Something was brought up in the Re-balancing thread; Asset Allocation, specifically International funds as part of a well balanced retirement portfolio. I have not owned any international funds in my retirement accounts for several years. The reason is that I don't see any great benefit anymore. Maybe 20-30 years ago it made sense, but not now. Not that its a bad idea, just not necessary. Conventional Wisdom goes that when the US market is down, foreign markets may be up, or that foreign markets are cheaper. Conventional Wisdom also says to not invest in something you don't understand, i.e., foreign markets for me. The US, one country, makes up about 50% of the world's wealth. When the US sneezes the world gets the flu. Today many of the S&P 500 companies are multinational in nature and have huge investments in foreign counties. The bottom line for me is what is the rate of return (ROR) for a total US market index fund compared to a total international (excluding the US) index fund. The answer, looking at 5 year and greater returns, is the US fund, and it has always been that way. Emerging markets funds can have some very goods returns, but that is usually followed by big declines, not a good fit for retirement accounts, especially in the first 10 years of retirement. Comparing the US to individual countries, the US has outperform all other counties on the planet except for South Africa and another small country that I have forgotten the name of. So I think I will stay with total US market index funds unless new information comes to light. What do you think????? 🤓
This is fairly common logic, but I disagree. The reasons stated by Pizza Man are only backward looking. You know what they say about past performance not guaranteeing future results! I'm with Vanguard, who, based on their top analysts deep study, currently recommends that 20-40% of your equity allocation should be international. I like their x-US international ETF (not 'world' which includes the US) to compliment a total US stock market ETF.
Why? Lots of reasons. For one, if you don't do this, you miss out on ownership in some *great* companies, like Toyota, Samsung, Nestle, Alibaba, Roche, Taiwan Semiconductor, Astro-Zenica, Sony, Unilever, SAP, etc. You're not in Canada, Switzerland, Japan, China, Australia, UK, Europe. Yes, our companies are multinational, sometimes to a very small degree of earnings.
Second, I'm an American patriot, multigenerational veteran, and love our country, but every dynasty eventually comes to an end (just ask the Romans, Chinese, Egyptians, dinosaurs...). We're in an incredible amount of debt. We have extreme political division and a major think tank has listed us as a backsliding democracy for the first time ever. We're like that billionaire with all the shiny gold stuff and buildings, country clubs, etc that everyone envies but is actually dead broke and up to his/her ears in debt. Or the Jones' next door with those big fancy cars and McMansion.
Covid - we're not even in the top 50 vaccinated countries, and that's why those other countries listed above, and the developed international funds, may outperform us in the near future and going forward. Another reason - diversity. Never put all your eggs in one basket. Total US stock market is diverse within the US, but not across the world. It's all on one country's economy. What if we're suddenly in an expensive and unsustainable war with China, Russia, Iran? Given we have a relatively huge portion of our citizenry that doesn't believe in vaccines and science, what's the hit to our economy when the next pandemic, or mutation, shuts us down again while the rest of the civilized, science-believing world keeps on chugging along?
Be careful - some international investments and funds incur currency risk! Vanguard's doesn't, which is why I use it. I keep it simple, avoid speculation in emerging markets (at least for important money, do what you want with fun money).
Looks like the gloves are off 😜 I love it! First the easy one, if the US gets into a war with China every stock market on the planet will take a gigantic hit, diversification be damned. I didn't say investing globally was a bad idea, just not necessary. You really have to know what you are doing. Investing globally will not reduce volatility. The US had the lowest volatility of any individual developed country from 1970 to 2018. A globally diversified portfolio only had a 1% lower volatility than the US. Comparing the S&P 500 vs the MSCI ACWi (ex USA), the S&P 500 has vastly outperformed the global index. Seeing vast growth in emerging markets may seem like an easy way to make money. However, that growth may not equate to grow in share prices that you have limited access to as an investor. Meaning, as a retail investor you may not have access to those gains here via your stock broker. According to the 2019 Credit Suisse Global Investment Returns Yearbook, the U.S. stock market accounted for 15% of the world’s total stock market in 1989. At the start of 2019, it was 53%. Also from that report: But while EMs and FMs together account for 55% of world PPP GDP, some 40% of world GDP at market exchange rates and 68% of the world’s population, their combined weighting in global equity indexes is still remarkably small, at around 12%. DMs account for virtually all of the remainder (88%). Furthermore, although the EM plus FM share has grown from a negligible 2% in 1980 to 12% today, there has been no progress over the last 11 years. In 2007, their combined share was 12.4%, while today, it is 12.2%. EM is Emerging markets, FM Frontier Markets and DM Developed Markets. Even during the heart of the global pandemic, 2020, US stock wealth grew more than China, Germany, Japan and the United Kingdom combined. To me this indicates that the US is better positioned to weather major disruptions then any other country. When Warren Buffet was asked what his wife should invest in, he said 90% in US S&P 500 and 10% bonds. He did not mention foreign stocks.
“The sky is falling the sky is falling”. That refrain has been repeated since stock markets began. And yet we are near records highs, again (not counting this week 😭). We’ve been hitting record highs for over a century. Predicting what rates of return (ROR) or inflation will be in 10, 20 or 30 years is pointless. Back in 2009 Jack Bogle wrote don’t count on ROR being as good as the past. If you followed his advice back then and took money out of the US stock market you would have missed out on big stock asset growth. Back in Jan 2012, Vanguard 10-year outlook for a 50:50 portfolio was 1.1-6.6% (25th to 75th percentile of the simulated outcomes), with a median of 3.8%. That didn't happen. Using historical data is the only way realistically to define retirement asset risk, whose data includes the great depression, stagflation of the 60’s/70’s, dot.com bubble, great recession, pandemic, etc. If you known how markets reacted to bad situations in the past, you will have a good idea how they will react in the future. If things get worst then these experiences then it won’t matter what you thought the ROR of inflation would be or even where your money is invested, we will all be in big doo-doo.
Long term the US is still the best play in town (on earth).
I hear you, Pizza Man, and I do enjoy our discourse. Again though, what you just added is backward-looking and historical. I don't argue the US market is the best game in town right now and historically. But, it's important to look forward as well. Given the fantastic companies and countries I listed, I want some of that in my portfolio. I like the diversification.
I love Bogle and Buffet, but those words were an eon ago, especially in terms of all that's changed since then with what we've learned about how diseases, climate disasters, and other catastrophic events can upend things economically and regionally. Remember when Sandy shut down Wall Street? The Bogleheads community, BigERN, Kitces, many more, all the folks I follow and trust, recommend an allocation to international. It makes sense to me.
And for sure, I'm not going to argue with what Vanguard and their huge team of experts, who do this analysis day in and day out every day, are saying is a good strategy.
That said, I read a recent study that indicated the most impactful thing is getting your asset allocation dialed in properly for your risk tolerance, time horizon, and income needs. US vs international mix, individual stocks vs mutual funds/ETFs, types of fixed income, yada yada all have an impact, but the primary one is getting that asset allocation (and I'd argue asset location, in terms of taxes) correct.
Some Bogleheads go with a two-fund portfolio - some of those just use a total US stock fund and one aggregate bond fund as their two. Others just do a 'world' total market fund such as VT and an agg bond fund so that they have US and international exposure. And as we know, time in the market is important, and timing the market is bad 🙂
Hey Bill, I like your avatar. I agree with a lot of the ideas and observations in your most recent post.
Even though virtually every financial "Professional" is recommending increasing international exposure, I am still not sold. History is data, data that you can use to help predict the future. I can tell you what happened to the stock market on July 14, 1949, or June 3 1976, or May 15 1998. What will the stock market do tomorrow? I have no clue, nobody does, and for the next 10 years.................... 🤢 No professional has a functional crystal ball. Most prognosticators have an underlining motive. It is safe for Vanguard, Fidelity, or whoever to guess that US stock value growth will be less in the future. If it comes true, they are geniuses. If it doesn't come true, nobody will care because their portfolio will have increased more then expected. Just like their failed (and forgotten) prediction in 2010.
Bill, I am wondering what index funds you recommend for your US/International mix and their relative %.
I'm using the Vanguard VTI ETF for total US and VXUS for total international. VT is the 'world' ETF, which includes US and international, but I haven't used that. I like to control the mix,or rather, blend it based on my clients' preferences, so it's not cookie-cutter as far as how much in each. Vanguard says 20-40% of your equities should be international. They also recommend an international bond fund for the fixed income part, perhaps due to the constant credit threats facing us here.
I'm also approved to trade Dimensional funds, which are great and sometimes are the preferred choice in a particular space, or clients request them.
As this conversation has shown, some people feel differently about this than others. It's the same thing I'm finding lately with ESG funds and clients expressing a desire for them.
I use tools to compare portfolios with different mixes of just about anything, and show the projected results, and if they meet the goals and risk tolerance and folks are happy with them, it's a go. I try to keep my clients in just a handful of funds - three in some cases, so they can understand what they're invested in and why, and learn to manage it themselves over time. It's the fixed income part that's more challenging, contrary to popular belief!
Thanks Bill for your openness on how you invest. It's frustrating to read articles on the internet where the authors say to have a balanced portfolio or buy on the dips or reduce risk or reduce volatility, but don't say HOW to do it.
If you chart VTI vs VXUS, VTI is just crushing VXUS in terms of return on investment. I see that VXUS only goes back to about 2011. Do you know of any total world (ex USA) mutual funds or ETF's that started in the last century (pre-2000)? I can't seem to find any.
Yep, historically US has always done better, pretty much. But I watch this closely, and have seen tell-tale periods throughout the pandemic when VTI was down and VXUS was up, or VXUS was up 'more' than VTI. I like that. We may see a whole lot more of it going forward,who knows. There are certainly reasons to think so, and hence add in some international. I'm getting advisor invites to the 2022 Global Forecasts for Vanguard, Fidelity, Schwab, and T Rowe. Those will be in the next few weeks, so I'm excited to hear what they think and whether they'll dial any of this back.
You're right, there's *so* much noise out there, so much blatantly bad info. Balanced funds and target-date funds might be great, especially when young, as set-it-and-forget-it tactics for folks that are busy with kids, careers, life. But they're managed funds, hence have high expenses, to pay those fund managers that really, really like having nice cars, homes, and other things 🙂 Plus, too many folks carry those kinds of funds into retirement, where they can't just sell the fixed income part for income in retirement when stocks are down. They have to sell shares of the whole fund, which includes selling stocks when they're down, a bad way to go in most cases (unless intentionally loss harvesting, and you can't even do that in these kinds of funds!).
The only time it's good to buy on the dips is when your asset allocation is off and you needed to fix it anyway. Or in a 'play' account for your entertainment budget. Otherwise, it's market-timing and will just about always burn you. Same with selling in a down market - you have to make two correct guesses - when to sell (market top?) and when to buy back in (bottom, correction is over?). The odds of getting those both right are pretty much nil, and folks doing this tend to miss the best days in the market in either case.
It will be interesting to see what the 2022 Global Forecasts say and their reasoning.
Getting back to the theme of this thread, if you are near or in the beginning of your retirement with 30 to 40 years more to go 😎, your retirement planning is surly looking at a time frame of 5 years plus in terms of what to invest in. Meaning the ups and downs of individual assets over a time frame of a few months to a few years should have little to no bearing on your investment choices. With that assumption, I still don't see the advantage of international funds. Sure there are good overseas companies, but that does not necessarily equate to investments gains for US retail investors. The track record for total market international mutual & ETF funds only seem to go back 10-15 years, not much of a track record. I am the guy who says "show me the data", prove it please 🤑. Anybody else out there have any thoughts???
Following up here (as promised) I've sat in on the Vanguard advisor calls. With the backdrop of low bond yields, reduced fed policy support, inflation, and the market being over-valued, among other factors, Vanguard projects 10-year annualized returns for the total US stock market to be 2.3% to 4.3%. For ex-US developed (non emerging markets) international, they're projecting 5.3% to 7.3%. For emerging markets, they like the Latin America and Asian regions that have almost full vaccination rates, and suggest staying away from European emerging markets (eastern mostly) where vaccination rates are low. You can't have a healthy economy when workers are sick, or afraid they'll get sick at work, or when they go out to consumer services and products. And right now, things aren't looking so hot here as we go into yet another surge of an ever-evolving, highly intelligent, deadly virus (that may well be an escaped bio-weapon). Science/medical forecasts say that by the end of this winter, folks will be in one of three categories - vaccinated, dead, or recovering from covid. Anyway, Vanguard goes into great detail on the call, and it makes sense. The info is publicly available now.
Same with T. Rowe Prices's presentation. They're underweighting (out of favor) US equities (operating margins at a historically high level due to inflation and labor pressures) and overweighting (favoring) global ex-US.
I've got the Morningstar call for advisors next week, with their 2022 US/global outlook, as well as Fidelity, so we'll see what they say. But there's a clear trend so far. These are different times, other than 1918. Again, there's nothing wrong with a set it and forget it portfolio, it's the proper asset allocation between equities and fixed income that is the primary driver of success. The rest, like having some international, is just optimizing gravy (or, not...). The important thing is to have a plan, a strategy, and be in the game.
Thanks for the follow up. I like your optimizing gravy analogy! Although I wouldn't put gravy on my ribs 🍔. By the way, Europe's biggest economy is likely going into recession: https://www.cnn.com/2021/12/14/economy/germany-recession-omicron/index.html
The Wall Street Journal has a great article on the booming US economy and how that effects foreign markets: https://www.wsj.com/articles/booming-u-s-economy-ripples-world-wide-straining-supply-chains-and-driving-up-prices-11640082604
Further evidence that the US market leads the world.
Thanks for the lively debate. I tend to rely on the financial industry experts as a reasonable guide on how asset allocations as well as the ROR to use in the software. I think it is important to have reasonable ROR expectations and to take into consideration current market conditions. I get most of my information from Vanguard, Research Affiliates and Money For the Rest Of US. Except for Vanguard who relies on an a stochastic economic model, the others use a simple approach based on current dividend yields, earnings growth and valuations. They give a range of outcomes and are updated on at least an annual basis so as market conditions change, the estimates will too. I factor in their low cases as a way to stress test my plan.
However, for my retirement plan, I use a "safety first" approach which means I have a significant amount of guaranteed income to support my spending. This is much different than relying on withdrawals from a portfolio to support spending. I do this because there is so much uncertainty in the future performance. However, I do have a portfolio to support my "fun" spending so asset allocation and ROR expectations are somewhat important.
When it comes to asset allocation, I have the same philosophy. I can't predict what individual markets will do but I do know what the current market conditions are in terms of valuations, interest rates, inflation etc.. Given the high absolute US stock valuations (CAPE ~ 40 compared to 25 year average of about 28) and high relative US stock valuations compared to international, I have a healthy allocation to international equities. I do believe that correlations have increased over time and have gone to 1 in recent downturns so there is probably no escaping a large drawdown at some point no matter how you are positioned. However, I am always reminded of Japan whose stock market peaked in 1989 at about 39,000 and it is currently at about 29,000. I am not saying the US will do the same, but the probability is not zero. Also, since 1971, there have been about 9 regime changes where US and international have traded place in terms of performance so the probability that the US will continue to outperform international is not 100%.
@hines202 Bill - do you go to the trouble of specifying stock funds by type in PRC (i.e., U.S., International, emerging, etc.) or do you lump them together as "stock" and specify a ROR for just that? I can see the value of breaking them out in greater detail, but for those of use who are using a broad index fund to represent the whole U.S. market (VTI), trying to delineate it by type is a real chore, as is trying to pin down ROR for each class. Not to mention that for most of us, we're trying to get a good if not perfect sense for the future, not "stick the landing on a moonshot" by striving for a level of precision that in the end, isn't that critical compared to the big picture.