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Diversification
Old 07-05-2014, 11:37 AM   #1
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Diversification

Can one get total world stock diversification through just Vanguard Total Stock Fund. In a story in Market Watch from Mark Jaffe on 7/4 he stated that 75% of US companies, independent of market cap, derive 30 to 50% of revenue from international operations. My European foreign fund (RERFX) has an expense ratio of .55 and my US fund (VITSX) has it at .04. I really wonder nowadays in this global economy if I need to have foreign funds.
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Old 07-05-2014, 12:18 PM   #2
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The same argument could have been made for the Japanese economy, a large percentage of their companies are multinational and derive their revenue from export and international operations. So tell me, how did that work out for people who were invested only in Japan when their market crashed?
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Old 07-05-2014, 01:04 PM   #3
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You probably can get by very well with just U.S. stocks. However, you're missing out on any companies not listed on the U.S. stock exchanges. Many of which may derive 30% to 50% of their revenue from the U.S.. I don't think this argument for holding only U.S. listed companies is worth following unless you want a portfolio of individual stocks and want to avoid foreign stock exchanges.

It's not hard to buy foreign stocks these days, especially with a mutual fund or ETF. Why shy away from it?
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Old 07-05-2014, 04:45 PM   #4
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Can one get total world stock diversification through just Vanguard Total Stock Fund. In a story in Market Watch from Mark Jaffe on 7/4 he stated that 75% of US companies, independent of market cap, derive 30 to 50% of revenue from international operations. My European foreign fund (RERFX) has an expense ratio of .55 and my US fund (VITSX) has it at .04. I really wonder nowadays in this global economy if I need to have foreign funds.
Review: Mebane Faber's Global Value - Forbes

While diversification is important, some argue that valuation is even more important. Different countries sell at different valuations, specifically using CAPE as your filter, let alone differing valuation of companies within those countries.

Above article is about Cambria's Meb Faber, who makes the case for a zero percent allocation to US stocks based on current valuations.

I haven't followed Meb very long, but what I've seen about him and his methods, impresses me. The only thing that makes me pause, is that he seems to be the upcoming "hot star" manager, although he espouses fundamentally sound Graham and Dodds, smaller cap, value methods. Anyone familiar with him?
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Old 07-05-2014, 07:39 PM   #5
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I would add a smaller allocation to International plus perhaps an even smaller Emerging Markets index.
Disclosure: for the last 10 years I've steadily increased my foreign exposure, including to International Small Cap and Emerging Market, but the disconnect between US P/E and some foreign makes a stronger case than in the past. If you can tolerate the volatility--big caveat.
I sold Fidelity Pacific fund to Emerging Asia, by the way, at about one year before the absolute worst time to do so, based on the FidPac fund not moving for 5-7 years. Luckily Emerging Asia caught most but not all of the move.
For market inefficiencies to correct, you sometimes need a 1-2 decade patience fuse.
That is Buffett's advantage, I think, since he thinks in 10-30 year time frames. The lesson I learned from Buffett was to have a 3-8 year time frame, at least on areas where the market seemed misallocated. It's paid off when I had the patience to wait 5-10 years, usually with automatic monthly contributions, which lesson the sting unless the correction occurs quickly. Usually it took longer than I estimated.
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Old 07-05-2014, 08:07 PM   #6
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Can one get total world stock diversification through just Vanguard Total Stock Fund.
IMO, you cannot. This is why I have a small allocation in VWO (like 0.5% of total portfolio), while I have about 35% of my overall portfolio in companies domiciled in foreign countries, with some individual stocks but lots of single-country funds, so that way I can get more exposure to each individual country, rather than the situation of having VWO too focused on just a few companies - kind of like only owning the S&P 500 and not having any exposure to other companies.

Are you destined for failure by only owning the S&P 500 (or just VWO)? No....but I'd rather be more diversified than less, especially given that there are many emerging economies with great valuations, that will hopefully see both growth as well as PE expansion. Just like the US did from 1900-now.
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Old 07-06-2014, 02:01 PM   #7
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I don't know what's the best percentage, but of my stock funds, I got about 2/3 in Vanguard's total us stock index, and about 1/3 in Vanguard's total international stock index. Gives me some international exposure, but not too much.
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Old 07-06-2014, 09:05 PM   #8
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my best performer this year, I believe, is VSS, my foreign small cap from Vanguard. I keep 45% of my portfolio international. It's a big world out there, and technology, I think, will level the playing field for other countries and their markets should be able to rapidly expand as they learn to leverage the internet and information. I want a piece of that action. But volatility comes with it, no doubt. Also, the bull run we just had has been limited to developed markets. At some point, emerging markets are going to catch up. And finally, you get a tax credit for foreign stock in your taxable accounts!
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Old 07-07-2014, 04:59 AM   #9
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the total market fund provides little diversification even on the home front.

it is moved 75% or better by the s&p 500 . the other 4500 stocks out there contribute very little to the mix.

while mid caps and small caps have beat their big dividend paying cousins in the dow and s&p by 5-6% every year the last 5 years a total market fund picked up a point or less of that performance.
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Old 07-07-2014, 06:39 AM   #10
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Read several articles recently that contained the message that it people should look at putting money into overseas stocks, due to the high valuations of many US stocks. I am going to shift more of my funds into some ETFs that hold non-US stocks, but will probably focus on a fund that mostly hold large cap European stocks.
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Old 07-07-2014, 08:04 AM   #11
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I think pretty much all my equity purchases in the past year or so have been in foreign stocks. This is a natural outcome of following an AA and rebalancing not consciously trying to buy the stocks with lowest pe10.

I do buy the argument that lower valuations leads to higher expected returns but I wouldn't go so far as to eliminate us equities. Keep in mind that at the beginning of 2013 pe10 was also high for the US. Also one can try to find lower valuation subsets of the. US


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