The case for re-balancing into non-US stocks

[OldShooter]

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

False premise. The past cannot predict a random future. More than a half century of data tells us this.

 

[target2019]

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?

If you don't believe in international investing (and some, like Bogle, did not) then you should allocate 100% to US.

When I get the feeling my allocation is wrong, I usually check the Callan Periodic Table or the Collection and contemplate the ranking of various asset classes over 20 years.

 

[Gearhead Jim]

If you don't believe in international investing (and some, like Bogle, did not) then you should allocate 100% to US.

When I get the feeling my allocation is wrong, I usually check the Callan Periodic Table or the Collection and contemplate the ranking of various asset classes over 20 years.

I switched my equity AA TO 100% US about a dozen years ago and that has done well. Foreign stocks would need to out perform US by a big margin in the future, to catch up over the whole period. People younger than I might look at it differently.

We should revisit this topic in ten years...

 

[target2019]

I switched my equity AA TO 100% US about a dozen years ago and that has done well. Foreign stocks would need to out perform US by a big margin in the future, to catch up over the whole period. People younger than I might look at it differently.

We should revisit this topic in ten years...

You have done good, as my F-I-L used to say.

It's always interesting when we talk about a time period, and the other specifics like AA. Your move to 100% worked well, but may not be the winning choice for someone right now.

With international, I think the belief is that it is a diversifier. Who knows if that will hold true for the next 10 years?

 

[dixonge]

I feel like index funds handle most of the things that AA advice from the past was concerned with, including sectors, international, etc. I'm sure there's a point at which fixed income becomes advisable, but I doubt I'll ever reach that point, so...

 

[Lucky1]

She absolutely right. International stocks have underperformed the U.S. market for the past 10 years. However, the 10 years prior to that, International out preformed US stocks. I rebalanced last month, more into international. That’s the whole proven theory around diversity and rebalancing.

 

[Delawaredave5]

I have the same dilemma.

I cannot understand how the US can be 5% of worlds population yet 55% of worlds market capitalization.

One would think that’s unsustainable, especially for a country with debt over 100% of GDP.

Reminded about Warrren Buffet “never bet against America” quote.

 

[OldShooter]

... I cannot understand how the US can be 5% of worlds population yet 55% of worlds market capitalization.

One would think that’s unsustainable, especially for a country with debt over 100% of GDP. ...

I don't know either and I do think that devaluation of the dollar is inevitable, but am with @Lucky1. I diversify because I don't know.

 

[Delawaredave5]

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.

Excellent chart - thanks. So obvious question: Are we due for a period of EAFE outperformance..... And if you're "heavy US", do you rebalance towards Intl.

I'm not a "timer" of stocks vs bonds, so shouldn't be a "timer" of Domestic vs Intl (I suppose)

Interesting table of "non US headquartered" companies on NYSE
https://www.nyse.com/listings/international-listings

 

[mrfeh]

Excellent chart - thanks. So obvious question: Are we due for a period of EAFE outperformance..... And if you're "heavy US", do you rebalance towards Intl.

Nobody knows, which is why you choose an AA and stick to it.

 

[Montecfo]

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.

True. Yet you are paying US PE's on US stocks. A large portion of the value proposition of international stocks is they have lower PEs.

 

[FLSUnFIRE]

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.

The next Apple and Google are out there...

 

[OldShooter]

Excellent chart - thanks.

The whole deck is available in the wild. It's done in the "baffle 'em with bulls#it" style/71 charts but if you're curious search "JP Morgan Guide to the Markets."

So obvious question: Are we due for a period of EAFE outperformance..... And if you're "heavy US", do you rebalance towards Intl.

Anyone who believes in regression to the mean is probably inclined that way, but that belief neglects to tell us "when."

(Edit: There's a lot more International out there than the EAFE. I don't consider that sector to be anything special; I want everything, particularly because China is not in the EAFE.)

I'm not a "timer" of stocks vs bonds, so shouldn't be a "timer" of Domestic vs Intl (I suppose)

Well, that's why we hold about 95% of our equity tranche in VTWAX.

Interesting table of "non US headquartered" companies on NYSE
https://www.nyse.com/listings/international-listings

Yes. Search for "biggest companies in the world" to see more of what you're missing with 100% home country bias. Budweiser, anyone?

 

[Markola]

^^^^^^. That raises a related question. How do we think of American companies in the S&P 500, like Medtronic, for example, that are so patriotic they moved their headquarters to Ireland to escape paying taxes to America? Much of their operations, earnings and HQs are now overseas, even though they are still part of the S&P 500.

On one hand, I guess it feeds the idea that the S&P 500 is internationally-diversified. For me, it feeds my opposite strategy that, because our best companies become international hybrids as soon as it suits them, I might as well buy all of the successful companies in the world via index funds. Potato, Potahto, Tomato, Tomahto.

So, I guess I’m answering my own question: If domestic corporations treat the country that spawned their success as a tradable commodity, that’s how they deserve to be treated in return.

 

[OldShooter]

... If domestic corporations treat the country that spawned their success as a tradable commodity, that’s how they deserve to be treated in return.

Well, I think it's more complicated than that. IIRC the US has the highest corporate taxes in the OECD, maybe the world. Further, the managers of companies have a fiduciary duty to their shareholders, so they must always do what they believe is best for the shareholders. Making this decision is much more complicated than just looking at tax rates, but taxes still must be considered.

There is, IMO, a very unfortunate metaphor where corporations are almost universally thought of as bears in caves sitting on piles of money. Actually, if a Martian looked at the situation he might conclude that the main purpose of a corporation is to employ people and to buy from suppliers. That is where most of the money goes. Some more goes to shareholders, but that is a relatively small fraction. I think the idea that companies can be "patriotic" at least partially embraces the bear metaphor. The owners of corporations, certainly, can be "patriotic" but the corporation itself is really just a piece of paper in a file drawer somewhere. No free will there.

It's complex.

 

[MichaelB]

Well, I think it's more complicated than that. IIRC the US has the highest corporate taxes in the OECD, maybe the world.

Neither statutory nor average US corporate tax rates are highest in OECD. They are closer to the average and below rates of most major EU economies.
https://www.oecd.org/tax/tax-policy/corporate-tax-statistics-database.htm

 

[OldShooter]

Neither statutory nor average US corporate tax rates are highest in OECD. They are closer to the average and below rates of most major EU economies.
https://www.oecd.org/tax/tax-policy/corporate-tax-statistics-database.htm

I thought I had read that; maybe not. Thx. IIRC Ireland has been attracting big US companies with low tax rates. But, regardless, the point is the same: corporate management should be doing what they believe to be best for their shareholders.

 

[MichaelB]

Ireland is a special situation because it has adopted a strategy of tax arbitrage directed toward US businesses with substantial profit derived from intellectual property. US corporate execs have fiduciary duty but that does not require them to engage in this tax arbitrage. This is something they do because, put simply, then can get away with it. It is shameful behavior IMHO.