Shifting from US to international due to overvaluing?

[forummm]

US stocks are substantially overvalued from a historical perspective according to both the Schiller PE10 and one of Warren Buffet's preferred measure:
http://www.multpl.com/shiller-pe/
http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php
http://thume.ca/indexView

At the same time, it appears that markets in many other countries are around or below their historical averages:

http://www.thisismoney.co.uk/money/investing/article-2738966/How-use-CAPE-beat-market-global-CAPE-values.html

I currently have 100% in VFIAX (S&P500) and want to keep 100% in equities (5+ years until FIRE). I would keep my existing taxable accounts in VFIAX (to avoid capital gains), but could move my IRA/401k funds and any new contributions I make. What do you all think about shifting to international equity funds such as the European VEUSX and Pacific VPADX? The international funds have not performed very well in recent years, while the S&P500 has been gangbusters. Perhaps this is a good way to rebalance and diversify? The stocks in the international funds are heavily weighted towards a lot of solid companies (Nestle, Toyota, etc).

https://personal.vanguard.com/us/funds/snapshot?FundId=0579&FundIntExt=INT
https://personal.vanguard.com/us/funds/snapshot?FundId=0572&FundIntExt=INT

[innerscorecard]

I find it funny how many Bogleheads and Mustachians take as an ironclad principle that they can't pick stocks (whereas there are many thousands of stocks with no analyst coverage, and even the biggest blue-chips swing wildly every year far out proportion to their underlying economic prospects), but think they can reliably move money in and out of different indexes, which should be the most obvious, widely scrutinized, and easily identified under or over valuation and thus the least likely arbitrage opportunity to exist.

I do think there are many good reasons for not being 100% in the S&P 500 or in US stocks. But be careful of trying to take an action based on something obvious. It often ends very poorly for those who try that.

[Dodge]

I agree with innerscorecard. While you shouldn't be 100% in US stocks (or very likely even 100% stocks in general), these are the wrong reasons to want to move your money internationally.

[Cottonswab]

I agree that it would be good for you to rebalance and diversify to securities that are likely to provide a better expected return for the price (i.e., international), based on current valuation. 

I disagree with the other posters.  There is nothing sacred about the S&P, U.S. Stocks, or any other index.  Current price matters.  Based on current valuations and expected returns, calculate your expected return on investment for your different investment options.  Then make a purchase decision. 

[wtjbatman]

Current valuations have, in the past, been a good predictor of future returns. Higher valued securities are likely to have a lower ROI than lower valued securities. There's a reason "value investing" is so popular. It has worked before.

Just don't go crazy and put your entire portfolio out of whack. An even better solution might be to take this opportunity to diversify now (go to, say, 20% international), then stick with that and make it your permanent AA.

[Mr. Green]

So what if in 2015 the US stock market made no gain or loss, but GDP continued to grow at 3-5%? By the end of the year stocks would potentially look "normal" and in 2016 there was another nice run up? This is a completely possible scenario. Because no one knows what will happen, it's possibilities like this that keep my money where it is.

[GGNoob]

I currently have 100% in VFIAX (S&P500) and want to keep 100% in equities (5+ years until FIRE). I would keep my existing taxable accounts in VFIAX (to avoid capital gains), but could move my IRA/401k funds and any new contributions I make. What do you all think about shifting to international equity funds such as the European VEUSX and Pacific VPADX? The international funds have not performed very well in recent years, while the S&P500 has been gangbusters. Perhaps this is a good way to rebalance and diversify? The stocks in the international funds are heavily weighted towards a lot of solid companies (Nestle, Toyota, etc).

I believe everyone should be between 20 and 50% international with their stock allocation. So if you wanted to add international, now would probably be a good time. But I would say pick an allocation between US and international stocks and stick with it. Having some money in each will give you re-balancing opportunities to sell high and buy low.

[Bob W]

Trend is your friend

[forummm]

I find it funny how many Bogleheads and Mustachians take as an ironclad principle that they can't pick stocks (whereas there are many thousands of stocks with no analyst coverage, and even the biggest blue-chips swing wildly every year far out proportion to their underlying economic prospects), but think they can reliably move money in and out of different indexes, which should be the most obvious, widely scrutinized, and easily identified under or over valuation and thus the least likely arbitrage opportunity to exist.

I do think there are many good reasons for not being 100% in the S&P 500 or in US stocks. But be careful of trying to take an action based on something obvious. It often ends very poorly for those who try that.

In my case, I'm not opposed to stock picking. But I don't feel like I'm very good at individual company analysis, and don't have the time to dedicate to it at the moment. Index investing is an easy solution to that.

[Static Void]

This is a quandary I'm having as well, considering tuning my US/Int'l/Bond mix lazy portfolio. Currently my main one is 65/15/20. (Yes, in part because the SP500 multiple is high.)

But take a step back! Here we are, debating the merits of adjusting, occasionally, by a few percent, allocation across broad markets, on a multi-year "stay" strategy. That's pretty civilized. It is so very from, "Yikes! Something happened yesterday so I dumped it all today, should I buy Walmart y'think?"

Life is good, eh?

[forummm]

So what if in 2015 the US stock market made no gain or loss, but GDP continued to grow at 3-5%? By the end of the year stocks would potentially look "normal" and in 2016 there was another nice run up? This is a completely possible scenario. Because no one knows what will happen, it's possibilities like this that keep my money where it is.

Could you explain how the math works on this?

If I have this right...
According to FRED, corporate equities are at $21.7 trillion, and GDP is at $18 trillion. So a 4 %GDP growth and stagnant equities would lower the ratio to 116%, still nearly 2 SD above mean, and only exceeded twice since the Great Depression. It appears that equities would need to drop by 75% on Monday to get to the historical mean of 68.8%. Or if equities are stagnant, GDP would need to rise to $31.5 trillion (75% increase) to hit the historical mean--which would take a dozen years, even at a historically robust 5% per year GDP growth.
http://research.stlouisfed.org/fred2/graph/?id=MVEONWMVBSNNCB

[YoungInvestor]

So what if in 2015 the US stock market made no gain or loss, but GDP continued to grow at 3-5%? By the end of the year stocks would potentially look "normal" and in 2016 there was another nice run up? This is a completely possible scenario. Because no one knows what will happen, it's possibilities like this that keep my money where it is.

Could you explain how the math works on this?

If I have this right...
According to FRED, corporate equities are at $21.7 trillion, and GDP is at $18 trillion. So a 4 %GDP growth and stagnant equities would lower the ratio to 116%, still nearly 2 SD above mean, and only exceeded twice since the Great Depression. It appears that equities would need to drop by 75% on Monday to get to the historical mean of 68.8%. Or if equities are stagnant, GDP would need to rise to $31.5 trillion (75% increase) to hit the historical mean--which would take a dozen years, even at a historically robust 5% per year GDP growth.
http://research.stlouisfed.org/fred2/graph/?id=MVEONWMVBSNNCB

In order for this analysis to be relevant, we would need to know if the % of the GDP attributable to public company has remained the same, which seems unlikely.

Also, with lower interest rates (they are currently FAR below average), one would be willing to accept lower returns on their investment.

[JetBlast]

An even better solution might be to take this opportunity to diversify now (go to, say, 20% international), then stick with that and make it your permanent AA.

This. 

I've been shifting some of my investments from S&P 500 to international funds, not because I have a particular opinion on current valuations, but because my portfolio was starting to drift from my desired asset allocation. 

[EarlyStart]

As others have said, try to pick an allocation that you can stick with for long periods of time. Jumping in and out of funds is what kills returns for most investors (obviously not all). People who do this for a living have trouble.


I'm 75% US, 25% Intl, for better or worse. I imagine that tinkering with it would more than likely be a net negative. Sometimes US outperforms Intl; sometimes it's the other way around. Pick an AA and let it ride.

[Mr. Captain Cash]

I agree with EarlyStart that jumping in and out of funds will usually diminish returns for most investors.

If you are going to invest I believe you must determine your desired asset allocation then;

- Tune out the noise from all the media, and wall street guru's
- Don't second guess yourself if you have done your research
- Don't time the market trying to be a hero
- Develop a thick skin and not panic during short term market fluctuations
- And lastly be patient with your indexing strategy and you will hopefully see great results.

[RapmasterD]

I think most markets move pretty much in tandem with each other.

So at some times you might pick up a percentage point. At others you'll lose that percentage point.

Furthermore I think you get plenty of international exposure through buying U.S. securities. Just listen to an investor call from a typical Fortune 500 company.

Oh I do know it's a contrarian view in these parts, but in my humble opinion AND...FOR ME, buying international assets is a waste of time.

I did it for many years (15+), but no longer. And for me, making a decision to invest internationally based on an assumption that our market is 'overpriced' equates to timing the market.

[RyeWhiskey]

There is a simple solution to the domestic/international allocation conundrums: the Vanguard Total World Stock Index (VTWSX/VT). It is easily the world's most diversified single equity fund with over 6,000 stocks from across all major markets (EM included). It is a near 50/50 US/International split.

Disclaimer: This is currently my only holding and it becomes more and more appealing as I read threads like these.

[thenextguy]

And you hedged for currency risk?

[r3dt4rget]

Furthermore I think you get plenty of international exposure through buying U.S. securities. Just listen to an investor call from a typical Fortune 500 company.

+1

If you want to go 100% US that is fine, you aren't missing much. If you have 50% international you are probably under performing the S&P 500 over the last few years, missing out on strong gains. If the US markets go down in the next few years and your international holdings fare better, then you aren't really ahead, just catching back up. I think the important strategy is long term holdings and consistency in your allocation. If you can maintain your 25% or 50% international over the long run you will do just fine. Trying to time the market and sell US high, buy international low is not a winning strategy if you ask me. It's no different than trying to pick stocks.

Another thing to consider is the higher expenses for international indexes. The S&P500 or total US market index ER is 0.05% compared to the total world index at 0.18%. The international funds offered in my 401k had ER's of 0.49%. I decided to get rid of the international holdings and go cheaper with all US indexes.

[rmendpara]

US stocks are substantially overvalued from a historical perspective according to both the Schiller PE10 and one of Warren Buffet's preferred measure:
http://www.multpl.com/shiller-pe/
http://www.advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php
http://thume.ca/indexView

At the same time, it appears that markets in many other countries are around or below their historical averages:

http://www.thisismoney.co.uk/money/investing/article-2738966/How-use-CAPE-beat-market-global-CAPE-values.html

I currently have 100% in VFIAX (S&P500) and want to keep 100% in equities (5+ years until FIRE). I would keep my existing taxable accounts in VFIAX (to avoid capital gains), but could move my IRA/401k funds and any new contributions I make. What do you all think about shifting to international equity funds such as the European VEUSX and Pacific VPADX? The international funds have not performed very well in recent years, while the S&P500 has been gangbusters. Perhaps this is a good way to rebalance and diversify? The stocks in the international funds are heavily weighted towards a lot of solid companies (Nestle, Toyota, etc).

https://personal.vanguard.com/us/funds/snapshot?FundId=0579&FundIntExt=INT
https://personal.vanguard.com/us/funds/snapshot?FundId=0572&FundIntExt=INT

You should be focusing on allocation not valuation. At all times, you should keep a certain number of eggs in several different baskets. If you have no international exposure, now is as good a time as any to adjust your allocation.

[DavidAnnArbor]

So what if in 2015 the US stock market made no gain or loss, but GDP continued to grow at 3-5%? By the end of the year stocks would potentially look "normal" and in 2016 there was another nice run up? This is a completely possible scenario. Because no one knows what will happen, it's possibilities like this that keep my money where it is.

Could you explain how the math works on this?

If I have this right...
According to FRED, corporate equities are at $21.7 trillion, and GDP is at $18 trillion. So a 4 %GDP growth and stagnant equities would lower the ratio to 116%, still nearly 2 SD above mean, and only exceeded twice since the Great Depression. It appears that equities would need to drop by 75% on Monday to get to the historical mean of 68.8%. Or if equities are stagnant, GDP would need to rise to $31.5 trillion (75% increase) to hit the historical mean--which would take a dozen years, even at a historically robust 5% per year GDP growth.
http://research.stlouisfed.org/fred2/graph/?id=MVEONWMVBSNNCB

In order for this analysis to be relevant, we would need to know if the % of the GDP attributable to public company has remained the same, which seems unlikely.

Also, with lower interest rates (they are currently FAR below average), one would be willing to accept lower returns on their investment.

There's a difference between Real GDP increase and Nominal GDP increase.  If inflation is 2% for the year and the Real GDP increases by 4% for the year then the Nominal GDP increases by 6% for the year. Probably would still leave stocks overvalued but still it's important to note that if stocks didn't go up in price over the next few years and if nominal GDP grew around 5-6% a year then stocks would probably be undervalued in five years.

[Mr. Captain Cash]

Rmendpara,

You should check out my allocation of index funds and let me know what you think. I have had very solid results these last couple years with my diversified index portfolio.

Check it out here;
http://www.mrcaptaincash.com/cash-accumulators/

I believe it is always important to do some research regarding current valuations when your are building your portfolio to your desired asset allocations to possible pick up a some bargains along the way. Now that my index portfolio is established and of decent value when I have available cash to invest I work towards rebalancing my portfolio.

Mr. Captain Cash

[Indexer]

So I'm normally 70% total stock, 30% total international.  But when valuations get high I do let new contributions build up in cash until it hits 5%(but never over 10%) of the portfolio and if I see something that looks cheap I'll throw it in that.  Right now that money is going into total international.  So I'm closer to a 65/35.

So I agree, the US looks a little hot(I'm still not selling, just not buying as much) and international looks a little cold(so I'm buying extra).  If you are currently 100% US large caps I think right now would be a great time to diversify a bit better.

Do remember its a long play.  If Greece exits the Euro, China's housing market collapses, Russia just goes FUBAR, etc. expect a lot more downside with a possible very long recovery.

[Mr. Captain Cash]

Indexer,

I think the way you are managing your investment portfolio is pretty solid. I always find it interesting what approach people take to adding cash to their investment portfolio. I myself am never able to let my cash accumulate on the sideline that long. If I have available cash I one day plan to  invest I invest it as quickly as I can. What happens when your portfolio builds up to 10% cash and nothing looks cheap do you wait for a downturn in Mr. Market?

Mr. Captain Cash

[Indexer]

Indexer,

I think the way you are managing your investment portfolio is pretty solid. I always find it interesting what approach people take to adding cash to their investment portfolio. I myself am never able to let my cash accumulate on the sideline that long. If I have available cash I one day plan to  invest I invest it as quickly as I can. What happens when your portfolio builds up to 10% cash and nothing looks cheap do you wait for a downturn in Mr. Market?

Mr. Captain Cash

I left that part out.  So if my cash gets to 10% I just start adding new contributions back to the big index funds.  So 90% of my money is always 70/30 total stock/total international.  No exceptions to that rule.  That rule keeps me from market timing in a way that would actually hurt my long term returns.  If some cash is built up and something does look attractive I'll invest it in that, but once whatever that is goes back up I'll start moving it back into my total stock/total international.  2014 I though large cap was undervalued compared to small cap so the extra 10% was in a 500 index.  That play worked great and after small caps got hammered earlier in the year I shifted back to my 70/30.  Once international has a run or US takes a hit I'll do it again and shift back to 70/30.  Basically I tilt to whatever I think is on sale!

[Mr. Captain Cash]

Indexer,

Thanks for clarifying. I actually like the approach you are using a lot and might implement something like that into how I manage my investment portfolio.

Thanks for sharing.

Mr. Captain Cash