Bogle and Global Investing

[Rich_by_the_Bay]

I was paging through Bogle's book on mutual funds at Borders today. I was interested to learn that he has reservations about the 'irrational exuberance' in international investing.

Unlike many authors (Merriman for example) who are advising up to 30-50% allocation in international funds, Bogle cautions not to exceed 10% to 20%. His reasoning is only briefly discussed but it seems he fears not so much the performance risk (if any), but rather the currency risk.

Interesting red flag coming from him. Not hard to imagine China, for example, doing unanticipated things with their currency or for the dollar to do a major dance even when actual stock performance is doing OK. Wouldn't claim to understand this, but Bogle is a hard voice to ignore.

 

[astromeria]

If I understand this correctly, one of the reasons international funds have done so well recently is the falling dollar. Some risk if the dollar rebounds, I presume, but that doesn't look likely any time soon. Brewer?

 

[bpp]

Unlike many authors (Merriman for example) who are advising up to 30-50% allocation in international funds, Bogle cautions not to exceed 10% to 20%. His reasoning is only briefly discussed but it seems he fears not so much the performance risk (if any), but rather the currency risk.

I don't think it is primarily currency risk. He reportedly recommends Canadian investors to go 50/50 Canadian/foreign, for example. I think he is more concerned about regulatory and governance issues.

 

[unclemick]

Hmmm

Thru blind luck - I reduced my foriegn(VG International) and began shifting into Lifestrategy when they became availible in the 90's - in time for the $ to rally.

I think I was over 30% allocated to foreign before shifting.

heh heh heh heh - I read the 1994 Bogle book.

 

[soupcxan]

I believe that most foreign mutual funds and foreign bond funds are hedged against currency fluctuations to some degree, which reduces direct foreign exchange risk (one notable exception is GIM, for example). Of course, the hedges cost money, which is a drag on returns. And there are indirect elements of FX risk that are not completely eliminated with the hedges.

 

[Gone4Good]

Having not read Bogle's discussion on this topic, I can not speak to his rationale.  But there is logic to avoiding FX risk.  Oftentimes currency fluctuations produce volatility without any compensating return - i.e. risk without reward.  Currently, conventional wisdom is that the USD is doomed to decline.  More often then not, though, conventional wisdom ends up being lousy investment advice.

 

[Delawaredave]

I thought it was Bernstein and Swenson (Yale endowment fund manager) that favor the "currency diversification" via unhedged international funds.   

No one knows where the dollar is going, especially me.   The mix of asset class, country, and currency diversifications hopefully will "smooth the ride" for me.

Emotionally, I do strongly agree with the conventional wisdom that the dollar is going to tank, long term, against many world currencies, especially Asian.

But I try to keep emotion out of things....

 

[Nords]

I believe that most foreign mutual funds and foreign bond funds are hedged against currency fluctuations to some degree, which reduces direct foreign exchange risk (one notable exception is GIM, for example). Of course, the hedges cost money, which is a drag on returns. And there are indirect elements of FX risk that are not completely eliminated with the hedges.

I'm not so sure that hedging is common. Tweedy, Browne Global Value advertises itself as one of the few funds to use hedging, for which they feel entitled to charge a (rising) expense ratio of 1.38%.

Ironically, if you dig deep into their publications and Buffett, everyone agrees that over 10-20 years the currency-exchange risk flattens out. So Tweedy is buying insurance to satisfy their customers who are focused on the short term.

 

[dkpearson]

and..then again....you can get some pretty good diversification by buying us companies with large foreign sales....especially those that represent the good life to folks coming up from poverty....those great icons like coke, mcdonalds....

 

[dasinsin]

I have 50% in international investment.
I am also concerning currency risk, but no matter dollars go up or down, I have 50% asset can benefit.

 

[mathjak107]

Except a strong dollar may hurt both investments. The strong dollar would hurt your international from currency risk and hurt your us stocks from being a non-competitive business risk in a world market.

 

[brewer12345]

That's a rather curious comment from Bogle, considering that currency effects tend to wash after a sufficiently long period of time.

Very few international mutual funds hedge, and standard international index funds are all unhedged.

I personally think Bogle missed the boat on this one, his vieews spurred no doubt by the decade or so of US equity market outperformance of international markets through about 2000. Having a healthy internaional allocation makes a lot of sense in a portfolio perspective.

Yeah, I think the USD is headed down, but I am not prepared to make a big bet on it. But I do maintain a significant allocation to GIM and I own several equities that would benefit from a falling USD. But none of those investments is solely predicated on a falling dollar.

 

[poyet]

Warren Buffet seems to be very bearish on the USD and he's not alone based on various US imbalances...

Having said that, and given that for a US based investor some international diversification is welcome, a double benefit will arise would the dollar fall, as most of these funds are not hedged (as Brewer said). Would be kind of a beneficial side effect of the international diversification.

One difficulty is that most of the asian funds (except Japan of course) are denominated in USD and not in Euros or local currencies. And Japan has not such a positive prospect long term...

 

[mickeyd]

Bogle at one time wrote that international investing was not necessary, but should never be over 20% of the equity position.

I think that he has since softened his position and I have read that he recommends no more than 20%. Later I read one of his speaches online and he seemed to say that 25% should be the max.

He seems to be leaning toward more internatinal investing as time progresses. Give him 10-20 more years and he should arrive at a good #. Of course he will be over 100 and probably be readyfor a more agressive portfolio. 8)

 

[Gone4Good]

That's a rather curious comment from Bogle, considering that currency effects tend to wash after a sufficiently long period of time.

I think that is precisely his point. Unlike many other investments, currencies are a zero sum game. If the effects wash out over a long period of time, all you get for your troubles is added volatility and, therefore, lower risk adjusted returns.

 

[d]

1) seems to me that if one wishes to speculate in currency, they should do so by speculating in currency directly, not with foreign debt/equity issues.

2) while i do believe it wise to devote a moderate % of a portfolio to foreign investments, i suspect the current affection reflects some return chasing, which will probably reverse at some point

3) the additioanl risks of foreign investment go well beyond currency risk, and to a large extent seem not well appreciated.

 

[brewer12345]

I think that is precisely his point.  Unlike many other investments, currencies are a zero sum game.  If the effects wash out over a long period of time, all you get for your troubles is added volatility and, therefore, lower risk adjusted returns.

Uh, did you forget about the whole low/less than perfect correlation thing?

 

[FinanceDude]

Uh, did you forget about the whole low/less than perfect correlation thing?

Apparently, yes, he did..................

 

[Gone4Good]

Uh, did you forget about the whole low/less than perfect correlation thing?

No. While adding some low correlation vol can reduce the overall portfolio vol, adding more is not necessarily better. Bogle says to keep foreign investments below 20%. I don't know what the optimal mix is, but it could be that adding beyond 20% becomes counterproductive as the benefits of the low correlation vol are offset by the poor risk/return dynamics of the underlying investment.

 

[bpp]

I don't know what the optimal mix is, but it could be that adding beyond 20% becomes counterproductive as the benefits of the low correlation vol are offset by the poor risk/return dynamics of the underlying investment.

I seem to recall studies that have found the optimal mix for a US-based investor, from a return/volatility standpoint, is somewhere around 60/40 US/foreign.

 

[unclemick]

hmmm

As I recall there is no science in selecting asset classes and percents - hopefully armed with data on rolling correlations and knowledge/data of the 'long term' expected growth of the asset classes you've selected - it's a crap shoot.

And and those correlations vary over time(hence the rolling word) and and hopefully you enter selected asset classes a good aka value buy point points cause some have irritatingly long trends(??gold, long bonds, etc) before they revert trends.

Which is why I'm a Boglehead - in retirement - I just buy Vanguard's best shot - aka Target Retirement and try to buy middle of the road dividend stocks with my side money.

heh heh heh heh heh - a little razz to stir up the slice and dice crowd. Ie what's global - cap weight, regional selection and ignore mrkt cap or trying to select what's cheap at time you have money. What happens when the rolling correlations change - hold the line or change asset classes??