International Diversification
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- Опубліковано 14 бер 2023
- Meet with PWL Capital: calendly.com/d/3vm-t2j-h3p
International stocks have trailed US stocks for more than 100 years. Performance aside, the US market is well diversified across industries, makes up more than 50% of the global stock market, and lots of US companies have international revenue exposure. Additionally, international diversification has gotten less effective over time as correlations across markets have increased.
These arguments for forgoing international diversification in favor of US stocks do seem compelling at the surface, but, as I will explain, they’re flimsy, at best. International diversification is crucial, both theoretically and empirically, to sensible portfolio construction.
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Sources:
van Binsbergen, Jules H. and Hua, Sophia and Wachter, Jessica A., Is The United States A Lucky Survivor: A Hierarchical Bayesian Approach (March 1, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: ssrn.com/abstract=3689958 or dx.doi.org/10.2139/ssrn.3689958
Barber, B. M., & Odean, T. (2013). The Behavior of Individual Investors. Handbook of the Economics of Finance, 1533-1570. doi:10.1016/b978-0-44-459406-8.00022-6
Bailey, W., Kumar, A., & Ng, D. (2011). Behavioral biases of mutual fund investors. Journal of Financial Economics, 102(1), 1-27. doi:10.1016/j.jfineco.2011.05.002
Ritter, J.R. (2012), Is Economic Growth Good for Investors?. Journal of Applied Corporate Finance, 24: 8-18. doi.org/10.1111/j.1745-6622.2...
Viceira, L., Wang, Z. (K. (2018). Global portfolio diversification for long-horizon investors. doi.org/10.3386/w24646
Asness, C. S., Israelov, R., & Liew, J. M. (2011). International Diversification Works (Eventually). Financial Analysts Journal, 67(3), 24-38. doi:10.2469/faj.v67.n3.1
Anarkulova, A., Cederburg, S., & O'Doherty, M. S. (2021). The long-horizon returns of stocks, bonds, and bills: Evidence from a broad sample of developed markets. SSRN Electronic Journal. doi.org/10.2139/ssrn.3964908
BEKAERT, G., HODRICK, R. J., & ZHANG, X. (2009). International Stock Return Comovements. The Journal of Finance, 64(6), 2591-2626. doi:10.1111/j.1540-6261.2009.01512.x
Zixuan (Kevin) Wang and Luis Viceira. Working Paper. “Global Portfolio Diversification for Long-Horizon Investors”. Copy at tinyurl.com/ycvedksg
Bekaert, G., Hoyem, K., Hu, W.-Y., & Ravina, E. (2017). Who is internationally diversified? Evidence from the 401(k) plans of 296 firms. Journal of Financial Economics, 124(1), 86-112. doi:10.1016/j.jfineco.2016.12.010
Sinquefield, R. A. (1996). Where are the gains from international diversification? Financial Analysts Journal, 52(1), 8-14. doi.org/10.2469/faj.v52.n1.1961
Lewis, K. K. (1999). Trying to Explain Home Bias in Equities and Consumption. Journal of Economic Literature, 37(2), 571-608. doi:10.1257/jel.37.2.571
Jacquillat, B., & Solnik, B. (1978). Multinationals are Poor Tools for Diversification. The Journal of Portfolio Management, 4(2), 8-12. doi:10.3905/jpm.1978.408629
Senchack, A. J., & Beedles, W. L. (1980). Is indirect international diversification desirable? The Journal of Portfolio Management, 6(2), 49-57. doi:10.3905/jpm.1980.408729
Rowland, P. F., & Tesar, L. L. (2004). Multinationals and the gains from international diversification. Review of Economic Dynamics, 7(4), 789-826. doi:10.1016/j.red.2004.05.001
Heston, S. L., & Rouwenhorst, K. G. (1994). Does industrial structure explain the benefits of international diversification? Journal of Financial Economics, 36(1), 3-27. doi:10.1016/0304-405x(94)90028-0
Hello Ben.
Just wanted to make sure. Are you on Telegram? Or is it someone impersonating you?
I am not on Telegram. Please report this person if that's a thing on Telegram. Otherwise block them.
@@BenFelixCSI Great. Reported. Glad I asked.
Ben's chuckles are so subdued and yet convey such a strong sense of "what I just said was irrational behavior" and I love it
I just thought the same thing haha
I actually find it arrogant and unnecessary.
Rational reminder podcast?!?!
He's doing that Plain Bagel chuckle
@@sandralee5502 Wherever you get your podcasts.
Ben Felix gets a haircut after briefly entertaining the world of hair.
Just the comment I was looking for 😂
This is a strong signal that the Fed will cut rates.
It was weird for a bit. Like the book of fire in Avatar
Ben, are you a bond investor in 2022? Because you just got a haircut.
Best investment channel on UA-cam. I get so excited whenever I see a new video posted!!
Check out the podcast he co-hosts, Rational Reminder. Awesome episodes and very indepth content coverage there
i always think back to the Japanese pricing bubble as the historical lesson on the importance of diversifying across all countries.
The difference is US pricing is protected and insured by the US Military. That ludicrous military spending every year is insurance against economic collapse.
Was Japan invaded
@@isaacongzy In 1945. The US never left.
No. The asset pricing bubble was in the late 80s.
@@om7303 i’d argue that it only insures against dollar devaluation.
Wow! An actually thoughtful, careful, and responsible economic thesis video!
Well done!
The lengths some people will go through to justify under performing the S&P is fascinating...
Best investing content on YT. Thanks champ
Brilliant and genius content, as always! One may learn so much, by watching this channel; it’s actually amazing.
Oh, and so happy the short hair is back!!
this is literally everything I wanted to know about this topic. Amazing. Thanks so much.
So hyped to watch this video. Thanks Ben.changing lives.
Great video. Everyone saving for retirement needs to see this. I love the explanation about stock prices and expected returns; “it’s a noisy relationship, it’s not gravity”
Maybe it is like gravity, but it is on a feather in the wind?
Thankyou Ben for the tremendous value that you provide!
As someone who’s still buying all-world funds, I’m still waiting for the day international beats US. As the saying goes, when US sneezes, the rest of the world catches a cold.
Excellent video as always!
The best and only investment UA-cam channel you need.
Love from Korea! Love the way you always do your best research and quote literature.
"Diversification is the only free lunch in investing."
- Harry Markowitz, Nobel Prize winner in Economics
“S&P 500” - Warren Buffett on index funds, greatest investor of all time.
@@soshityowhy do you think that WB is the greatest investor of all time?
@@soshityoSince 2009 the S&P 500 index has actually beaten Berkshire Hathaway by some margin. Check it on the free US backtester, portfolio visualiser. But i guess this doesn't necessarily mean the S&P 500 index will continue to outperform in the future. As John Bogle said he was given some good advice, nobody knows nothing. Nobody really knows what will happen in the future, and this really applies to stock markets, investments because they are very unpredictable, volatile etc
@@soshityo ‘S&P 500,’ Warren Buffet on index funds, being wrong yet again
Thank you for sharing your knowledge. I am in awe of the research put into this work.
Best analysis on UA-cam. My "go to" for facts over emotion.
Yep.
Thanks! you are answering the questions i have in the back of my mind for years.
More arguments for index funds! Great video!
An idea for a future video/question: given that I do want to invest using a globally diversified portfolio, could you explain the difference it makes if I invest in an ETF or a more traditional index fund? ETF's seem extremely popular in North America while very few seem know of them in my country (Sweden).
Excellent video!
As someone who owns value factor and international (and US), it hasn’t always been easy to stick with it the past 10-12 years while the US large cap market has ripped.
I stick everything in VFIAX and VTSAX but with strong misgivings - fairly early in retirement savings but mindful of that risk long term. Good reminder to add a slice of VTIAX. Great video 👍🏽
@BenFelix Is there a publicly available source for the peer reviewed finance studies you cite? You are the only person I’ve found that cites actual sources, really great work over the years. Cheers
I see now you cite everything in the description, great.
As valuable as ever! Thank you Ben!
Excellent video, as always.
Great video!
So what is the right (rational) amount of domestic stock to keep in the portfolio? The same weight of the domestic market over the world market?
Thanks, Ben!
Another great and informative video by Ben, thank you!
Great video, as always!
I'm curious about country weights in a portfolio. From your past video on home country bias I remember a suggestion of an equal split between US, home and international stocks. Does this still hold? Great video, as always!
Here it makes sense to keep it in same way as stocks itselves - based on market cap. There are ETFs covering most of it (speaking about big and mid size caps) like Vanguard FTSE All World or iShares Core MSCI World. US is then about 60 % and 40 % is divided into rest of the world.
Hi Ben, I have been enjoying your insights in investment strategies, economic theories and so forth. I am not an active investors and have all my investments in a ETF's, with a 80/20 split (I have a few years before I retire - 20). I have followed the principle of having my 80% equity split into USA, Canadian, Non-North American (EU mostly) and a small % in emerging markets.
Markets haven't really been trending upwards recently. This year has seen a sharp dip. Should we consider switching our equity to lower risk stocks with dividends rather than stay with ETF's?
I ask, but I understand that you may not be able to answer.Still I thought I would ask.
Cheers
Thanks Ben, you are among the most sensible friends I've never met. Keep up the great work.
(Also, curious if VXUS is a decent, hypothetical means of getting that exposure, or if there are other vehicles available to DIYers that are worth a deeper dive. As a continuing student of repentance, suggestions are appreciated.)
I don't know what Ben would write, but when Vanguard designs a portfolio, they use their own VXUS or VEU, which are very similar, for ex-US exposure.
Amazing content man!
Love from India!
Great video thanks. Here is a proposal for a future video: the role of alternative investments (private equity, hedge funds, digital assets) in portfolio diversification. Would love to hear your take on this topic. Cheers
Best content!
Another Ben Felix textbook, university-class, reference quality video.
You make unfortunately no mention whatsoever of foreign tax withholdings, which can bear significant impact upon the outcomes of international/global investing (especially in domestic tax-sheltered accounts).
Thanks Ben! Solid content!
Thank you so much Ben
This video is so thoroughly convincing. The arguments are rock solid.
I have always resisted owning international stocks because Warren Buffett and Jack bogle both advise against it. But I had been looking at vxus for a while. The dividend is about double that of vti.
So now my portfolio contains 20% vxus. Jack bogle did say, he wouldn't stop someone from owning perhaps 20% international stocks as it won't hurt them too bad, lol.
I had long thought that the advice of "just buy the s&p 500" was outdated, thanks for providing evidence in defense of this
So Warren Buffett is wrong?
@@larryjones9773 yeah. Just buying the sp500 is good advice if you were buying individual stocks, but there are much more optimal portfolios than just sp500
Awesome. Thank you very much for the valuable lessen
@BenFelix Have you ever though about hosting an online forum for more academic discussion? Related to the papers you cite and your analysis, etc.
I love the on screen citations.
Great video, Ben. I do wish you had addressed cost of ownership fees, foreign taxes, and currency risk when contemplating whether to include global diversity for US citizens. Net of those taxes and fees, is it still worth it to diversify or is the risk premium completely wiped out?
I think it’s still worth it but there may be an argument for some home country bias for the reasons that you mentioned. Topic for a future video.
@@BenFelixCSI , when adressing the home country bias topic (can't wait), would love to hear the case for Euro Zone (should you overweight your country - e.g France or Germany or is it sensible to overweight the entire economic zone since it shares the same currency)
That might be outside the scope of the video for me to really dive into, but once I walk through the reasons for a home country bias you should be able to answer that question.
Oh..and don't forget higher expense-ratios for non-U.S
funds, as well.. ANOTHER "fence" to have to jump over.
The quality of the finance education here is insane!
Great video, keep it up
Do all in one ETFs like VEQT offer enough diversification? How can I measure the correct amount of diversification?
Companies like Spotfiy, Arm, Oatly etc all list in the US because they know that they will receive higher valuations there. If this doesn't send off major alarm-bells then you aren't paying attention. It doesn't make any sense that stocks on the NYSE or the Nasdaq trades at a premium to everything else simply based on their ticker symbols and this will likely not continue indefinitely.
So, Warren Buffett is wrong?
@@larryjones9773 Warren Buffet has been wrong plenty of times in the past and he will be wrong again in the future. He is a genious and the best investor ever but no man is perfect. I'm not saying you should invest nothing in America but the market is expensive and diversification makes sense.
People in the US don't want to deal with currency conversions, and because the US has the largest investing pool in the world, it makes sense that companies that list in the US will get better results. It's supply and demand. There is more stock buyers if you list in the US pushing prices higher.
Likewise, as long as US currency continues to stay strong, people in other parts of the world want the currency conversion so they're more likely to invest US. If the US dollar falls too much, that's when you should get concerned, because international investments will dry up.
@@Danielle_1234 Of course, there are tons of reasons why people prefer to invest in the US above other markets. However, none of these reasons change the fact that high prices means low expected returns. That's reason enough to diversify away from one of the most expensive markets on the planet.
Whoa Ben Felix rises!
Great video, thank you! What weighting between Canada, USA, Emerging, and Developed markets would you advise as being optimally diversified?
I believe his last portfolio that tilted small cap value reflected 40%U.S. 30%CAD and 30%Int'l (75 dev/25 emerg)
Thank you for this extremely helpful and informative video. I was afraid that 26% of FTIHX in my Roth 401 was far too high but maybe it’s just right?
In MSCI ACWI index, US market is around 60%. The rest of developed and emerging are around 40% combined. Which part of the portfolio is better diversified US(bigger but correlated) or the rest? And since the US market has much higher valuations, can we achieve better real diversification and higher EV by reducing exposure to US market from 60/40 to 50/50 or even 40/60?
I try to keep my portfolio balanced around 60%-US/30%-Itnl EX US Developed/10%-Emerging Mkts which is close to global mkt weights. I agree completely with the need for global diversification. Thx @Ben Felix for yet another valuable video. Big thumbs up! 👍
Hi ben. Can you make a video about consumer staples. Historically they have higher returns and less risk. How is this not a free lunch?
Update us on the yield curve.
Being Norwegian, a nice thing about globally diversifying is that the currency movements dampens downturns. Because the NOK typically depreciates during a downturn, the downturn presented in NOK is not as big. This is bad for buying the dip though.
A large percentage of my losses in international equities has been due to the strong U.S. dollar in the past year or two.
@@michaelsmith4904 yeah it goes both ways. If you're in USD, that means international are extra cheap :)
Leave it to Ben to crush all the heresay and rumors
excellent video
Would the Vanguard ETF VDU be an example of international diversification?
Does this hold true when taking into account after-tax returns? (just thinking as a Canadian and the taxation of Cdn eligible dividends)
Great explanation. Living in Belgium, I find it astonishing that there are people here who still believe investing their life savings in only the domestic market (which in the case of Belgium is 0,25% of the global market cap) is a good idea 😂.
Do you have a model portfolio for US investors to include international and value tilts? Please and thanks.
Hi Ben, Can you upload an exclusive video on Japan market crash for decades. And how to diversify during that kind of crash were the whole market is down for decades
I hold HSBC FTSE All-World which is 58% US, the rest is developed and emerging markets. All market cap weighted. However, thats only 50% of my total portfolio. Another 25% goes into a global technology index tracker and 25% Scottish Mortgage Investment Trust. Balance risk against capital preservation. All are globally diversified.
@BenFelixCSI - I am trying to understand how important is the role of currency when diversifying in international equity. Are you aware of any robust paper/study analysing how much of the difference in performance between US and International is actually related to the currency movements?
Exactly. Currency conversion is important.
Do you consider the american blue chips as American or International?
Hi Ben, how often do you suggest investors to rebalance their portfolios?
Is there an easy way to do this? Like a "developed world index"?
OMX Helsinki 25 (Finnish Stocks) has outperformed the S & P 500 this year, due to the appriciation being lower and there having been less expectations on the stocks. If you diversify to Europe (where stocks are cheaper) with your main investment in the States, you get downside protection when the market doesn't go your way.
Indeed, VSGX is carrying my index investments at the moment. The others are mostly still positive for me but VSGX is the star year to date.
@benfelixcsi - which international or total world global stock market index funds would you recommend for a canadian investor
From the title of the studies, It seems that mostly you are referring to industrialized countries (north America and Europe), not including much the emerging markets... Am I correct?
What would be the tax implications of purchasing an international etf?
So what country would you recommend?
I was looking at japan and or India any in-site?
I use ETF tracking FTSE All-World index and I think it's great for simple, long term portfolio.
Yes
which emerging countries quality etf would you suggest
Does this account for the foreign stocks listed on US exchanges?
Ben - late to the party, but from this video I’m sensing that something like the FTSE All Cap Global Index (Vanguard’s VT as an approximation) most closely follows the advice in this video, as it is the closest thing out there to tracking the entire global market independent of cap size, sector, geography, etc. Would that be correct?
Yes VT approximates the global equity market. It’s a good starting point for a portfolio.
i divested internationally after the greek austerity crisis and EU response. so far it's worked out.
Thank you
Recently, I got into the UA-cam financial niche, and I’ve taken a deep dive into investing. Particularly, dividend growth investments as it interests me. I have tried multiple methods to build my portfolio in the past. So far I’m making progress the help of a fund manager. Back to the video, wonderful job there. I always look forward to your content.
How did you do it? I’ve tried to put some money in to see if I can earn but I always hit a dead end.
@@VikturneerInvesting without sufficient knowledge deems your chances of being profitable at an inherently high rate because it is risky and requires considerable skill as individuals who attempt to trade themselves end up losing money. Profiting from the stock market is possible, personally, I don't underestimate the role that professional guidance plays as Herman W Jonas, an astute fund manager has given me an edge over the rest of the market which has propelled me to gain more.
Quite true. From my experience, it’s about understanding the market and volatility, but that’s difficult to do without help and guidance. Going in blindly is like betting a pony against a horse in a race.
@@LifuryOh thanks for affirming this specially because I’ve come across other laudable comments on his prowess, as I usually skip past these because they usually sound generic. Is there a means I can reach him through? I want to start my investment process with him.
Thank you for responding. I left him a mail and he responded in no time. From our conversation, I can tell he has stellar knowledge of the market.
Good video as always, but it was surprising that cost / tax of owning wasn’t touched upon (unless I missed it)
How much do people invest in US vs intl?
then what the proper percentage allocation for international?? Thx
Welcome back to the head shaved club!
I can barely invest in my 3rd world stock exchange, how do I do this or a version of this that makes sense? (not being sassy) any direction?
What about Currency Hedging for cross-border investments?
The question is, how much should be allocated?
I really did not get the point about cashflow flow shock correlation...
There are two ways to look at the same situation where asset class A outperforms asset class B:
1. Whoah, 'A' is doing great. I should sell 'B' and buy more 'A'.
2. Hmm, A seems due for a downturn. I should rebalance into more 'B'.
Whether A is US, growth, or large cap, the first thing to check is whether there's a structural reason for the outperformance. If so, by all means buy 'A'; if not 'B' seems more sound.
Structural reason = rule of law? I can barely tolerate the corruption in the U.S. I've traveled some internationally, and I 'sensed corruption'.
It sounds like I should stick with my S&P 500 portfolio? I'm retired with a 100% stock portfolio. And, doesn't the S&P 500 have international exposure?
Are you referring to stock prices only or total return in your video?
Total return
Ben! I would love to hear you talk about life planning when you will have a full union-style pension.
My ETF portfolio is all Global but my largest holding leverages MSCI World Index, which means I don't hold Emerging Markets
Does it make sense to do a 83% (World Index) - 12% (Emerging) split as some suggest?
Compensate with EIMI or start buying an all in like VWRA or ISAC(blackrock)
But do you mean internationally diversified on market weighted basis, or hand crafting through region ETFs to reduce US concentration in market cap indices?
Market cap weights, but potentially with some home country bias ua-cam.com/video/jN8mIHve1Ds/v-deo.htmlsi=IjhN3SxtR54Ns50L
Hey Ben,
Love your videos! Do you believe that depopulation could affect the US market? What would happen if the crisis facing Japan were to come to America?
Have you seen the millions and millions of immigrants crossing into the US over the past few years? Thousands cross our borders daily (undocumented asylum seekers, and mostly those coming for economic opportunity) and it is a big source of political turmoil. In addition, we have many tens of thousands who immigrate legally each year. The US citizen birthrate has been dropping, but the immigrants keep coming. It will drastically change the ethnic population and the US will be more diverse than ever.
Do you feel like accounting for significant risks should include at least environmental factors? Your ideal portfolio has significant exposure to oil and gas, the new aspect is the governments around the world are starting to put laws in place that discourage investing in this sector, should not that be a concern? I mean AVUV categorizes 14% of its holdings as oil and gas related, shouldn't that be a risk dimension?
One advantage of USA only portfolio is that USA companies are more regulated than international. So there is more safety than stocks held in dodgy markets in dodgy countries.
The main question for me is: what is a proper proportion? I have 1/3 US, 1/3 EU, 1/3 others. Is it okay or not?
I'm tempted to suggest by market cap.... but I have no idea.
Speaking of diversification: I would be interested to hear your thoughts on Ray Dalio's All Weather Portfolio, which puts more emphasis on the right mix of different, negatively correlated assets
Not a fan. Portfolios like that rely heavily on past correlations, which are notoriously poor predictors of future correlations. I wrote about this a while ago rationalreminder.ca/blog/2014/11/21/stories-over-science-tony-robbins-financial-advice.
@@BenFelixCSI I see your point, thanks for the link ! Though I would add, that given it was made by Ray Dalio there at Bridgewater, they probably were aware of that as well, but still proposed the portfolio. I mean, they must have put some serious thoughts into it, one would assume.