International Stock exposure in the Permanent Portfolio

[smurff]

I've been wondering whether it is a good idea to include an ETF or mutual fund that gives me more exposure to international stocks in my PP.  HB's original PP came out when the USA was the dominant market in the world and American companies were the biggest and baddest.  But the world has changed a lot since then--China may or  may not be the largest manufacturing company, may or may not be the second largest overall economy, etc.--and I like the idea of acknowledging the importance of major economies.  (The USA is still big and bad.)

Anyway, it occurred to me that if I invest in a Total Stock Market fund (ETF or mutual fund), I might already have significant international exposure.  Aside from Fortune 5000 USA-based companies that have substantial earnings from Asia and Europe, there are companies abroad that list their ADRs on the NYSE/NASDAQ, as well as some companies that trade directly on the NYSE or NASDAQ in US dollars, without the need for American Depository Receipts.

I tried to do some research online to see what percentage of the Total Stock Market is made up of international companies (those headquartered abroad) that trade directly or by ADRs, but I got nowhere. 

Does anyone know?  If someone invests in a total stock market fund, does that mean there is automatically a substantial percentage of international companies represented?

[KevinW]

International stocks have been discussed a few times.  My thoughts:

For the PP to work properly in all four economic conditions, all three non-gold assets need to be purchased relative to the same economy.  If cash and bonds are in US treasuries, then stocks need to be US companies.  If your stock is US/China and the US had a period of prosperity while China was in a different economic state, the portfolio as a whole would underperform.

The largest companies in the TSM are globalized concerns that conduct business around the world.  The TSM already has exposure to foreign prosperity.

The PP is finely and subtly tuned to be currency-agnostic.  Adding stocks denominated in a foreign currency introduces volatility tied to the exchange rate between the currencies.  This is a benefit to TSM/bond portfolios that would otherwise have no currency hedge.  However when applied to the PP it is a speculative play, and speculation is supposed to be limited to the VP.

International stocks introduce higher expenses and greater complexity, which needs to be weighed against any potential upside.

It wouldn't break any PP guidelines to hold international stocks in your VP.

You could also run two separate PPs, one denominated in USD and the other denominated in foreign currency.  I.e. the second portfolio would use Chinese stocks, Chinese bonds, and Chinese cash.  That might be appropriate for someone with ties to multiple countries.

IMO the stock portion of a US PP should be 100% TSM.

[MediumTex]

I don't know the answer to the question in the OP, but I am pretty sure that the percentage of U.S.-based companies' earnings coming from foreign markets is only going to increase as time goes by.

Thus, simply holding a domestic TSM fund is likely to naturally increase your foreign exposure as demand in emerging markets grows.

In other words, if 17% of the S&P 500's earnings come from overseas markets today, in ten years I can easily see that number being 20% or more.

[smurff]

Okay, I think I answered my own question.  (Letter to self:  Don't try to post on a board while the cats are fighting each other over PolarTec cat bed privileges.)

Anyway, I did some more googling.  I found this on Wikipedia: 

The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all stocks actively traded in the United States. Currently, the index contains over 4,100 components.[1] The index is intended to measure the performance of most publicly traded companies headquartered in the United States, with readily available price data, (Bulletin Board/penny stocks and stocks of extremely small companies are excluded). Hence, the index includes a majority of the common stocks and REITs traded primarily through New York Stock Exchange, NASDAQ, or the American Stock Exchange. Limited Partnerships and ADRs are not included. It can be tracked by following the ticker W5000.

(The emphasis is mine.)

So from what I can tell, international companies that are traded on American exchanges are not included in USA-based Total Stock Market indices.  When a company abroad acquires or merges with an American company, it is removed from the index if the newly constituted company is then headquartered abroad.  Since all the companies in the index are headquartered in the USA, only those that operate globally will have any  exposure to foreign prosperity (as KevinW mentioned).

It's interesting--real estate is included in the Wilshire 5000 TMI via REITS, so if one invests in an ETF based on this index for the PP, real estate will be included in the PP.  But limited partnerships, CEFs, ETFs, ETNs, etc. are not.  I assume that Blackstone Group, Kinder Morgan Partners, and others organized as Master Limited Partnerships are not in the TSM index either.

[KevinW]

So from what I can tell, international companies that are traded on American exchanges are not included in USA-based Total Stock Market indices.  When a company abroad acquires or merges with an American company, it is removed from the index if the newly constituted company is then headquartered abroad.

Sounds right.  As a recent example, Anheuser-Busch recently merged with InBev and the new headquarters was moved to Belgium.  It appears to have been dropped from VTSMX.

It's interesting--real estate is included in the Wilshire 5000 TMI via REITS, so if one invests in an ETF based on this index for the PP, real estate will be included in the PP.  But limited partnerships, CEFs, ETFs, ETNs, etc. are not.

I think ETFs and other vehicles that aggregate individual securities need to be excluded to prevent an infinite feedback loop of them buying each other.  I.e. Schwab creates SCHB, so VTI buys some of it, so VTI's NAV increases, so SCHB buys more VTI, so VTI buys more SCHB, etc.

[smurff]

Buy into SP500 or TSM

"According to Standard and Poor’s, of the 250 S&P 500 companies that report detailed information on foreign income, 47% of sales were generated outside the U.S. in 2009. This represents a 7% increase from 2006 with growth primarily coming from Asia."

Now that's really interesting.  Leaves me wondering what % of sales came from outside the USA back in the '70s and '80s when HB formulated the PP.

[ahhrunforthehills]

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[AdamA]

With stocks only making up 25% of your portfolio, it really doesn't seem to matter much at all.  If one market did 2% better than another, you are only up .5% overall.

There's a recent post in the "permanent portfolio" discussion portion that talks about Japan. 

Apparently, a Japanese PP returned like -.5% a year from 1990-2000.  Stock market crashed, gold was in a bear market, and Japanese long term bonds are 15 year bonds (not volatile enough to help as much as 30 year bonds during a lengthy deflationary period). 

Someone made the point that in this situation, having a little foreign stock exposure may have been helpful.

Having said that, I still just stick with the S&P for simplicity sake.