International investing-- a year later

[lswswein]

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.

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

 

[bpp]

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.

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.

 

[terminator]

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 . . .

 

[justin]

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.

 

[lswswein]

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

 

[snodog]

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/investingbasics/9903/table3.html

 

[soupcxan]

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....

 

[wabmester]

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.

 

[Ed_The_Gypsy]

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.

 

[kcowan]

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?

 

[SecondCor521]

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.

2Cor521

 

[wabmester]

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.

 

[SecondCor521]

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.

2Cor521

 

[wabmester]

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.

 

[Ed_The_Gypsy]

That does not sound too rational to me. I guess he is not a believer in Firecalc?

Dunno. I think he loves his work.

 

[JJac]

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.

A trade deficit is a delta in revenue, not profit. It is possible to have a trade/revenue deficit, but still have more profit on the US side (or vice versa)

 

[arandomwalk07]

It's funny reading this thread living in Europe, as we see the same discussions over here but of course "International" now includes the US We've seen the US dollar fall away over the past year or so, so by keeping our money even in a deposit account we have "gained" over many US investors.

I think as someone said previously it makes sense to diversify across countries, but my personal core holdings would only be in democratic countries with strong business ethics. The speculative element goes into the Chinas and Japans of this world to hopefully gain a better return over the long term.

 

[Nords]

... but my personal core holdings would only be in democratic countries with strong business ethics.

Let me know when you find one of those!

 

[lswswein]

Let me know when you find one of those!

That's the one I am currently living in, at the moment. Hello home bias.

-h

 

[kcowan]

Let me know when you find one of those!

And why would you want to? I see no reason to eliminate the US and Canada just because of that. Also there are guys like Conrad Black (Lord Crossharbour) who managed to do business in Cda/US/UK/AU. Would not want to exclude all those places arbitrarily. :

 

[Spanky]

Let me know when you find one of those!

 

[Delawaredave]

A trade deficit is a delta in revenue, not profit. It is possible to have a trade/revenue deficit, but still have more profit on the US side (or vice versa)

Yes - I think so. There was an article about Apple's iPod - which contributes to the trade deficit (importing them from Asia) - but the majority of the profits are captured by Apple.

 

[Nords]

There was an article about Apple's iPod - which contributes to the trade deficit (importing them from Asia) - but the majority of the profits are captured by Apple.

Apple spent all that time, effort, and R&D money developing the iPod. Then they e-mailed the design to chip fabs, maquiladora, and other oversease manufacturers.

None of Apple's investment was counted toward the trade-deficit calculation when it zipped outta here in that e-mail. Yet all of the foreign companies' finances count against the trade deficit when the iPod containers are offloaded in U.S. ports.

Apple probably makes dozens of dollars of profit on every iPod. The foreign manufacturers probably make pennies.

Andy Kessler does a similar analysis of laptop computers in his book "Running Money".

I think the trade-deficit calculation is a function of garbage in, garbage out and is no longer relevant to the U.S.'s economic reality. So I don't worry about it any more.

Kinda like the Labor Department's report of unemployment, where monthly numbers change by 50,000... with a margin of error of +/- 100,000.

 

[Running_Man]

Apple spent all that time, effort, and R&D money developing the iPod. Then they e-mailed the design to chip fabs, maquiladora, and other oversease manufacturers.

None of Apple's investment was counted toward the trade-deficit calculation when it zipped outta here in that e-mail. Yet all of the foreign companies' finances count against the trade deficit when the iPod containers are offloaded in U.S. ports.

Aren't 3,000 of Apples 17,000 employees located in the new R&D research facility in India which opened last year? And I believe you are incorrect in your assessment of the trade defict calculation. If you have a company in another country perform as a manufacturer for your design you must have a reasonable royalty rate to be charging for the manufacture, typically a company will have a myriad of corporations under one umbrella and sales between intercompanies must meet guidlines so as not to totally evade taxes in any country nor allow a company to pick where it makes the income. Of course companies spend millions working around that but.....

 

[Gone4Good]

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.

No. According to balance of payment data returns on US foreign direct investment exceed returns paid to foreign investors. We borrow money from overseas investors at a very low rate (typically treasury rates) and reinvest overseas in foreign businesses with much higher returns. The US has benefited from a very profitable carry trade for many, many, years.