SP500 question

[ERD50]

I don't want to get into the general allocation argument, but I keep seeing this rationale that holding only US stocks produces adequate international exposure.

If true, then there should be a similarly small portfolio of non-US stocks that gives an investor adequate US exposure. Can you suggest one?

I don't think it makes sense to try to reverse it. The US is the big player - major US companies are doing business world-wide, and some ebb/flow will depend on the ebb/flow of many various countries outside the US.

To reverse it, and manage to get a 25% INTL exposure, I'd need to locate a diverse group (diverse by country and product) of INTL companies that have 75% of their business with the US. I suppose it could be done, but it would take some research, and what would be the point?

I asked AI: Of those top 10 market cap US companies, approximately how much of their profit is derived from international sales? It responded that profit isn't broken down by region, but revenue is, so: On average, the top 10 largest US companies derive roughly 45% to 55% of their total business from international markets.

That sure sounds like a lot of INTL exposure to me, smaller companies will likely have less INTL sales, but as we have discussed, the top 10 make up a very large part of the total, so I'd bet still ~25%~35% across something like VTI?

To each their own, I'm not trying to sway anyone one way or the other, I'm just trying to put some perspective to the numbers, and why I personally feel that I have enough INTL exposure.

 

[ERD50]

If you want to increase your exposure of non-US stocks, SCHF Schwab International Equity ETF is a good choice. With a P/E of 18.68, a dividend yield of 2.95% and just 18% in technology stocks, it's a marked change from the SP500. 5 year CAGR performance is 10.10% according to https://www.portfoliovisualizer.com/fund-performance?s=y&sl=7TAr5ElocPBzCyBf432lN

That's a tough sell for me. With 16 years of history, it under-performs, you'd have 2.7x the money, and lower volatility, if invested in VTI. Diversity is all well and good, but at what price?

 

[Al18]

SCHF has outperformed VTI the past 2 years and matched it for 2 1/2 years.

 

[G POP]

SCHF has outperformed VTI the past 2 years and matched it for 2 1/2 years.

Cherry pick?

 

[ERD50]

SCHF has outperformed VTI the past 2 years and matched it for 2 1/2 years.

That's nice.

However it has under-performed since:

inception: Portfolio Backtester for ETFs and Asset Allocation | testfolio VTI 2.70x SCHF
15 years: Portfolio Backtester for ETFs and Asset Allocation | testfolio VTI 2.41x SCHF
10 years: Portfolio Backtester for ETFs and Asset Allocation | testfolio VTI 1.47x SCHF
5 years: Portfolio Backtester for ETFs and Asset Allocation | testfolio VTI 1.09x SCHF

and clearly, VTI outperformed at 3 years, or you would have included it.

No one can predict the future, but 2 years vs 3~16, well, OK.

 

[Al18]

With diversification, you are specifically NOT choosing the best performing funds.

 

[ERD50]

With diversification, you are specifically NOT choosing the best performing funds.

Sure, the focus is not on risky high flyers, you are focusing on diversification. Maybe you feel the (supposed) added diversification in INTL stocks is worth the historical performance hit (the same reason I own any fixed income at all). But then why this?:

SCHF has outperformed VTI the past 2 years and matched it for 2 1/2 years.

 

[DrRoy]

Fired them in 2021 as we were paying 6 figures in capital gains, they were churning without regards for taxes.

I fired ML around 2015 after about 8 years. Their rate of return was lower than mine (they had half and I had half) even before fees.

 

[pjigar]

Little philosophical take: Isn't it the point of investing to hold the "winning" businesses? My definition of winning business: Ones who can make money long term. Since we can't predict who can make money long term, I consider market price/cap as a good proxy of the winning business. The best minds and the analysis of the market participants have already voted! This is a crude approximation which allows me hold winners via index fund which doesn't need "my" active participation. The only downside is the volatility and the impact costs when the winners/looser inevitably cycle in or out of the index. I am willing to weather the short term changes and costs in order to participate in the winning businesses over time. YMMV.

PS: My reasoning is for any index fund, not just S&P500. Just stick with any index fund(s) that makes sense to you but for god's sake "Don't do something, just stand there".

 

[junkanoo]

Yep. Hence I do not need to hold these individual stocks.

No doubt your point of being careful that you are not overweight in specific stocks or sectors is a good one. However, I'd suggest another approach *for some investors*

... rather than not owning those individual stocks, ditch your ETFs and broaden a bit and own these top 20 stocks.

Look at the vast majority of ETFs, index funds and OEFs and the same 20 companies make up most of them. That's because those stocks matter. Clearly, many of these companies are competing with other large competitors. So, there will be outsized winners and outsized losers. Have both in your ETF and you get whatever the average return is. Own those stocks outright and those outsized losers can offset those outsized winners producing a better after-tax return. Naturally, this only applies to a taxable account. Another approach is to own long/short cap-weighted direct indexing products and leave the tax harvesting to others.

Another approach is equal-weighting ETFs. However, I don't get the premise of owning stocks that don't matter.