This is beyond frustrating and we are obviously just talking past each-other despite both of our best efforts.
I don't know how else to say it.
I have conceded that I was not semantically accurate when I said Bogle was logically inconsistent, because one can Imagine a scenario such as your 99% tax scenario in which his logic makes perfect sense.
The point that I have always been making is that in the world as it actually exists it is indefensible to argue the valuations matter to the tune of 700 basis points a year, and then to argue that it is also unwise to diversify internationally because it costs 12 basis points a year when international equities are at their long-term average valuation, and thus should be expected to have average returns going forward long-term. (I.e. using Bogle's logic, they should be expected to outperform domestic stocks by about 700 basis points a year based on valuation alone.)
Ie Where is the missing 700 basis point disadvantage to international diversification?
Whether or not you agree with me about international diversification is immaterial. The question is whether or not anyone can come up with a credible scenario in which Bogle's logic makes sense numerically.
It is an open question.
Ok, I will try again, because my point was that Bogle’s opinions are logically consistent (even though I disagree with them) in the real world as it actually exists, and the fantasy hypothetical was only intended to illustrate why that is so.
These are Bogle’s contentions, as I understand them:
- The US equity markets are currently highly valued, such that they will return little to nothing over the next decade.
- Using the same valuation methodology used to reach the above conclusion, foreign equity markets are relatively undervalued (again, I don’t think I’ve ever read Bogle make this point, but I’m sure he would agree with it, because it is indisputable on its face).
- Nevertheless, US investors should avoid investing in foreign markets, because [insert host of reasons] (I inserted some illustrative examples of these reasons in my first post, including cost, but as you point out, cost cannot be the primary reason, or even all that important of a reason, because the cost differential is relatively small. So the other (mostly qualitative) reasons must be more important – e.g., better governmental stability, more efficient and transparent capital markets, superior legal, regulatory and accounting regimes, etc. - and they collectively outweigh the potential outsized returns that valuations would suggest foreign markets have to offer. Or, said differently, the expected
risk-adjusted return of foreign markets is not higher than the US.)
The argument in bullet # 3 (which is based on reality, not hypotheticals) is not inconsistent with the arguments in bullets 1 and 2. That was the only point I was making.
Now, again, I disagree with the argument in bullet # 3. I think Bogle is wrong to take an “active” investment approach in the selection of geographic markets to invest in, for the same reasons that he advocates taking a passive investment approach in the selection of stocks within the selected market – it is extremely difficult to know which ones will prove to be the best picks in the future. Bogle’s argument is betting that the US will continue to outperform in the future based on circumstances that exist today. Someone taking the same approach a century ago would have avoided investing in the US and put all their eggs in the British Empire. So, for the same reasons that Bogle advocates “buying the market” instead of trying to pick winners among individual stocks, I believe it makes sense to diversify internationally instead of trying to pick winners among geographic markets. So I agree with you, and disagree with Bogle, but not because I see an inconsistency in the three bullet points above – instead, it’s because I disagree with the argument being made in bullet # 3. Make sense?
