Is Large Increase in Foreign Holdings Justified?

[ejman]

I occasionally use Vanguards Portfolio Watch Tool to analyze my portfolio. Recently, this tool has taken a hard turn to international holdings in that its recommending 30-50% international equity and I just checked it and it's also suggesting 20-50 % in foreign bond holdings.

In the past for many years I followed Bogle's advice that since most large US companies have significant foreign exposure there is little need to explicitly buy a lot of foreign holdings. Vanguard has obviously significantly changed this tune recently. Thoughts?

 

[photoguy]

Have you read Vanguard's various white papers on this topic:

Foreign Equity:
https://personal.vanguard.com/pdf/icriecr.pdf
https://personal.vanguard.com/pdf/icrrhb.pdf
https://institutional.vanguard.com/iwe/pdf/FASIECR_112006.pdf

Foreign Bonds:
https://personal.vanguard.com/pdf/icrifi.pdf


Personally, I've been at 40% foreign equity since i started investing (about 15 years). As far back as I can remember, Vanguard has been recommending substantial foreign holdings. I would consider myself a passive investor / boglehead but you might find that many in this bucket disagree with Bogle on foreign equity.

Regarding foreign bonds - I didn't find the arguments convincing and I hold 0%.

Edit: page 3 of the first PDF has a sidebar that directly answers the question: Can multinational corporations provide enough exposure?

 

[dallas27]

45% foreign - has served me well in the last year too. The beta between foreign and domestic isn't 1, so there is some level of risk reduction there in normal markets. Risk increase though for situations like great recession. no bonds, no way.


19% VIG
19% VOE
19% VBR
19% VEU
19% VSS
5% VWO

 

[ejman]

Have you read Vanguard's various white papers on this topic:

Foreign Equity:
https://personal.vanguard.com/pdf/icriecr.pdf
https://personal.vanguard.com/pdf/icrrhb.pdf
https://institutional.vanguard.com/iwe/pdf/FASIECR_112006.pdf

Foreign Bonds:
https://personal.vanguard.com/pdf/icrifi.pdf


Personally, I've been at 40% foreign equity since i started investing (about 15 years). As far back as I can remember, Vanguard has been recommending substantial foreign holdings. I would consider myself a passive investor / boglehead but you might find that many in this bucket disagree with Bogle on foreign equity.

Regarding foreign bonds - I didn't find the arguments convincing and I hold 0%.

Edit: page 3 of the first PDF has a sidebar that directly answers the question: Can multinational corporations provide enough exposure?

Thank you for the links. I hadn't rear these white papers. Lots of reading ahead!

 

[robnplunder]

I've moved some out of bond and put it in foreign stock funds. I should have done it sooner b/c I think foreign market will outperform US or fixed bond market for foreseeable future. But what do I know?

 

[ejman]

I'm just going over the first white paper posted by photoguy (thanks!) and its interesting that the data that Vanguard is using only goes back to 1970 for developed markets and 1985 for emerging markets. An interesting quote also caught my eye "Since the ten years ended 10/31/2008, any allocation to non-U.S. stocks has increased average volatility"

Damn, if the world post 2008 is reflective of what we can expect in the future then what? It sure ain't easy is it?

I guess another thought rattling in the background somewhere is that very few countries other than the US have been able to sustain a 4% WR. So diversifying into countries that have historically supported lower WR rates helps how?

 

[nash031]

Moving from 20% of equities to 30% of equities as international via a combination of the TSP I fund and VGIAX myself via my periodic purchases (overall 85/15 AA). 0% foreign bonds.

 

[dallas27]

So diversifying into countries that have historically supported lower WR rates helps how?

For me, I'm in the contribution phase, so when investment is flowing into America, my contributions are buying foreign, and when they flowing out of America, I'm buying America. At minimum, I feel it has be buying what is out of favor, whether it's for market reasons or currency reasons.

America is about the only country to recover since 2008, and the Dollar is crazy high right now. I would fear missing the recovery in foreign assets, and not catching the falling dollar to boot.

 

[Lsbcal]

My equalibrium level of foreign equity is 40% (of total equity). I set this based on previous research papers from the past. Within that 40% it is split 40/60 between large cap international (VEU) and small cap international (VINEX). I'm just mentioning this as an example of what one might do.

What I actually do with that foreign allocation is to move it between comparabe US and foreign indexes based on an algorithm that is backtested over several decades. I'm only mentioning this because as of May 1 it had me move my allocation back to foreign. So it's a little late in getting back to foreign (in a successful trade into US equities over several (months) but the point is that this backtested algorithm is saying foreign is fine for now.

So if one is wondering is now still an OK time to allocate to foreign equities, I'd agree that it's a decent time to do it. At least you have one example here.

 

[ejman]

My equalibrium level of foreign equity is 40% (of total equity). I set this based on previous research papers from the past. Within that 40% it is split 40/60 between large cap international (VEU) and small cap international (VINEX). I'm just mentioning this as an example of what one might do.

What I actually do with that foreign allocation is to move it between comparabe US and foreign indexes based on an algorithm that is backtested over several decades. I'm only mentioning this because as of May 1 it had me move my allocation back to foreign. So it's a little late in getting back to foreign (in a successful trade into US equities over several (months) but the point is that this backtested algorithm is saying foreign is fine for now.

So if one is wondering is now still an OK time to allocate to foreign equities, I'd agree that it's a decent time to do it. At least you have one example here.

Is that an algorithm you developed or something in the public domain?. Just so I understand, you stay within a certain equity/fixed AA but switch between foreign and domestic equities based on the algorithm?

 

[Lsbcal]

Is that an algorithm you developed or something in the public domain?. Just so I understand, you stay within a certain equity/fixed AA but switch between foreign and domestic equities based on the algorithm?

It is my algorithim. I'm not recommending it to others and not trying to brag here. I just mentioned it as a way of making clear that this might be a good entry time for putting money to work in foreign equities. Since it is momentum based and compares US vs. foreign, this should come as no surprise. The last 4 months or so has seen foreign outperform US.

Yes, instead of a fixed international I move that component between US and international. Statisticaly it has worked out but month to month this can vary a lot. Again not recommended as most here are buy/hold.

 

[ejman]

Coincidentally I just got an email from Vanguard re a live video broadcast titled "The case for a Global Portfolio" On May 28th. I guess that particular vibe must be in the air...

 

[LOL!]

With international returning about -4% in 2014 and US equities about +13%, it seems that early in 2015 was not a bad time to increase portfolio weights to international. Don't forget to add in Draghi's quantitative easing which makes it more compelling.

OTOH, maybe this horse is already out of the barn with Int'l up 11% in 2015 and US up only 4% so far this year.

 

[daylatedollarshort]

We've been increasing our international holdings. I think it spreads the risk around a bit better than betting the farm on one country, when that country could be the next Japan or Greece.

 

[RobLJ]

My foreign allocation is 35% of total equity, but similar. Similar on small/large in both foreign and US. I increased foreign and also rebalanced. a year ago (a little) and the S&P crushed everything. This year (so far), the foreign is starting to pay off.
I also have foreign bonds as 30% of bond allocation and am about to plunk some more in emerging market, although the largest position is currency hedged. Also a long-term position in GIM, which I start selling chunks when it's above 10.50 and buying when it's below 8 (I've been buying the last year).

My equalibrium level of foreign equity is 40% (of total equity). I set this based on previous research papers from the past. Within that 40% it is split 40/60 between large cap international (VEU) and small cap international (VINEX). I'm just mentioning this as an example of what one might do.

What I actually do with that foreign allocation is to move it between comparabe US and foreign indexes based on an algorithm that is backtested over several decades. I'm only mentioning this because as of May 1 it had me move my allocation back to foreign. So it's a little late in getting back to foreign (in a successful trade into US equities over several (months) but the point is that this backtested algorithm is saying foreign is fine for now.

So if one is wondering is now still an OK time to allocate to foreign equities, I'd agree that it's a decent time to do it. At least you have one example here.

 

[explanade]

OTOH, China's GDP is declining, which is also hurting the economies of emerging nations, like Brazil.

I guess PIIGs are no longer a concern either?

 

[Lsbcal]

With international returning about -4% in 2014 and US equities about +13%, it seems that early in 2015 was not a bad time to increase portfolio weights to international. Don't forget to add in Draghi's quantitative easing which makes it more compelling.

OTOH, maybe this horse is already out of the barn with Int'l up 11% in 2015 and US up only 4% so far this year.

Well the horses are definitely out of the starting gate for 2015 with international leading. The results would be even more lopsided if reported in non-dollar (local currency) terms. Even if both international and US run neck and neck, it could be that some of that US dollar strength will reverse a bit giving better dollar based returns for international. I'm just up in the stands rooting for both international and US.

Here is an article from Pimco that suggests dollar strength in the future:
PIMCO | Viewpoints - Three Reasons the Dollar Should Stay Strong

 

[RobLJ]

PIIGS are a concern; US stock valuations are a concern; bond valuations are a concern; cash is a concern due to the sure hyperinflation; and then there is the zombie invasion, as a concern. Guns and ammo and toilet paper and vienna sausages are also a concern. Everything concerns me.

I like investing in Emerging economies, gradually, when the tide is going out or has gone out, but I could be wrong here. I got Japan wrong 10 years ago or so; emerging economies not as much.

OTOH, China's GDP is declining, which is also hurting the economies of emerging nations, like Brazil.

I guess PIIGs are no longer a concern either?

 

[2017ish]

PIIGS are a concern; US stock valuations are a concern; bond valuations are a concern; cash is a concern due to the sure hyperinflation; and then there is the zombie invasion, as a concern. Guns and ammo and toilet paper and vienna sausages are also a concern. Everything concerns me.

...

Hence, OMY * N!

 

[audreyh1]

With international returning about -4% in 2014 and US equities about +13%, it seems that early in 2015 was not a bad time to increase portfolio weights to international. Don't forget to add in Draghi's quantitative easing which makes it more compelling.

OTOH, maybe this horse is already out of the barn with Int'l up 11% in 2015 and US up only 4% so far this year.

Right - it does seem like the horse has left the barn. I bought more international in Jan, due to rebalancing after a tough 2014. Been a sweet reward so far.

But just because they are up YTD doesn't mean they will end the year that way.

 

[Chuckanut]

Rebalancing tends to correct these problems and take advantage of opportunities. Don't retire without it.

 

[explanade]

Which instruments are people using for foreign exposure?

 

[LOL!]

Which instruments are people using for foreign exposure?

Vanguard index funds:
VTIAX
VEU
VSS

Plus some small-cap emerging markets ETFs:
EWX
DGS

Large-cap emerging markets companies are included in VEU and VTIAX.

 

[2017ish]

Have broad international in our 401k accounts (not great, but there)

Our taxable accounts hold tilting positions:
VWO (emerging)
DLS (smallish value)

 

[FIREd]

My only exposure to foreign equity at this time is through the Vanguard FTSE All-World ex-US index fund (VFWAX). I am thinking about building a position in the Vanguard FTSE All-World ex-US Small-Cap index fund (VFSVX).