.
International exposure increases the return of a portfolio over the long run because it reduces overall risk.

Realize that the expected return of international stock in isolation is no higher than US stocks, but global capital shifts cause one region of the globe to outperform the others over long-term periods. International stocks clobbered US stocks in the late 1980s, but fell behind in the 1990s.

Since the return of US stocks and international stocks are not 100% correlated, when one zigs, the other occasionally zags. When that happens, rebalancing back to your portfolio back to the original US/International mix reduces the volatility in the portfolio, which creates a slightly higher compounded return over time.

I would explain the math behind this, but Bill Bernstein does a wonderful job of that in his first book, The Intelligent Asset Allocator, which should be on all serious Diehard investors bookshelf (next to my two books, of course!).

Rick Ferri

PS. I use 70% US/ 30% International. Somewhere around 25% to 40% international has the best risk and return tradeoff, but we will not know the exact number until after the fact.

Originally posted in thread: 19630

Malkiel, author of Random Walk Down Wall Street, believes strongly in international, but it does disapear from his sample portfolios as one ages. Up to your early 40s he believes you should have 33% of your equities in international. In your mid 50s he believes that amount should drop to 25% and from late 60s and beyond he shows no international in his sample allocations.

Mr. Bogle, who has always said it is OK to have up to 20% of your equities in international, allows just that in the accumulation phase (25-50). He refers to this as a specialty fund in his book Bogle on Mutual Funds. In the transition phase (51-65) specialty funds go down to 5% of equities and in retirement specialty dissapears.

I always remember what Mr. Bogle told us in Orlando. It's OK to tilt anytime, "just don't over do it." Good advice for investing and for life.

Steve

Originally posted in thread: 19630

Maybe, if you always think of your international allocation as a percentage of your equity allocation then you simply shrink the latter, but keep the same diversifying percentage in international.

I'm reading Bill's new book right now, but keep coming back to check on the forum..;-) so haven't got to p. 119 yet.

It's a pleasant way to spend a Friday.

Chris

Originally posted in thread: 19630

You do not spend all the money on the day you retire (hopefully). So your "time horizon" does not become zero.

If you are spending 5% of assets per year that would mean that the time horizon for about 50% of your money is 10 years or more.

Originally posted in thread: 19630

Wes (& all):

I haven't read Bernstein's latest book, but the passages you quote suggest that tracking error regret, rather than the supposed riskiness of international stocks, is his main concern (actually, while tracking error is clearly the issue in the second passage, I'm not quite sure what he's saying in the first one).

Even over a period of less than 10-15 years, it's just as likely that international stocks will outperform domestic ones as the other way around; hence global diversification is still a prudent strategy. Nevertheless, Bernstein appears to be suggesting, many investors would experience more regret if they underperformed the S&P 500 because of their international equities than if they underperformed EAFE because of their domestic stocks. Since a global equity portfolio is more likely to underperform the S&P 500 in the short run than in the long run, those who are prone to tracking error regret should limit their international exposure, especially if they have fairly short investment horizons.

My own view is that limiting yourself to the stocks of just one country--even if it's the US--is far riskier than global diversification.


Best wishes,

Patrick

Originally posted in thread: 19630

Taylor Larimore posted the following in response to an earlier post on the merits of including international in one's asset allocation plan. I think it provides great perspective.

The best argument I have heard for International Investing is Japan:

Thirteen years ago the Japanese stock market was larger than our own. During the preceeding 50 years (in dollar terms) the Japanese stock market increased 10 times the increase of our own stock market. No wonder most Japanese were very self-satisfied investing only in their own stocks.

But look what happened. In 1989 the Nikkei Dow-Jones was over 39,000. In August 1992 it was near 14,000. Today, it is still down nearly 50% from its high 13-years ago. Any Japanese citizen who failed to diversify internationally is very sorry.

Best wishes,
Phil

Originally posted in thread: 19630

1-the time horizon and diversification issue is one of the "mistakes" I address in my new book-IMO investors get it exactly backwards--the shorter the horizon the more important it is to diversify across asset classes--reason is that over the long term returns are likely to be similar--even for lg and sv in US the return difference is "only" 5% a year over 75 years- but how about for 20 years say from 66-85 -lg returns 7.1 and sv 17.6 or over 10% a year, and over shorter periods like last two years difference even greater.
75-89 Int'l large returned 26% pa and S&P returned 16.6--US loses by almost 10% a year--so if you said you only had 15 years you lost out on a lot. Of course in next 13 years it worked the other way.. Too bad we cannot know which will win when (:-))
2_ I know Bill Schultheis very well and I believe that today if he were to write that book he would write it to be more of slice and dice and int'l investor---we actually talked about writing that book together but can't get Bill to focus on it
3-It is more important I believe for seniors to own int'l--the reason has to do with inflation risk---which they are generally more exposed to as their earned income will no longer be going up with inflation. By owning int'l they protect against falling dollar and its impact on cost of living.

Originally posted in thread: 19630

"Lay all the economists end-to-end and they will never reach a conclusion." Judging from the above posts, this likely holds true for investment scholars/authors too.

Best wishes,
Michael

Originally posted in thread: 19630

On Sept 1 of this year, I will have been retired 12 years. I've always, and still do, carry somewhere around 25% international in the equity portion of my portfolio. Over the 35 years or so that I've held international, I'd say the effect on my portfolio, as far as performance goes, is about a push. What you make on the tomatoes, you lose on the bananas. I have the feeling (no hard data) that international has smoothed the ride a bit. But I think that had I never held any international stocks, I'd be pretty much right where I am now.

Which is a very long-winded way of saying that you can take or leave international stocks and not worry much about it either way.

Good luck.

Wiley

Originally posted in thread: 19630