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International Equity Allocation
Old 07-13-2005, 12:36 AM   #1
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International Equity Allocation

2004 was a good year for my International funds. TOTAL equities have grown to about 60% of portfolio, about where I want it. Of that 60%, 40% of equity is International. So International is now about 24% of my overall portfolio.

24% in International sounds like a lot... but I'm not sure really WHY I think that. Is it just Ameri-centric thinking? If I was a Canadian would I think the same?* Here are some pro's and con's I have come up with:

Against a large International allocation:
- Risks of International investing - Instability, volatility.
- Currency conversions back to the Dollar.

For a large International allocation:
- Large US Federal budget deficits mean increased borrowing.
- Looking forward, redemption of SS "Trust Fund" virtual bonds means a further heavy increase in Fed borrowing.
- US is only 50% of equity market now, the world is growing. Sort of like the S&P500 vs. Total Stock Market argument.

An old rule of thumb was to have just a small exposure to International to gain an asset class with a lower correlation to the US market, while accepting it's greater volatility.

I'm just not so sure that the old rule of thumb's "only a touch of International" plays well into the future. I'm tempted to leave my International allocation as it is now.
Comments?
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Re: International Equity Allocation
Old 07-13-2005, 01:18 AM   #2
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Re: International Equity Allocation

Quote:
Against a large International allocation:
- Risks of International investing - Instability, volatility.
- Currency conversions back to the Dollar.
I was debating this myself when I read an article by Vanguard founder Jack Bogle.* He pointed out that U.S. corporations are already so heavily invested across the globe that most of us are well diversified internationally whether we hold international stocks / funds or not.

This is certainly true for the Megacorp I work for and most of the other companies we do business with.

Apart from that (and reaching back to my days working for a quantitative analysis firm), it matters a LOT which countries / funds you're invested in.* I don't think it's a pure International vs U.S. question.* *Again, for my industry, Europe is in the doghouse while Asia (excluding Japan) is coming on in a big way.

All things considered and with that nasty currency question out there, I decided to stand pat with the large majority of my money in U.S. Index Funds, the solid performance of my single international fund notwithstanding.

Only time will tell.


FWIW,
Caroline
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Re: International Equity Allocation
Old 07-13-2005, 01:22 AM   #3
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Re: International Equity Allocation

Is it just Ameri-centric thinking? Yes!

At 40% of your equities in foreign you are still below the global capitalisation (not that THAT would have to be the best allocation but it puts things in perspective).

Also; I WELCOME the currency diversification - in our new global world you need your overall buying power to remain stable. Foreign cars, champagne, international services and other imports will certainly be impacted should the USD weaken - and the Wal-mart effect will not be able to keep the inflation/currency weakness from hitting the end consumer forever....

In addition can you imagine if the idea of paying oil in a basket of currencies (or Euro only) becomes reality? Everything produced in the states will go up,up,up!

Finally; 200 years ago EU vas an "emerging market" and 100 years ago USA was an "emerging market" - I would certainly feel stupid leaving out/underweighing the new USA/EU being Asia in this century

Cheers!!





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Re: International Equity Allocation
Old 07-13-2005, 04:01 AM   #4
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Re: International Equity Allocation

A 60/40 US/Intl split sounds fine to me.* * Personally, I like to overweight Asia ex-Japan (using EPP for now) since both Europe and Japan have nasty demographic trends that are slowing their economies (similar to what the US will face in about 15 years).* * But don't forget that a lot of the gains you saw last year were due to the falling dollar, and that probably won't be repeated anytime soon.
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Re: International Equity Allocation
Old 07-13-2005, 06:37 AM   #5
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Re: International Equity Allocation

EPP is certainly not a bad choice but it is 65% Australia, 20% HKG and 10% Singapore so basically an AUS fund with a few spices. Personally I would add some of the much more diversified VWO or EEM for some more exotic foreign exposure spread across some other countries too.

As to the USD not weakening again I do not have the same crystal ball as wabmester so that gain might continue/re-start in my book. No matter what; as previously mentioned; part of my reason for holding international is that I welcome the currency diversification - but I avoid to speculate in it.

Cheers!
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Re: International Equity Allocation
Old 07-13-2005, 06:42 AM   #6
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Re: International Equity Allocation

I am about 20% international now, and I will likely boost my exposure over time. I think the less than perfect correlation is attractive, and I want the currency hedge, since I really don't like what I see for the future of the dollar right now.

It also depends on what else is in your portfolio. I have a huge overweight to domestic small caps. Most of these companies are NOT deriving a substantial portion of revenues from overseas markets, so I am less well-diversified than someone who owns a lot of multinational equities that are based in the US.
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Re: International Equity Allocation
Old 07-13-2005, 07:33 AM   #7
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Re: International Equity Allocation

Just curious - Are EEM, EPP, VWO or any other emerging market funds overvalued?
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Re: International Equity Allocation
Old 07-13-2005, 07:54 AM   #8
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Re: International Equity Allocation

I'm 20% or so Intl and tilted towards value
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Re: International Equity Allocation
Old 07-13-2005, 10:58 AM   #9
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Re: International Equity Allocation

24% international. 90% equities. The way I figure it, if US holdings half and int'l double, I'll still have 87.5% of the value I started with. That's another way of saying I like diversification.
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Re: International Equity Allocation
Old 07-13-2005, 12:26 PM   #10
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Re: International Equity Allocation

I am 77% equities. Of that, 13% is international. That is as much as I am comfortable with. I follow the US market pretty carefully but I don't have nearly as much insight into what moves any particular foreign market. Therefore, the bulk of my international equity exposure is through index funds.

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Re: International Equity Allocation
Old 07-13-2005, 07:01 PM   #11
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Re: International Equity Allocation

One argument against using large U.S. multi-nationals as a substitute
for foreign stocks is that they use currency hedging strategies to
offset currency fluctuation. This eliminates a good part of the benefit
of owning foreign stocks.

Cheers,

Charlie
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Re: International Equity Allocation
Old 07-13-2005, 09:20 PM   #12
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Re: International Equity Allocation

I stand corrected. Bogle has changed tack and HAS been recommending some international investment lately:


In MONEY magazine's March issue, Jason Zweig wrote an article about "The Rip Van Winkle Portfolio: Is it possible to invest so reliably that you won't have to change anything for the next 20 years?"

He interviewed both Jack Bogle and W. Bernstein whom suggested the following portfolios:

Tax-sheltered 20 year account: Jack Bogle
40% Vanguard Total Stock Market Index
10% Vanguard Total International Market Index
30% Vanguard Intermediate-Term Bond
10% Vanguard Inflation-Protected Securities
10% Pimco Foreign Bond D

Taxable Account 20 year account: William Bernstein
30% Vanguard Tax-managed Growth & Income
20% Vanguard Intermediate Term Tax exempt
20% Vanguard Limited Term Tax exempt
15% Vanguard Tax-Managed Small Cap
15% Vanguard Tax-Managed International

Here's what Bogle was quoted as saying in the article:

"Therefore, Bogle thinks other countries might grow faster than the U.S. over the next 20 years. That's why Bogle's Rip Van Winkle portfolio includes international stocks and bonds---assets that he traditionally shunned."

So for those that hold no international investments at all because Bogle once said that international wasn't necessary and that U.S. TSM/TBM is all that is needed, please realize that Bogle HAS BEEN recommending some international exposure.


Caroline
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Re: International Equity Allocation
Old 07-14-2005, 12:10 AM   #13
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Re: International Equity Allocation

Thanks for the comments, folks*

It's interesting to see that some of you also have a significant International stake.

I came up with the 24% of portfolio by using Morningstar's X-Ray tool a few times, spaced it out at least a month between runs. I assume (?) that the tool backs out of the Intl. total the US cash position held by each fund for their purchase/sale purposes.

Of the two Intl. funds I have, Morningstar rates category and style as Foreign Large Blend for one, and World Stock Large Blend for the other.

I didn't know Bogle had modified his position on real Intl. vs. US-based Multinational International. Thanks for the news!

I've been a bit skeptical of the previous idea that US-based Multinationals are essentially the same market predictors/samplers as foreign-based corporations in overseas economies. There are home advantages sometimes. And sometimes US-based corporations aren't present, or have a minor piece of the pie.
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Re: International Equity Allocation
Old 07-14-2005, 08:37 AM   #14
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Re: International Equity Allocation

Hmmm

Time passes - things change (cycle). Maybe time to revisit what I owned in the late 80's. Those days - had up to 30% Vanguard Trustee's co-mingled international and a tad of a Putnam? closed end foriegn bond fund.

On the other hand - may do nothing - Lifestrategy mod has some International. Fixed side in Bogle's recommendation I find more interesting. ? are the portfolio's for accumulation phase or distribution phase? Wonder how they come up with the % asset classes?
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Re: International Equity Allocation
Old 07-14-2005, 09:46 AM   #15
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Re: International Equity Allocation

The other issue to consider is where you plan to spend your retirement. If you plan to spend it in the US, that is one thing. But if you plan to spend it in a country where the local currency doesn't move with the dollar, then it bears some consideration how heavily tied to the US dollar you want your portfolio to be. This would argue for heavier international investments.

Although I am working in the US (sort of...feels more like the third world), I will be moving to Canada in about 2 years to enter ER (actually, my household has already moved). The Canadian dollar has moved from under $.63 US (Jan of 02) to around $.83 currently. That represents 24% loss in purchasing power on a portfolio denominated in US dollars. You would have had to make 24% in the US market to break even.

On the other hand, the US market has historically performed better than the Canadian market (but not since 2000). So it's a bit of a balancing act.

I am striving for about 25% us equities, 25% international, 25% Canadian, and 25% fixed income of a global character. Given constraints on my account at the present, the last category is more difficult to attain. That will change.

The point, however, is that depending on who you believe, the dollar is poised for further dramatic losses. It is being propped up by buying from the central bank of China and other places, and how long that will continue is anyone's guess--sort of like the real estate bubble.

Bosco
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