John Bogle Suggests International Investing will Lag

[MasterBlaster]

I saw this over on the Vanguard forum and thougt it might be of interest here.

John Bogle (of Vanguard fame) suggests that Large Cap International equities will perform poorly going forward. He suggests that a US-only portfolio will do much better. Besides if you have large-cap US equities you already have foreign exposure through the large US equity dealings..

Q: Many investors have been adding more international investments, expecting better growth. Do you think that's smart?

A: If you invest in a diversified international fund, your largest investment will be in Japan, which doesn't look so good to me now. And your second-largest will be in Britain, which is in worse shape than the U.S. Your third-largest investment will be in France, where they don't want to seem to work anymore. I don't see any great attractiveness to that.

The interview is on the CNBC website if you are interested.

Me personally, I tend to agree with what Bogle has to say.

 

[NW-Bound]

Even emerging markets have been lagging. However, I see EM as having potential to rebound in the long term, relative to the above mentioned developed countries.

 

[MasterBlaster]

NW-B:

You may be right but this is not what Bogle was referring to.

He suggested, contrary to the ubiqitous advice on having some percentage in large-cap international, that we forego that in favor of only US equities. Or at least a much diminished role for international equities.

 

[braumeister]

Generally speaking, I would agree with JB completely.

However, I believe it's still possible to pick and choose carefully.
Sure, the Euro zone is a mess, but the Nordic region has been in excellent shape.

Just as an example, one of my holdings has been FNORX, Fidelity Nordic Fund. One-year total return of 44.26% is not that shabby.

 

[foxfirev5]

I still plan to stick to my allocation of 45-50% equities with 70% US and 30% Int'l. This picking and choosing vs a diversified AA is the same as market timing in my book. Maybe he's right and maybe he's not. However I will never forget his implied timing advice in early '09 regarding getting out when you can't afford to lose any more - taken in context.
While I strongly believe in low cost index funds for my equity position, we all need to do our research and arrive at our own conclusions. I admire Mr Bogle but certainly would not hang on his every word as so many others do.

 

[ziggy29]

It doesn't seem very Bogleheaded to try to pick which market sectors will be hot or cold. It's not that much different than stock picking.

 

[gcgang]

Very unBogle-like thing for Bogle to say.

Next will he be saying that his S&P Index fund contains overvalued stocks?!

Maybe he is setting us up for an actively managed fund.

 

[meierlde]

I don't know if the total has been published but what percentage of the business done by the members of the S&P 500 is international? I know big oil tends to the 60-80% range. GE tends to be over 50% etc. So its a question of how much difference the location of the incorporation makes, if the company has a diverse revenue stream from multiple countries.

 

[clifp]

It doesn't seem very Bogleheaded to try to pick which market sectors will be hot or cold. It's not that much different than stock picking.

I was thinking the exact same thing.

I am planning on up my international percent from 11% to 20% this year. I do agree with Bogle that so many S&P 500 have a large (often over 50%) percent of their sales being internationally that the need to diversify to large cap international stocks is greatly diminished.

 

[walkinwood]

I found this - in a 2010 interview article.

Vanguard founder Jack Bogle: Don't trust Wall Street and its numbers - The Denver Post

 

[sengsational]

It doesn't seem very Bogleheaded to try to pick which market sectors will be hot or cold. It's not that much different than stock picking.

Well, not quite as bad as that. If a portion of the world has a future that's highly questionable, then excluding that portion might just be a 'tilt'. So you go pacific ex japan, and nordic, or something like that. In other words, figure a way to get most of the world without being in the 'worst' spots. You also could invest in only countries that have the highest financial freedom rankings, which has correlated with growth. That even has sort of an 'indexy' feel to it, and you'd not be in Japan or Eurozone.

 

[FIREd]

JB has never been a fan of international equities IIRC. In fact, he said this in a 2003 interview:

I believe the average investor does not need international. However, if an investor says he wants to put ten or twenty percent in international - I don't do it myself - I'm not going to jump up and down about that because it's probably not going to change things very much. In the long run it's reasonable to assume that international returns are likely to be similar to U.S. returns once you wash out the dollar. The problem with international is that 25% of all revenues and profits of all U.S. companies are international. So I don't think you're diversifying further.

http://www.indexfunds.com/articles/20030107_bogleQ&A_int_gen_JS.htm

 

[mickeyd]

If I recall correctly JB has never been a big fan of international investing (20% max he says) so I'm not surprised to hear this. I try to stay at about 20% myself.

 

[Ready]

In Jack's book "Common Sense on Mutual Funds", he speaks about his lack of enthusiasm for international stocks quite extensively. He believes there is a treasure trove of opportunities in the US, so why waste time looking abroad.

When I first opened an account with Vanguard and spoke with a CFP, I asked him why Vanguard as a company recommends exposure to international stocks while Jack recommends against them. He stated that he believed that Vanguard as a company and Jack Bogle as an individual do not completely agree on this topic. Vanguard CFPs generally recommend between 20-40% exposure to international stocks.

So, there are lots of opinions out there on this topic. I would guess that in the long run having diversification will prove to be ideal, even if international equities prove to be more volatile during certain periods.

 

[Options]

...

So, there are lots of opinions out there on this topic. I would guess that in the long run having diversification will prove to be ideal, even if international equities prove to be more volatile during certain periods.

+1

A diversified PF that included int'l/reit's/US mkt/bonds in the 2000's had less volatility and better returns than a PF not diversified as such. We'll see what the future brings. Personally, 20% of my equity position is int'l.

 

[NW-Bound]

It should be noted that Burton Malkiel, the author of the well-known book A Random Walk down Wall Street advocated EMs as these markets have been lagging that of the US and developed nations.

See: Burton Malkiel: How to Overhaul Your Portfolio for 2014 - WSJ.com

 

[Turboslacker]

I don't understand why one would be interested in following laggards like EM. I'm sure the attraction is assumed better returns elsewhere after the recent US run up. The US stock market has plenty of opportunities for us to succeed and fail...I don't need more choices lol.

 

[NW-Bound]

Buy low, sell high?

Or buy high, sell even higher?

Buy high, and never sell?

 

[enjoyinglife102]

So is JB the only one aware of this information about Japan, the UK and France and so it's not priced into the current valuations? His crystal ball is no more clear than anyone else's.

 

[samclem]

So is JB the only one aware of this information about Japan, the UK and France and so it's not priced into the current valuations? His crystal ball is no more clear than anyone else's.

Is there "stickiness" and political distortion that artificially (i.e. outside of pure performance-based market forces) influence the valuations of equities across international borders? For instance, some countries have laws that serve to keep their citizens investing only in domestic companies, some have laws that stipulate government funding preferentially goes to domestic companies, government preferences bestowed on favored industries, etc. In addition, laws vary between countries concerning taxation, how stocks may be purchased, disclosures to investors, other transparency issues, etc.
So, I don't think the efficiency of stock price signals across borders is as reliable an indication of "true value" as we would find between equities from a single country. While it is true that sales of equities on worldwide exchanges would help drive down the price of shares with inflated values, if the shares of a company are thinly traded and much of the buying is done, say, by a captive domestic market or by buyers with a completely different valuation method than US investors would have, then I can see the reasons for questioning the validity of playing in that game.

 

[Chuckanut]

Bogle has often taken the position that the Total US market already has plenty of international exposure built into it due to the international business many US companies are involved in. So, this is not an surprise. I respect the man and what he has done for the small investor. But, he is not perfect and I imagine he would be the first to tell us that.

 

[Animorph]

What about foreign companies with lots of U.S. exposure? Should we ignore them? U.S. companies may give adequate investment diversity, and the U.S. economy may have adequate stability, so that investors can feel pretty good about their portfolio. But they'd still be ignoring half of their investment possibilities.

 

[Elbata]

When E F Hutton speaks....

Nah, give me Jack Bogle. I love the man.

 

[Lsbcal]

FWIW, I split my international into large cap and midcap/smallcap at a 40/60 ratio. Right now the large cap is switched into US large cap based on a momentum algorithm which I've been running for a few years and backtested over the last 40 years. The midcap/smallcap has been in VINEX for 4 months now.

International equities offer some currency diversification ... might be a decent bet over the long term.

 

[unclemick]

Even though I count myself as a Boglehead, I have to disagree with 'Saint Jack'. Back in the 'old days' of 'Bogle's Folly' aka the the first Index 500 fund his reasoning went something along the lines of stick with America, they are over half the world market and our multinational corporations internally handle the currency risk.

He has always had a tendency toward home country bias which given our size in the world leaves some wiggle to debate.

I like the new kid(relatively) on the block - Vanguard's Total World Stock index fund.

Have I abandoned my all in Target Retirement 2015 - no.

But I would debate a world stock index fund counterbalanced with a fixed bond index - ? US or world? as a combo worth examining.



heh heh heh - even Saint's can be interviewed too much. Buy the haystack at the lowest possible cost and hold it forever. And watch that turnover.