I see so many people here push international funds... and then charts like this make me wonder why?!
Mean reversion, diversification out of the dollar, lower P/E ratios, lower transaction costs than in the past, increased political risk in the US, huge portions of the US market in a handful of stocks, less correlated returns, and demographics (for Emerging Markets).Those are a few reasons that immediately come to mind.
--How have these factors served you in the past? Answer is they havent. take any time frame, 1 year, 3, 5, 10 etc. Answer why the international (Europe especially) is pushed by money managers is expense ratios are higher, but more importantly to sound intelligent on TV and in brochures. Why would anyone pay them if the advice was invest 90% in $SPY and have 10% cash on hand. So much of that industry is sounding intelligent and not much about actual outperformance.
Your response has the same shades, all your reasons do sound intelligent and logical, but actual performance has been a disaster.
What?? Someone challenging my opinion?? Oh the horrors!
:-)
Skepticism is a good thing so lets go take a look at the numbers. I'm going to use the gold standard for MMMers, portfoliocharts.com maintained by our own
@Tyler . Super good stuff. Backtests about anything you'd want to look at. Thank you Tyler! Just remember the inherent danger of looking at investment history:
past performance does not necessarily predict the future. But it's the best we've got absent a crystal ball, so let's look at it.
Let's look at it from the perspective of a 100% Total Stock Market portfolio. Portfoliocharts has been upgraded again and allows us to look at 5 different total stock market portfolios: US, Europe, Japan, World except US, and Emerging Markets. Just run a 100% portfolio and lets compare each based on average annual returns, median returns over 10 years, a SWR for both a 30 year and perpetual retirement, and something he calls an ulcer index. Assuming a US based investor. So here goes, and feel free to check my numbers:
100% US TSM
Average annual real return 8.0%
Median return over 10 years 8.0%
SWR 30 year 4.3%
SWR perpetual 3.5%
Ulcer index 16.5
100% Europe TSM
Average annual real return 7.4%
Median return over 10 years 6.6%
SWR 30 year 4.5%
SWR perpetual 3.3%
Ulcer index 18.2
100% Japan TSM
Average annual real return 8.6%
Median return over 10 years 2.8% (wow)
SWR 30 year 1.5%
SWR perpetual not provided (probably 0% because of incredible variance)
Ulcer index 43.3 (wow)
100% World ex US
Average annual real return 6.8%
Median return over 10 years 4.4%
SWR 30 year 3.8%
SWR perpetual 1.9%
Ulcer index 19.8
100% Emerging Market
Average annual real return 8.5%
Median return over 10 years 5.6%
SWR 30 year 2.9%
SWR perpetual 1.4%
Ulcer index 28.0
Some interesting things to note in the numbers. The US does very well in annual and average returns, and has a surprisingly low ulcer index. EM does very well on annual returns, beating the US, but less well on median returns over a longer time period. Europe does a little bit better on SWRs than the US. But here is the part that's fun: what does it look like when we combine various portfolios?
Here's a 50/ 50 split between US TSM and EUROPE TSM
Average annual real return 7.7%
Median return over 10 years 7.5%
SWR 30 year 4.5%
SWR perpetual 3.6%
Ulcer index 15.9
Note that the returns go down, BUT the safe withdrawal rates increase and the ulcer index goes down as compared to the all US portfolio. Let's look at another one.
50/50 split US TSM and Emerging Market TSM
Average annual real return 8.3%
Median return over 10 years 6.8%
SWR 30 year 3.8%
SWR perpetual 2.8%
Ulcer index 18.9
Interestingly that raises the average annual real return to 8.3%, but lowers the SWR and increases the ulcer index as compared to US.
25/25/25/25 split between TSM US, Europe, Japan, and EM
Average annual real return 8.1%
Median return over 10 years 6.2%
SWR 30 year 4.5%
SWR perpetual 3.3%
Ulcer index 17.2
One last one:
40/20/20/20 TSM US, Europe Japan, and EM
Average annual real return 8.1%
Median return over 10 years 6.5%
SWR 30 year 4.5%
SWR perpetual 3.4%
Ulcer index 17.2
What I got out of this other than it was a fun exercise. (1) while the US TSM does have the higher returns over 30 years, the difference isn't immense. (2) there is a tradeoff to be made in return versus safe withdrawal rates. Diversification does provide a little bit of free risk reduction. (3) a lot of this is going to be based on perspective. What's more important to you? A higher SWR or average rate of return? (4) I keep on coming back to the underlying problem with historical data and it's relevance to the future. The data on Japan was really interesting in this respect. The average annual return was great, but there was that period during 80's and 90's where they were just massacred.
ETA: I forgot one important point. If the name of the game here is to pick the maximum returns and SWRs, we're wasting time looking at Total Stock Market returns in the first place. There are market sectors that at least historically have done really well as compare to the overall markets. One specific sector is small cap value. Here is a simple portfolio of 50% US Small Cap Value and 50% World except US small cap value:
Average annual real return 10.4%
Median return over 10 years 9.6%
SWR 30 year 6.5%
SWR perpetual 6.0%
Ulcer index 11.6
But again, these are historical numbers. I would not expect the future to match this.