Author Topic: International developed market equities , bad choice ?  (Read 1543 times)

wapiti

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International developed market equities , bad choice ?
« on: May 22, 2016, 02:51:55 PM »
Hello,

I was doing some backtestings and found out that develloped intl market really underperformed (without taking in account volatility) USA stock market or emerging market in most timeframes.
Is there any good reason to invest in develloped market ?

What do you think if I invest 40% USA total stock and 60 % Emerging market ? My goal is to have the best total return whatever the volatility.
« Last Edit: May 22, 2016, 02:56:54 PM by titi22 »

forummm

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Re: International developed market equities , bad choice ?
« Reply #1 on: May 22, 2016, 03:23:18 PM »
https://personal.vanguard.com/pdf/icriecr.pdf
http://www.vanguard.com/pdf/icrieid.pdf
http://vanguardblog.com/2015/10/06/anytime-is-the-right-time-to-have-international-exposure-in-your-portfolio/
https://www.bogleheads.org/wiki/Domestic/International

I do 50 US 50 Total international.

What if emerging markets don't perform well? They are more risky, not just more volatile. Don't rely on backtests. The future is not the same as the past.

MustacheAndaHalf

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Re: International developed market equities , bad choice ?
« Reply #2 on: May 22, 2016, 03:30:44 PM »
You might want to look at individual decades, instead of back testing to the present every time.  You want to avoid "recency bias", where you weigh recent events too heavily in your decision making.  That will at least show you times when developed markets did better than US stocks.

smoghat

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Re: International developed market equities , bad choice ?
« Reply #3 on: May 22, 2016, 07:59:17 PM »
I wish I was convinced, but I'm not. I keep looking at the numbers for international and, at best they perform like US equities. As someone with dual citizenships (US and EU) who has worked both in the US and abroad, the international world seems like a scary place, hampered by massive inefficiencies, corruption, bad history, and just plain daftness. The big growth stories of the last two decades have run aground in big ways and are unlikely to recover soon, if ever. 

Jack Bogle, for one, doesn't believe in investing in international funds. This was interesting too. http://www.trivant.com/files/Beware_of_the_Great_Oz.pdf

MustacheAndaHalf

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Re: International developed market equities , bad choice ?
« Reply #4 on: May 22, 2016, 10:57:23 PM »
smoghat - Your wording hints at being the original poster we're trying to convince, which you're not.  Also, if someone is willing to change their investing style because of your personal impressions of international markets, they're already in trouble.  Investing decisions on emotion are bad enough - on someone else's emotion is even worse.

Bogle and Buffet both suggest the S&P 500 is all you need, thanks to the international reach of US corporations.  You could also argue the world has become so interconnected that US and international markets are more correlated today than in the past.  That's at least based on characteristics of US companies rather than fear.

The problem, especially relevant to OP, is seeing a 60% emerging markets portfolio.  It suggests whatever succeeds most be a priority.  When US makes 4% a year and Europe earns 14% a year, OP will be sorely tempted to switch allocations at the wrong time.  Chasing performance can translate to buying high each time.

joleran

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Re: International developed market equities , bad choice ?
« Reply #5 on: May 23, 2016, 08:37:37 AM »
Here's VWO over the last 5 years:



Is it going to turn around and start gaining?  Probably at some point.  Is it going to be the best returning asset class over the next 20-40 years?  Beats me.

Laserjet3051

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Re: International developed market equities , bad choice ?
« Reply #6 on: May 23, 2016, 08:38:00 AM »
If I understand the rationale for optimal AA correctly, its not just about performance but also about inverse correlation between assets classes to prevent a total portfolio slide if US equities tank. Dont international developed equities correlate poorly with those of the US, making them an important asset class? I just started building a position in the ETF VEA based on this premise.

k9

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Re: International developed market equities , bad choice ?
« Reply #7 on: May 23, 2016, 08:53:41 AM »
My advice : don't try to outsmart the market by picking individual stocks, sectors, caps or geographical regions. Just buy the whole market.

If you believe the stock markets are efficient, you must take into consideration that the fact intl always underperforms US is already known by institutional investors and those stocks are priced accordingly.

forummm

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Re: International developed market equities , bad choice ?
« Reply #8 on: May 23, 2016, 10:22:16 AM »
the fact intl always underperforms US is already known

Except that it doesn't.

wapiti

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Re: International developed market equities , bad choice ?
« Reply #9 on: May 23, 2016, 10:50:02 AM »
Quote
My advice : don't try to outsmart the market by picking individual stocks, sectors, caps or geographical regions. Just buy the whole market.
I agree, however EM market are more risky and volatile which imply higher return.

Quote
Bogle and Buffet both suggest the S&P 500 is all you need, thanks to the international reach of US corporations.  You could also argue the world has become so interconnected that US and international markets are more correlated today than in the past.  That's at least based on characteristics of US companies rather than fear.

The data is clearly showing that in recent years the correlation between usa total stock market and international developed market has increased.


Moreover, the indice are weighting with market capitalisation which make the EM under represented, if you take the gdp per country you have 50 % DM and 50% EM
« Last Edit: May 23, 2016, 11:08:31 AM by titi22 »

Scandium

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Re: International developed market equities , bad choice ?
« Reply #10 on: May 23, 2016, 11:06:35 AM »
Is this a weekly thread now? Maybe we need a sticky..

And I think I will start a thread for every sector that has underperformed and ask why I want it in VTSAX