How much International allocation is good insurance?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

Marseille07 wrote: Mon Apr 24, 2023 8:27 pm
km91 wrote: Mon Apr 24, 2023 7:46 pm Presumably all the times the global portfolio outperformed the US only portfolio. The global portfolio underperformed the US only portfolio, we gave up potential upside to achieve a less risky portfolio, which sounds like the textbook definition of a hedge. Just because the US concentration risks didn't come to fruition in the backtest data doesn't mean they aren't there though or that the factors that lead to 10 years of amazing US performance can't easily reverse
But the fact is VT is 60% US. It's not that the US concentration risks didn't come to fruition; it is that when the risks came, VT also went down (as it should, since the US is a major holding). This is what I mean by understand how much you're actually hedging.
Equity investors should be prepared to hold for 5-10 years or longer. The risk is not defined in terms of 1-3 year periods that we need to be concerned about with equities. It's the long-term returns, which is why you invest in equities to begin with. And on longer horizons, US and exUS tend to hedge and provide that "long term" insurance-type policy because they both have similar long term returns but different sequences of those returns. If you want short term protection, you use other asset classes.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
3funder
Posts: 1814
Joined: Sun Oct 15, 2017 9:35 pm

Re: How much International allocation is good insurance?

Post by 3funder »

km91 wrote: Mon Apr 24, 2023 2:23 pm
Marseille07 wrote: Mon Apr 24, 2023 1:30 pm
km91 wrote: Mon Apr 24, 2023 11:38 am If an investor views a single country equity portfolio, like US only, as a concentration risk they can insure this risk away by diversifying across international markets
You might be able to reduce the US risk somewhat. We're pretty big and it's not so easy to insure the US risk away, especially when you merely diversify (i.e. still holding US equities).
In my mind the biggest risk of a US only portfolio is not a drawdown scenario where US zigs and ex US zags, but a period of prolonged underperformance of US due to current valuations. For the 12 year period ending in 2021 US stocks returned 16%/year. This is a phenomenal return for equities but it is not normal or sustainable. US stocks have become more richly valued than ex US stocks and history shows us that assets that have such run ups in price tend to underperform on a forward going basis, at least for some period. Valuations and fundamentals do matter in the long term and the risk of a concentrated US only portfolio is that relatively expensive current valuations lead to lower returns for the next 10 or 20 years. Will US stocks mean revert and return something like 4%/year over the next decade to get back to the 10%/year long term trend? I have no idea but I don't want to take that risk
Ding, ding, ding. We have a winner! Well said!
Global stocks, US bonds, and time.
jginseattle
Posts: 1125
Joined: Fri Jul 01, 2011 7:33 pm

Re: How much International allocation is good insurance?

Post by jginseattle »

40% to 50% of equities.
Topic Author
gavinsiu
Posts: 4536
Joined: Sun Nov 14, 2021 11:42 am

Re: How much International allocation is good insurance?

Post by gavinsiu »

Yes, I think the issue is long enough period of underperformance where a withdraw rate of 3% is inot possible. Currently one of the good example of an economy that seems to continue but with a stagnate stock market would be Japan. What sort of international allocation could you add to a Japanese portfolio to have survived retiring in the 90's (assuming you had sufficient asset)?

Someone posted a thread of a Japanese portfolio where a good chunk was allocated in world asset. I can't find the thread unfortunately.
Gaston
Posts: 1220
Joined: Wed Aug 21, 2013 7:12 pm

Re: How much International allocation is good insurance?

Post by Gaston »

If you tend to shy away from international equity and need a mental justification for doing so, listen to what Corey Hoffstein says at the 26:20 timestamp in this video: https://youtu.be/rowDp6JiWWs

I do not share Mr. Hoffstein’s view, but it’s always fun to listen to a sound thinker.
“My opinions are just that - opinions.”
averagedude
Posts: 1772
Joined: Sun May 13, 2018 3:41 pm

Re: How much International allocation is good insurance?

Post by averagedude »

whodidntante wrote: Mon Apr 24, 2023 6:43 pm I wonder if it's somehow possible to harness the energy put into this ceaseless discussion topic.
I agree, but in the meantime we all have our opinion and we LOVE expressing it. You minds well join the debate and share your opinion, as these threads tend to have hundreds of comments.
seajay
Posts: 1656
Joined: Sat May 01, 2021 3:26 pm
Contact:

Re: How much International allocation is good insurance?

Post by seajay »

gavinsiu wrote: Mon Apr 24, 2023 8:50 am A lot of threads debate the merits of international allocation or whether to have it or not. Most debate seems to center around whether international drags down long term returns. However, this is something that someone in the US would complaint about with its above world average returns. Investors in Japan and even the UK probably think differently. I currently have a 1/3 of my stock portfolio in international. Would that even make a difference if I were a investor in Japan for example. I was thinking of the allocation was more of a defense. I wouldn't like to bet against the US economy, but I also feel that it is not forever. Unfortunately, visual portfolio virtualizer don't do stuff like historical data in Japan.

On the flip-side, what about bonds? Would bond return be just as bad as stock when the country goes stagnate? I had previously never allocated international bond due to currency risk. I wonder would I think different if bond returns were close to zero while international bonds have a higher return.
If you combined US stock (Simba's TSM data) with UK stock (Barclays Equity Gilt study FT All Share data), adjusted to US Dollars (FRED), then 50/50 yearly rebalanced had the tendency to cling closer to the top (better case) line for total returns. But that excluded the cost of yearly rebalancing

Image

On that measure holding both and tending to align with the better case outcome of the two has holding both more appealing than one alone.

Also noteworthy is that from that 1951 start date year, up to the end of 2020 (70 years in total), UK house prices and gold both matched FT All Share price only gains. A house also had imputed rent benefit on top, as did stocks have dividends on top, which were both similar. If you could rebalance all three total returns each year (in practice you can't accumulate imputed rent, nor add/reduce to a property to rebalance its value) back to thirds weightings each, then the total returns from house/stock/gold compared to just stock total returns. If you initially invested a third in each and didn't rebalance, accumulated imputed rent, and stock dividends back into house/stocks (respectively) then you also ended up with the same overall total return, but where the better performing assets had become considerably heavily weighted, you didn't reduce 'winners' to add to laggards so ended up with a high average exposure to the better performing asset(s).
Blue456
Posts: 2152
Joined: Tue Jun 04, 2019 5:46 am

Re: How much International allocation is good insurance?

Post by Blue456 »

gavinsiu wrote: Mon Apr 24, 2023 8:50 am I currently have a 1/3 of my stock portfolio in international. Would that even make a difference.
You need at least 40% would make enough difference in 40/60 portfolio. I came to this conclusion by putting 24% US and 76% total bond market. I get consistently good enough growth that keeps up with inflation. ~25% is just enough stock exposure recommended.
ScubaHogg
Posts: 3573
Joined: Sun Nov 06, 2011 2:02 pm

Re: How much International allocation is good insurance?

Post by ScubaHogg »

gavinsiu wrote: Mon Apr 24, 2023 8:50 am I wouldn't like to bet against the US economy, but I also feel that it is not forever.
First, you gotta disabuse yourself of the notion that a countries market return and economic growth go hand in hand
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: How much International allocation is good insurance?

Post by nisiprius »

Insurance is insurance. Investments are investments. Don't get them mixed up.

Do not use the word "insurance" to describe vague tendencies that "worked" dramatically once, but might easily "fail" the next time. Calling some category of investments "insurance" is salespersons' talk.

During 2008-2009, international stocks declined more than US stocks (-58% versus -51%). During 2008-2009, small-cap value funds declined more than total US stock funds (-61% versus -51%). During 2008-2009, (collateralized) commodity (futures) funds declined more than US stocks (-69% versus -51%). These might not have sunk a systematic withdrawal plan, but they weren't "insurance."

And don't just look at US versus international stock percentage. Do the math involving actual dollar numbers in your total financial situation. Look seriously at what your actual life plans are if your home country encounters a long period of stagnation or an economic disaster.

What is your international stock percentage, in dollars, as a percentage of your net worth, in dollars? I think you'll find it isn't enough to rescue you from a US collapse.

In real life, even when investments do what you hoped, it still isn't really an insurance-like situation. One of the best cases I know of an investment performing as advocates hoped was small-cap value during the tech crash. From 10/31/2000 to 9/30/2002, $10,000 invested in Total Stock would have fallen to $5,985 while $10,000 invested in the DFA Small Cap Value Portfolio, DFSVX, would have grown to $10,662. The stock market went down, small-cap value went up. Spectacular. (For comparison $10,000 in Total International would have fallen to $6,285. Not as bad as US, but not "insurance.")

But even with small-cap value, it's not like it could have made up for the losses in US stocks.

So let's imagine something as favorable as that happening with international. Suppose that US stocks fall by -50% and that international stocks rise by +10%. What is the effect on your total net worth? Do the back-of-the-envelope math.

Or consider 2002-2008, one of the periods when international most outperformed US. You didn't need "insurance," because a $10,000 investment in Total Stock would have grown to $19,000, but one in Total International would have grown to nearly $30,000. At the end of 2009, international advocates were saying "it wasn't a 'lost decade' if you held international." No, but the average for the whole decade was -0.45% for an S&P 500 fund, justifying "lost decade," +0.46% for Total Stock (two cheers for small-caps), and +3.18% for total international. So for a heavy international allocation, say 50/50, the average return over the "lost decade" might have been around 1.5% higher than US-only.

Helpful, yes. Bragging rights over US-only, maybe. "At least something in my portfolio went up," sure. But would you call it "insurance against a lost decade?"

When savings bonds averaged 6.2%, CAGR?

If it hits the fan in the US, people with 50% international stocks will do better than with 20%, sure, but it isn't likely to be a life-changing amount and it isn't guaranteed.

I actually made my first foray into international stocks in 2002, directing 20% of my 401(k) contributions into an international stock fund. So I got in at the beginning of the best run for international since the inception of the fund. I don't remember feeling like it had "insured" my retirement. In fact, I hardly noticed. I was much more focussed on that silly REIT fund I had, the one that was supposed to have low correlation with other stocks, losing -70%.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: How much International allocation is good insurance?

Post by watchnerd »

arcticpineapplecorp. wrote: Mon Apr 24, 2023 9:08 am You want to take that risk (currency, etc) on the stock, not the bond side of your portfolio.
Not necessarily -- what if I view bonds as part of my risk portfolio?

I don't view my investment in global IG credit as a 'safety' play.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: How much International allocation is good insurance?

Post by Marseille07 »

watchnerd wrote: Fri May 19, 2023 9:28 am Not necessarily -- what if I view bonds as part of my risk portfolio?

I don't view my investment in global IG credit as a 'safety' play.
OK...then do you have a safety play, anywhere? Maybe LMP TIPS? How big is that in terms of the size? 65+31+4 is already 100%.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: How much International allocation is good insurance?

Post by watchnerd »

Marseille07 wrote: Fri May 19, 2023 10:56 am
watchnerd wrote: Fri May 19, 2023 9:28 am Not necessarily -- what if I view bonds as part of my risk portfolio?

I don't view my investment in global IG credit as a 'safety' play.
OK...then do you have a safety play, anywhere? Maybe LMP TIPS? How big is that in terms of the size? 65+31+4 is already 100%.
The LMP isn't counted in the 100% as it's not part of the risk port, nor does it get rebalanced. It just gets consumed as income.

It's 14 years of living expenses.

26 years of living expenses in the risk port.

So 14/(26+14) = 35% in TIPS
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: How much International allocation is good insurance?

Post by Marseille07 »

watchnerd wrote: Fri May 19, 2023 11:35 am The LMP isn't counted in the 100% as it's not part of the risk port, nor does it get rebalanced. It just gets consumed as income.

It's 14 years of living expenses.

26 years of living expenses in the risk port.

So 14/(26+14) = 35% in TIPS
If you aim to hold world global cap weighting of ALL assets, including digital, not sure why you have 35% out of compliance. Shouldn't your safe assets mirror the world global cap weighting of safe assets, however much they'd be?
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: How much International allocation is good insurance?

Post by watchnerd »

Marseille07 wrote: Fri May 19, 2023 12:12 pm If you aim to hold world global cap weighting of ALL assets, including digital, not sure why you have 35% out of compliance. Shouldn't your safe assets mirror the world global cap weighting of safe assets, however much they'd be?
You can read the Sharpe papers if you want to understand why he uses a model of riskless vs risky assets:
Riskless and Risky Investments

Directly or indirectly, most sources of retirement income depend on the return from some sorts
of investment. To understand the range of likely incomes from such sources, we need to
construct matrices of possible future investment returns. In this and the next chapter, we shall
do so in the most parsimonious manner possible, with a single riskless investment and a single
risky one. While this may seem hopelessly oversimplified, financial economic theory provides
a possible rationale (or rationalization) for doing so. Moreover, it will be less limiting that one
might at first think, since it is possible to combine these two prototypical investments in a
myriad of ways, and introduce other types of investments that can be used to analyze particular
strategies, as will be seen in later chapters.

Recall from the discussion of inflation that our focus is on real, not nominal income. Hence it
is important that our returns be stated initially in real terms, and that the riskless asset provide
payments with predictable purchasing power, not those with fixed nominal monetary values.
For these reasons, we will generate matrices of asset returns stated in real terms. Of course, our
cost of living matrices can be used to convert real values to nominal, or vice-versa. We will do
so frequently when analyzing alternative retirement income strategies.

This chapter deals with the first of our two investments – a riskless real asset; the next deals
with our key risky alternative.
https://web.stanford.edu/~wfsharpe/RISMAT/RISMAT-6.pdf

But basically it's to couple the risk portfolio with a pension-like income stream that adjusts to inflation.

Sharpe uses the term "lock boxes".
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: How much International allocation is good insurance?

Post by Marseille07 »

watchnerd wrote: Fri May 19, 2023 1:22 pm But basically it's to couple the risk portfolio with a pension-like income stream that adjusts to inflation.

Sharpe uses the term "lock boxes".
I think the lockbox strategy makes sense, and I kind of do the same thing except that my lockbox is much smaller than 35%, and doesn't adjust as well to inflation as yours does. On the other hand my lockbox is more liquid, which is what I'm after.
SamB-Ari
Posts: 24
Joined: Tue Feb 15, 2022 7:49 am

Re: How much International allocation is good insurance?

Post by SamB-Ari »

Nathan Drake wrote: Mon Apr 24, 2023 6:51 pm
Marseille07 wrote: Mon Apr 24, 2023 6:50 pm
Nathan Drake wrote: Mon Apr 24, 2023 6:47 pm Yes we can if no rebalancing

Regardless, this example proves you wrong. A 40% allocation can make a big difference even when bonds reduce the total equity
Not at all. I already stated that I was talking about equity performance only.

Don't bring in bonds and tuck on SWR on top and claim this and that. They aren't what I was talking about. You proved nothing.
Go run the numbers on 1966-1996 with equity only. You’ll get a similar if not larger result

Again, it’s wrong to say a 40% exUS allocation is inconsequential yet you are claiming a 40% allocation to bonds is big enough to make a difference even though they’re the same for both portfolios?

What kind of illogical reasoning is that?
I disagree with your use of range for a few reasons - (1) the correlation between US and ex-US markets between 1966 and 1996 was pretty low (around .3). To your point, this did help with sequence of returns risk because of that low correlation; (2) Over time, US and ex-US markets have become more correlated. In developed and emerging markets although emerging markets less so. This means any benefit for sequence of returns risk has been diminished.

So, moving forward, it really depends. A long lived institution may very well benefit from global geographic exposure. Speaking specifically to U.S. investors, it may not be needed to reduce sequence of returns risk over a life time (small timeframe relative to a long lived institution) because a two assumptions must be made - (1) correlation trend reverses significantly over the investment time horizon for the U.S. investor to benefit from global exposure; and (2) ex-US will perform better than US for X reason(s).

In any case, international exposure is personal and make assertive statements that all investors must have international exposure is a bit reckless.

For me, my logic is this:
1. I want to invest in information efficient equity markets. I want to take advantage of the efficient market hypothesis which can only work if all the markets are well informed and information provided is trustworthy. I do not want to invest in markets where there may be mispricing, arbitrage opportunities or other inefficiencies because it does not work to my benefit. This limits me to US and most developed markets.

2. I believe the correlation between U.S markets and ex-US developed will remain high over time which eliminates any benefit to sequence of returns risk for me (perhaps not completely). But then, the ex-US returns would have to be greater than the higher trading costs /frictions associated with international stocks (higher spreads, other costs) and tax costs that I would bear. I'd rather work on reducing costs.

3. Investing in the US keeps me fully invested in the stock market. I have full faith in the United States as a country over the long term. I live and work and will retire (hopefully) in the US. Being 100% sold on America keeps me fully invested and sleeping like a baby. If I added international exposure, I'd sleep less which means it's wrong for me.

I think if international exposure helps someone sleep like a baby...they should probably have international exposure. :)
70% VUG | 30% VXF
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: How much International allocation is good insurance?

Post by Marseille07 »

SamB-Ari wrote: Fri May 19, 2023 2:44 pm I disagree with your use of range for a few reasons - (1) the correlation between US and ex-US markets between 1966 and 1996 was pretty low (around .3). To your point, this did help with sequence of returns risk because of that low correlation; (2) Over time, US and ex-US markets have become more correlated. In developed and emerging markets although emerging markets less so. This means any benefit for sequence of returns risk has been diminished.

So, moving forward, it really depends. A long lived institution may very well benefit from global geographic exposure. Speaking specifically to U.S. investors, it may not be needed to reduce sequence of returns risk over a life time (small timeframe relative to a long lived institution) because a two assumptions must be made - (1) correlation trend reverses significantly over the investment time horizon for the U.S. investor to benefit from global exposure; and (2) ex-US will perform better than US for X reason(s).

In any case, international exposure is personal and make assertive statements that all investors must have international exposure is a bit reckless.

For me, my logic is this:
1. I want to invest in information efficient equity markets. I want to take advantage of the efficient market hypothesis which can only work if all the markets are well informed and information provided is trustworthy. I do not want to invest in markets where there may be mispricing, arbitrage opportunities or other inefficiencies because it does not work to my benefit. This limits me to US and most developed markets.

2. I believe the correlation between U.S markets and ex-US developed will remain high over time which eliminates any benefit to sequence of returns risk for me (perhaps not completely). But then, the ex-US returns would have to be greater than the higher trading costs /frictions associated with international stocks (higher spreads, other costs) and tax costs that I would bear. I'd rather work on reducing costs.

3. Investing in the US keeps me fully invested in the stock market. I have full faith in the United States as a country over the long term. I live and work and will retire (hopefully) in the US. Being 100% sold on America keeps me fully invested and sleeping like a baby. If I added international exposure, I'd sleep less which means it's wrong for me.

I think if international exposure helps someone sleep like a baby...they should probably have international exposure. :)
People generally agree that the correlation remains high. But what they argue is a situation where ex-US returns 8%/year while the US only returns 3%/year, all the while maintaining high correlation. And I believe they often base their argument on valuations.
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

nisiprius wrote: Fri May 19, 2023 6:38 am Insurance is insurance. Investments are investments. Don't get them mixed up.

Do not use the word "insurance" to describe vague tendencies that "worked" dramatically once, but might easily "fail" the next time. Calling some category of investments "insurance" is salespersons' talk.

During 2008-2009, international stocks declined more than US stocks (-58% versus -51%). During 2008-2009, small-cap value funds declined more than total US stock funds (-61% versus -51%). During 2008-2009, (collateralized) commodity (futures) funds declined more than US stocks (-69% versus -51%). These might not have sunk a systematic withdrawal plan, but they weren't "insurance."

And don't just look at US versus international stock percentage. Do the math involving actual dollar numbers in your total financial situation. Look seriously at what your actual life plans are if your home country encounters a long period of stagnation or an economic disaster.

What is your international stock percentage, in dollars, as a percentage of your net worth, in dollars? I think you'll find it isn't enough to rescue you from a US collapse.

In real life, even when investments do what you hoped, it still isn't really an insurance-like situation. One of the best cases I know of an investment performing as advocates hoped was small-cap value during the tech crash. From 10/31/2000 to 9/30/2002, $10,000 invested in Total Stock would have fallen to $5,985 while $10,000 invested in the DFA Small Cap Value Portfolio, DFSVX, would have grown to $10,662. The stock market went down, small-cap value went up. Spectacular. (For comparison $10,000 in Total International would have fallen to $6,285. Not as bad as US, but not "insurance.")

But even with small-cap value, it's not like it could have made up for the losses in US stocks.

So let's imagine something as favorable as that happening with international. Suppose that US stocks fall by -50% and that international stocks rise by +10%. What is the effect on your total net worth? Do the back-of-the-envelope math.

Or consider 2002-2008, one of the periods when international most outperformed US. You didn't need "insurance," because a $10,000 investment in Total Stock would have grown to $19,000, but one in Total International would have grown to nearly $30,000. At the end of 2009, international advocates were saying "it wasn't a 'lost decade' if you held international." No, but the average for the whole decade was -0.45% for an S&P 500 fund, justifying "lost decade," +0.46% for Total Stock (two cheers for small-caps), and +3.18% for total international. So for a heavy international allocation, say 50/50, the average return over the "lost decade" might have been around 1.5% higher than US-only.

Helpful, yes. Bragging rights over US-only, maybe. "At least something in my portfolio went up," sure. But would you call it "insurance against a lost decade?"

When savings bonds averaged 6.2%, CAGR?

If it hits the fan in the US, people with 50% international stocks will do better than with 20%, sure, but it isn't likely to be a life-changing amount and it isn't guaranteed.

I actually made my first foray into international stocks in 2002, directing 20% of my 401(k) contributions into an international stock fund. So I got in at the beginning of the best run for international since the inception of the fund. I don't remember feeling like it had "insured" my retirement. In fact, I hardly noticed. I was much more focussed on that silly REIT fund I had, the one that was supposed to have low correlation with other stocks, losing -70%.
Yes. Diversification is a form of insurance. You just conveniently ignore pieces of history that have shown more meaningful benefits. Like the 60s through earl 90s.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

SamB-Ari wrote: Fri May 19, 2023 2:44 pm
Nathan Drake wrote: Mon Apr 24, 2023 6:51 pm
Marseille07 wrote: Mon Apr 24, 2023 6:50 pm
Nathan Drake wrote: Mon Apr 24, 2023 6:47 pm Yes we can if no rebalancing

Regardless, this example proves you wrong. A 40% allocation can make a big difference even when bonds reduce the total equity
Not at all. I already stated that I was talking about equity performance only.

Don't bring in bonds and tuck on SWR on top and claim this and that. They aren't what I was talking about. You proved nothing.
Go run the numbers on 1966-1996 with equity only. You’ll get a similar if not larger result

Again, it’s wrong to say a 40% exUS allocation is inconsequential yet you are claiming a 40% allocation to bonds is big enough to make a difference even though they’re the same for both portfolios?

What kind of illogical reasoning is that?
I disagree with your use of range for a few reasons - (1) the correlation between US and ex-US markets between 1966 and 1996 was pretty low (around .3). To your point, this did help with sequence of returns risk because of that low correlation; (2) Over time, US and ex-US markets have become more correlated. In developed and emerging markets although emerging markets less so. This means any benefit for sequence of returns risk has been diminished.

So, moving forward, it really depends. A long lived institution may very well benefit from global geographic exposure. Speaking specifically to U.S. investors, it may not be needed to reduce sequence of returns risk over a life time (small timeframe relative to a long lived institution) because a two assumptions must be made - (1) correlation trend reverses significantly over the investment time horizon for the U.S. investor to benefit from global exposure; and (2) ex-US will perform better than US for X reason(s).

In any case, international exposure is personal and make assertive statements that all investors must have international exposure is a bit reckless.

For me, my logic is this:
1. I want to invest in information efficient equity markets. I want to take advantage of the efficient market hypothesis which can only work if all the markets are well informed and information provided is trustworthy. I do not want to invest in markets where there may be mispricing, arbitrage opportunities or other inefficiencies because it does not work to my benefit. This limits me to US and most developed markets.

2. I believe the correlation between U.S markets and ex-US developed will remain high over time which eliminates any benefit to sequence of returns risk for me (perhaps not completely). But then, the ex-US returns would have to be greater than the higher trading costs /frictions associated with international stocks (higher spreads, other costs) and tax costs that I would bear. I'd rather work on reducing costs.

3. Investing in the US keeps me fully invested in the stock market. I have full faith in the United States as a country over the long term. I live and work and will retire (hopefully) in the US. Being 100% sold on America keeps me fully invested and sleeping like a baby. If I added international exposure, I'd sleep less which means it's wrong for me.

I think if international exposure helps someone sleep like a baby...they should probably have international exposure. :)
This post features a number of inaccuracies. Where is the proof that correlations were only .3? I have seen no such evidence. And similarly, COVARIANCE is the measure of equity diversification benefits, not correlations. Living, working, and retiring in the US means you are MOST exposed to US risks and international should hedge against a scenario where your situation is materially impacted should risk show up in the US. You wouldn't invest all of your capital into the company you work for.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
smooth_rough
Posts: 793
Joined: Sat Feb 12, 2022 1:14 pm

Re: How much International allocation is good insurance?

Post by smooth_rough »

strummer6969 wrote: Mon Apr 24, 2023 9:51 am How do you insure against risk by taking more risk?

Equity diversification =/= insurance.
Agreed. OP is confusing concepts. Incorrect use of word "insurance", when should have used word "diversification".
PoorHomieQuan
Posts: 153
Joined: Thu Aug 25, 2022 8:07 pm

Re: How much International allocation is good insurance?

Post by PoorHomieQuan »

strummer6969 wrote: Mon Apr 24, 2023 11:47 am perhaps returns follow more of a Gaussian distribution where international can be expected to diversify certain risks of a U.S.-only portfolio. That's why I hold them, not for any particular insurance purposes.
Isn't diversification of risk exactly the business that Geico is in?
unwitting_gulag
Posts: 665
Joined: Mon Dec 05, 2016 3:37 pm

Re: How much International allocation is good insurance?

Post by unwitting_gulag »

Nathan Drake wrote: Mon Apr 24, 2023 9:15 pm Equity investors should be prepared to hold for 5-10 years or longer. The risk is not defined in terms of 1-3 year periods that we need to be concerned about with equities. It's the long-term returns, which is why you invest in equities to begin with. And on longer horizons, US and exUS tend to hedge and provide that "long term" insurance-type policy because they both have similar long term returns but different sequences of those returns. If you want short term protection, you use other asset classes.
Few serious participants in a Forum such as this, would predicate an investment-thesis on what might have happened over just 1-3 years. But seeing as how US stocks have trounced ex-US for a solid 15 years, one not only begins to get antsy, but to start believing, that we're witnessing not a trend, but an emerging law of nature.

Consider the analogy to Moore's Law in computer chips. When Gordon Moore first made his famous observation, chip-manufacturing technology was already developing according to his maxim, for several years... but the duration was still fresh. His "law" wasn't yet a law, nor did he himself coin it as such. It was just a plausible conjecture. But as the 70s gave way to the 80s, and the 80s to the 90s, it was clear that his conjecture had all of the trappings and verisimilitude of a law. Now of course, writing in 2023, we broadly believe that Moore's Law has slowed down, and is no longer operative. So, "Laws" are perhaps not eternal.

In our analogy, observers in say 1978 would be tantalized by Moore's Law potentially being a good predictive guide. But they might still have been skeptical. By 1988, to be thus skeptical, would have been petulant and obtuse. Now of course such skeptics are only too right.

By way of trite attempt at mirroring Moore's Law in foreign vs. US stock markets, I am tempting to propose this: American society has figured out uniquely well, how to channel flow of money from labor to capital, and in particular to publicly-held capital. It has become the magnet for global capital par-excellence. This gives American stock markets an enduring advantage. Just as Moore's law broke when the density of transistors on a silicon chip ran into physical limits, so too, we can conjecture, that this financial "law" will break once American markets become so corrupted or otherwise fraught, that they're no longer investable. When would that be? Probably before 2100. But likely not soon.
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: How much International allocation is good insurance?

Post by nisiprius »

Nathan Drake wrote: Fri May 19, 2023 4:21 pm ...You just conveniently ignore pieces of history that have shown more meaningful benefits. Like the 60s through earl 90s.
Well, looked it up... I don't know what you are using for the 1960s since the earliest international index, MSCI EAFE, only goes back to 1970... and I'm not seeing it. Not for the 70s through the 90s, anyway.

I'm seeing leapfrogging and nothing dramatic. And nothing "insurance-like" since the bursts of international outperformance both occurred during times when the US market was doing well. Around 2001-2003 mall-cap value pulled off the trick of going up while the market as a whole was going down, but I don't see any place where international stocks have done that.

Image

Going back to 1970, international stocks had two bursts of outperformance, the one I experienced personally around 2003-2008, and an earlier one around 1986. And the 1986 burst was immediately followed by near flat returns for five years.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: How much International allocation is good insurance?

Post by watchnerd »

unwitting_gulag wrote: Sat May 20, 2023 4:21 pm But seeing as how US stocks have trounced ex-US for a solid 15 years, one not only begins to get antsy, but to start believing, that we're witnessing not a trend, but an emerging law of nature.
I actually don't get antsy at all.

And as long as you're holding >50% US, I'm not sure why others do, either.

It's not like ex-US is returning nothing.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: How much International allocation is good insurance?

Post by Marseille07 »

nisiprius wrote: Sat May 20, 2023 5:11 pm I'm seeing leapfrogging and nothing dramatic.
To be fair, the 1985~1990 gap is dramatic. That said, it's almost impossible to nail that 5-year period even if something like that happens again. It's also not an insurance marker, since the US markets did well, just that Japan did much better.
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

nisiprius wrote: Sat May 20, 2023 5:11 pm
Nathan Drake wrote: Fri May 19, 2023 4:21 pm ...You just conveniently ignore pieces of history that have shown more meaningful benefits. Like the 60s through earl 90s.
Well, looked it up... I don't know what you are using for the 1960s since the earliest international index, MSCI EAFE, only goes back to 1970... and I'm not seeing it. Not for the 70s through the 90s, anyway.

I'm seeing leapfrogging and nothing dramatic. And nothing "insurance-like" since the bursts of international outperformance both occurred during times when the US market was doing well. Around 2001-2003 mall-cap value pulled off the trick of going up while the market as a whole was going down, but I don't see any place where international stocks have done that.

Image

Going back to 1970, international stocks had two bursts of outperformance, the one I experienced personally around 2003-2008, and an earlier one around 1986. And the 1986 burst was immediately followed by near flat returns for five years.
That scale isn't doing you favors. Come on, you are better than this and usually pick out these sorts of flaws in other posts!
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: How much International allocation is good insurance?

Post by Beensabu »

gavinsiu wrote: Mon Apr 24, 2023 8:50 am I currently have a 1/3 of my stock portfolio in international. Would that even make a difference if I were a investor in Japan for example. I was thinking of the allocation was more of a defense. I wouldn't like to bet against the US economy, but I also feel that it is not forever.
Well, since your thread has been resurrected as the exUS thread du jour, the insurance is two-fold and addresses:

- single country risk (should the performance of your home country decline)
- currency risk (should the strength of your home currency decline)

The above risks are why I have an exUS allocation.

At least 20-25% of your overall port, as far as currency diversification, in my opinion. This is most inexpensively achieved with an unhedged stock index fund like VTIAX. Coincidentally, that particular fund (and its like) also addresses single country risk quite handily. What this also means is that as your equity allocation is reduced, the percentage of that equity allocation that is exUS should go up.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
halfnine
Posts: 2421
Joined: Tue Dec 21, 2010 12:48 pm

Re: How much International allocation is good insurance?

Post by halfnine »

gavinsiu wrote: Mon Apr 24, 2023 8:50 am ..I wouldn't like to bet against the US...
A bet against the US would require that you invest more ex-US than market cap. A bet on the US would require you invest more US than market cap. If you don't want to make either bet then you would own market cap.
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: How much International allocation is good insurance?

Post by Beensabu »

halfnine wrote: Sun May 21, 2023 12:00 am
gavinsiu wrote: Mon Apr 24, 2023 8:50 am ..I wouldn't like to bet against the US...
A bet against the US would require that you invest more ex-US than market cap. A bet on the US would require you invest more US than market cap. If you don't want to make either bet then you would own market cap.
You're awesome. Well said.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: How much International allocation is good insurance?

Post by nisiprius »

Nathan Drake wrote: Fri May 19, 2023 4:21 pm...Diversification is a form of insurance.
"Insurance" usually means a contractual guarantee. If not, it usually means "reliably helps when needed."

"Diversification" usually means something different, because it doesn't specifically help when needed, and can hurt at times.

Thus, one of Larry Swedroe's "Rules of Prudent Investing:"
Diversification is always working; sometimes you'll like the results and sometimes you won't.
And, thus, the disclaimer that you will see in a footnote whenever "diversification" is mentioned in official fund literature:
Diversification does not ensure a profit or protect against a loss in a declining market.
Nathan Drake wrote: Fri May 19, 2023 4:21 pm...You ... ignore pieces of history that have shown more meaningful benefits. Like the 60s through earl 90s.
When I did look back, as far as the EAFE index can take me, what I saw was a short, spectacular period of outperformance versus the US in 1985-87, which was immediately followed by thirteen years of underperformance from 1987-2000--which took it all back and then took back some more. International stock certainly showed a different pattern of fluctuations, and thus would have "diversified" a US holding.

But what I don't see is any big US downturn that wasn't accompanied by an international downturn. I see no times where a US investor suffering major losses in US stocks would have been rescued if they had had an international holding.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
runner540
Posts: 1763
Joined: Sun Feb 26, 2017 4:43 pm

Re: How much International allocation is good insurance?

Post by runner540 »

Beensabu wrote: Sat May 20, 2023 11:41 pm
gavinsiu wrote: Mon Apr 24, 2023 8:50 am I currently have a 1/3 of my stock portfolio in international. Would that even make a difference if I were a investor in Japan for example. I was thinking of the allocation was more of a defense. I wouldn't like to bet against the US economy, but I also feel that it is not forever.
Well, since your thread has been resurrected as the exUS thread du jour, the insurance is two-fold and addresses:

- single country risk (should the performance of your home country decline)
- currency risk (should the strength of your home currency decline)

The above risks are why I have an exUS allocation.

At least 20-25% of your overall port, as far as currency diversification, in my opinion. This is most inexpensively achieved with an unhedged stock index fund like VTIAX. Coincidentally, that particular fund (and its like) also addresses single country risk quite handily. What this also means is that as your equity allocation is reduced, the percentage of that equity allocation that is exUS should go up.
+1
I come to the international vs US threads to remind US only investors that their real estate, human and social capital is all tied to the US already.
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: How much International allocation is good insurance?

Post by nisiprius »

Continuing to explore the question of whether international stocks can serve as "insurance" for US stocks, I looked at the annual returns of the S&P 500 index and the MSCI EAFE index from 1970 through 2020, a total period of 51 years.

The S&P 500 index was down in ten of those years: 1970, 1973, 1974, 1981, 1982, 1990, 1992, 2000, 2001, 2002, 2008, 2011, 2014, 2015, 2018.

Of the ten years when the S&P 500 index was down, the MSCI EAFE index was also down in nine of them.

There was only one year when the MSCI EAFE index was up, 1977.

But that was a great year for international: S&P 500 -7.16%, MSCI EAFE +18.06%.

Image
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Logan Roy
Posts: 1838
Joined: Sun May 29, 2022 10:15 am

Re: How much International allocation is good insurance?

Post by Logan Roy »

nisiprius wrote: Sat May 20, 2023 5:11 pm
Nathan Drake wrote: Fri May 19, 2023 4:21 pm ...You just conveniently ignore pieces of history that have shown more meaningful benefits. Like the 60s through earl 90s.
Well, looked it up... I don't know what you are using for the 1960s since the earliest international index, MSCI EAFE, only goes back to 1970... and I'm not seeing it. Not for the 70s through the 90s, anyway.

I'm seeing leapfrogging and nothing dramatic. And nothing "insurance-like" since the bursts of international outperformance both occurred during times when the US market was doing well. Around 2001-2003 mall-cap value pulled off the trick of going up while the market as a whole was going down, but I don't see any place where international stocks have done that.

Image

Going back to 1970, international stocks had two bursts of outperformance, the one I experienced personally around 2003-2008, and an earlier one around 1986. And the 1986 burst was immediately followed by near flat returns for five years.
Apologies if it's been posted, but didn't Vanguard do a paper showing that the post-GFC divergence in US vs International is almost entirely down to multiples expansion? Being that the US has been pumping most of the liquidity into the system, and it's been benefiting the kind of long-duration (growth) stocks that dominate the US market, this would be a good reason to believe future returns from US stocks are likely to be lower. Whether international's likely to be higher or lower, you're buying more earnings and growth for your money – beyond that it's all going to be decided by macroeconomics. Knowable vs unknowable. I'd weight international at market weight.

Image
User avatar
nisiprius
Advisory Board
Posts: 52212
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: How much International allocation is good insurance?

Post by nisiprius »

Logan Roy wrote: Sun May 21, 2023 8:01 am...I'd weight international at market weight...
In the search for the optimum, there is a wide range of defensible positions. However, addressing the original poster's point, while a global allocation may provide "diversification," it is important to remember the official disclaimer, "Diversification does not ensure a profit or protect against a loss in a declining market." I think it is a mistake to expect that, say, using VT instead of VTI is going to be "good insurance" against the next US downturn, or to advocate it on that basis.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Logan Roy
Posts: 1838
Joined: Sun May 29, 2022 10:15 am

Re: How much International allocation is good insurance?

Post by Logan Roy »

nisiprius wrote: Sun May 21, 2023 8:26 am
Logan Roy wrote: Sun May 21, 2023 8:01 am...I'd weight international at market weight...
In the search for the optimum, there is a wide range of defensible positions. However, addressing the original poster's point, while a global allocation may provide "diversification," it is important to remember the official disclaimer, "Diversification does not ensure a profit or protect against a loss in a declining market." I think it is a mistake to expect that, say, using VT instead of VTI is going to be "good insurance" against the next US downturn, or to advocate it on that basis.
I'd certainly agree with that – I think this kind of diversification is more about balance than downside protection. So if adding international broadens your exposure to sectors/styles/currencies a bit, one should be adding slightly more consistency to returns, in the context of 100 different paths markets could take. The same reason for holding 1,000 stocks rather than 10 or 100.
User avatar
Charles Joseph
Posts: 2394
Joined: Tue Apr 05, 2022 10:49 pm

Re: How much International allocation is good insurance?

Post by Charles Joseph »

Zero.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
pizzy
Posts: 4339
Joined: Tue Jun 02, 2020 6:59 pm

Re: How much International allocation is good insurance?

Post by pizzy »

Charles Joseph wrote: Sun May 21, 2023 12:09 pm Zero.
In your signature, what is “the market”?
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
User avatar
Charles Joseph
Posts: 2394
Joined: Tue Apr 05, 2022 10:49 pm

Re: How much International allocation is good insurance?

Post by Charles Joseph »

pizzy wrote: Sun May 21, 2023 12:12 pm
Charles Joseph wrote: Sun May 21, 2023 12:09 pm Zero.
In your signature, what is “the market”?
Take your pick, but there is no one "global stock market."
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

nisiprius wrote: Sun May 21, 2023 7:03 am
Nathan Drake wrote: Fri May 19, 2023 4:21 pm...Diversification is a form of insurance.
"Insurance" usually means a contractual guarantee. If not, it usually means "reliably helps when needed."
ExUS has, historically, tended to help when the US market does quite poorly over 10-15 year periods which is precisely when it is needed for equities. Regardless, I am not discussing whether it represents a contractual form of insurance, it clearly does not.

The only period a SWR of 4% failed for a US retiree in the 1966-1996 period, an investor that had allocated roughly half to exUS ended up with $2M left over while the US only investor ran out of money early
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

Charles Joseph wrote: Sun May 21, 2023 12:21 pm
pizzy wrote: Sun May 21, 2023 12:12 pm
Charles Joseph wrote: Sun May 21, 2023 12:09 pm Zero.
In your signature, what is “the market”?
Take your pick, but there is no one "global stock market."
There's no US market. Guess you should avoid that then
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

nisiprius wrote: Sun May 21, 2023 7:47 am Continuing to explore the question of whether international stocks can serve as "insurance" for US stocks, I looked at the annual returns of the S&P 500 index and the MSCI EAFE index from 1970 through 2020, a total period of 51 years.

The S&P 500 index was down in ten of those years: 1970, 1973, 1974, 1981, 1982, 1990, 1992, 2000, 2001, 2002, 2008, 2011, 2014, 2015, 2018.

Of the ten years when the S&P 500 index was down, the MSCI EAFE index was also down in nine of them.

There was only one year when the MSCI EAFE index was up, 1977.

But that was a great year for international: S&P 500 -7.16%, MSCI EAFE +18.06%.

Image
That's your problem.

You are making the mistaken conclusion that short term (1 year performance) is when exUS is "needed most" as a form of hedge/insurance.

It is not. You have other assets to ballast short term market drawdowns. The real risk is the longer term risk for equities, which is why we diversify to begin with, to protect longer term outcomes.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
User avatar
Charles Joseph
Posts: 2394
Joined: Tue Apr 05, 2022 10:49 pm

Re: How much International allocation is good insurance?

Post by Charles Joseph »

Nathan Drake wrote: Sun May 21, 2023 12:44 pm
Charles Joseph wrote: Sun May 21, 2023 12:21 pm
pizzy wrote: Sun May 21, 2023 12:12 pm
Charles Joseph wrote: Sun May 21, 2023 12:09 pm Zero.
In your signature, what is “the market”?
Take your pick, but there is no one "global stock market."
There's no US market. Guess you should avoid that then
You are in error. Allow me to correct you. There is a US stock market. It covers all publicly traded companies in the United States. It is covered by the same laws. It is regulated by the same regulating body. People who have grievances can appeal to the same court system to seek redress. The same requirements of transparency apply to all publicly traded companies. Etcetera, etcetera, and so forth.

There is no global stock market to which the same description can apply.

Do you now understand, Nathan? We've been here before, but I'm gonna hang in there with you.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
visualguy
Posts: 2988
Joined: Thu Jan 30, 2014 12:32 am

Re: How much International allocation is good insurance?

Post by visualguy »

Nathan Drake wrote: Sun May 21, 2023 12:42 pm
nisiprius wrote: Sun May 21, 2023 7:03 am
Nathan Drake wrote: Fri May 19, 2023 4:21 pm...Diversification is a form of insurance.
"Insurance" usually means a contractual guarantee. If not, it usually means "reliably helps when needed."
ExUS has, historically, tended to help when the US market does quite poorly over 10-15 year periods which is precisely when it is needed for equities. Regardless, I am not discussing whether it represents a contractual form of insurance, it clearly does not.

The only period a SWR of 4% failed for a US retiree in the 1966-1996 period, an investor that had allocated roughly half to exUS ended up with $2M left over while the US only investor ran out of money early
You're ignoring the difference in the size of the portfolio at the beginning of the retirement period. The 100% US investor, and the 50%/50% US/ex-US investor didn't reach the retirement year of 1966 with the same size portfolio after their accumulation period.
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

Charles Joseph wrote: Sun May 21, 2023 2:03 pm
Nathan Drake wrote: Sun May 21, 2023 12:44 pm
Charles Joseph wrote: Sun May 21, 2023 12:21 pm
pizzy wrote: Sun May 21, 2023 12:12 pm
Charles Joseph wrote: Sun May 21, 2023 12:09 pm Zero.
In your signature, what is “the market”?
Take your pick, but there is no one "global stock market."
There's no US market. Guess you should avoid that then
You are in error. Allow me to correct you. There is a US stock market. It covers all publicly traded companies in the United States. It is covered by the same laws. It is regulated by the same regulating body. People who have grievances can appeal to the same court system to seek redress. The same requirements of transparency apply to all publicly traded companies. Etcetera, etcetera, and so forth.

There is no global stock market to which the same description can apply.

Do you now understand, Nathan? We've been here before, but I'm gonna hang in there with you.
That's not the US market. You're missing Private Equity / Real Estate and alternatives. You cannot actually obtain 100% exposure to all things "US". But just because you cannot do that, doesn't mean you should avoid it entirely

The same logical fallacy applies to avoiding all of exUS markets just because they have different governance. You can still invest in an approximation of the global markets.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

visualguy wrote: Sun May 21, 2023 2:25 pm
Nathan Drake wrote: Sun May 21, 2023 12:42 pm
nisiprius wrote: Sun May 21, 2023 7:03 am
Nathan Drake wrote: Fri May 19, 2023 4:21 pm...Diversification is a form of insurance.
"Insurance" usually means a contractual guarantee. If not, it usually means "reliably helps when needed."
ExUS has, historically, tended to help when the US market does quite poorly over 10-15 year periods which is precisely when it is needed for equities. Regardless, I am not discussing whether it represents a contractual form of insurance, it clearly does not.

The only period a SWR of 4% failed for a US retiree in the 1966-1996 period, an investor that had allocated roughly half to exUS ended up with $2M left over while the US only investor ran out of money early
You're ignoring the difference in the size of the portfolio at the beginning of the retirement period. The 100% US investor, and the 50%/50% US/ex-US investor didn't reach the retirement year of 1966 with the same size portfolio after their accumulation period.
Right, the international investor could have retired sooner.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
visualguy
Posts: 2988
Joined: Thu Jan 30, 2014 12:32 am

Re: How much International allocation is good insurance?

Post by visualguy »

Nathan Drake wrote: Sun May 21, 2023 3:25 pm
visualguy wrote: Sun May 21, 2023 2:25 pm
Nathan Drake wrote: Sun May 21, 2023 12:42 pm
nisiprius wrote: Sun May 21, 2023 7:03 am
Nathan Drake wrote: Fri May 19, 2023 4:21 pm...Diversification is a form of insurance.
"Insurance" usually means a contractual guarantee. If not, it usually means "reliably helps when needed."
ExUS has, historically, tended to help when the US market does quite poorly over 10-15 year periods which is precisely when it is needed for equities. Regardless, I am not discussing whether it represents a contractual form of insurance, it clearly does not.

The only period a SWR of 4% failed for a US retiree in the 1966-1996 period, an investor that had allocated roughly half to exUS ended up with $2M left over while the US only investor ran out of money early
You're ignoring the difference in the size of the portfolio at the beginning of the retirement period. The 100% US investor, and the 50%/50% US/ex-US investor didn't reach the retirement year of 1966 with the same size portfolio after their accumulation period.
Right, the international investor could have retired sooner.
Huh? Based on what?
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

visualguy wrote: Sun May 21, 2023 3:37 pm
Nathan Drake wrote: Sun May 21, 2023 3:25 pm
visualguy wrote: Sun May 21, 2023 2:25 pm
Nathan Drake wrote: Sun May 21, 2023 12:42 pm
nisiprius wrote: Sun May 21, 2023 7:03 am "Insurance" usually means a contractual guarantee. If not, it usually means "reliably helps when needed."
ExUS has, historically, tended to help when the US market does quite poorly over 10-15 year periods which is precisely when it is needed for equities. Regardless, I am not discussing whether it represents a contractual form of insurance, it clearly does not.

The only period a SWR of 4% failed for a US retiree in the 1966-1996 period, an investor that had allocated roughly half to exUS ended up with $2M left over while the US only investor ran out of money early
You're ignoring the difference in the size of the portfolio at the beginning of the retirement period. The 100% US investor, and the 50%/50% US/ex-US investor didn't reach the retirement year of 1966 with the same size portfolio after their accumulation period.
Right, the international investor could have retired sooner.
Huh? Based on what?
Based on peak earning years coinciding with more dollar weighted average returns in the higher yielding exUS markets at that time
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
User avatar
Charles Joseph
Posts: 2394
Joined: Tue Apr 05, 2022 10:49 pm

Re: How much International allocation is good insurance?

Post by Charles Joseph »

Nathan Drake wrote: Sun May 21, 2023 3:23 pm
Charles Joseph wrote: Sun May 21, 2023 2:03 pm
Nathan Drake wrote: Sun May 21, 2023 12:44 pm
Charles Joseph wrote: Sun May 21, 2023 12:21 pm
pizzy wrote: Sun May 21, 2023 12:12 pm

In your signature, what is “the market”?
Take your pick, but there is no one "global stock market."
There's no US market. Guess you should avoid that then
You are in error. Allow me to correct you. There is a US stock market. It covers all publicly traded companies in the United States. It is covered by the same laws. It is regulated by the same regulating body. People who have grievances can appeal to the same court system to seek redress. The same requirements of transparency apply to all publicly traded companies. Etcetera, etcetera, and so forth.

There is no global stock market to which the same description can apply.

Do you now understand, Nathan? We've been here before, but I'm gonna hang in there with you.
That's not the US market. You're missing Private Equity / Real Estate and alternatives. You cannot actually obtain 100% exposure to all things "US". But just because you cannot do that, doesn't mean you should avoid it entirely

The same logical fallacy applies to avoiding all of exUS markets just because they have different governance. You can still invest in an approximation of the global markets.
You are arguing with yourself. I'm referring to publicly traded companies. Stocks. Equities. As is pretty much everyone else who refers to stock markets.
"The big money is not in the buying and selling, but in the waiting." - Charles Munger
Nathan Drake
Posts: 6234
Joined: Mon Apr 11, 2011 12:28 am

Re: How much International allocation is good insurance?

Post by Nathan Drake »

Charles Joseph wrote: Sun May 21, 2023 3:42 pm
Nathan Drake wrote: Sun May 21, 2023 3:23 pm
Charles Joseph wrote: Sun May 21, 2023 2:03 pm
Nathan Drake wrote: Sun May 21, 2023 12:44 pm
Charles Joseph wrote: Sun May 21, 2023 12:21 pm

Take your pick, but there is no one "global stock market."
There's no US market. Guess you should avoid that then
You are in error. Allow me to correct you. There is a US stock market. It covers all publicly traded companies in the United States. It is covered by the same laws. It is regulated by the same regulating body. People who have grievances can appeal to the same court system to seek redress. The same requirements of transparency apply to all publicly traded companies. Etcetera, etcetera, and so forth.

There is no global stock market to which the same description can apply.

Do you now understand, Nathan? We've been here before, but I'm gonna hang in there with you.
That's not the US market. You're missing Private Equity / Real Estate and alternatives. You cannot actually obtain 100% exposure to all things "US". But just because you cannot do that, doesn't mean you should avoid it entirely

The same logical fallacy applies to avoiding all of exUS markets just because they have different governance. You can still invest in an approximation of the global markets.
You are arguing with yourself. I'm referring to publicly traded companies. Stocks. Equities. As is pretty much everyone else who refers to stock markets.
I have exciting news for you - you can invest in publicly traded ex US stocks.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Post Reply