International stocks in PP

Discussion of the Stock portion of the Permanent Portfolio

Moderator: Global Moderator

Post Reply
User avatar
foglifter
Executive Member
Executive Member
Posts: 634
Joined: Tue Apr 27, 2010 5:37 pm
Location: The Golden State

International stocks in PP

Post by foglifter » Fri Jun 04, 2010 2:21 pm

This topic is inspired by a great discussion "Using SCV and EM".

Craigr, I feel from the stock allocation's standpoint I'm going in the same direction as you were going before - you mentioned you used to slice-and-dice until you moved to simply TSM + some foreign allocation. My slice-and-dicing pattern used to be 10-12 index funds, but I'm gradually moving to simplify my stock allocation based on analysis of correlations, volatility and risk/return ratio.

You said you have some international equities in your PP. My latest thought was about simplifying the international part and I am thinking about having only emerging markets given that developed markets have become highly correlated with the US. Would you mind to highlight what positions and why you use for the international equities part in your portfolio? Also, I'd be glad to hear what you think about my idea of EM as the only type of foreign equities in the stock part of PP.

Thank you
"Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve."
- Talmud
User avatar
KevinW
Executive Member
Executive Member
Posts: 945
Joined: Sun May 02, 2010 11:01 pm

Re: International stocks in PP

Post by KevinW » Fri Jun 04, 2010 4:17 pm

I'm not craigr but I'll assume that it's OK for the peanut gallery to pipe up since this is a forum.

First, in my opinion international stocks are necessary for a traditional stock/bond index fund portfolio, but are redundant in a Permanent Portfolio.  A conventional stock/bond index fund portfolio needs currency diversification, and international stocks are a reasonable way of getting it.  However a Permanent Portfolio already holds a lot of gold for this reason, and I expect the gold to work so well that adding international stocks would be overkill and would only add expenses and complexity.

Second, I agree with your premise that emerging markets will be less correlated with the US than ex-US developed markets will be.  However emerging market funds tend to have high expenses.  I think it's worth analyzing whether emerging market funds will add enough returns to compensate for their higher expenses.  In general simple, low-cost investments seem to win out over more exotic, expensive ones, so my intuition is that the answer is "no."  But I could be wrong.

There's also the matter of your emotional reaction to tracking error.  There could be a period of domestic prosperity where the US stock market goes up and emerging markets go down.  There is a risk that you'll get disgusted and sell off the emerging market stocks at exactly the moment when you should be rebalancing from US to emerging market stocks.  Since you're interested in the Permanent Portfolio you're probably not very prone to this, but it's worth considering.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: International stocks in PP

Post by MediumTex » Fri Jun 04, 2010 10:16 pm

I would say go 10-20% of the stock piece in an international index fund and not worry about it.

Anything but an international index is going to tempt you to tinker from time to time.  No reason to put that temptation in front of you when it's not necessary in order for the PP to do its thing.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: International stocks in PP

Post by craigr » Sat Jun 05, 2010 6:07 pm

foglifter wrote:
This topic is inspired by a great discussion "Using SCV and EM".

Craigr, I feel from the stock allocation's standpoint I'm going in the same direction as you were going before - you mentioned you used to slice-and-dice until you moved to simply TSM + some foreign allocation. My slice-and-dicing pattern used to be 10-12 index funds, but I'm gradually moving to simplify my stock allocation based on analysis of correlations, volatility and risk/return ratio.
My first index portfolio I constructed was slice and dice of stocks and bonds. Not only was it more expensive to maintain due to taxes, but I never felt the diversification was what I wanted.

I think simple is better. I am convinced that your primary diversification comes from the stock, bonds, cash and hard asset split and not slicing stocks up into tiny little segments.
You said you have some international equities in your PP. My latest thought was about simplifying the international part and I am thinking about having only emerging markets given that developed markets have become highly correlated with the US. Would you mind to highlight what positions and why you use for the international equities part in your portfolio? Also, I'd be glad to hear what you think about my idea of EM as the only type of foreign equities in the stock part of PP.
My portfolio is nominally at 20% US TSM and 5% FTSE ex-US. It may go higher or lower due to growth or rebalancing. Etc.

But don't do what I do just because it's what I do. Do what you think works for you.

Arguably, my 5% slice might not matter that much going forward. The US market is so big that even if you held 100% US you'd probably be just fine. US Companies do business and operate all over the world so you may have much more international exposure than you think if you just owned US TSM.

Some would say it's too low and should be more like 50/50 US and Intl. That's too much for me because if you hold too much international you have more currency risk and that can hurt or help the portfolio. It just depends which way the coin comes up.

As for concentrating in EM, I wouldn't do it personally.
User avatar
foglifter
Executive Member
Executive Member
Posts: 634
Joined: Tue Apr 27, 2010 5:37 pm
Location: The Golden State

Re: International stocks in PP

Post by foglifter » Sat Jun 05, 2010 8:58 pm

Thanks for sharing your thoughts, KevinW, MediumTex, and craigr.

KevinW, I agree with your point regarding the role of gold as currency risk mitigation. The reason I'm considering foreign stocks is potentially higher returns. And since the idea behind PP is to use the most volatile asset classes in all four corners of the portfolio I think spicing up a bit US TSM with exposure to emerging markets might work well (or not, and I do realize that).

Craigr, I like your choice of total ex-US fund for international portion. If I'm not mistaken about 20% of S&P500 revenues come from abroad and this share apparently is growing. In fact, many global companies earn MOST of their revenue from foreign sales. The beauty of a total fund is you don't need to worry about changing developed/emerging ratio as all rebalancing happens naturally. The only reason I'm not using this option right now is a high correlation of ex-US and TSM due to the fact that majority of ex-US is in developed countries. I may change my position though later.
"Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve."
- Talmud
User avatar
craigr
Administrator
Administrator
Posts: 2540
Joined: Sun Apr 25, 2010 9:26 pm

Re: International stocks in PP

Post by craigr » Sat Jun 05, 2010 10:52 pm

When I travel abroad I'm always amazed at the widespread use of American products around the world. I can go anywhere just about on this planet and get a Coca Cola. In Europe and Latin America I see many American brand autos. The computers I see are Dells, HP, etc. They are almost all running Microsoft Windows and connecting to the Internet on Cisco networking gear. American clothes and other trends are always present. I've lost track of the number of times I've heard a familiar song on the radio only to realize it's in English and by an American band yet I'm in a place where they don't speak English and it isn't America. In most places you find UPS and Fedex delivering packages. I can't think of a country yet that I've been to that doesn't have a McDonalds or other chain restaurant. Etc.

If you only had exposure to American companies you can rest assured you have an abundance of international exposure. American companies are present in just about every corner of the planet.
MCSquared
Junior Member
Junior Member
Posts: 23
Joined: Sun Apr 25, 2010 11:42 pm

Re: International stocks in PP

Post by MCSquared » Sun Jun 06, 2010 8:46 am

This implies to me that I was better off having switched into foreign currencies (and maybe buying domestic stocks in those currencies) than I would have been had I used the funds to buy into the UK FT100 with its 70% of foreign earnings.
[/quote]


Interesting point Clive.  I have been pondering this very same thing for a few weeks.  VTI provides my stock allocation and I have had no international/foreign exposure on the equity side.  While gold provides the protection I am ultimately looking for, your "currency" posts have me wondering if a small international position on the equity side is worthwhile.  Would you choose another long stable currency like the Swiss franc (I know it's tie to gold was terminated a decade ago) or a true international exposure?
User avatar
6 Iron
Executive Member
Executive Member
Posts: 339
Joined: Sun Apr 25, 2010 11:12 pm

Re: International stocks in PP

Post by 6 Iron » Wed Oct 27, 2010 4:29 pm

While the pure HB portfolio does not include international exposure in equities, many of us have chosen, either in our permanent or variable portfolios to include it. With the evolving changes in VGTSX (Vanguard total international) to include Canada, a lower expense ratio, small cap exposure, and future presumed Admiral shares, I thought I would share this link discussing when, and if one should switch from VFWIX/VEU (all world ex US FTSE).

http://www.bogleheads.org/forum/viewtop ... ight=vgtsx

There are issues if you hold it in a tax advantaged account, as well as the fact that VGTSX is not yet offered as an ETF. I myself plan to wait until next year and reassess, but this was educational.
cowboyhat
Senior Member
Senior Member
Posts: 122
Joined: Sun Nov 14, 2010 7:12 pm

Re: International stocks in PP

Post by cowboyhat » Thu Nov 18, 2010 7:35 pm

Why is the currency hedge set at 25% in the PP? At 50% you could expect an equal consequences for a rise or fall in the value of your local currency.
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: International stocks in PP

Post by MediumTex » Thu Nov 18, 2010 7:59 pm

cowboyhat wrote: Why is the currency hedge set at 25% in the PP? At 50% you could expect an equal consequences for a rise or fall in the value of your local currency.
I'm not sure I follow the question.

There is 25% gold in the PP because history has shown that this allocation provides safety and stability.  More or less would not provide the same safety and stability and would involve an element of speculation.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
cowboyhat
Senior Member
Senior Member
Posts: 122
Joined: Sun Nov 14, 2010 7:12 pm

Re: International stocks in PP

Post by cowboyhat » Fri Nov 19, 2010 5:02 am

I thought the 25% allocation to gold is the currency hedge in the PP. The rest of the PP is supposed to be allocated to domestic stocks, domestic bonds, and domestic cash.

Seems like that makes the portfolio 25% non-domestic and 75% domestic, which gives it a 50% domestic bias.

If a PP investor is agnostic about the direction their domestic currency will move, why would they want a domestic bias?
User avatar
MediumTex
Administrator
Administrator
Posts: 9096
Joined: Sun Apr 25, 2010 11:47 pm
Contact:

Re: International stocks in PP

Post by MediumTex » Fri Nov 19, 2010 8:54 am

cowboyhat wrote: I thought the 25% allocation to gold is the currency hedge in the PP. The rest of the PP is supposed to be allocated to domestic stocks, domestic bonds, and domestic cash.

Seems like that makes the portfolio 25% non-domestic and 75% domestic, which gives it a 50% domestic bias.

If a PP investor is agnostic about the direction their domestic currency will move, why would they want a domestic bias?
Investing in U.S. Treasurys is only partially a domestic play, since the dollar is the #1 reserve currency of the world and Treasurys are perceived by the whole world as the safest debt available.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
Post Reply