Equities- Intl vs US?

[Gearhead Jim]

My equity distribution is simple-

Vanguard VTSAX for US stocks and VTIAX for international.

It's generally said that having a portion of the equities in international can reduce volatility, but comparing those two funds makes it look like international moves mostly in lock step with US only with lower returns. No advantage in that.

However, the time period we can compare those two particular funds is limited. If we go back further, say 20-30 years, does international have some times when it works better than US?

 

[pb4uski]

See https://www.blackrock.com/investing...ation/asset-class-returns-one-pager-va-us.pdf

There are some years when international shines, look at 2003-2007... but not many lately. I'm sure that as soon as I liquidated, international would have a 30% year and I would feel like a chump.

 

[catotx]

My equity distribution is simple-

Vanguard VTSAX for US stocks and VTIAX for international.

It's generally said that having a portion of the equities in international can reduce volatility, but comparing those two funds makes it look like international moves mostly in lock step with US only with lower returns. No advantage in that.

However, the time period we can compare those two particular funds is limited. If we go back further, say 20-30 years, does international have some times when it works better than US?

Yes. International stocks (EAFE) most recently outperformed from 2002 to 2007.

https://www.hennionandwalsh.com/wp-content/uploads/2016/01/2015CallanTable.pdf

 

[Markola]

A lot of respectable investors don't buy international stocks, because they argue that US companies are multinationals. That's true, except US multinationals employ armies of professionals to hedge away their exchange rate risks and they often do not bring international profits home due to tax disincentives, hence all the inversions recently in the news. YMMV but I choose to buy some international stock indices directly. I like Vanguard's Life Strategy Growth Fund VASGX as our core fund because it is 80/20, self-balancing, low-fee and the most globally-diverse fund-of-index-funds I've seen. I've looked seriously at Vanguard Total World Stock but the performance/risk ratio just hasn't been there yet and I only buy funds > 10 years old. Good luck.

 

[Totoro]

Living in the eurozone kind of forces me to go for maximum diversification, so I use IWDA (a VT look-a-like).

I also don't want to think too much about allocation % Intl. vs US for my core index holding.

So far that's eaten into my results, since the euro dropped alot I still got a great result though. In Euros ..

 

[devans0]

We have put 6% in INDY, and will probably add another 6% soon. Other places don't instill confidence, or I don't know enough. I've met a few engineers from China who've said that oversupply and quality doesn't matter and the numbers are made up.

If I can't trust the numbers, I'm keeping out. P/E of 10 makes me happier. A strong dollar helps on the buy side.

 

[donheff]

See https://www.blackrock.com/investing...ation/asset-class-returns-one-pager-va-us.pdf

There are some years when international shines, look at 2003-2007... but not many lately. I'm sure that as soon as I liquidated, international would have a 30% year and I would feel like a chump.

+1 Recency bias makes me wonder why I have international and why I have any bonds. But I know if I make a change I will find out why.

 

[Happyras]

I was looking at diversifying into some international using VMNVX, Vanguard Global Minimum Volatility Admiral shares. Does anyone hold this fund or considered it for augmenting a balanced portfolio? It seems to do very well in foreign without the volitility.

 

[catotx]

I was looking at diversifying into some international using VMNVX, Vanguard Global Minimum Volatility Admiral shares. Does anyone hold this fund or considered it for augmenting a balanced portfolio? It seems to do very well in foreign without the volitility.

This fund hedges its foreign currency exposure in foreign stocks. Works well now when the US$ is strengthening but will lag the plain vanilla foreign funds when the reverse happens.

 

[NW-Bound]

Living in the eurozone kind of forces me to go for maximum diversification, so I use IWDA (a VT look-a-like).

I also don't want to think too much about allocation % Intl. vs US for my core index holding.

So far that's eaten into my results, since the euro dropped alot I still got a great result though. In Euros ..

Americans love to travel to Europe when the euro is low relative to the dollar. You do not have to travel; you are already there.

 

[DrRoy]

It's generally said that having a portion of the equities in international can reduce volatility, but comparing those two funds makes it look like international moves mostly in lock step with US only with lower returns. No advantage in that.

That's the way I saw it about 3 years ago. I had a FA at the time (no longer do), who recommended raising my AA in international because it had underperformed for a while. For international to do equal or better than US would require their economic performance to be better than ours, and I did not see that happening. I sold all of it off instead. That turned out to be a better move than I could have known. It will probably reverse at some point for a while, but I am happy to hold what I've got.

 

[convergent]

I am rebalancing my retirement portfolio... will be retiring in 5-10 years from now. I've had a portfolio with about 20% international for years and I'm done with it. I am completely moving out of international only funds. For last 10 years I'm not seeing much positive and too me most large cap companies are global anyways. This is a situation where the world has fundamentally changed over the last 25 years quite a bit and most companies are global. I don't want to be investing purely for currency gains/losses.

The only exception to this is that I moved more funds into REIT funds that I was before and did get one fund that is international. I see international real estate as being something substantive and going to give it a try. Also, some of my funds have some exposure to non-US companies as well.

All of that said, I know enough about this stuff to be dangerous and would never want to think I'm giving advise. I'm just sharing what I'm doing and my rationale for it.

 

[catotx]

Vanguard just posted this article yesterday

Global stock investing: Broadening the borders of your portfolio

https://personal.vanguard.com/us/insights/article/global-stock-investing-032016?SYND=RSS&Channel=AN

 

[Big_Hitter]

isn't the reason we hold international stocks is due to their covariance with respect to other types of investments so that we can hold an optimal risky portfolio?

that's my thinking anyway

 

[Sunset]

Vanguard just posted this article yesterday

Global stock investing: Broadening the borders of your portfolio

https://personal.vanguard.com/us/insights/article/global-stock-investing-032016?SYND=RSS&Channel=AN

A lot of what they said is opposite of what folks here have posted, and I have to wonder if the article was written by someone repeating the same old drivel without research.

No mention of when and how the global stocks did better.
No mention of what countries to avoid or be sure you get into.
No breakout of emerging vs developed countries.

For this they suggest 20 - 40 percent be in international stocks

 

[MichaelB]

DM and EM had impressive performance during the early 'aughts, right up to '07 and the crash. A fair part of that was currency. The US$ has run up substantially over the past couple of years, and is probably somewhat overvalued. Here's a website that attempts to project future returns by country using Shiller PE10 based methodology. Asset Allocation Website

 

[JohnnyBGoode]

Very interesting. I am in the middle of dramatically simplifying my former FA-driven portfolio to 4 funds. I have some cash from the liquidated mutual funds that I'm "supposed" to put into a broad international fund (FSIVX) but I just can't pull the trigger right now. I think I will stay on the sidelines for a few more months and see what happens. I have a hard time envisioning strong growth international right now.

 

[catotx]

I am not making allocation changes due to recent poor stock performance of EAFE and EM.

I recall I had the opposite feelings back in 2005 to 2007, lamenting the relative under performance of the US stock market compared to international. Now their roles have reversed.

 

[CaliforniaMan]

I have no international, never had, and never plan to, strictly U.S. for me. While sometimes various international markets will outperform the U.S., long term I don't see anyplace else in the world with better stability and long term growth prospects than the U.S. so my investments are here. Will Europe have better long term growth than the U.S.? With their problems, I don't see how. Will Asia? Well many Asian countries are starting out at a lower level so long term growth prospects are good, but potential volatility seems to me to be so high, I am out. The U.S. proportion of world GDP will decline in the future as the rest of the world catches up, but these areas are highly volatile. If your time horizon is long enough, then some international is in order, but it needs to be quite a long time horizon in my opinion. In addition as some of these economies grow, it is not at all certain that international shareholders will get the benefit. These are not regulated, open or free markets as we have in the U.S. I suspect most of the growth will be realized by the governments or insiders. From my little bit of personal experience, that is what I have seen. I might be wrong not to own any international, but it will only be a "small" wrong. On the other hand owning a lot of international could be a "big" wrong.

 

[Cobra9777]

We own VXUS, VEA and VWO in the taxable account, mostly the latter. Pretty nice dividend (2.9%) with FTC. It's so volatile that I can usually find good TLH opportunities by shifting between the 3. But it's only 13% of our equity allocation and 6% overall, so pretty small relative to the conventional wisdom of 20-30%. We held a much larger allocation of international during the accumulation phase and it did quite well up until 2008. We cut back when we retired just to reduce some of the volatility in the taxable account. Now the taxable account is mainly high-dividend equity ETFs, with smaller positions in VTI, international, and municipal bonds. In tax-deferred, we also hold some international bonds (BNDX), but it's only 9% of bonds and 3% overall. I make a nod to international, but just lack the intestinal fortitude for a larger position.

Historically, there was a low correlation between US and international equity markets. This meant that diversifying into international stocks reduced overall volatility. Even though international stocks themselves are more volatile than US, the diversified portfolio was less volatile due to the low correlation. Since the mid-to-late 90s, the trend has been toward a much higher correlation. So holding international stocks has less benefit from diversification and could actually increase overall volatility. I believe this trend toward higher correlation will continue as the whole world moves toward greater synchronization in economic matters. This is one reason I keep international exposure low. I don't hold it to reduce volatility; my experience has been the opposite. But I do want some exposure to EM because I think that's where the growth is in the future. So I'm willing to accept some increased volatility... but only to a point.

That's my thinking anyway.

 

[gcgang]

http://3p5bnx3przb73659la2iupn2.wpe...wp-content/uploads/2016/05/SSRN-id2129474.pdf

Above may be a little off topic, in that it deals with historical returns given CAPE values, but I think his point is, if you have a choice to invest in a highly valued market, or a lowly valued one, why constrain yourself to just one?

Faber has other research on "home country bias". Below is a link he had to a Credit Suisse report.

http://publications.credit-suisse.c...fm?fileid=80603618-9230-382D-C51FF70FAF7A4A65

Starting on page 32, I think, you can look up returns for about any country you like.

 

[catotx]

http://3p5bnx3przb73659la2iupn2.wpe...wp-content/uploads/2016/05/SSRN-id2129474.pdf

Above may be a little off topic, in that it deals with historical returns given CAPE values, but I think his point is, if you have a choice to invest in a highly valued market, or a lowly valued one, why constrain yourself to just one?

Faber has other research on "home country bias". Below is a link he had to a Credit Suisse report.

http://publications.credit-suisse.c...fm?fileid=80603618-9230-382D-C51FF70FAF7A4A65

Starting on page 32, I think, you can look up returns for about ant country you like.

Interesting read. BTW, the current US CAPE value is 26.92.

Shiller PE Ratio

 

[eytonxav]

I cap international equity (including EM) at no more than 25% of my total allocation to equities.

 

[convergent]

Vanguard just posted this article yesterday

Global stock investing: Broadening the borders of your portfolio

https://personal.vanguard.com/us/insights/article/global-stock-investing-032016?SYND=RSS&Channel=AN

The key word in this whole article is "historically".... blah, blah, blah. My premise is that analysts are meaning going back 50-60-70 years when they say "historically". The world has dramatically gotten smaller in the last 20 years ... meaning most large companies are operating globally now, and they weren't 50 years ago. Many US based companies get the majority of their sales from outside the US. Take the 2008 banking crisis in the US... the worlds markets all kind of reacted similarly. So the historical look is not really the best way to approach this.

I have no finance background and could be completely off the wall in my thinking, but I've just pulled out of international funds and will stick with my new plan and see how it does. Ironically I used the Fidelity retirement planner and its recommending I move 20% back into international to have the right balance. Their projection if I do that is less accumulated wealth over the long haul, but I guess supposedly less volatile? I don't buy it. I don't freak out if the market takes a big dip and just ride it out. I think the world is so connected right now that a big problem in any of the major markets is going to drag down the world markets.

 

[catotx]

With so many people declaring that they are getting out of international, I am wondering if we are nearing the bottom ...