Buying international stocks instead of domestic - investment heretics thread

[Buffaloski Boris]

There was an opinion article in MarketWatch yesterday about a topic near and dear to me: international stocks over domestic: "Opinion: No U.S. stock funds? Is this 25-year-old investor crazy — or on to something?" 

https://www.marketwatch.com/story/no-us-stock-funds-is-this-25-year-old-investor-crazy-or-on-to-something-2020-07-02?mod=home-page

The TL/DR version of the article was that most investment advisors were against the strategy.  However the author wasn't so sure.  Here was the money quote: "Of course, past performance is no guarantee of future results. There is nothing to say the U.S. stock market will outperform overseas rivals over the next 10 years as it has over the last 10. Indeed, logic and history would make you wonder. U.S. stocks have often beaten overseas markets for decades at a time—and vice versa. Today U.S. stocks are at levels—or example, compared with total GDP — that should raise some concerns. The last time large U.S. stocks were this dominant in the global indexes was in 2000."

My view: diversification is a good thing.  Diversification across countries, sectors, assets, and (especially) currencies.  When we talk about diversification in the US, it's often seen as buying different stocks in the US market.  A market which happens to be very pricey right now by historical standards and compared to other markets. In my view US diversification just isn't enough.

[MustacheAndaHalf]

Should I click on an article because a "25 year old" has investment advice?  Smells like click bait.... and also, the 25 year old's 40% allocation to global is half U.S. stocks, so they hold 20% U.S. equities.  The title is only technically accurate, but highly misleading (a global ETF isn't a U.S. ETF - but it still holds U.S. stocks).

I recall a Vanguard white paper on the appropriate international diversification, but can't find it right now.  Essentially it said for investors who want a certain benefit, 20% international.  For those willing to take more risk of under performance, and wait longer for a possible benefit, 40% international... that was their range, ultimately, 20-40% international.

But if we're talking about what I do in my own market timing portfolio, that's a whole different story.

[Buffaloski Boris]

It looks to me like a very skewed distribution towards international. And that’s really the nut of the question: do you skew US based as the vast bulk of US investors do?  Or do you skew more to international?  Is 20-40% sufficient? I personally don’t think so.

I assume that most articles are clickbait. The author or editor will title it or choose a topic that is most likely to get views. I don’t see that as particularly problematic: online publishing is a business. It’s whether the content is useful that’s really the question.

[vand]

I question any strategy that is 100% stocks regardless of how its sliced up.

That said, having zero US exposure is not a crazy position if you are clear why you are underweight. My portfolio has about 3% exposure to the US.

[ChpBstrd]

It is tempting because

(a) valuations are better, and
(b) many Asian and European economies have gotten COVID-19 under control, while the US continues to thrash about in denialism and immature complaining about inconveniences, even as casualties pile up.

The trick is to buy liquid ETFs that don’t include similar COVID denialists a like Brazil, India, and Russia. E.G. FXI, VESIX, EWY, EWJ. Australia and the U.K. seem to be coming around despite their leaders, so EWA and EWU might join the list later.

[Financial.Velociraptor]

I started a "heretics" trend at MMM.  I feel so proud.

Back in grad school when we used the One High And Holy Mathematics [Amen] to "prove" that the markets were perfectly efficient; we also "proved" that a your non-US allocation should be around 20-22%.  That was 2000 and the relative Betas have probably changed since then as the world has globalized more thus negating some of the diversification benefit.  Whether the Capital Asset Pricing Model (CAPM) is still valid in today's world is a topic for an entirely different heretics thread.

[Buffaloski Boris]

It is tempting because

(a) valuations are better, and
(b) many Asian and European economies have gotten COVID-19 under control, while the US continues to thrash about in denialism and immature complaining about inconveniences, even as casualties pile up.

The trick is to buy liquid ETFs that don’t include similar COVID denialists a like Brazil, India, and Russia. E.G. FXI, VESIX, EWY, EWJ. Australia and the U.K. seem to be coming around despite their leaders, so EWA and EWU might join the list later.

There are single country index ETFs available. Franklin Templeton has several that have low fees.

Valuations are the big issue for me. There is also the COVID response. One big issue that doesn’t get a lot of play is the political risk. I’m not talking the “world is ending” kind of silliness that pervades the discourse. I’m thinking about things like significant changes to the tax code. The 2017 changes helped the market significantly. If that rug gets pulled out, it’ll leave a mark. Oh and currency risk given the level of debt as well as the stated aim of the current government to deflate the currency.

[Travis]

This scenario only has about 10,000 posts on Bogleheads. They've been talking about this for decades and still aren't anywhere close to consensus.  My AA is 25% international stock to split the difference between those who say "US=the world" and "global weight."  It's probably slowed down my portfolio's growth over the last decade, but I'm not upset with the results. I read ChpBstrd's prediction a few times this week so who knows.

[SeattleCPA]

I recall a Vanguard white paper on the appropriate international diversification, but can't find it right now.  Essentially it said for investors who want a certain benefit, 20% international.  For those willing to take more risk of under performance, and wait longer for a possible benefit, 40% international... that was their range, ultimately, 20-40% international.

I think this link points to an updated version of the paper you may be talking about:

https://www.vanguard.com/pdf/ISGGEB.pdf

[Buffaloski Boris]

I recall a Vanguard white paper on the appropriate international diversification, but can't find it right now.  Essentially it said for investors who want a certain benefit, 20% international.  For those willing to take more risk of under performance, and wait longer for a possible benefit, 40% international... that was their range, ultimately, 20-40% international.

I think this link points to an updated version of the paper you may be talking about:

https://www.vanguard.com/pdf/ISGGEB.pdf

That’s a great paper. Thanks for posting it!

[Buffaloski Boris]

I started a "heretics" trend at MMM.  I feel so proud.

Back in grad school when we used the One High And Holy Mathematics [Amen] to "prove" that the markets were perfectly efficient; we also "proved" that a your non-US allocation should be around 20-22%.  That was 2000 and the relative Betas have probably changed since then as the world has globalized more thus negating some of the diversification benefit.  Whether the Capital Asset Pricing Model (CAPM) is still valid in today's world is a topic for an entirely different heretics thread.

As well you should be proud. Have you noticed that the posts on the investment heretic threads tend to stay on topic?

As for 20-22%, that’s way low in my opinion. The Vanguard paper linked by @SeattleCPA shows a sweet spot of 40-50% it seems. My preference for right now is higher still.

[never give up]

This topic always intrigues me a little bit and I can see the dilemma if US based. Being in the UK I’m definitely not going to have a 100% UK allocation to the stocks part of my portfolio and of course why would I be 100% US either. As a result most passive index investors in the UK will select a global fund. These vary a little in terms of home (UK) bias but will typically be 45-60% US depending on the funds alignment to global market cap.

I don’t know, but I don’t see many US investors talking about global funds. Do you have them? I generally see US based investors talking about a US fund e.g. VTSAX and International funds. Going International then makes quite a simple two fund stock portfolio but provides a human decision. How much to allocate to each one? Arghh a decision! Suddenly things aren’t quite as passive as they could be.

If I was in the US (and didn’t have access to a global fund) then I would probably try to keep to market cap e.g. 55% US and 45% International. I’m a ‘dumb’ passive investor so wouldn’t try to market time based on valuations but can understand anyone wanting to be underweight with US right now.

[caracarn]

I have settled on the fact that many US companies have a significant portion of their warnings in international markets, so that it provides me international diversification.  I had read several studies and I believe Warren Buffet also backed the strategy as sound for someone looking to have a simple portfolio. 

Now I am not 100% stocks, but am still very heavy in stocks and have only backed down to the 85/15 split I float around in the last two years.  Prior to that have been 90/10.

[ChpBstrd]

This topic always intrigues me a little bit and I can see the dilemma if US based. Being in the UK I’m definitely not going to have a 100% UK allocation to the stocks part of my portfolio and of course why would I be 100% US either. As a result most passive index investors in the UK will select a global fund. These vary a little in terms of home (UK) bias but will typically be 45-60% US depending on the funds alignment to global market cap.

I don’t know, but I don’t see many US investors talking about global funds. Do you have them? I generally see US based investors talking about a US fund e.g. VTSAX and International funds. Going International then makes quite a simple two fund stock portfolio but provides a human decision. How much to allocate to each one? Arghh a decision! Suddenly things aren’t quite as passive as they could be.

If I was in the US (and didn’t have access to a global fund) then I would probably try to keep to market cap e.g. 55% US and 45% International. I’m a ‘dumb’ passive investor so wouldn’t try to market time based on valuations but can understand anyone wanting to be underweight with US right now.

I believe the lack of enthusiasm for global funds may be due to many years of under-performance compared to the US, in terms of both volatility and total returns. The saying is that when the U.S. sneezes, the world catches a cold. So why invest in riskier, lower performing assets? Additionally, the US seems to have this unique ability to print trillions of dollars of the world’s reserve currency to bail itself out of trouble and not suffer inflation. In fact, demand for dollars only goes up during a crisis while the money printers are at full speed. For all these reasons, most US investors consider the S&P 500 to be the standard for diversification.

On many different levels, it is a prediction that the future will resemble the past.

[never give up]

Yes that makes sense ChpBstrd. Thanks for the reply. I can certainly understand that perspective.

[Optimiser]

I haven't touched  my asset allocation, which is 90/10 stocks with 25% (22.5% of total portfolio) of the stocks in VXUS. But I have been wondering if international markets will outperform US markets based to what appears to be a better handling of COVID and earlier, safer reopening.

It makes sense to me that it would be wise to be globally diversified, but then the US market seems to almost always outperform, so I view my asset allocation as a compromise.

[maizefolk]

Never give up, Vanguard does have whole world cap-weighted index funds on offer here in the US. Personally I tend to invest separately in VTI (US stocks index) and VXUS (stocks everywhere but the US index), but the option is there for those who want it.

Boris, I was listening to a podcast a while back which attributed a big part of the difference in PE ratios between the European and American stock markets to differences in the sector breakdowns. The US has more tech, which tends to have high PE ratios, Europe more industrials and utilities with low ratios. I hadn't done the work to even verify if this is the case, but is this an argument you've come across in the past when discussing investing in international vs domestic stocks based on valuations?

[Buffaloski Boris]

This topic always intrigues me a little bit and I can see the dilemma if US based. Being in the UK I’m definitely not going to have a 100% UK allocation to the stocks part of my portfolio and of course why would I be 100% US either. As a result most passive index investors in the UK will select a global fund. These vary a little in terms of home (UK) bias but will typically be 45-60% US depending on the funds alignment to global market cap.

I don’t know, but I don’t see many US investors talking about global funds. Do you have them? I generally see US based investors talking about a US fund e.g. VTSAX and International funds. Going International then makes quite a simple two fund stock portfolio but provides a human decision. How much to allocate to each one? Arghh a decision! Suddenly things aren’t quite as passive as they could be.

If I was in the US (and didn’t have access to a global fund) then I would probably try to keep to market cap e.g. 55% US and 45% International. I’m a ‘dumb’ passive investor so wouldn’t try to market time based on valuations but can understand anyone wanting to be underweight with US right now.

There are global funds, but target retirement date funds tend to be all the rage.  Those are typically a blend of several funds with a gradually increasing allocation to bonds over time.  The ones I've seen have all had an international (to the US) component. 

[PDXTabs]

It looks to me like a very skewed distribution towards international. And that’s really the nut of the question: do you skew US based as the vast bulk of US investors do?  Or do you skew more to international?

Neither, I'm global market-cap weighted.

[Buffaloski Boris]

Never give up, Vanguard does have whole world cap-weighted index funds on offer here in the US. Personally I tend to invest separately in VTI (US stocks index) and VXUS (stocks everywhere but the US index), but the option is there for those who want it.

Boris, I was listening to a podcast a while back which attributed a big part of the difference in PE ratios between the European and American stock markets to differences in the sector breakdowns. The US has more tech, which tends to have high PE ratios, Europe more industrials and utilities with low ratios. I hadn't done the work to even verify if this is the case, but is this an argument you've come across in the past when discussing investing in international vs domestic stocks based on valuations?

Hi @maizefolk I haven't come across that specific argument, but it makes some sense.  Depends on the country of course, but my impression is that most international tends to be skewed toward the value end of the spectrum.  Which is great if you think value is poised to do well in the coming years, which it typically does at the beginning of a recovery.  What I'd love to see is a comparison of the PE ratios for value stocks in the US vice international.

Personally, I'm evolving towards the philosophy that I don't know what I don't know, so diversify like mad.  And while diversifying buy what looks to be cheap historically.  And you can always pivot as things change. International hasn't done as well as the US for awhile, but in the past there have been periods when it's actually done better. So why would I want to buy what's hot now? US equities, the US dollar, and big US tech are hot now.  Isn't the idea to buy low and hopefully sell higher a long time from now? International, relatively speaking, isn't hot.  Add in my concerns over US currency and political risk and for me it's fairly obvious that I want to skew heavily international right now.  There will come a time when US is a fair deal again and I'll pivot.   

[js82]

I'm heavier in international equity than most people.  This hasn't worked out well for me for the better part of the past 2 years.  I've stuck with it.

Still sticking with it.  Valuations are still better(in my opinion), and the rest of the world seems better-position to recover post-Covid when compared with the US.

I've passed the phase where I try to get fancy by timing markets, but I'm still of the mind that finding investments with better valuations is a useful long-term strategy.  In practice this tends to overlap somewhat with continuous rebalancing to a constant asset allocation in cases where stock price swings are driven by factors other than fundamentals.

[never give up]

Thanks maizefolk and Buffaloski Boris. The marketing is quite interesting. We don’t have a rest of the world fund here. There are developed world funds excluding the UK, and someone can go the route of having separate UK, US, Europe, Japan, Asia Pac and Emerging Markets funds. This is actually the cheapest way of investing globally but of course there are more funds to rebalance.

We also have LifeStrategy and Target Retirement Date funds.

I also think it’s worth investing globally just to be as diversified as possible. What happens if a French company invents the wonderthingymebob and within ten years 80% of households have three of them. I would want to capture that in my portfolio.

[vand]

Anyone seen what the China stock market has been doing lately?

A couple of my fund holdings with big China exposure have been on fire as a result:

https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR06JJH
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F0GBR04V9X

Sometimes its nice when your investment thesis does what you think it should. Who said global macro's a waste of time? :-)

[MustacheAndaHalf]

I recall a Vanguard white paper on the appropriate international diversification, but can't find it right now.  Essentially it said for investors who want a certain benefit, 20% international.  For those willing to take more risk of under performance, and wait longer for a possible benefit, 40% international... that was their range, ultimately, 20-40% international.

I think this link points to an updated version of the paper you may be talking about:
https://www.vanguard.com/pdf/ISGGEB.pdf

That could explain it - that old document I sought was replaced by this one.  Thanks for providing the link.

Boris, I was listening to a podcast a while back which attributed a big part of the difference in PE ratios between the European and American stock markets to differences in the sector breakdowns. The US has more tech, which tends to have high PE ratios, Europe more industrials and utilities with low ratios. I hadn't done the work to even verify if this is the case, but is this an argument you've come across in the past when discussing investing in international vs domestic stocks based on valuations?

I looked at tech (VGT, P/E 28.1) and industrials (VIS, P/E 18.5) in the U.S., both of which have higher P/E ratios than Vanguard Developed Markets (VEA, P/E 17.1).  So even in those two sectors, it looks like there's systemic differences in P/E ratios between U.S. and developed markets.

[Wintergreen78]

I'm heavier in international equity than most people.  This hasn't worked out well for me for the better part of the past 2 years.  I've stuck with it.

Still sticking with it.  Valuations are still better(in my opinion), and the rest of the world seems better-position to recover post-Covid when compared with the US.

I've passed the phase where I try to get fancy by timing markets, but I'm still of the mind that finding investments with better valuations is a useful long-term strategy.  In practice this tends to overlap somewhat with continuous rebalancing to a constant asset allocation in cases where stock price swings are driven by factors other than fundamentals.

I’m in about the same boat. I moved bought international stock index funds a few years ago, up to about 30% of my total amount invested. Overall I am about 80% equity/20% low volatility. My international investments have lagged, but I’m not making big changes due to that.

Since I retired a few years ago I have sold some international when I needed to replenish cash. Between that and US equities performing better I’m down to about 21% international. I’ll rebalance and increase my international percentage at my next check-in if it is any lower than that.

[Buffaloski Boris]

Here’s something relevant: look at the trend of the dollar for the past few months

https://www.barchart.com/futures/quotes/DXY20/technical-chart?plot=BAR&volume=0&data=DO&density=ML&pricesOn=1&asPctChange=0&logscale=0&sym=DXY20&grid=1&height=210&studyheight=100