US vs Global Stock Market Returns

Thanks for sharing. It is not easy to eliminate home country bias and it is possible that the US will continue to outperform but we need to recognize the fact that there have been prolonged periods where international has outperformed US equities. We could be entering into one of those periods now given the relative valuation advantage that international stocks have over US and the higher dividend payouts. We will never know so each investor needs to feel comfortable with their allocations. I have an allocation to international because of the relative valuation advantage and higher dividend payouts. I do not know what the future will bring and want to be as diversified as possible.

It is also difficult to determine if investing in the MSCI EAFE Index (and by extension foreign developed markets) is a worthwhile idea. The problem is the relative short history of that index and even shorter history of index funds that follow the MSCI EAFE index. The MSCI EAFE index was created in 1969 https://www.investopedia.com/terms/e/eafe_index.asp. Buying stock of the individual companies in the MSCI EAFE index is, I assume, not something most people in this forum have done historically. As far as I can determine, index funds that cover the MSCI EAFE index didn't start until the early 2010's (IEFA is an example). Saying that there are good foreign companies is one thing, being able to invest in them historically in index funds here in the US, is another. If you chart IEFA which started in 2013 vs the S&P 500 index (both from 2013 to 2022) IEFA increased in value by 31.9% while the S&P 500 increased 198%. In fact there hasn't been prolonged periods (for me that means greater than 5 years) in which foreign developed markets out performed the US during the time you could actually invest in index funds that follow the MSCI EAFE index. Is it possible that foreign developed markets could outperform the US over the next 5 or more years, sure. All the big boys are predicting that will be the case. But remember, that's exactly what they predicted in 2010, but of course that didn't happen. Not saying investing in foreign developed markets is a bad idea, just that there is not a lot of history to go on.

Another reason I am dubious about investing too much in developed foreign markets: https://fortune.com/2022/09/24/europe-energy-crisis-winter-natural-gas-putin/

The size and diversity of the US market and its abundant fossil fuels (until we tradition to clean energy) helps the US weather global shocks better than other countries.

I'm with @golich428 on this. We could say "Well stocks always outperform bonds, especially during this past 11 year bull market (recency bias) so I'm not going to get any bonds in my portfolio. They didn't look at the lost decade, 1999 on, when the S&P returned nada, nuttin' and bonds returned 7.5%. That's why we diversify, folks.

It's for the long haul, not biased away because of some looming energy crisis this year caused by Russia. There's a pretty good chance that when this Ukraine situation is settled, Europe will go on a boom as everyone spends and helps to rebuild that country and its major cities, and it returns to prosperity. I want in on that.

Since Russia was in the emerging markets sector, that looked like something to bail on as well - until India, Brazil and the other EM countries start doing well due to economies shifting away from Russia and toward those other EMs.

Vanguard (and Dimensional, Black Rock, Fidelity) have sound reasoning derived by the best people and tools in the business that says *over the next ten years* ex-US will outperform US. I wouldn't put all my eggs in that basket, but I'll have a reasonable allocation to VXUS. It's diversification. win-win.

A research report was just published titled The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets (attached). The researchers developed a comprehensive new dataset of asset-class returns in 38 developed countries as well as the US going back to 1890 to examine the popular 4% spending rule among others. They start with the typical 60/40 asset allocation using two models to implement their analysis; investing the 60% stock allocation in the 38 developed countries, and then using the US stock market. Using the developed countries the 4% rule leads to financial ruin in 17.4% of simulations runs. In contrast a model based on the historical US experience leads to a failure rate of 3.5%. I found Figure 1 and Table IV very interesting.

Here is what Fidelity thinks about investing in foreign stock markets: https://www.fidelity.com/learning-center/wealth-management-insights/international-stocks?WMI&ccsource=em_Promo_1028464_29_0_P4

"Overall, most international economies are experiencing positive growth, but at a slower pace." This backdrop may lead to positive but more modest returns for international stocks. As a result, the investment team at Strategic Advisers, LLC has slightly trimmed international stock holdings within client portfolios—but plans to maintain exposure to the asset class.

Between 1950 and 2021, a hypothetical, globally balanced portfolio made up of 70% US stocks and 30% international stocks would have returned an annualized 11.6%, almost matching the returns on a hypothetical portfolio invested solely in US stocks, which would have returned an annualized 11.7%. However, in this hypothetical example, the globally balanced portfolio had a lower standard deviation, a widely accepted measure of volatility.² "This shows how a 70/30 portfolio could potentially provide strong return potential with less volatility than a 100% US stock portfolio," Malwal says. In addition, he notes, Fidelity's Asset Allocation Research Team (AART) expects international stocks to outperform US stocks over the next 20 years.

Doesn't say how much lower the volatility is. Other research I've read suggests about 1% less volatile, not that big of a difference. Again with the ridiculous 20 year prediction 😬

Strategic Advisors LLC who? Who dis? As @golich428 said, we've seen periods where international outperforms US. I'm attaching a graph of VTI (total US) vs VXUS (total intl ex-US) and you can see the trending there - several periods in the last year alone where international has outperformed US.

I'm going with that the very best in the business are telling me consistently (Vanguard, Blackrock, Dimensional, Fidelity, Morningstar) in the advisor forecast calls. And that is that they expectd international to do better over the next ten years. Am I putting all my eggs in that basket? Heck no. I think it's wise to have diversity. Diversity always wins over time.

Strategic Advisors LLC was referenced by Fidelity in my previous post, one of "the very best in the business" 🤗 so they must be knowledgeable for Fidelity to quote them.

This ones for @hines202 https://www.advisorperspectives.com/commentaries/2022/11/23/a-menu-of-global-opportunities

I am beginning to weaken my stance on only investing in the US stock market, just a little 😋. The article makes a point of remembering that in 2010 the best in the business predicted that US stock market was going to perform badly over the next 10 years. Of course, it turned out to be one of the best 10 years ever! (side note: since we were invested mostly in the US stock market in the 2010's, we were able to retire early, sort of reverse sequence of return risk). The article doesn't make a 10 year prediction. Instead they present facts and figures and tables, stuff I like 😎. They make the case that, in the short term anyway, developed markets look good relative to the US market. Alright, I'll buy that. I guess it depends on your time horizon. If you are looking at a 30+ year time frame, and want to buy and hold, then investing solely in the US stock market for 30 years is the best way to go, you can't do any better, full stop. If you are a little risk adverse and/or your retirement money is teetering on the edge of providing 30 years of income safely, well, you'll need to do more analysis (PRC Gold 2023 anyone 😍). My stance on only investing in US stocks is admittedly biased, I have a high tolerance for risk (I am willing to wait things out), have no kids, live in the Midwest (relatively low cost of living) and we have a fairly wide margin of money safety. So, if you are willing to review your retirement planning on a yearly bases, meaning adjusting your asset allocation based on the newest information, then I guess investing some of your assets in developed markets will work out just fine, for now (I had to throw that in 🙃.)

Strategic Advisors LLC is used by Fidelity "as the investment manager for many of our clients who have a managed account": https://www.fidelity.com/learning-center/wealth-management-insights/does-diversification-still-matter?ccsource=em_Promo_1028465_9_0_P5

https://money.usnews.com/financial-advisors/firm/strategic-advisers-llc-104555

@hines202 One can draw two somewhat contradictory conclusions from this study: 1) Stick with US Markets, there's something distinct in US compared to rest of world, 2) Over time the US will revert to the global mean, so lower your expectations. I'm not sure which one I believe, though I lean toward the latter. The other thing to keep in mind about boostrap monte carlos is that your results are based on past history generalized: so when they say 17% chance of failure they mean "if past history were to occur in different random orders". The real chance of failure is likely much higher due to things we don't know that haven't occurred yet.

@pizzaman I hear you. As long as you're doing it the fundamentally right way (DIY, indexing, low-expense, diverse, bucket, PLAN) you're doing it right. The rest is nuance. Man plans/forecasts, karma laughs.

Mrs. Emancipare and I have been watching the new Madoff documentary on Netflix. I'll post my review on my site with the other reviews of such personal finance documentaries. But, good Lord, did a lot of people get destroyed by chasing that rainbow/fraudster instead of just putting their money in an S&P 500 fund or somesuch.

The more people between you and your money, the worse you'll do, IMHO. Which is why I can't stand products like deferred annuities, permanent life policies, and the rest.

Just a clarification, bootstrap and Monte Carlo are two different statistical methods:

https://nicelifestylemag.com/blog/how-is-bootstrap-and-monte-carlo-related.html

There is a whole thread on this forum - Historical vs Monte Carlo on the Frequently asked questions tab. Look up the May 11, 2022 post as an example.

If you really want an eye opener, look up the "Return on Everything" paper. They do a remarkable job of listing stock and bond returns across the globe across history. And you really see how unique the USA has been in its high returns for equity. It's made me lower my expected returns. Not because I assume that will occur but because the USA is out of the norm of other countries through time. Here's a chart I made for myself a few years ago summarizing its results:

Return of Everything article summary