Scott Burns - SWRs and Int'l Diversification

[intercst]

http://www.dallasnews.com/sharedcon...umns/2004/stories/060104dnbusburns.4bb14.html

Will international investments make your retirement nest egg last longer?

The answer to that question comes from the same three Trinity University professors – Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz – who did one of the original studies of withdrawal rates and portfolio survival. Writing in the May issue of the AAII Journal, the monthly publication of the American Association of Individual Investors, the researchers compare survival rates for portfolios with, and without, international investments. They compare, for example, survival rates of a portfolio that is 50 percent U.S. stocks and 50 percent bonds with a portfolio that is 25 percent U.S. stocks, 25 percent international stocks and 50 percent bonds. They do this for equity allocations ranging from 100 percent down to 25 percent.

Their conclusion?

International diversification probably isn't worth the trouble.

</snip>

It's nice to get confirmation on that, but Buffett and Bogle have been saying the same thing for quite a while.

intercst

 

[unclemick]

I bought into the foreign investment in the early 90's(AAII hogwash) until Bogle's 94 book and Lifestrategy funds came on the scene. But the old memory says the countervailing agrument was buy S&P 500 because up to?40? % of earnings came from oversea's and 'they' took care of currency fluctuation for you. I want to say Bogle but it could have easily been someone else.

 

[unclemick]

BTY- Lifestrategy mod and cons. have small foreign components. So Bogle hasn't totally convinced Vanguard or me - if I was 'more theoretically pure' I would switch to Balanced Index. Heh. Heh,

 

[unclemick]

AND AND - Koelnischerueckver-scherungs ord is Buffet's 8th largest stock position - sounds foreign to me. But that's okay - there's always principle and then there's sometimes a good buy.

 

[John Galt]

Plus they make a helluva sausage

John Galt

 

[wabmester]

It's nice to get confirmation on that, but Buffett and Bogle have been saying the same thing for quite a while.

Confirmation of what, exactly? They seem to be saying that historically, exposure to international improved performance a little, or at worse performed the same as a US portfolio. That's not a very strong condemnation of the idea, especially if you think there's a strong trend towards globalization and away from US hegenomy.

 

[intercst]

Confirmation of what, exactly?  They seem to be saying that historically, exposure to international improved performance a little, or at worse performed the same as a US portfolio.   That's not a very strong condemnation of the idea, especially if you think there's a strong trend towards globalization and away from US hegenomy.

I think the trend towards globalization may be contributing to the fact that diversifying internationally does little or nothing to improve SWRs. Globaliztion is causing markets to become more correlated, not less. Diversification only works well with uncorrelated asset classes.

Combine that with the higher fees and expenses that international investors pay relative to investors holding a domestic index fund (which the authors of the study ignored) and their conclusion is even reinforced.

intercst

 

[cute fuzzy bunny]

As usual, this is firm proof of what's already happened and not what will happen.

Most of what I've read has said that the US market may be seeing lowered returns while other markets still DO offer diversification and potential for stronger returns than our market has seen.

I'm not sure I want to buy into the "globalization" of the US market just yet either.

Maybe I'm a fool, but I'll keep my 10-15% in foreign equities, 5% in emerging market equities, and 3-5% in foreign bonds for a while yet.

 

[ESRBob]

If you really believe in indexing, why wouldn't you want to hold the whole world's equity (and bonds for that matter) in something like the proportions of their market caps (perhaps with a tilt toward value and small - thank you French/Fama)?

Holding all US Stocks may not have looked bad during the Trinity Study, but much of that covered a time of huge gains in the US stock market. (80s and 90s)

I look out at all the stories about off-shoring and chinese growth and so forth and think to myself "I don't care what happens here-- I will be fine because I own it all".

Capital has to move to the place where it can work the hardest -- at least the capital which does will be rewarded most highly over time. Go to some place like Mexico and see the transformation going on there. In our lifetime, 'third world' will transform to something very much like the US, and that kind of growth will reward equity investors. PEs outside the US are a bargain, if you believe the growth will happen there. I do. If you think the US may have crested and now be commencing a long-term secular decline, your thinking would have ample parallels in history. A hundred years ago, British investors held roughly half their equity outside the UK, funding things like railroads in the US.

Anyway, bottom line is roughly a third of our capital is outside the US - I still feel we have a US 'tilt', but I am working on it. We still try to buy value and small stocks internationally, too: EAFE is full of megacaps that track the S&P500 pretty nicely, but international small and international value seem like attractive, long-term indexer kinds of buckets to be invested in. (DFA has funds selected specifically along these lines).

ESRBob

 

[Cut-Throat]

Yup, I'm staying the course with 20% of my Stock exposure to International. Split between Total, Europe, Pacific and Emerging.

My heirs can think about if they want to move it some day

 

[wabmester]

Yup, I'm staying the course with 20% of my Stock exposure to International.

You realize, of course, that the world has decided to allocate about 50% of stock market capital to international (outside of the US), right? If you believe the market is smarter than you are, then you're underexposed.

 

[Cut-Throat]

You realize, of course, that the world has decided to allocate about 50% of stock market capital to international (outside of the US), right?   If you believe the market is smarter than you are, then you're underexposed.

 

No I didn't realize that! - And for maximum returns, I may be underexposed. But as Berstein says 'staying the course on your planned asset classes is more important than selecting the right asset classes'

I am not sure of your point, but if you are trying to convince me that you are smarter than me, don't bother I'm convinced! If you are trying to convince me that you are smarter than Berstein - Well, if you had come out with a book as convincing as Berstein, I might have followed your advice. BTW - What is your advice?

 

[sgeeeee]

The first time I ever saw the risk-return curves for US/foreign stock allocation was in the early 80's. Since then I've seen studies every several years and it seems like you can come up with what ever answer you want depending on the time frame you use to develop the historical curve.

Bernstein (in at least one of his books) makes the case that you should not expect much difference in foriegn and US stock returns in the long run. If one country does begin to produce higher returns, then new money will enter that country and bid the price up till the returns are equivalent to the rest of the world. That argument seems consistent with the results of this study.

So diversification into non-US stocks may not buy much improvement in risk/return on a 30 year time frame. But that doesn't mean it won't buy reduced risk over shorter periods. Even if non-US stock returns exactly tracked US returns but were offset by a couple of years, you would see more stability in your portfolio by diversifying than you would by buying only US stocks.

 

[haha]

A hundred years ago, British investors held roughly half their equity outside the UK, funding things like railroads in the US.

The irony here is that they lost almost all of it to the many bankruptcies of that era. And to some extent, to the predatory activities of the Robber Barons. Nineteenth centrury USA business had at least some things in common with today's Russia and China.

Mikey

 

[John Galt]

Hey Mikey, the "robber barons" were some of my heroes,
free enterprise-wise. It's an era I viewed with great
envy vis-a-vis the lack of rules and constraints on
free wheeling adn dealing.

John Galt

 

[unclemick]

Nowadays it's called 'crony capitalism' aka 'robber barons'. Mikey indirectly hit the ongoing debate - about the shareholders getting a fair shake - both inside and outside the US. Remember the late 80's when Japan was going to 'buy' the world? I don't know the answer ---sooo--- 10% foreign buried in Lifestrategy index funds and one, two or more dividend paying foreign stocks in my hobby portfolio. (sold BP, a mistake maybe, still have Glaxo and looking at others). Buffet appears to have dumped Petrochina but still has one foreign stock. In short, I have no clue so if I see a 'good' dividend company, I will buy it - anywhere in the world.

 

[Hyperborea]

You realize, of course, that the world has decided to allocate about 50% of stock market capital to international (outside of the US), right?

I think the number is closer to 40% US / 60% Rest of the World these days.

My personal equity split is 50% US / 50% ROW.  Each of those is about 80% total market / 20% small/value tilt.

 

[charlie]

I think SG's post above makes good sense. Personally,
I have about 15% of my total port in European Index
and Pacific Index split equally.

I am considering changing to a 10% international allocation soon to complete my conversion to the "coffeehouse" approach.

What do you guys think about 5% in International Explorer and 5% in International Value? Unfortunately, both are managed funds but their expenses are not too bad. I have a hunch that International Explorer (small/mid growth) will provide the diversification
we hope for. International Value may not, but I
don't think it will do any harm

Cheers,

Charlie

 

[Skylark]

Intl diversification is also about confidence or lack of confidence in currency values.

I tend to think the US$ will be dragged down by excessive spending on defense over the next 20 years. I would like to have at least some Euro based stocks so if the dollar drops I still have a backup.

 

[unclemick]

Skylark

I got hosed last go-round. In 1985 we took our Euro vacation with the $ at it's peak. By the late 80's I fell prey to 'international' diversification(AAII influence?) and was as high as 30% or more. By 1994 had read Bogle's book and shifted to Lifestrategy (low fixed international). We all know what happened to Japan and $ rebound in the 90's. Will the $ trend hold and international get with the program? Don't no? - fixed allocation for me. BUT in hobby land - if something looks good? - one case at time.

 

[BigMoneyJim]

I find the differences of opinion here interesting.

Personally I opted out of international stock funds a while back largely because I don't understand them. I also rationalize that much of the S&P 500 does business internationally and will benefit from improved economies in other countries.

Another rationalization is that I'm not going to try to outperform the US economy by investing internationally because even if the US economy crashes I live here and would benefit form the reduced costs. Or put another way, by saving and investing I'm still financially better off than most of my peers no matter what the economy does.

By the way, my reaction to Intercst's post was to feel validated for avoiding international stock funds.

 

[wabmester]

Personally I opted out of international stock funds a while back largely because I don't understand them.

I can't argue with that. Nobody should invest in something that they don't feel they reasonably understand. Of course, if most people followed that advice, there wouldn't be many individual investors in the stock market.

I also rationalize that much of the S&P 500 does business internationally and will benefit from improved economies in other countries.

That's true, too. But the fact that we run a trade deficit means that other countries benefit more from our improved economy than vice versa. There's also the covariance argument that the MPT world loves. But to me, it's more of a sector bet. Pick a few countries that have a better demographic profile than the US, stronger GDP growth, or even lower P/E multiples.

Another rationalization is that I'm not going to try to outperform the US economy by investing internationally because even if the US economy crashes I live here and would benefit form the reduced costs. Or put another way, by saving and investing I'm still financially better off than most of my peers no matter what the economy does.

Personally, I don't consider it heroic to go down with the ship. I'll be the guy with the inflatable raft (hoping I don't need to use it).

 

[unclemick]

I am in the distribution phase(retired) - so as in the Scot Burn's article my international is small and 'out of the can' in a balanced index fund.

BUT - a sector bet via a closed end country/area fund or other mechanism is not off the table - provided I 'believe' I understand what I'm betting on. Dividend's would be high on my checklist. And of course, heh, heh - 'international mutlinationals'.

 

[Ed_B]

I keep about 15% of my stock portfolio in international funds. For me, this is less about improved performance and more about reducing volatility. From what I have read, many foreign stocks are not well synched to the US stock market. Given that, having a slice of international funds in a portfolio that is mostly US stock funds should result in lower volatility than a similar portfolio that is 100% in US stock funds. I would not have more than 20% in international funds but I do think that there is a place in most portfolios for good international stock funds. Costs can be significant with many international funds, so a close eye needs to be kept on this if reasonable performance is to result.


Ed_B