The case for re-balancing into non-US stocks

[Zorba]

Our target allocation for US vs non-US stocks is 2/3 US and 1/3 non-US, but thanks to the thriving US stock market, our allocation has drifted to more like 80/20. If you compare the PE10 for US versus non-US, you can see that the US stock market is overvalued relative to the non-US market by 50-60% (e.g.

https://twitter.com/x/status/1491870465186414601

).
However, I am having trouble convincing my DW that we need to re-balance back into non-US stocks. She notes that our non-US has under performed for a long time. To test this I ran three models through the Portfolio Visualizer (https://www.portfoliovisualizer.com/backtest-portfolio) using 100% Vanguard Total Stock Mkt Idx Inv (VTSMX), 100% Vanguard Total Intl Stock Index Inv (VGTSX) and 66/34 of VTSMX/VGTSX.

She is not wrong. From May 1996 to January 2022 the US stock market had a CAGR is 9.47%, while non-US had 5.23%. Annual re-balancing of a 55/33 US/non-US does better with a CAGR of 8.14%, but still 1.3% worse than 100% US.

Does anyone have a better argument for why one should be re-balancing into non-US now?

Thanks, Zorba.

 

[steelyman]

I overshot my rebalancing and moved too much into international (developed and emerging) but will not change it.

 

[walkinwood]

I don't have an argument either way, but you should be comparing portfolio performance + volatility.



I have kept my international allocation constant but haven't gone back to check what would have happened if I had not rebalanced. Too much work for me since I don't have anyone to convince



Good luck.

 

[OldShooter]

... Does anyone have a better argument for why one should be re-balancing into non-US now? ...

Well, the academics say we should hold "the market portfolio," which is everything. We hold VTWAX, which is everything on a market cap weighted basis. This has not been a winning hand in the past few years, but we are long-term investors and believers in the academic results. Right now, IIRC VTWAX is about 55% US stocks but during our ownership it has been as low as 45%.

Good video: Dr. Kenneth French on International: https://famafrench.dimensional.com/videos/home-bias.aspx

Reading:
Vanguard "Global equity investing:The benefits of diversification and sizing your allocation" https://www.vanguard.com/pdf/ISGGEB.pdf

Vanguard on International: https://investor.vanguard.com/investing/investment/international-investing

I'm pretty sure M* has some stuff, too, but maybe behind their paywall.

 

[Chuckanut]

Buy Low, Sell High? Other than that old bromide I have no recommendation.

 

[mrfeh]

Does anyone have a better argument for why one should be re-balancing into non-US now?

This shouldn't be a judgment call - your IPS should tell you when to rebalance.

Putting that aside, recent performance is a lousy reason to not rebalance.

 

[FLSUnFIRE]

No advice but my 2¢.... I think PE across markets in isolation is not a good metric. Part of the PE multiple is the amount of risk priced in. International has currency and political and economic risk that the US markets do not so all else being equal, I would want a lower multiple in those riskier investments. -from a US perspective -but also why many international invest in US even though yields are lower.


I think I'm about 10% international but most of my investments have plenty of international exposure even though they are heavily weighted in "US" stocks.

 

[Markola]

We hold the suggested 40% international in our equities portfolio for all the reasons listed in OldShooter’s Vanguard article, and I’ve made the case for doing so right here many times over the years. Year after year, however, the markets continue to be lead handily by the US, so I don’t know. Someday our patience will be rewarded. Maybe.

 

[Which Roger]

This shouldn't be a judgment call - your IPS should tell you when to rebalance.

Putting that aside, recent performance is a lousy reason to not rebalance.

+1 If your IPS includes rebalancing triggers, follow them. A mix of auto-pilot and market timing will not work.

 

[38Chevy454]

I feel that if you hold large cap US stocks, you already have international exposure since these companies are global. The advantage being that US based companies conform to US corporate reporting rules and accounting; something that can be questionable in pure international environments (translation - I don't trust Chinese companies for example). Also agree that since US dollar is the world's currency, it has additional exchange rate risk with pure international. I do believe some international is OK, but my personal allocation is more like 10% in pure international. So for OP Zorba being at 20% international would not cause me any concern. I think that Zorba's original allocation of 33% international is much higher than is recommended.

 

[Chuckanut]

I think I'm about 10% international but most of my investments have plenty of international exposure even though they are heavily weighted in "US" stocks.

That was John Bogle's view, IIRC. The bigger and many many medium sized US stocks have plenty of foreign exposure built into them already.

Me? I do about 10% in foreign stocks.

 

[pb4uski]

... However, I am having trouble convincing my DW that we need to re-balance back into non-US stocks. She notes that our non-US has under performed for a long time. ...

Does anyone have a better argument for why one should be re-balancing into non-US now?

Thanks, Zorba.

This is the exact reason that I bailed on foreign stocks a number of years ago... pretty consistent underperformance compared to domestic equities. I know that many pundits are saying that foreign equities is the way to go because the valuations are better and they may be right. But I'm from Missouri on foreign stocks... they would need to show a few years of good performance before they would interest me.

 

[Zorba]

Thanks everyone for the input. I'll use the info to make the case for re-balancing our international back to 34% of our stock allocation from its current 20%. A few quick comments...

Oldshooter: Thanks for the links. I am looking at them now. BTW. Your pdf link did not work for me but I think I've read that Vanguard article.


mrfeh: "recent performance is a lousy reason to not rebalance." Ouch, man! The truth hurts.

Chuckanut: All things being equal, we would follow the path of Saint Bogle for no other reason if just to keep our portfolio simple. However, we've got a old Canadian RRSP that keeps us investing International.

 

[OldShooter]

... Oldshooter: Thanks for the links. I am looking at them now. BTW. Your pdf link did not work for me but I think I've read that Vanguard article. ...

Sorry. I have a clip file that I copy and paste links from. I'll check/verify more carefully in the future.

I feel that if you hold large cap US stocks, you already have international exposure since these companies are global. ...

This is a very common argument but I think it is weak. American penetration of overseas markets is very spotty. China and India are the most populated counties on the planet and both are quite protectionist. Neither will ever permit US companies to operate freely. At the next level down, sticking with US domiciled companies eliminates market leaders like Volkswagen and Toyota, Nestlé, AB Inbev, ArcelorMittal, Cemex, and of course existing and growing Chinese companies. In India and China the ride may be rough, but I think a serious investor needs to have a world view, not a parochial one.

Another future factor is IMO the likely decline of the US dollar as the world's reserve currency. We are universally hated for using our dominance as a political weapon and, again IMO, this hatred will eventually cause a non-trivial decline in the value of the dollar. Central bank cryptocurrencies seem to be the horse to bet on currently, but the "why" is clear. It is only the "how" that has proved difficult so far. A 20% decline in the dollar means a 25% increase in the value of most non-dollar denominated assets. I have no crystal ball and a likely dollar decline is not the reason we are invested worldwide, but it is certainly a nice thing to think about.

 

[mrfeh]

mrfeh: "recent performance is a lousy reason to not rebalance." Ouch, man! The truth hurts.

FWIW, our equities are also 1/3 ex-US, and I never let it get far away from that number.

 

[gcgang]

https://www.mymoneyblog.com/gmo-the-case-for-non-us-stocks.html

Above cites GMO research highlighting that PE ratios are very high in US compared to non-US. Seems concise and factual.

IMO, now is not the time to reduce your non-US exposure.

 

[Markola]

FWIW, our equities are also 1/3 ex-US, and I never let it get far away from that number.

+1. We stick with 40%. Historically, U.S. and International stocks swap leadership approximately every five years. Of course, the current run of domestic leadership has been very, very long - historically abnormal. Who knows what conditions will cause the next inversion in market leadership but, when it happens, it might happen very fast, with the biggest, not-to-be-missed trading days at the beginning of the rally.

 

[Gearhead Jim]

Looking at some Vanguard funds, VTSAX and VTIAX look to be comparable US vs International.

Looking at the value of $10k invested ten years ago, the US fund appears to have doubled the value of the international fund.

The last ten years are not forever, but I'm not going to live forever.
And different funds US vs Intl would have somewhat different results. But I recall someone saying a few years ago that Intl stocks generally had been a consistent drag on his portfolio for a very long time.

Comments?

 

[OldShooter]

Here's a chart I was given in a recent investment review:

​

Lots of ways to read it. Read it like @PB4 and you conclude that international is not the place to be. Others might conclude that we are long overdue for a regression to the mean in both US and International sectors. Read it like I do, sectors wax and wane and I am not smart enough to predict this, so I just do what the academics recommend and I hold everything. But regardless of how you read it, it's a pretty good history chart if you want to look at only the historical developed world (EAFE). Note that this omits the developing economies, aka emerging markets, of which China is by far the largest.

 

[target2019]

OP wants 3/2 and spouse wants 4/1. Why not 3.5/1.5?

70%/30% for a tactical adjustment.

 

[mrfeh]

Looking at some Vanguard funds, VTSAX and VTIAX look to be comparable US vs International.

Looking at the value of $10k invested ten years ago, the US fund appears to have doubled the value of the international fund.

The last ten years are not forever, but I'm not going to live forever.
And different funds US vs Intl would have somewhat different results. But I recall someone saying a few years ago that Intl stocks generally had been a consistent drag on his portfolio for a very long time.

Comments?

Past returns are not indicative of future returns.

 

[Gearhead Jim]

Past returns are not indicative of future returns.

True.
But if we subscribe fully to that concept, then we should rebalance more into bonds because they have been lagging stocks for quite a while, but sometimes do better than stocks.

For all of us, the problem in looking at historical returns is to decide what is the appropriate sample period to predict the future.

 

[Magus]

Our target allocation for US vs non-US stocks is 2/3 US and 1/3 non-US, but thanks to the thriving US stock market, our allocation has drifted to more like 80/20. If you compare the PE10 for US versus non-US, you can see that the US stock market is overvalued relative to the non-US market by 50-60% (e.g.

https://twitter.com/x/status/1491870465186414601

).
However, I am having trouble convincing my DW that we need to re-balance back into non-US stocks. She notes that our non-US has under performed for a long time. To test this I ran three models through the Portfolio Visualizer (https://www.portfoliovisualizer.com/backtest-portfolio) using 100% Vanguard Total Stock Mkt Idx Inv (VTSMX), 100% Vanguard Total Intl Stock Index Inv (VGTSX) and 66/34 of VTSMX/VGTSX.

She is not wrong. From May 1996 to January 2022 the US stock market had a CAGR is 9.47%, while non-US had 5.23%. Annual re-balancing of a 55/33 US/non-US does better with a CAGR of 8.14%, but still 1.3% worse than 100% US.

Does anyone have a better argument for why one should be re-balancing into non-US now?

Thanks, Zorba.

Keep in mind 30+% of S&P 500 earnings come from international so you have more international exposure than you think already

 

[mrfeh]

True.
But if we subscribe fully to that concept, then we should rebalance more into bonds because they have been lagging stocks for quite a while, but sometimes do better than stocks.

People should rebalance when their IPS indicates they should, not based on what has happened the last X days/months.

For all of us, the problem in looking at historical returns is to decide what is the appropriate sample period to predict the future.

Asset allocation should be determined by ability and need to take a certain risk, not based on some predicted return.

 

[Markola]

Here's a chart I was given in a recent investment review:

​

Lots of ways to read it. Read it like @PB4 and you conclude that international is not the place to be. Others might conclude that we are long overdue for a regression to the mean in both US and International sectors. Read it like I do, sectors wax and wane and I am not smart enough to predict this, so I just do what the academics recommend and I hold everything. But regardless of how you read it, it's a pretty good history chart if you want to look at only the historical developed world (EAFE). Note that this omits the developing economies, aka emerging markets, of which China is by far the largest.

Good chart. It looks that way thanks to six reasons: Facebook (Meta), Apple, Amazon, Microsoft, Netflix and Google (Alphabet). The answer to how long U.S. stocks lead international very likely depends on how well those 6 mature tech behemoths continue growing earnings at feverish, unprecedented rates. Facebook is wobbling severely, mostly due to new Apple I-Phone privacy features, which undercut Facebook’s ad revenue, plus various expensive Meta projects with unproven revenues. Meta’s stock has fallen by half since September. Google is also heavily ad-based. Amazon’s revenues are overwhelmingly reliant on its cloud data services, not its delivery trucks. Netflix? Uh oh. Earnings were bad and the stock has fallen by half since November. How much more market share is there to be gained by the remaining 4 behemoths to drive the S&P 500 ever-higher and higher?

If anyone is comfortable things will never again change, well, I’m not.