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Re: International investing-- a year later
Old 04-24-2007, 07:12 PM   #21
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Re: International investing-- a year later

I'm 26. Plan on FIREing in mid-30's. I have a 5 to 7 decade time horizon for my investments. That's a long time. Who's to say that the USA will remain dominant in the world economy for the next 7 decades? What if the USA has a few decades of stagnant market returns while the rest of the world keeps slowly trickling along, growing and making profits?

Economic theory suggests that in the long term, exchange rate fluctuations are a wash.

I've got my bets placed at 50% international equities just in case. Worst case (versus a predominantly USA portfolio), the dollar gets stronger, the USA outperforms the world over the next 7 decades. I should still be ok with my portfolio. If the dollar gets really strong, that means I can retire abroad really cheaply if necessary.

I'm as patriotic as the next guy, but it seems foolhardy to accept the USA as the best place to have all or most of your money invested, when access to more diverse investments can be had for a few basis points in expense ratio.
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Re: International investing-- a year later
Old 04-24-2007, 08:08 PM   #22
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Re: International investing-- a year later

Quote:
Originally Posted by justin
I've got my bets placed at 50% international equities just in case.
I have settled on 50/50 domestic/foreign, too. Running "Japan 1990" scenarios helped me feel comfortable with that. I suspect that if you look back in history, there were a lot more times and places where being all or almost all in domestic had more downside than having a more even split, and I expect on general principles for that to be true in the future, as well.

Added: Point being that it has more to do with minimizing the downside than maximizing the upside.
(To which no doubt someone will reply, "Ah, but that's what they all say just before they jump on the bandwagon.")

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Re: International investing-- a year later
Old 04-24-2007, 09:44 PM   #23
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Re: International investing-- a year later

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Originally Posted by 3 Yrs to Go
Maybe a good speculative bet but I question the wisdom of having mostly international investments for a retiree's portfolio. After all, your expenses are denominated in dollars. If most your assets are overseas, you not only have to worry about a bear equity market but also a bull USD market. If they happen simultaneously its probably back to work for you.
1) Your expenses are directly denominated in dollars, but many of the inputs into the things you buy are not priced in dollars, so you will feel the pass-through pricing pain. If you need an example, look at almost any manufactured product - chances are, it's produced outside the US so your effective price will rise as the dollar's value declines. 2) Most international equity funds are at least somewhat hedged against FX changes, so you are partially immunized from currency swings.

As far as the split between US and intl equities, if you look at the global market cap, the US is about 50% versus the rest of the world. Some believe that your portfolio should mirror the global capital markets to get to the efficient frontier, but plenty will disagree. Then you get into issues of home bias - why investors all over the world seem to prefer to hold their own countries' securities versus others. As far as explaining the increased attention for international funds lately, it's not necessarily performance chasing - there are plenty of rational reasons why int'l markets are more favorable now. Consider decreased transactions costs brought about by ETFs, greater transparency because of increased oversight (more investors scrutinizing those non-GAAP financial statements), the need for assets with low correlation to the US, and growth prospects for countries that were flagged as "developing" only 20 years ago.
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Re: International investing-- a year later
Old 04-24-2007, 10:44 PM   #24
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Re: International investing-- a year later

Quote:
Originally Posted by soupcxan
2) Most international equity funds are at least somewhat hedged against FX changes, so you are partially immunized from currency swings.
I agree with your comment on goods being produced overseas, but very few Intl equity funds are hedged at all. TBGVX - TweedyBrowne is one of the few funds which is hedged and they charge a big ER of 1.38

-h
p.s: Another stretch for Intl equities like the one Japan had between 1989-2000 would tell us who believes in Intl investing; I am betting the % would drop below 10% for a lot of people.
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Re: International investing-- a year later
Old 04-24-2007, 11:36 PM   #25
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Re: International investing-- a year later

Quote:
Originally Posted by lswswein
p.s: Another stretch for Intl equities like the one Japan had between 1989-2000 would tell us who believes in Intl investing; I am betting the % would drop below 10% for a lot of people.
Japan is just one country. Any one country can have a terrible run without the rest of the world being dragged down. Which is more likely: the country you live in crashes and the rest of the world doesn't, or the whole rest of the world crashes and the country you live in doesn't?

Consider the 4 simplified extremes:

a) Home country crashes, rest of world does ok: foreign equity helps
b) Home country does ok, rest of world crashes: foreign equity hurts
c) Everybody does ok: foreign equity neutral
d) Everybody crashes: foreign equity neutral

Attach probabilities to the 4 cases, and pick your poison. I suspect that b) is the least likely scenario of them all.

But you're probably right that many people will thrash their allocations as the markets ebb and flow, no matter what happens.
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Re: International investing-- a year later
Old 04-25-2007, 12:16 AM   #26
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Re: International investing-- a year later

Quote:
Originally Posted by bpp
Consider the 4 simplified extremes:

a) Home country crashes, rest of world does ok: foreign equity helps
b) Home country does ok, rest of world crashes: foreign equity hurts
c) Everybody does ok: foreign equity neutral
d) Everybody crashes: foreign equity neutral
Looks very similar to Pascal's wager and we know what the answer to that is don't we? Btw you are preaching to the choir here. I have about 60%+ of my equity allocated to Intl(non-US) though 20% of it is hedged.

Quote:
But you're probably right that many people will thrash their allocations as the markets ebb and flow, no matter what happens.
The scenario I am waiting for is something like this: There is a EM country stock mkt collapse eg. Russia or China. That would get all the EM equities to crash (plausible since Gazprom is 5% of VEIEX). Now there is a flight to safety and we could have a rally in USD. Let's say this happens over a 1yr period. All the Intl (non-EM say EAFE) funds start showing losses while the stocks are staying neutral. After about -10% loses in their Intl funds along with couple of stock scandals in foreign lands, how many do you think will stick with their 40%+ allocations? Btw we are not even talking about people who have money in country specific stock funds(eg Korea fund, India Fund etc).

I always ask myself can I stay put and rebalance into my Intl allocation when this happens! That's the question I ask myself a lot.

-h
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Re: International investing-- a year later
Old 04-25-2007, 04:24 AM   #27
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Re: International investing-- a year later

Quote:
Originally Posted by lswswein
Looks very similar to Pascal's wager and we know what the answer to that is don't we?
Pascal omitted the logical possibility of there being a deity or deities, but you happen to choose the wrong one to believe in. I think I at least avoided that mistake.

Quote:
I always ask myself can I stay put and rebalance into my Intl allocation when this happens! That's the question I ask myself a lot.
I guess I'm more afraid of single-country risk, so even if the rest of the world went to heck, I'd rather rebalance into it than further concentrate my assets domestically. But I'm in the accumulation stage, so I can always just view it as an opportunity anyway. I would assume you feel the same way, at least at some level, given your allocation.
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Re: International investing-- a year later
Old 04-25-2007, 07:52 AM   #28
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Re: International investing-- a year later

Quote:
Originally Posted by justin
I've got my bets placed at 50% international equities just in case. Worst case (versus a predominantly USA portfolio), the dollar gets stronger, the USA outperforms the world over the next 7 decades. I should still be ok with my portfolio. If the dollar gets really strong, that means I can retire abroad really cheaply if necessary.
It seems like the worst case for a foreign investor is that our dollar gets weaker, thereby making (1) U.S. products more attractively priced overseas, (2) making foreign companies' products pricier and less desirable to import into the U.S., (3) making those foreign earnings of U.S. companies being repatriated into U.S. Dollars worth more dollars and (4) those U.S. based profits of foreign companies worth less in their currencies. Granted there are other implications long-term of a weak dollar.

So, then we get into the question, is GE a "U.S." company? P&G? Coca-Cola? I don't know the exact numbers offhand but I'm pretty sure all of those are deriving more than 50% or more of revenues from international operations. Heck, even the quintessential American company Harley-Davidson has 20% of its revenues from foreign operations (and rapidly growing).

It makes me wonder if you own "50% international stocks and 50% U.S. stocks" what percentage of revenues are foreign and what percentage are domestic. If U.S. companies are doing more business overseas than foreign companies are doing in the U.S., you could be weighted more than 50% outside the U.S. Heck, there's an argument to be made that if you own Coca-Cola you are weighted too heavily toward international . . .
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Re: International investing-- a year later
Old 04-25-2007, 08:36 AM   #29
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Re: International investing-- a year later

Quote:
Originally Posted by terminator
It makes me wonder if you own "50% international stocks and 50% U.S. stocks" what percentage of revenues are foreign and what percentage are domestic. If U.S. companies are doing more business overseas than foreign companies are doing in the U.S., you could be weighted more than 50% outside the U.S. Heck, there's an argument to be made that if you own Coca-Cola you are weighted too heavily toward international . . .
Dunno the exact percentages for domestic and foreign revenue/profit sources. According to
this article
, the SP500 companies derive 45% of revenues from abroad.

I haven't done the research, but I'd be willing to bet that my small tilted portfolio has less revenues derived from international sources than the large cap SP500.

I may already own plenty of international exposure with my domestic allocation. But I get additional international exposure from my international allocation. And I get the benefits of currency diversification. I'm hoping that the unhedged currency exposure and inherent differences in perceived or real political/country specific risks causes the returns of the domestic and international portions of my portfolio to be less correlated.
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Re: International investing-- a year later
Old 04-25-2007, 09:40 AM   #30
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Re: International investing-- a year later

Quote:
Originally Posted by bpp
I guess I'm more afraid of single-country risk, so even if the rest of the world went to heck, I'd rather rebalance into it than further concentrate my assets domestically. But I'm in the accumulation stage, so I can always just view it as an opportunity anyway. I would assume you feel the same way, at least at some level, given your allocation.
I agree with your assessment here and I am also in the my accumulation phase so hopefully would be able to buy into dips in the markets.

-h
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Re: International investing-- a year later
Old 04-25-2007, 01:40 PM   #31
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Re: International investing-- a year later

I'm working to up my international exposure from 30% to 40%.

I feel much safer having my money in many different countries than having 80 or 90% of it tied to one country.

here is an article some of you may find interesting. It seems that having half your money overseas would have increased performance and decreased risk from 1970 to 1998.

http://www.fundadvice.com/fehtml/inv...03/table3.html
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Re: International investing-- a year later
Old 04-25-2007, 01:51 PM   #32
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Re: International investing-- a year later

There was also an article in the Journal this week about how the correlation between US and Int'l markets was relatively high during the last few years but now seems to be shrinking. This is good news for investors seeking diversification - you will get a better risk/return tradeoff if you hold a portfolio of assets that are not highly correlated with each other. A snippet:


An Unrelated Story --- U.S., Global Stock Markets Increasingly Take Separate Paths
By Craig Karmin and Joanna Slater
949 words
23 April 2007
The Wall Street Journal
C1

For the first time in years, foreign stocks are behaving less like they are joined at the hip with U.S. shares -- good news for globally minded investors worried that U.S. economic growth may be slowing.

Investors are increasingly preoccupied with the relationship between U.S. and foreign markets, particularly last Thursday, when a 4.5% drop in the Shanghai Composite Index led to declines across Asia. U.S. markets finished flat or slightly lower.

Correlation -- the tendency of two markets to move in tandem -- is decreasing between U.S. and foreign markets partly because economic and earnings growth are diverging.

etc....
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Re: International investing-- a year later
Old 04-25-2007, 02:21 PM   #33
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Re: International investing-- a year later

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Originally Posted by SecondCor521
I thought most pundits until recently recommended 10-20% international, and now I read 40%. Yikes! I wouldn't want 40% of my money in international personally.
Why not? The world's investors have approx 50% of their capital invested outside of the US. Why would you want to bet against the world's investors?

I never understood how "pundits" derived their rules of thumb on asset allocation. I always start from how investors vote with their capital, and I might make side-bets that deviate from that allocation.
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Re: International investing-- a year later
Old 04-26-2007, 06:50 AM   #34
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Re: International investing-- a year later

I am still 50/50 US/intl and about 100% in equities. Still in accumulation phase. Happy so far.

snodog, Paul Merriman's articles--with numbers!--on the subject are one of the things that give me confidence in this approach. Les Antman (friend of Andrew Tobias) also likes 50/50 (also gave numbers). Les says he will retire on 50/50, taking out 5% of whatever the pot is each year forever.

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Re: International investing-- a year later
Old 04-26-2007, 08:37 AM   #35
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Re: International investing-- a year later

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Originally Posted by Ed_The_Gypsy
Les says he will retire on 50/50, taking out 5% of whatever the pot is each year forever.
That does not sound too rational to me. I guess he is not a believer in Firecalc?
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Re: International investing-- a year later
Old 04-26-2007, 07:49 PM   #36
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Re: International investing-- a year later

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Originally Posted by wab
Why not? The world's investors have approx 50% of their capital invested outside of the US. Why would you want to bet against the world's investors?

I never understood how "pundits" derived their rules of thumb on asset allocation. I always start from how investors vote with their capital, and I might make side-bets that deviate from that allocation.
Well, lots of reasons, not all of which are good.

1. I'm a typical American investor who thinks that the relatively free market capitalism, company disclosure of financials, decent IP protection, and contract enforcement provides a better risk-adjusted rate of return than the rest of the world.

2. I believe I'll get a good enough rate of return on my S&P500 investments...no need to go elsewhere.

3. I don't assume that capital can flow freely and therefore seek the best rate of return. In other words, I don't think that capital is currently optimally distributed.

BWDIK.

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Re: International investing-- a year later
Old 04-26-2007, 08:45 PM   #37
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Re: International investing-- a year later

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Originally Posted by SecondCor521
Well, lots of reasons, not all of which are good.

1. I'm a typical American investor who thinks that the relatively free market capitalism, company disclosure of financials, decent IP protection, and contract enforcement provides a better risk-adjusted rate of return than the rest of the world.

2. I believe I'll get a good enough rate of return on my S&P500 investments...no need to go elsewhere.

3. I don't assume that capital can flow freely and therefore seek the best rate of return. In other words, I don't think that capital is currently optimally distributed.
Those are good reasons, and those are things I consider when investing. I'm just not convinced that the American Advantage is big enough to warrant more than 50% of my equity investments. I consider 50% to be a big bet on a single country.
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Re: International investing-- a year later
Old 04-26-2007, 09:14 PM   #38
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Re: International investing-- a year later

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Originally Posted by wab
Those are good reasons, and those are things I consider when investing. I'm just not convinced that the American Advantage is big enough to warrant more than 50% of my equity investments. I consider 50% to be a big bet on a single country.
You reminded me of another one:

4. A certain percentage of the S&P 500's operations, sales, and profits occur internationally, so I can capture some of the benefits of international diversification that way.

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Re: International investing-- a year later
Old 04-26-2007, 09:17 PM   #39
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Re: International investing-- a year later

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Originally Posted by SecondCor521
4. A certain percentage of the S&P 500's operations, sales, and profits occur internationally, so I can capture some of the benefits of international diversification that way.
Are you forgetting our trade deficit? Other countries make more money from us than we do from them. So, you could go with 100% international stock and still have a large chunk of US-based profits.
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Re: International investing-- a year later
Old 04-26-2007, 10:47 PM   #40
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Re: International investing-- a year later

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That does not sound too rational to me. I guess he is not a believer in Firecalc?
Dunno. I think he loves his work.
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