: changed alpha to beta because my dyslexic mind got them confused
Is this just because of the difficulty of international investing or bad indices? Or is this just a skewed view of historical data? Can we expect etfs that are globally weighted to eventually outperform?
EDIT: changed alpha to beta because my dyslexic mind got them confused
Last edited by Trance on Fri Aug 19, 2022 12:40 am, edited 1 time in total.
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Re: Why do we market weight USA equity but not global equity?
A lot of people here invest in the all world.
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Re: Why do we market weight USA equity but not global equity?
It's one of those eternal argument subjects with threads popping up regularly, running thousands of messages long, and eventually getting locked or forgotten.
Re: Why do we market weight USA equity but not global equity?
I follow all world, but lots of people underweight international for various reasons. Lots of threads. Fact is that international has underperformed for the last several years.
Re: Why do we market weight USA equity but not global equity?
Uncompensated risk for foreign investors.
Most nations markets are primarily invested in and their prices are largely driven by domestic investors, as almost every country's investors have a strong home country bias. Foreign investors often face additional risks or costs, like for example taxes from the foreign country they are investing in or from their home country, and in the case of many developing countries the risk of expropriation, sanctions, or other policies explicitly targeted at foreign investors is not negligible. Since the markets are mostly driven by domestic investors, these additional risks/costs faced by foreign investors are not compensated, and so they face a lower risk-adjusted expected return. Foreign developed markets incur less uncompensated risk but also provide less diversification benefit since developed market economies are highly intertwined and thus correlated.
Most nations markets are primarily invested in and their prices are largely driven by domestic investors, as almost every country's investors have a strong home country bias. Foreign investors often face additional risks or costs, like for example taxes from the foreign country they are investing in or from their home country, and in the case of many developing countries the risk of expropriation, sanctions, or other policies explicitly targeted at foreign investors is not negligible. Since the markets are mostly driven by domestic investors, these additional risks/costs faced by foreign investors are not compensated, and so they face a lower risk-adjusted expected return. Foreign developed markets incur less uncompensated risk but also provide less diversification benefit since developed market economies are highly intertwined and thus correlated.
Re: Why do we market weight USA equity but not global equity?
Considering that most international indices started in the 1990s, which was a time when Japan made up over half of the international index and was coming off a period of astronomical valuations that haven't been seen in any country since, and is now 15-20% of the international indices depending on the index, the odds are most if not all of the international underperformance of the last 30 years or so was due to Japan underperforming dramatically. Look at the EAFE data from 1970-1994, in contrast, and foreign stocks outperformed by 2-3% IIRC.
Since late 2000 comparing US, developed ex-US, and EM, EM and the US have had almost the same exact return: https://www.portfoliovisualizer.com/bac ... ion3_3=100. So the emerging markets can't take the blame for international's underperformance.
So it appears something in the developed markets has been the drag (again, likely Japan, as you can see from this chart): https://www.portfoliovisualizer.com/bac ... ion3_3=100
The other thing I'll note is that you would expect some individual countries to outperform a basket of countries over long periods of time (e.g., Australia, South Africa, and US have all outperformed an international index for 100+ years), just like you would expect some individual stocks in one country to outperform an index of stocks in that country. These are completely expected events and don't mean you should invest in the best past performing stock or country. Yet ironically a growing chorus extrapolate that with the US market here.
Here's a good read from the latest Credit Suisse yearbook on global diversification: https://www.credit-suisse.com/media/ass ... dition.pdf. Some food for thought.
Since late 2000 comparing US, developed ex-US, and EM, EM and the US have had almost the same exact return: https://www.portfoliovisualizer.com/bac ... ion3_3=100. So the emerging markets can't take the blame for international's underperformance.
So it appears something in the developed markets has been the drag (again, likely Japan, as you can see from this chart): https://www.portfoliovisualizer.com/bac ... ion3_3=100
The other thing I'll note is that you would expect some individual countries to outperform a basket of countries over long periods of time (e.g., Australia, South Africa, and US have all outperformed an international index for 100+ years), just like you would expect some individual stocks in one country to outperform an index of stocks in that country. These are completely expected events and don't mean you should invest in the best past performing stock or country. Yet ironically a growing chorus extrapolate that with the US market here.
Here's a good read from the latest Credit Suisse yearbook on global diversification: https://www.credit-suisse.com/media/ass ... dition.pdf. Some food for thought.
Last edited by asif408 on Tue Aug 16, 2022 12:55 pm, edited 2 times in total.
Re: Why do we market weight USA equity but not global equity?
Whatever the current king is (USA) will have of course outperformed the others for the last 100 years or so. But 100 years ago, if you invested in the proven success of the time, you'd be underperforming now.
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Re: Why do we market weight USA equity but not global equity?
Vanguard rates VTI as a 4 on their risk/reward scale, but they rate VXUS as a 5. Why should I treat them as having the same risk if Vanguard does not?
Re: Why do we market weight USA equity but not global equity?
VXUS has added currency risk, in the sense that potential upside and downside for VXUS price is even higher than VTI.UpperNwGuy wrote: ↑Tue Aug 16, 2022 1:04 pm Vanguard rates VTI as a 4 on their risk/reward scale, but they rate VXUS as a 5. Why should I treat them as having the same risk if Vanguard does not?
But since we're all being paid in dollars, I instead consider VXUS a hedge against a weakening of what I'm paid in.
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Re: Why do we market weight USA equity but not global equity?
Home country bias, recency bias, performance chasing. As for what we can expect, I don't expect anything. It is interesting though that there don't seem to be any investors, at least that I know or on this forum who have more than 50% international and less than 50% U.S. You would think that there would at least be some.
Re: Why do we market weight USA equity but not global equity?
Its much harder to make the case for International Investing for US investor as US Economy is largest in World so whatever crisis happens there will spread to ROW. Other people's economies including mine are much smaller so I cannot be certain that whatever crisis that happens here will spread to ROW so the case for International Investments are much stronger and hence I have International Investments.Trance wrote: ↑Tue Aug 16, 2022 11:39 am A key tenant of Boglehead philosophy is that you can't beat the market. Alpha is king. But why does alpha not win globally? The global market can easily be outperformed if you invest more in America than globally. And I know that a lot of Bogleheads will hold international still, but it's usually much lower than the current 55/45 global market weight. It's consistently tilted towards America. Even John Bogle argued against it.
Is this just because of the difficulty of international investing or bad indices? Or is this just a skewed view of historical data? Can we expect etfs that are globally weighted to eventually outperform?
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Re: Why do we market weight USA equity but not global equity?
I try to keep my equity allocation in line with MSCI ACWI.
Occasionally I wonder if I have left some money on the table, but for now I am “staying the course”.
Occasionally I wonder if I have left some money on the table, but for now I am “staying the course”.
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Re: Why do we market weight USA equity but not global equity?
Having been deployed, and employed, world-wide, I suggest the following answer:
There are no equities, or securities, markets that are as stable, as transparent, and as liquid, as those in the United States.
Even markets that appear similar to our own have far more investment, and control, by governments, and by government-sanctioned actors.
In short, we are the "cleanest dirty shirt in the laundry basket."
This is also the reason the rest of the world bids, every business day, to loan money to the United States Treasury for 30 years at 3% nominal rate.
Certainly, no one can predict the future.
The best we can do is allocate assets based on our perceptions of risk and reward.
For the record, we are 57% equities, 43% securities, 100% invested in U.S. corporations, and obligations of the U.S. Treasury.
There are no equities, or securities, markets that are as stable, as transparent, and as liquid, as those in the United States.
Even markets that appear similar to our own have far more investment, and control, by governments, and by government-sanctioned actors.
In short, we are the "cleanest dirty shirt in the laundry basket."
This is also the reason the rest of the world bids, every business day, to loan money to the United States Treasury for 30 years at 3% nominal rate.
Certainly, no one can predict the future.
The best we can do is allocate assets based on our perceptions of risk and reward.
For the record, we are 57% equities, 43% securities, 100% invested in U.S. corporations, and obligations of the U.S. Treasury.
Re: Why do we market weight USA equity but not global equity?
I'm 90% Int'l/10% US. There are a handful I know of here around 50-60 international, I don't know of anyone else as extreme as me. We are definitely a small minority, so you'll have to look hard to find us.Florida Orange wrote: ↑Tue Aug 16, 2022 1:08 pm It is interesting though that there don't seem to be any investors, at least that I know or on this forum who have more than 50% international and less than 50% U.S. You would think that there would at least be some.
Maybe more will come out of the woodwork when international has a run like we've seen with the US only folks here the last few years.
Re: Why do we market weight USA equity but not global equity?
Just to add to my above post, here's a comparison of the US, Europe, and Pacific stocks since 1990: https://www.portfoliovisualizer.com/bac ... ion3_3=100asif408 wrote: ↑Tue Aug 16, 2022 12:51 pm So it appears something in the developed markets has been the drag (again, likely Japan, as you can see from this chart): https://www.portfoliovisualizer.com/bac ... ion3_3=100
Certainly appears Japan has been the major drag on international stocks, since it has been the biggest component of the Pacific index. Europe has only really significantly lagged in the past decade, for the 1st 20 years it was essentially even with the US.
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Re: Why do we market weight USA equity but not global equity?
Good to know, asif408. Do you mind if I ask why you're so heavily international?
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Re: Why do we market weight USA equity but not global equity?
I'm pretty much at world market weight (FTSE All-World index). It's the most logical thing to do in my view for non-US investors.
From a US point of view, one point why investing in the US is favorable because foreign countries levy dividend withholding taxes (just as the US does for foreign investors), so there's an added "expense ratio" that US investors don't get compensated for.
And even as an "all world, anything else would be quite illogical" investor I sometimes wonder how international will ever be able to outperform the US given all the issues in many regions (demographical, political, structural).
From a US point of view, one point why investing in the US is favorable because foreign countries levy dividend withholding taxes (just as the US does for foreign investors), so there's an added "expense ratio" that US investors don't get compensated for.
And even as an "all world, anything else would be quite illogical" investor I sometimes wonder how international will ever be able to outperform the US given all the issues in many regions (demographical, political, structural).
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Re: Why do we market weight USA equity but not global equity?
International does not protect you during a down turn in US markets. Time and time again, international has followed the drop in US markets and has not offered any added benefit/ protection vs a US specific crash even with added risk of less transparency, and unstable governments. So they dont offer anything in the real world other then satiate the desire for " diversifation" although it will statistically not protect you if US markets crash even for US specific reasons.
Re: Why do we market weight USA equity but not global equity?
Two primary reasons:Florida Orange wrote: ↑Tue Aug 16, 2022 1:36 pm Good to know, asif408. Do you mind if I ask why you're so heavily international?
1) Valuations. A lot of people here poo-poo valuations but I think they are an essential component to a long term investment allocation. I have a long investment horizon and to my eyes all the valuation data show that the disparities between foreign and US stocks are dramatic by almost any historical measure. Of course, I said that several years ago when I set this allocation, and the disparities have continued to grow.
But I don't see how they can continue for the next several decades, and I have a long time to wait things out, so I can live with several years of underperformance with the expectation that I am likely (though not guaranteed) to be rewarded in the long-term for my patience and some might say stubbornness to stick with this.
2) I also have a pension plan at work that I don't count in here. It invests heavily in US stocks. I see my heavy foreign investment as a hedge against that. Pension plans are reducing benefits and payouts and I would expect with a poor performance in US stocks that my pension benefits would likely be reduced by the time I retire.
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Re: Why do we market weight USA equity but not global equity?
Very interesting asif408. Do you have a theory as to why there is so much valuation disparity?
Re: Why do we market weight USA equity but not global equity?
Alpha is king. On the Bogleheads? Are you sure? Maybe I’m wrong. Have you read Swedroe?
Re: Why do we market weight USA equity but not global equity?
Foreign countries do have more problems and therefore more uncertainty than the US, so some of the disparity is deserved. I don't personally have a good theory, it appears the lower valuations are due to multiple factors.Florida Orange wrote: ↑Tue Aug 16, 2022 2:03 pm Very interesting asif408. Do you have a theory as to why there is so much valuation disparity?
Take Japan, Europe, and China, for instance, which represent more than half of the international index. The things I typically here said is that Japan has an aging population and their stocks haven't gone anywhere for 30 years, Europe is a basket case with people who don't want to work and like to vacation 3 months of the year, China isn't trustworthy and the actual returns of their stock market haven't matched their growth and profits, etc. These statements do all have some truth to them.
History tells me that where the news is bad and skies are dark and cloudy (i.e., recent past returns have been poor) forward looking returns are high, and where news is good and skies are clear (i.e., recent past returns have been good) forward looking returns are low. So my preference for international equities is really based on the bad news and poor trailing performance, and is what makes them most appealing to me. I certainly wouldn't place a big bet on any of the individual foreign countries (I believe my largest individual country holding is 15%), but I am willing to place a big bet on a large basket of 30+ countries in the international indices.
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Re: Why do we market weight USA equity but not global equity?
I have wondered lately if the stated ratio (60/40 or whatever) is representative of reality.
Do the large multinationals (that get a significant portion of their revenue from international, but are housed in the US) account for some of the "overperformance" of US relative to international? Afterall, these are the companies that have grown significantly over the past few decades and may account for outsized performance. Perhaps we need some more nuance in determining what percent of US/exUS mirrors reality. e.g. A portfolio of 60/40 S&P500/exUS may actually be tilted too far in favor of exUS since the 60% "US" includes multinationals that derive 50% of their revenue internationally, rendering the actual ratio 30/70 US/exUS.
I am a fan of global diversification, but I'm fuzzy on whether we apply the ratio accurately.
Do the large multinationals (that get a significant portion of their revenue from international, but are housed in the US) account for some of the "overperformance" of US relative to international? Afterall, these are the companies that have grown significantly over the past few decades and may account for outsized performance. Perhaps we need some more nuance in determining what percent of US/exUS mirrors reality. e.g. A portfolio of 60/40 S&P500/exUS may actually be tilted too far in favor of exUS since the 60% "US" includes multinationals that derive 50% of their revenue internationally, rendering the actual ratio 30/70 US/exUS.
I am a fan of global diversification, but I'm fuzzy on whether we apply the ratio accurately.
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Re: Why do we market weight USA equity but not global equity?
Thank you, asif408. I understand your logic although it seems a little risky (which I'm sure you're aware of). Anyway, thanks for the explanation.
Re: Why do we market weight USA equity but not global equity?
Sure. I'll add that although most people tell me I'm crazy and it's risky, to me it is less risky because I don't have more than 15 or 20% of my portfolio in any single country. I'm most concerned about poor individual country performance for decades (like Japan had), and I minimize that risk by not going with the current global market cap, which is 60% in one country, or some variation of a mostly US or US only portfolio.Florida Orange wrote: ↑Tue Aug 16, 2022 3:10 pm Thank you, asif408. I understand your logic although it seems a little risky (which I'm sure you're aware of). Anyway, thanks for the explanation.
Re: Why do we market weight USA equity but not global equity?
Please, PLEASE, search for the previous 99999 threads asking and debating this same question. Many of we do market weight globally.
I appreciate your point, but don't forget that those international companies have plenty of US revenue too. (Toyota, Samsung, LVMH, etc.)incognito_man wrote: ↑Tue Aug 16, 2022 2:54 pm I have wondered lately if the stated ratio (60/40 or whatever) is representative of reality.
A portfolio of 60/40 S&P500/exUS may actually be tilted too far in favor of exUS since the 60% "US" includes multinationals that derive 50% of their revenue internationally, rendering the actual ratio 30/70 US/exUS.
70% Global Stocks / 30% Bonds
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Re: Why do we market weight USA equity but not global equity?
"We" do all sorts of things and this is one of the most frequently (and fruitlessly) debated topics in the forum. Many Bogleheads do market weight global equity, using the Vanguard Total World Stock Index Fund. (I'm not one of them).
I'm going to give two reasons. Both of them have been disputed in the forum, but obviously I think they're valid.
1) The most important one is that even if you take everything at face value, the plots of just about anything as a function of foreign stock exposure are broad and shallow. However you choose to measure it, the penalty for being at 20% ex-US exposure instead of 50% is small. It doesn't matter much. Therefore, even if you fully believe everything said by global diversification advocates, even if you believe that underweighting ex-US stocks by a US investor is just provincial home bias, it is mostly harmless.
A stunning example of this was provided by an author in 2009. He presented an illustration of the DFA-style method of portfolio construction. He was trying to show that layering on diversifying assets produced improvement in return-for-risk with each addition. I'm guessing this was a standard presentation, and that when the numbers were updated for 2009, nobody noticed that for that particular time period, "the most important diversification on the equity side, [adding] an exposure to international equities" produced absolutely no difference, to within roundoff error, in either return or standard deviation.
2) The theory I'm familiar with for justifying cap-weighting is that it is a mean-variance optimum. That is only true if we are talking about a unified market within which assets are traded frictionlessly. That is not the case for global stock investing. There is no such thing as "the global stock market." There are sixteen different trillion-dollar national stock markets. Assets are not traded frictionlessly between them. One big source of friction is the need for currency conversion, which adds uncompensated risk for any investor investing across currency frontiers. Currency risk provides a perfectly rational, symmetrical justification for home bias. Rational investors should overweight investments in their home currency.
I'm going to give two reasons. Both of them have been disputed in the forum, but obviously I think they're valid.
1) The most important one is that even if you take everything at face value, the plots of just about anything as a function of foreign stock exposure are broad and shallow. However you choose to measure it, the penalty for being at 20% ex-US exposure instead of 50% is small. It doesn't matter much. Therefore, even if you fully believe everything said by global diversification advocates, even if you believe that underweighting ex-US stocks by a US investor is just provincial home bias, it is mostly harmless.
A stunning example of this was provided by an author in 2009. He presented an illustration of the DFA-style method of portfolio construction. He was trying to show that layering on diversifying assets produced improvement in return-for-risk with each addition. I'm guessing this was a standard presentation, and that when the numbers were updated for 2009, nobody noticed that for that particular time period, "the most important diversification on the equity side, [adding] an exposure to international equities" produced absolutely no difference, to within roundoff error, in either return or standard deviation.
2) The theory I'm familiar with for justifying cap-weighting is that it is a mean-variance optimum. That is only true if we are talking about a unified market within which assets are traded frictionlessly. That is not the case for global stock investing. There is no such thing as "the global stock market." There are sixteen different trillion-dollar national stock markets. Assets are not traded frictionlessly between them. One big source of friction is the need for currency conversion, which adds uncompensated risk for any investor investing across currency frontiers. Currency risk provides a perfectly rational, symmetrical justification for home bias. Rational investors should overweight investments in their home currency.
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Re: Why do we market weight USA equity but not global equity?
Absolutely. So I'm VERY curious to see how that balances out. I'm suspicious that the ratio many think they are buying is actually significantly "off" from what they think it represents.z3r0c00l wrote: ↑Tue Aug 16, 2022 3:34 pm Please, PLEASE, search for the previous 99999 threads asking and debating this same question. Many of we do market weight globally.
I appreciate your point, but don't forget that those international companies have plenty of US revenue too. (Toyota, Samsung, LVMH, etc.)incognito_man wrote: ↑Tue Aug 16, 2022 2:54 pm I have wondered lately if the stated ratio (60/40 or whatever) is representative of reality.
A portfolio of 60/40 S&P500/exUS may actually be tilted too far in favor of exUS since the 60% "US" includes multinationals that derive 50% of their revenue internationally, rendering the actual ratio 30/70 US/exUS.
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Re: Why do we market weight USA equity but not global equity?
Asif408, intellectually your position makes a lot of sense but I would need a powerful reason to adopt a strategy so far out of the mainstream. To me, your rational, although entirely reasonable, isn't quite powerful enough to justify taking such a contrarian position. You're making a pretty big bet that even something as conventional as global cap weight is likely to be substantially off the mark. And you may be right. I guess I'm just afraid to go that much against the grain unless I'm very sure that I'm right, which would mean that almost everybody else is wrong. But I admire your courage. It's independent spirits like you that make this forum interesting. You've definitely given me food for thought. Thanks.
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Re: Why do we market weight USA equity but not global equity?
I think it is because winner take all markets.Trance wrote: ↑Tue Aug 16, 2022 11:39 am A key tenant of Boglehead philosophy is that you can't beat the market. Alpha is king. But why does alpha not win globally? The global market can easily be outperformed if you invest more in America than globally. And I know that a lot of Bogleheads will hold international still, but it's usually much lower than the current 55/45 global market weight. It's consistently tilted towards America. Even John Bogle argued against it.
Is this just because of the difficulty of international investing or bad indices? Or is this just a skewed view of historical data? Can we expect etfs that are globally weighted to eventually outperform?
Apple\Amazon\Microsoft\Google\Meta all have huge profits from the world economy.
These are monopolies which are impossible to replace.
Non US indices are just focused primarily on Financials and with very low population growth they have been under-performing.
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Re: Why do we market weight USA equity but not global equity?
Although there is no consensus on this topic, some argue for a home country bias, which I will boil down to two points:
1. In many years, the performance of foreign equities as measured in one's home country currency is as much related to exchange rate movements as it is to the performance of the underlying equities.
2. Since the bulk of one's present and future spending likely occurs in one's home country currency, exchange rate risk presents an additional risk that, as nisiprius notes, is an uncompensated risk.
FWIW.
1. In many years, the performance of foreign equities as measured in one's home country currency is as much related to exchange rate movements as it is to the performance of the underlying equities.
2. Since the bulk of one's present and future spending likely occurs in one's home country currency, exchange rate risk presents an additional risk that, as nisiprius notes, is an uncompensated risk.
FWIW.
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Re: Why do we market weight USA equity but not global equity?
Not impossible, maybe not even that hard. Odds are good a few of those companies won't even be around in 30 years.invest2bfree wrote: ↑Tue Aug 16, 2022 3:57 pm
Apple\Amazon\Microsoft\Google\Meta all have huge profits from the world economy.
These are monopolies which are impossible to replace.
70% Global Stocks / 30% Bonds
Re: Why do we market weight USA equity but not global equity?
I don't think people using 60/40 country weighting expect or want 60% of the revenue to come from the US.incognito_man wrote: ↑Tue Aug 16, 2022 2:54 pm I have wondered lately if the stated ratio (60/40 or whatever) is representative of reality.
Do the large multinationals (that get a significant portion of their revenue from international, but are housed in the US) account for some of the "overperformance" of US relative to international? Afterall, these are the companies that have grown significantly over the past few decades and may account for outsized performance. Perhaps we need some more nuance in determining what percent of US/exUS mirrors reality. e.g. A portfolio of 60/40 S&P500/exUS may actually be tilted too far in favor of exUS since the 60% "US" includes multinationals that derive 50% of their revenue internationally, rendering the actual ratio 30/70 US/exUS.
I am a fan of global diversification, but I'm fuzzy on whether we apply the ratio accurately.
60/40 is very close to the current ratio of float-adjusted market capitalization ratio between US stocks and exUS stock, according to https://research.ftserussell.com/Analyt ... Name=ACGRF as of the end of July 2022.
If you are trying to use float-adjusted market capitalization weighting on a global scale then you should include each country in the same percentage it is in the index. You could do this with a single global fund (Vanguard has one) but you get the same result if you split US and exUS at market weight. The latter approach would (very slightly) reduce expenses and also is more feasible if you have a 401k plan with no global fund.
FTSE's guidelines for determining which country is stock in are documented on https://research.ftserussell.com/produc ... nality.pdf and always put each stock in one country. You could argue for assigning some stocks to different countries, or splitting between countries, but it doesn't matter in this case. If you are going to hold countries at market weight, moving a stock to a different country would also increase that country's market weight and you'd end up with the same fraction of the portfolio in the stock anyway.
EDIT: To summarize, 60/40 accurately represents the float-adjusted market capitalization ratio using the index provider's assignment rules, so a 60/40 portfolio accurately invest in each stock at float-adjusted market weight.
Re: Why do we market weight USA equity but not global equity?
Ok, but even if new major companies emerge to take the place of those companies at the top, where are they most likely to be listed? The US as we've been seeing for decades now, or stagnated Europe/Japan? We've seen major new companies emerge in China, but there are serious issues with investing there.z3r0c00l wrote: ↑Tue Aug 16, 2022 4:26 pmNot impossible, maybe not even that hard. Odds are good a few of those companies won't even be around in 30 years.invest2bfree wrote: ↑Tue Aug 16, 2022 3:57 pm
Apple\Amazon\Microsoft\Google\Meta all have huge profits from the world economy.
These are monopolies which are impossible to replace.
Re: Why do we market weight USA equity but not global equity?
It has been mostly harmless in the past, but that would change if US stocks underperform significantly in the future.nisiprius wrote: ↑Tue Aug 16, 2022 3:37 pm "We" do all sorts of things and this is one of the most frequently (and fruitlessly) debated topics in the forum. Many Bogleheads do market weight global equity, using the Vanguard Total World Stock Index Fund. (I'm not one of them).
I'm going to give two reasons. Both of them have been disputed in the forum, but obviously I think they're valid.
1) The most important one is that even if you take everything at face value, the plots of just about anything as a function of foreign stock exposure are broad and shallow. However you choose to measure it, the penalty for being at 20% ex-US exposure instead of 50% is small. It doesn't matter much. Therefore, even if you fully believe everything said by global diversification advocates, even if you believe that underweighting ex-US stocks by a US investor is just provincial home bias, it is mostly harmless.
There are many foreign stocks listed on US exchanges. Some foreign stocks are traded more actively in the US than in their home countries. Some foreign stocks are listed exclusively in the US. If the concern is mainly about the currency used on the exchanges, concern over currency risk would not apply to these.2) The theory I'm familiar with for justifying cap-weighting is that it is a mean-variance optimum. That is only true if we are talking about a unified market within which assets are traded frictionlessly. That is not the case for global stock investing. There is no such thing as "the global stock market." There are sixteen different trillion-dollar national stock markets. Assets are not traded frictionlessly between them. One big source of friction is the need for currency conversion, which adds uncompensated risk for any investor investing across currency frontiers. Currency risk provides a perfectly rational, symmetrical justification for home bias. Rational investors should overweight investments in their home currency.
If the concern is also about currencies the companies use, note that many US-based companies have employees, suppliers, and customers abroad. Would this make it safer to underweight those US companies with lots of foreign currency activity in favor of investing mainly in US companies that only do business within the US?
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Re: Why do we market weight USA equity but not global equity?
The concern isn't about the currency that the companies use. It is about the currency that the stock is denominated in. I guess that means the currency used by the exchange that the company is listed on. The S&P 500 contains something like nineteen stocks of foreign-headquartered companies, but their inclusion rules require listing on a U.S. exchange. I haven't thought about this before so there may be details I don't understand, but I think the issue is the currency used by the exchange the stock is listed on.patrick wrote: ↑Tue Aug 16, 2022 5:20 pmIf the concern is also about currencies the companies use, note that many US-based companies have employees, suppliers, and customers abroad. Would this make it safer to underweight those US companies with lots of foreign currency activity in favor of investing mainly in US companies that only do business within the US?
I think are companies issuing stocks listed on different national exchanges. I don't know if they are "the same stock," in which case yes, it is riskier to buy the same stock on a foreign exchange, or whether these are simply different stocks and the foreign-listed stock is riskier for US buyers than the US-listed stock.
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Re: Why do we market weight USA equity but not global equity?
The largest holding of Vanguard Total International Stock Index is Taiwan Semiconductor Manufacturing, which is listed on the NYSE under the symbol TSM. Looking at the rest of the top ten holdings, there are also US exchange listings for ASML, AstraZenaca, Shell, Toyota, and Novo Nordisk. You could replicate a large portion of total international while only trading on US exchanges.nisiprius wrote: ↑Tue Aug 16, 2022 5:40 pmThe concern isn't about the currency that the companies use. It is about the currency that the stock is denominated in. I guess that means the currency used by the exchange that the company is listed on. The S&P 500 contains something like nineteen stocks of foreign-headquartered companies, but their inclusion rules require listing on a U.S. exchange. I haven't thought about this before so there may be details I don't understand, but I think the issue is the currency used by the exchange the stock is listed on.patrick wrote: ↑Tue Aug 16, 2022 5:20 pmIf the concern is also about currencies the companies use, note that many US-based companies have employees, suppliers, and customers abroad. Would this make it safer to underweight those US companies with lots of foreign currency activity in favor of investing mainly in US companies that only do business within the US?
I think are companies issuing stocks listed on different national exchanges. I don't know if they are "the same stock," in which case yes, it is riskier to buy the same stock on a foreign exchange, or whether these are simply different stocks and the foreign-listed stock is riskier for US buyers than the US-listed stock.
As far as I know, the "foreign" stocks in the S&P 500 are mainly companies incorporated abroad for tax reasons. If they are not even listed on their "home" exchanges at all, they would be considered US companies by FTSE's criteria too and wouldn't be included in Vanguard's international index fund. None of the top 10 in the international index are included in the S&P 500.
If the exact some stock is traded on multiple exchanges, the price (after adjusting for exchange rates) should be the same as otherwise there would be an easy arbitrage opportunity. Many foreign stocks are instead traded as depositary receipts, which prevent the US version from being cheaper since they can be redeemed for the underlying shares, but might allow the US version to be more expensive because investors can't freely create more of the US version. When such a premium exists the US version would probably be the riskier one.
By the way, China B-shares are traded in US dollars in Shanghai.
Re: Why do we market weight USA equity but not global equity?
Trance wrote: ↑Tue Aug 16, 2022 11:39 am A key tenant of Boglehead philosophy is that you can't beat the market. Alpha is king. But why does alpha not win globally? The global market can easily be outperformed if you invest more in America than globally. And I know that a lot of Bogleheads will hold international still, but it's usually much lower than the current 55/45 global market weight. It's consistently tilted towards America. Even John Bogle argued against it.
Is this just because of the difficulty of international investing or bad indices? Or is this just a skewed view of historical data? Can we expect etfs that are globally weighted to eventually outperform?
Good job. You figured it out. It's such a confusing contradiction, isn't it?
Some people have a home bias, in that they are biased towards their home country when it comes to investing. This is the case globally, even for investors from countries where the global market cap of their home country is 3% (or 1%, or less than 1%). It's just a thing.
That home bias has happened to pay off quite well for US-based investors over the last 30 years or so, which reinforces the bias.
No clue whether global market cap will outperform US-overweighted over any particular time period. But global market cap has provided a pretty solid 5% real rate of return over the typical investing time period that most of us have overall while alive (and that has included a couple world wars). It just depends on whether one finds that "good enough" or wants to try for more.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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Re: Why do we market weight USA equity but not global equity?
depends upon the timeframe doesn't it:
also another way to think about the US might be analagous to Berkshire Hathaway. It's one company that owns many companies. The US is one country, but look at the GDP of the states within that country and how they compare to lots of other countries:
I'm 70/30 US/Int at present (except in 457b where I use target date which defaults to 60/40 US/Int) partially because of this:
it's important to hold global if only for the reason that US was only top dog once in these 20 years (Finland was top dog 4 times!):
(don't put it all in Finland. Past performance is no guarantee of future results).
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Re: Why do we market weight USA equity but not global equity?
depends upon the timeframe doesn't it:
also another way to think about the US might be analagous to Berkshire Hathaway. It's one company that owns many companies. The US is one country, but look at the GDP of the states within that country and how they compare to lots of other countries:
I'm 70/30 US/Int at present (except in 457b where I use target date which defaults to 60/40 US/Int) partially because of this:
it's important to hold global if only for the reason that US was only top dog once in these 20 years (Finland was top dog 4 times!):
(don't put it all in Finland. Past performance is no guarantee of future results).
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions |
Re: Why do we market weight USA equity but not global equity?
This has been true since way back in 1989... To understand international investing, you have to crack a history book. Or look at what could happen in the future. Perhaps the most important company on Earth is domiciled in Taiwan. They could easily be at $2 Trillion in a decade. You simply don't know where these companies will emerge or how international trade will play out.visualguy wrote: ↑Tue Aug 16, 2022 4:46 pmOk, but even if new major companies emerge to take the place of those companies at the top, where are they most likely to be listed? The US as we've been seeing for decades now, or stagnated Europe/Japan? We've seen major new companies emerge in China, but there are serious issues with investing there.z3r0c00l wrote: ↑Tue Aug 16, 2022 4:26 pmNot impossible, maybe not even that hard. Odds are good a few of those companies won't even be around in 30 years.invest2bfree wrote: ↑Tue Aug 16, 2022 3:57 pm
Apple\Amazon\Microsoft\Google\Meta all have huge profits from the world economy.
These are monopolies which are impossible to replace.
70% Global Stocks / 30% Bonds
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Re: Why do we market weight USA equity but not global equity?
Sector is the one you don't mention. But it's absolutely clear that the largest US sector is tech & internet stocks, that have traded at very high valuations. I'd describe Tesla as a "tech" stock.asif408 wrote: ↑Tue Aug 16, 2022 2:52 pmForeign countries do have more problems and therefore more uncertainty than the US, so some of the disparity is deserved. I don't personally have a good theory, it appears the lower valuations are due to multiple factors.Florida Orange wrote: ↑Tue Aug 16, 2022 2:03 pm Very interesting asif408. Do you have a theory as to why there is so much valuation disparity?
To say that there are stereotypes embedded in that paragraph ... I'll add a (fair) characterisation, in my opinion. American senior managements are greedy, and highly incentivized by stock price. They are a bit like sports stars. They know they have a short shelf life, so they have to maximise their returns while they are on top. Thus US companies tend to use financial engineering to drive stock returns. They also drive their businesses quite hard for short term profitability.* A friend moved to EBay during the dot com years and found the focus on quarterly earnings quite disconcerting - business and investment plans just got ripped up based on the share price reaction to the quarterly earnings call.Take Japan, Europe, and China, for instance, which represent more than half of the international index. The things I typically here said is that Japan has an aging population and their stocks haven't gone anywhere for 30 years, Europe is a basket case with people who don't want to work and like to vacation 3 months of the year, China isn't trustworthy and the actual returns of their stock market haven't matched their growth and profits, etc. These statements do all have some truth to them.
I broadly agree with this although I am not entirely convinced the PE of international stocks is going anywhere.History tells me that where the news is bad and skies are dark and cloudy (i.e., recent past returns have been poor) forward looking returns are high, and where news is good and skies are clear (i.e., recent past returns have been good) forward looking returns are low. So my preference for international equities is really based on the bad news and poor trailing performance, and is what makes them most appealing to me. I certainly wouldn't place a big bet on any of the individual foreign countries (I believe my largest individual country holding is 15%), but I am willing to place a big bet on a large basket of 30+ countries in the international indices.
It's where you have structural change that things get interesting. Britain from the 1980s v the 1970s. Japan now there is far more attention to shareholder value than their was.
* such a theory also has to explain companies like Amazon, which famously invests to grow.
Re: Why do we market weight USA equity but not global equity?
I'm 40% Sweden, 40% global (of which about half US) and 20% EM. So that puts me at about 20% US. But then I'm not a US investor.Florida Orange wrote: ↑Tue Aug 16, 2022 1:08 pm Home country bias, recency bias, performance chasing. As for what we can expect, I don't expect anything. It is interesting though that there don't seem to be any investors, at least that I know or on this forum who have more than 50% international and less than 50% U.S. You would think that there would at least be some.
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Re: Why do we market weight USA equity but not global equity?
Good point, ari. I guess I was thinking of U.S. investors.
Re: Why do we market weight USA equity but not global equity?
Personally, I do not invest in global stock markets for 2 major reasons (this is after living in a emerging market country for more than 20 years):
- account standards vary by country. Many other countries, especially emerging market countries, do not have governance standards, or governance standards are not enforced, in similar ways as the United States.
- 30% of revenue of the S&P 500 is from international markets. International revenue is different than owning an international company or indices.
All the best.
- account standards vary by country. Many other countries, especially emerging market countries, do not have governance standards, or governance standards are not enforced, in similar ways as the United States.
- 30% of revenue of the S&P 500 is from international markets. International revenue is different than owning an international company or indices.
All the best.
Re: Why do we market weight USA equity but not global equity?
I actually wouldn't recommend my position. My goal with all of this is just to persuade those who might be open to convincing that a US only or mostly US strategy is risky in the sense that you are likely to have to live through a lost decade or two. With a globally diversified portfolio that is less so the case, at least historically. Look at something like a 1/3 US, 1/3 developed ex-US, and 1/3 emerging markets allocation during 2 time periods. I imagine most people would say this a risky portfolio, with 1/3 in emerging markets and only 1/3 in US stocks. Here's how that fared over the last 2 decades.Florida Orange wrote: ↑Tue Aug 16, 2022 3:45 pm Asif408, intellectually your position makes a lot of sense but I would need a powerful reason to adopt a strategy so far out of the mainstream. To me, your rational, although entirely reasonable, isn't quite powerful enough to justify taking such a contrarian position. You're making a pretty big bet that even something as conventional as global cap weight is likely to be substantially off the mark. And you may be right. I guess I'm just afraid to go that much against the grain unless I'm very sure that I'm right, which would mean that almost everybody else is wrong. But I admire your courage. It's independent spirits like you that make this forum interesting. You've definitely given me food for thought. Thanks.
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Sure, it would have been nice to be 100% EM in the 2000s and 100% US in the 2010s. But without knowing what was going to happen, with a 1/3 mix of each over the whole time frame you underperformed a US only portfolio by a little more than 1%, will all of that underperformance coming in the last few years: https://www.portfoliovisualizer.com/bac ... tion3_1=33
You got a low but positive real return over both decades with a diversified portfolio (actually almost the same exact return! 3,14% and 3.15% real), and you avoided the negative decade in the 2000s for the US only portfolio. I'll reiterate that the greatest risk to me is negative real returns over a decade or two, not low but positive real returns over a decade or two. FWIW, my 90% international is split into half foreign developed and half emerging.
You are correct I'm making a big bet against the US. But I also have a pension that is US heavy, which mitigates some of that risk if the US continues to do well. If I didn't have the pension I might be closer to a global market cap allocation, but still probably overweight international. Or even something like the 1/3 US, 1/3 ex US developed, and 1/3 emerging is pretty appealing.
Re: Why do we market weight USA equity but not global equity?
You at least have one guy on this forum. I am 55% VXUS and 45% VTV+AVUV.Florida Orange wrote: ↑Tue Aug 16, 2022 1:08 pm Home country bias, recency bias, performance chasing. As for what we can expect, I don't expect anything. It is interesting though that there don't seem to be any investors, at least that I know or on this forum who have more than 50% international and less than 50% U.S. You would think that there would at least be some.
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Re: Why do we market weight USA equity but not global equity?
Those are exactly some of the reasons why I am one of the 100% USA guys. Also if no one has a stronger protection of private property as us and no one enforces the rule of law objectively more than us. As far as any major economy goes I look around and I just don’t see any other major economy it is more dynamic than ours. I think you can rule out the communist countries for obvious reasons. There’s no real rule of law and no transparency and at the end of the day the government controls the economy. Maybe South Korea and Taiwan can out perform us but are obviously much smaller economies than are we. Looking to see where dynamic growth will come from Europe’s economies are more sclerotic than are ours. And they are losing population or replacing their population with large numbers of people with little formal education and western values of freedom and equality. So I just don’t see that they will up perform over the next 20 years. Where does that leave? South America? Central America? I don’t see those areas as having a strong educated middle-class that will outperform the United States over the next 20 years. So for me I look at the rest of the world and not right right USA but I just don’t see another segment of the world that looks like it will outperform us. And if one comes up I will alter my asset allocation appropriately.Dontridetheindexdown wrote: ↑Tue Aug 16, 2022 1:22 pm Having been deployed, and employed, world-wide, I suggest the following answer:
There are no equities, or securities, markets that are as stable, as transparent, and as liquid, as those in the United States.
Even markets that appear similar to our own have far more investment, and control, by governments, and by government-sanctioned actors.
In short, we are the "cleanest dirty shirt in the laundry basket."
This is also the reason the rest of the world bids, every business day, to loan money to the United States Treasury for 30 years at 3% nominal rate.
Certainly, no one can predict the future.
The best we can do is allocate assets based on our perceptions of risk and reward.
For the record, we are 57% equities, 43% securities, 100% invested in U.S. corporations, and obligations of the U.S. Treasury.
Maybe India? I don’t know enough about India to comment. I suspect that a lot of the highly educated people – engineers and doctors - come here. But I don’t know enough to comment intelligently.