US / International weight

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joypog
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US / International weight

Post by joypog » Thu Apr 28, 2022 9:24 am

I'm curious how many of y'all hold significant International Stock indexes as part of your PP.

It seems that the classic HBPP only holds US with the international exposure coming via US company business dealings (I guess same for Jack Bogle's 60/40).

I'm still sorting through the subtle shift from the Bogleheads "buy the market mindset" to the PP approach that gives each asset class a job for specific market conditions.
35-US, 10-SV, 10-Intl, 10-LTT, 10-Gold, 25-Cash
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Re: US / International weight

Post by boglerdude » Thu Apr 28, 2022 4:21 pm

Yes. And if your job is in tech, you could tilt away from tech stocks. Any large basket of stocks is good enough tho.
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Re: US / International weight

Post by Kbg » Mon May 02, 2022 5:29 pm

If you are buying the S&P 500 index then I think Bogle is right...international is baked in. If one is segmenting their stock allocation to various things (cap, factors, whatever) then you need to pay a bit more attention to direct international indexes if you are trying to max diversify.

Personally I wouldn't jettison everything you learned/were exposed to at Bogleheads.

To laser in on something that is worth thinking about...When you conceptualize equal portions to all economic conditions and what that means...don't forget economic conditions historically temporally do not bin into 25% buckets. The prosperity bin is is more like 70% with the other three capturing the rest of the time. In reality they aren't that clean...but it is indisputable that prosperity is by far the most likely condition we will be in.

Thus, a multi-decade commitment to a PP will put a serious dent in your terminal wealth as compared to other options.

I would never, categorically never, recommend this portfolio to anyone less than 50. There is WAY too much dead weight in it if growth is a goal. Even Harry Browne recognized this which is why there is a PP and a VP (variable portfolio).

In short...define your financial goals and objectives first, then go looking for a portfolio that (at least historically) matches them.

If you are 50 or over and reduced returns in exchange for a smoother ride is in the above sentence then the PP is worth consideration.
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Re: US / International weight

Post by joypog » Mon May 02, 2022 6:43 pm

Makes sense. I think your warning is also well taken. I had settled on the PP last week, but as I sat with the decision, I also came to the conclusion that it is a bit too conservative since we are in our early forties, even though my wife and I are terminally cautious.

So a bunch more reading over the weekend, and I think we're ultimately ending up into the Golden Butterfly precisely because it makes a lot of sense to stay tilted towards prosperity. We're still going to put a significant chunk into the PP, but keep the PP at a reasonable size. Then the excess will go into SV and other speculations. Maybe I'll explicity pick up some international at that time...hell I could pick some individual stocks too. >:D
35-US, 10-SV, 10-Intl, 10-LTT, 10-Gold, 25-Cash
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Re: US / International weight

Post by boglerdude » Mon May 02, 2022 7:18 pm

> never recommend this portfolio to anyone less than 50

Unless they have enough saved. Esp combined with a house/downsizing and possible SS/pension.
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Re: US / International weight

Post by Kbg » Tue May 03, 2022 8:23 am

boglerdude wrote:
Mon May 02, 2022 7:18 pm
> never recommend this portfolio to anyone less than 50

Unless they have enough saved. Esp combined with a house/downsizing and possible SS/pension.
Actually, if one has a pension and particularly if one has an inflation adjusted pension there's less reason to have a PP because one has a stable base.

My personal take on portfolios has always been the following:

- Without fail, somewhere in their origin story they are a result of backtesting

- Backtesting results, the interpretation of them and the presumed extension of them as representing the future is a bet on the past repeating. We have no idea if history will repeat or not. (Hat nod to HB and others who emphasize no one knows the future)

- The best portfolio is one you really understand and has "the" risk profile you can actually stick with. The PP is great because it is one that has a good body of written evidence and theory behind it.

- The PP is very conservative which comes with a price...performance/asset growth

- The gold thing is a distinguishing feature of the PP compared to most portfolios...and gold is a hard thing to get one's head around so far as how it behaves as an asset class. The fact that it is a non-productive asset is a legitimate criticism. The fact that it had tended to do well when stocks are doing very poorly and both stocks and bonds are doing poorly is in its history and tends to get ignored by mainstream investors. LOL in advance...gold is awesome to have in one's port or is a complete rip out the bow boat sinking anchor. Which it will be normally lasts about a decade.

I bolded the one line because that's probably the most important thing to understand about any portfolio (e.g. what are the tradeoffs?)
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Re: US / International weight

Post by I Shrugged » Tue May 03, 2022 2:16 pm

In 2009 I made a big bet that the rest of the world would outperform the US. I put half of our stock allocation into the FTSE ex-US fund at vanguard. It’s been a wrong bet ever since. We still have it. But hey, diversification.
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Re: US / International weight

Post by Kevin K. » Tue May 03, 2022 2:48 pm

Tyler @ Portfolio Charts offered some typically insightful thoughts in response to an earlier question in these forums about the possibility of adding international stocks to the PP or GB:

"Q: One additional question: Have you considered a slice of international, for diversification? I realize that past returns show it's always been a return-reducer (with the exception of very high risk EM).


A: I've looked into it several times, and have yet to find a convincing evidence-based reason to add international stocks to a US-based PP. The biggest proponents of international diversification generally cite the very reasonable assumption that US stocks won't always perform so well and you'll need something else to pick up the slack. I completely agree, but the data indicates that gold already fills that role particularly well which is why adding international never seems to improve the numbers. And in the GB, the small caps also pitch in by greatly diversifying away from the relatively small number of large caps that drive returns of a total market fund due to how the index is weighted. There's more to stock performance than the country it's domiciled in.

I'll note, however, that due to macroeconomic forces the negative correlation of gold to stocks is more pronounced in the US than in other countries. If I was a PP investor outside of the US, international investing would look more appealing. And if gold ownership is ever outlawed again in the future or if an individual investor simply has a mental block on owning gold, international stocks are a logical backup choice to fill that role in a portfolio."

And speaking of Tyler, I thought this recent post by him was one of the most amazing and helpful yet:

https://portfoliocharts.com/2021/12/16/ ... ortfolios/

Cutting to the chase, the 3 secret ingredients are SCV, LTT's and gold - in very judicious amounts.

If I were using the PP rather than the GB instead of adding international equities I'd be giving strong consideration to replacing up to half of its TSM allocation to SCV. TSM's performance because of what has happened with the FAANG stocks in just a few short years is pretty much entirely dependent on what that handful of tech stocks does. Works great until it doesn't - like what we're seeing now. Of course you have to be prepared for SCV to under-perform for years, but hey if you can't handle long bouts of underperformance and massive tracking error vs. the larger market the PP/GB aren't for you anyway.

Portfolio Charts has data on how each of the model portfolios on the site works for both the accumulation phase and retirement, as well as safe and perpetual withdrawal rates. To do better than the GB you've got to have enough of an appetite for both managing complexity and dealing with exponentially greater volatility (e.g. Merriman Ultimate, Tyler's own very cool Pinwheel Portfolio). I'd be looking at those options (especially the PInwheel) if I still had decades of paid employment ahead of me.
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Re: US / International weight

Post by dualstow » Wed May 11, 2022 9:33 am

^ Thank you for this post. I haven’t visited Portfolio Charts for a while. Always useful ^
let 2022 be the year of GOLD
The decision of one man to launch a wholly unjustified and brutal invasion of Iraq. I mean of Ukraine.” - W
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Re: US / International weight

Post by D1984 » Wed May 11, 2022 7:58 pm

Kevin K. wrote:
Tue May 03, 2022 2:48 pm
Tyler @ Portfolio Charts offered some typically insightful thoughts in response to an earlier question in these forums about the possibility of adding international stocks to the PP or GB:

"Q: One additional question: Have you considered a slice of international, for diversification? I realize that past returns show it's always been a return-reducer (with the exception of very high risk EM).


A: I've looked into it several times, and have yet to find a convincing evidence-based reason to add international stocks to a US-based PP. The biggest proponents of international diversification generally cite the very reasonable assumption that US stocks won't always perform so well and you'll need something else to pick up the slack. I completely agree, but the data indicates that gold already fills that role particularly well which is why adding international never seems to improve the numbers. And in the GB, the small caps also pitch in by greatly diversifying away from the relatively small number of large caps that drive returns of a total market fund due to how the index is weighted. There's more to stock performance than the country it's domiciled in.

I'll note, however, that due to macroeconomic forces the negative correlation of gold to stocks is more pronounced in the US than in other countries. If I was a PP investor outside of the US, international investing would look more appealing. And if gold ownership is ever outlawed again in the future or if an individual investor simply has a mental block on owning gold, international stocks are a logical backup choice to fill that role in a portfolio."

And speaking of Tyler, I thought this recent post by him was one of the most amazing and helpful yet:

https://portfoliocharts.com/2021/12/16/ ... ortfolios/

Cutting to the chase, the 3 secret ingredients are SCV, LTT's and gold - in very judicious amounts.

If I were using the PP rather than the GB instead of adding international equities I'd be giving strong consideration to replacing up to half of its TSM allocation to SCV. TSM's performance because of what has happened with the FAANG stocks in just a few short years is pretty much entirely dependent on what that handful of tech stocks does. Works great until it doesn't - like what we're seeing now. Of course you have to be prepared for SCV to under-perform for years, but hey if you can't handle long bouts of underperformance and massive tracking error vs. the larger market the PP/GB aren't for you anyway.

Portfolio Charts has data on how each of the model portfolios on the site works for both the accumulation phase and retirement, as well as safe and perpetual withdrawal rates. To do better than the GB you've got to have enough of an appetite for both managing complexity and dealing with exponentially greater volatility (e.g. Merriman Ultimate, Tyler's own very cool Pinwheel Portfolio). I'd be looking at those options (especially the PInwheel) if I still had decades of paid employment ahead of me.
That Portfoliocharts article is excellent but IIRC Portfoliocharts only starts at 1970, right? If you start at, say, 1955 or 1957 or 1960 or 1966 or 1968 any portfolio with LTTs will look much worse than for any period that only starts on 1-1-1970 given that long Treasury interest rates started the mid-1950s at about where they started in 2021 (i.e. ridiculously low) and went up almost continually (with a few exceptions like 1957, 1960, and 1962) from then until around mid-1970 when they reached a peak of 7.60% or so before beginning to decline in the summer of 1970. Of course, they went up even higher than that from 1973 to 1981 but the capital value losses inflicted by this rate rise over this period were at least somewhat cushioned by the relatively high coupon yield paid out; for LTT returns starting in the mid-1950s period there was very much less yield to cushion the falling prices as rates rose.

Conversely, adding foreign equities would've increased your total return (and typically your total 30-year SWR as well....and oftentimes your 40-year SWR too...especially for the periods that included 1956-1960 or 1967-1972) starting from almost any year from 1955 to the late 1970s or very early 1980s.

From the (admittedly crudely) simulated historical pre-1968 gold data sets I have it appears adding gold to a portfolio would've likely hurt SWR and total return (albeit not by as much as one might think) for any period starting in the years 1955 to 1963, would've helped slightly for the period starting in 1964 and probably 1965, and from then on for any time until the mid to late 1970s would've definitely helped even if you "nerfed" the gold returns for 1971 to 1974 to account for gold coming off the fixed $35 an ounce price in late 1971 (after 12-31-1974 gold was truly free market priced and legal to own everywhere so no changes would be made to gold prices from 1-1-75 onwards). From what I can see from the free-market gold prices published by the IMF and the BIS gold would've been killed from 1949 to 1954 had it been truly freely traded and priced so for any portfolio starting in these years gold would've definitely hurt its SWR over thirty or forty years; conversely, had gold been freely priced--instead of artificially fixed at $35 an ounce under Bretton Woods--from say, very late 1945 to 1948 it would've likely done very well in the prevailing environment of financial repression and negative real rates (just look how inflation hedges like silver, oil, platinum, copper, commodity futures in general, farmland, timberland, residential real estate, and commercial real estate did during those years) during most of that time frame.

Also, if one is going to include SCV in a very diversified portfolio like the GB or Pinwheel or Merriman or the like, one should typically go for the valueyy-est and smallest cap SCV one can get. This might be a bad idea if you were only investing in 100% SCV but when using it in a portfolio like this (where SCV only makes up maybe 10-35% of a given portfolio)and rebalancing every year (and/or via rebalance bands) you want heavy exposure to just these kind of volatile SCV equities.

Finally, don't even get me started on the wonderful (and sometimes not-so-wonderful) ways leveraged ETFs can help/harm return and SWR when rebalanced regularly inside a truly diversified portfolio....I do wish Portfoliocharts finds a way to include those in its backtests someday.
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Re: US / International weight

Post by Kbg » Thu May 12, 2022 8:26 am

The Simba spreadsheet on Bogleheads is useful for a really long view of the asset histories available...with a HUGE caveat that it is annual data which will definitely smooth out the lumps one would have taken in reality.

The point made though is a good one...there is pre 1981 and post 1981 when it comes to bonds.

On gold...gold was cash when it and the dollar were pegged and that is how you have to interpret any result during the gold standard period. I don't know why people try to assume or make it into something it was not. If inflation was going strong you got less tangible goods for your dollars AND your gold. So, gold = cash end of story during those years.

Side comment and slightly snarky remark...I love it when folks assert that gold is great due to lack of government control. That's an idea that started in the 1970s and is a shill point made by purveyors of gold. Having said this...I have a decent allocation in paper gold because of it's behavior as an asset class since the 1970s has been useful in a portfolio...but one can make a good argument against it and not be wrong either.

Anyway...studying pre 1981 is worth one's time
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Re: US / International weight

Post by dualstow » Thu May 12, 2022 10:25 am

kbg wrote: I love it when folks assert that gold is great due to lack of government control. That's an idea that started in the 1970s and is a shill point made by purveyors of gold.
Could you clarify?
Didn’t Harry Browne call bullshit on charges of gold manipulation and regulation? Not just once but on a regular basis?
let 2022 be the year of GOLD
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Re: US / International weight

Post by Kbg » Thu May 12, 2022 11:29 pm

When I wrote the above I was specifically referring to governments can regulate anything they want when they want (assuming the powers that be want to). Gold has been no exception.

And they happen to be, by far, the largest holders of the stuff.

I’m not saying it’s being manipulated now…I am saying one is totally naive and ignorant of history to think governments wouldn’t and haven’t regulated it.
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