International investing, or not?

[VanWinkle]

I read 2 good articles this morning concerning the reasons to invest in foreign markets, or to invest only in the US. Compelling arguments for both are included in the linked articles below.

https://humbledollar.com/2020/09/ha..._medium=email&utm_campaign=another-ses-test_7


https://humbledollar.com/2020/09/ve..._medium=email&utm_campaign=another-ses-test_7

The academics mostly promote International investing. I don't think it will make a big difference either way.

VW

 

[Dtail]

Could just be a cycle, but international investing hasn't beaten US investing for quite awhile now.
Many up and coming tech companies still on the US side.

 

[OldShooter]

I think the articles do a reasonable job of laying out the "what ifs." It would be interesting to know what the author's portfolio looks like. In terms of forecasting the future, I find the regression to the mean and the probable decline of the dollar to be reasons for optimism. But nobody can predict.

So, at its basics, our equity strategy is diversification and I can see no reason that diversification should stop at the seashore. There are a lot of great companies in the 45% of the world market cap that international represents. So we're there. VTWAX. 8734 stocks per VG.

 

[DrRoy]

I have been out of nearly all international for 15 years or so, to my benefit. Just a lucky move, but I'm still pleased.

 

[Markola]

I think the articles do a reasonable job of laying out the "what ifs." It would be interesting to know what the author's portfolio looks like. In terms of forecasting the future, I find the regression to the mean and the probable decline of the dollar to be reasons for optimism. But nobody can predict.

So, at its basics, our equity strategy is diversification and I can see no reason that diversification should stop at the seashore. There are a lot of great companies in the 45% of the world market cap that international represents. So we're there. VTWAX. 8734 stocks per VG.

+1. As a very long term, buy and hold investor, this point from the second article is one of the reasons I have significant international exposure:

“Reversion to the mean. Since 1970, U.S. and foreign stocks have seesawed back and forth, with each delivering better returns for a decade or longer. Foreign stocks beat U.S. stocks in the 1970s, 1980s and 2000s. U.S. stocks won out in the 1990s and 2010s. Given the great run that U.S. stocks have had of late, foreign stocks may be primed to outperform.”

 

[jazz4cash]

I have been out of nearly all international for 15 years or so, to my benefit. Just a lucky move, but I'm still pleased.

I think US large cap and tech stocks have sufficient exposure to global economy that I don’t need a dedicated international allocation in my portfolio. I wish I had figured that out 15 yrs ago, lucky or not.

 

[OldShooter]

I think US large cap and tech stocks have sufficient exposure to global economy that I don’t need a dedicated international allocation in my portfolio. I wish I had figured that out 15 yrs ago, lucky or not.

Well, determining "sufficient" is your call alone.

Among the stocks you are missing are: Nestle, BP, Toyota, Volkswagen, Cemex, AB Inbev, ArcelorMittal, etc. Not to say these are good or bad investments today, but they are typical of the many companies of worldwide imporance that are not domiciled in the US. And that is without looking at Chinese companies at all.

 

[jazz4cash]

Well I’m not missing them since I do currently hold 1/3 of my equity position in international stocks. I just don’t see where it has given me any benefit. I also have BP as an individual holding and I’d be better off without it.

 

[jazz4cash]

This is what I had in mind wrt sufficient exposure....
In 2018, the percentage of S&P 500 sales from foreign countries decreased, after slightly increasing last year, and declining the prior two years. The overall rate for 2018 was 42.90%, down from 2017's 43.62% and 2016's 43.16%. The recent high mark was 2014's 47.82%, and the recent low mark was 2003's 41.84%.
us.spindices.com › djia-and-sp-500

 

[Nick12]

I've diversified for many years with index emerging market funds in my portfolio. It's a no brainer and I have done well.

 

[Montecfo]

I have added some international exposure with weakening dollar. International outperformance is usually tied to dollar cycles.

And other markets cheaper so that helps.

 

[Montecfo]

I think US large cap and tech stocks have sufficient exposure to global economy that I don’t need a dedicated international allocation in my portfolio. I wish I had figured that out 15 yrs ago, lucky or not.

They do and it is helpful in a weak dollar environment, but you are paying US multiples for those sales.

 

[tdv2]

I have been out of nearly all international for 15 years or so, to my benefit. Just a lucky move, but I'm still pleased.

Reminds me of Bill Miller who beat the S&P index for 15 straight years in his Legg Mason Value Trust Fund only to give back most of the cumulative advantage in the 3 subsequent years. Most agree that it was luck and not skill. I prefer diversification over concentration myself.....I do have a very small tilt to small stocks due to one legacy fund that I'm liquidating slowly. Nirvana for me is only having to re-balance when I get outside my percentage bands.

 

[Markola]

+1. “Buy the casino” (and the parking lot, utilities, roads, billboards, hotels, gas stations, restaurants and everything else in sight.)

 

[OldShooter]

They do and it is helpful in a weak dollar environment, but you are paying US multiples for those sales.

No one can argue with you if you judge 100% US-only exposure to provide "sufficient" international exposure for your portfolio. That's a judgment call. I don't know of any academic or investment company resources that believe that though. Buffett used to, but has now branched out internationally. Bogle believed it, but IMO he is from a different era when the US economy was far more dominant.

Personally, I believe the idea that diversification ends at the seashore to be illogical. I think it's the investment equivalent of the famous New Yorker magazine's "View of the World from 9th Avenue" cover. (https://brilliantmaps.com/new-yorkers-world/) YMMV, of course.

 

[samm]

43% S&P 500 sales are ex-USA. US Equity has Int. Exposure

US equity investors investing in S&P 500 companies get significant international exposure from the US companies selling overseas.


In 2018, 42.90% S&P 500 sales was from foreign countries
2017’s = 43.62%
2016’s = 43.16%.

https://us.spindices.com/indexology/djia-and-sp-500/sp-500-global-sales

The high degree of international sales reduces the need for US investors to diversify internationally by investing in companies domiciled abroad. International investing makes far more sense for investors in small countries with small equity markets.

 

[OldShooter]

... The high degree of international sales reduces the need for US investors to diversify internationally by investing in companies domiciled abroad. ...

I have seen that said in multiple forum posts but I have not seen it said by any authoritative sources. For example, Vanguard: "Global equity investing:The benefits of diversification and sizing your allocation" https://www.vanguard.com/pdf/ISGGEB.pdf

Perhaps I have led a sheltered life. Do you have anything serious like the Vanguard analysis to support your statement? I would be interested to read. (not interested in noise generators like SeekingAlpha or Jim Cramer.)

 

[samm]

No one can argue with you if you judge 100% US-only exposure to provide "sufficient" international exposure for your portfolio. That's a judgment call. I don't know of any academic or investment company resources that believe that though. ... YMMV, of course.

Most traditional academic and investment company analysis and recommendations is based on the unsophisticated Capital Asset Pricing Model. Very outdated and simplistic model.

Newer asset allocation analysis, post 2010 or so, is "factor-based" not geographically-based.

Example:

Investing in a Canadian company that sells 100% to the US would not increase the US investors portfolio diversification.

Investing in a US-based company that sells 100% to Japan would increase the US investors portfolio diversification.

This shows that physical borders are a poor proxy for economic exposure in an integrated global economy.

Retired Chartered Financial Analyst, MBA

 

[audreyh1]

I have a relatively small exposure to foreign equities - about 20% of equities. I've had this allocation since the beginning, and will stick with it. It's far less than some experts had advised - especially many years ago. Yet it is far more than 0. I'm comfortable with that level and see no reason to change.

 

[skipro33]

I keep a small amount, around 2%, in an international index fund just to track it's growth against the domestic equity funds I am heavy with. By percentage of growth, I can tell if that's been a good decision or if I should get more involved with them. So far, I'm way ahead staying out of the international funds.

 

[OldShooter]

... Retired Chartered Financial Analyst, MBA

So you can point me to some credible analysis, then? Not just contrived and trivial examples?

Re factor based investing agreed that is definitely newer, encouraged by the Fama/French 3-factor model and the demise of the CAPM 30 years ago. At this point I view it simply as a trend. Five or ten years of experience will tell us whether the concept has any value or not. History has shown us that in investing newer is always newer, but rarely better. The backtests are of course wonderful.

 

[kgtest]

I read 2 good articles this morning concerning the reasons to invest in foreign markets, or to invest only in the US. Compelling arguments for both are included in the linked articles below.

https://humbledollar.com/2020/09/ha..._medium=email&utm_campaign=another-ses-test_7


https://humbledollar.com/2020/09/ve..._medium=email&utm_campaign=another-ses-test_7

The academics mostly promote International investing. I don't think it will make a big difference either way.

VW

My own personal take, I've done fine so far without them...but did hold them early on in 2005-2015?? Decided at that point to manage our own money and have just index'd ETF with LargeCaps that IMHO span globally. SO if they are selling an AAPL phone all over the world, I am internationally diversified by virtue of that LargeCap business model.

I actually probably don't know of a single Large company listed on any of the US indexes that is solely operated with revenues internal to the US and no external exports or customers or offices.

Also, I am a patriot...no point looking outside the US if I do buy an equity, its not going to be something outside a US HQ. As an investor I realize some opportunity in theory is lost with this approach, but I would never know which small international company to bet on, nor do I care to wager on the big ones.

 

[Markola]

This conversation seems stuck in the inevitable Coke/Pepsi, Orthodox/Protestant, skins/shirts stalemate and now someone wants to make it all “Give me Google or give me death!” If the debate is who is more diversified, however, it is impossible to deny that:

Vanguard Total Stock Market (VTSAX) holds 3,529 U.S. stocks.

Vanguard Total International Index (VTIAX) holds 7,392 stocks.

Own both and you are exposed to 10,921 stocks.

Every investor can and will determine “what is enough international exposure” for themselves and probably do just fine if they buy and hold but simple addition does not lie.

 

[RobLJ]

I'm about 1/4 international (out of the stock allocation) and plan on diversifying/scraping some of the tech/large cap gains and some bonds to get up to 1/3, just as a risk hedge given the gains of large cap tech. I'm already close to the bottom allocation for stocks and at my all-time high in cash allocation, so that's the only diversification play I'm comfortable with (other than buying individual bonds and preferreds, but that takes a lot of work and I'm not there yet and I'm worried what DW would do if I kicked off.) This will take a year or so; I'll just inch my way and if we have a correction, I'll fund it out of cash and some of the bond funds.

I don't think it's 2000 all over again, but then it probably is for a few of the big tech sharks juicing the NASDAQ and S&P. I can't tell you or me which ones, unfortunately. I suspect several will continue to do well despite my skepticism--hell maybe all of them. There is a scenario that the market could just rotate into value and small cap, so I'm looking also at a 1-2% increase in small/mid value.

 

[VanWinkle]

This conversation seems stuck in the inevitable Coke/Pepsi, Orthodox/Protestant, skins/shirts stalemate and now someone wants to make it all “Give me Google or give me death!” If the debate is who is more diversified, however, it is impossible to deny that:

Vanguard Total Stock Market (VTSAX) holds 3,529 U.S. stocks.

Vanguard Total International Index (VTIAX) holds 7,392 stocks.

Own both and you are exposed to 10,921 stocks.

Every investor can and will determine “what is enough international exposure” for themselves and probably do just fine if they buy and hold but simple addition does not lie.

I agree with your math. The question remains if it will make much of a difference over a 30 year retirement time line. I would not advocate either way as it seems to be a personal choice for many investors. I held 20-30% in international for 35 years, but have been out after tax loss harvesting my international fund in March. I did not go to cash, but reinvested it in a U.S. total stock fund. Diversification by number of stocks might be overkill in this case.