Allocation to non-US stocks

[mabcpa17]

I recognize the purest approach to the PP calls for the stock portion of the portfolio to be 100% to US equities; however, any views on whether this needs to be revisited?  Two reasons I am thinking about broadening beyond US equities; 1: the valuation of many non US equities (particularly emerging markets) is much lower than the US and 2: many non-US markets have lagged beyond the US and it would seem that there needs to be some mean-reversion at some point.

Same question for the bond portion of the portfolio. US is no longer AAA and many countries don't have the ongoing deficit we have.

With all of the above said, I am still a believer in the US leading the way, but wondering if it might be prudent to reconsider whether the US is really the safest place to be from an investment standpoint.

Thanks

[LittleD]

You are correct that Harry advocated setting up the portfolio to reflect your home country.  I don't think you
would be to politically incorrect to do something like:

15% VTI  Vanguard Total Market US
10% VXUS Vanguard Total World ex US.

You would have to accept some additional currency risk but you would be invested in over
8,000 stocks.

[mabcpa17]

Thanks!

Any thoughts on allocating to non-US bonds as well? Or is the thinking here, if the US tanks, the rest of the workd does too? 

[Kshartle]

Thanks!

Any thoughts on allocating to non-US bonds as well? Or is the thinking here, if the US tanks, the rest of the workd does too? 

I don't think there is a very good substitue for the 30 year US treasury available.

Most here will say that the gold componenet should be sufficient to protect you. I disagree since the bond portion outweighs the gold 2 to 1.

An interesting idea that is low volatility is replacing the cash portion with a Chinese RMB fund. They are extremely low volatility with what appears to me...very little downside compared to the dollar. The Chinese have been intervening for years to keep the currency down against the USD suggesting it naturally wants to rise. I think the reasons for that are obvious. They have decided to let it go up in measured steps though.

My thinking is...if the USD was seriously tanking...the RMB might go down with it but should not go as fast. At some point the Chinese should give up the manipulation because their people will be howling about inflation.

The ETF is CYB and it's up 7.9% in the last three years vs. SHY at 2.1% with practically zero volatility.

It's not much, but I think it's safer than having 50% in USD. Others will disagree I'm sure.

[dualstow]

Kshartle, are you saying that 1/4 of your portfolio is in this CYB fund instead of US dollars?
And this is your pp, not a variable portfolio?

[Ad Orientem]

I have seen some discussion of using VT instead VTI for the stock allocation and I don't think that would be particularly horrible. But my advice for those seeking some international exposure is to confine it to the variable portfolio. If you do 90% in an HBPP (all US) and then 10% in a variable portfolio using VT or VEU I think you could capture some zip when the foreign markets are doing better or the dollar drops in value. Likewise it adds a bit more exposure to stocks which over the last 200 years have been the best performing asset class, without going too far out on the risk curve.

[Kshartle]

Kshartle, are you saying that 1/4 of your portfolio is in this CYB fund instead of US dollars?
And this is your pp, not a variable portfolio?

No I don't own any bonds and very little cash.

I don't care about volatility, I'm 34. I am buying just PM and stocks until interest rates are much higher.

[Ad Orientem]

Kshartle, are you saying that 1/4 of your portfolio is in this CYB fund instead of US dollars?
And this is your pp, not a variable portfolio?

No I don't own any bonds and very little cash.

I don't care about volatility, I'm 34. I am buying just PM and stocks until interest rates are much higher.

Wow. That's a very speculative portfolio. If we see a sharp rise in inflation you stand to make a killing. But there's no way I would be able to sleep at night with a portfolio holding only stocks and gold/silver.

[Kshartle]

Kshartle, are you saying that 1/4 of your portfolio is in this CYB fund instead of US dollars?
And this is your pp, not a variable portfolio?

No I don't own any bonds and very little cash.

I don't care about volatility, I'm 34. I am buying just PM and stocks until interest rates are much higher.

Wow. That's a very speculative portfolio. If we see a sharp rise in inflation you stand to make a killing. But there's no way I would be able to sleep at night with a portfolio holding only stocks and gold/silver.

It's not nearly as volatile as you might think. They are uncorrelated and I don't check in too often. The part that is volatile is the gold mining stocks. That's the only thing I've been buying for about 8 months and I have a huge allocation there now.

[dualstow]

You must have a king-size pair, KS. I know that gold miners are beaten down, but I don't think I could make a concentrated bet on them, ever.
Well, here's hoping they have a great year.

[Quasimodo]

My choices are Vanguard's Total World Stock etf (VT) for the stock portion, and Vanguard's Total International Bond etf (BNDX) for the bond portion.

I realize this is not in conformity with Harry Browne's writings, but after the political impasse last fall I'm more comfortable holding an international bond index than US bonds.

Just a personal preference.

John

[Ad Orientem]

My choices are Vanguard's Total World Stock etf (VT) for the stock portion, and Vanguard's Total International Bond etf (BNDX) for the bond portion.

I realize this is not in conformity with Harry Browne's writings, but after the political impasse last fall I'm more comfortable holding an international bond index than US bonds.

Just a personal preference.

John

Just be aware that could leave you dangerously exposed in any scenario where the dollar strengthens.

[Thomas Hoog]

I also like to have some international Bonds
However Vanguard's Total International Bond etf (BNDX) is not what i want:
almost 60 % Europa, 27 Pacific (Japan) and only 7 % US
2) duration is only 6,6 years

[murphy_p_t]

Kshartle, are you saying that 1/4 of your portfolio is in this CYB fund instead of US dollars?
And this is your pp, not a variable portfolio?

No I don't own any bonds and very little cash.

I don't care about volatility, I'm 34. I am buying just PM and stocks until interest rates are much higher.

KShartle...I'm very sympathetic to your investment strategy...having heard the arguments of the goldbugs for many years...including recent articles saying that the miners are at historic lows currently.

Do you have any thoughts about when/where the bottom will come in, or do you bother...just knowing that eventually they will turn sharply higher? Any commentators you follow closely for insights?

[mgtow]

I think Harry Browne's "sticking to your home country's stock market" might be a little too simple.  In Canada for instance, our stock market is resource heavy and something like 10% of the TSX60 are gold miners (too much overlap with the 25% gold portion). One flavor of PP suggests to put the stock portion in the MSCI EAFE index which is way more diversified and will do well should the Canadian dollar tank like it did in 2008.

Would like to hear the thoughts on this of other Canadians who hold a permanent portfolio, or like me starting out.

[magneto]

UK investor here with stocks at :-
1/3rd domestic
2/3rds global
but thinking maybe 100% global is optimal.

We should not forget the oft quoted example of the hapless Japanese investor should he have invested 100% domestic.

The currency effect for non-domestic stocks tends to cancel out over time as higher domestic currency means head winds for stocks and lower domestic currency more competetive pricing.  From memory I think authors such as Malkiel and Siegel have commented on this issue.

Having said that, US investors may be at an advantage in that the US companies do not trade across borders to the same extent as in smaller countries, so an allocation to international is less critical.

All Best

[Ad Orientem]

UK investor here with stocks at :-
1/3rd domestic
2/3rds global
but thinking maybe 100% global is optimal.

We should not forget the oft quoted example of the hapless Japanese investor should he have invested 100% domestic.

The currency effect for non-domestic stocks tends to cancel out over time as higher domestic currency means head winds for stocks and lower domestic currency more competetive pricing.  From memory I think authors such as Malkiel and Siegel have commented on this issue.

Having said that, US investors may be at an advantage in that the US companies do not trade across borders to the same extent as in smaller countries, so an allocation to international is less critical.

All Best

I have no strong objections to using a global stock market index fund or ETF, especially for countries with a smaller share of the global economy. Prosperity is also the only one of the four possible economic conditions that is not closely tied to a currency event. Using VT or something close to it for the stock allocation seems acceptable.

[tnt]

From a PP perspective I wonder if we are approaching a point with these broad index funds where they are so broad they don't mean anything.  The foundation of the PP is looking for opposite correlations that are volatile enough to compliment each other and also some back testing data to back it up helps.  In a VP, a guy can do whatever works for them but the PP is different.  Is an "All Universe" fund next from Vanguard?  Not downing anyone, just asking the question, this is a good conversation. 

[Ad Orientem]

From a PP perspective I wonder if we are approaching a point with these broad index funds where they are so broad they don't mean anything.  The foundation of the PP is looking for opposite correlations that are volatile enough to compliment each other and also some back testing data to back it up helps.  In a VP, a guy can do whatever works for them but the PP is different.  Is an "All Universe" fund next from Vanguard?  Not downing anyone, just asking the question, this is a good conversation.

I think that's a very good question. In general I advise against tinkering with the PP. The LTTs, gold and cash are all there because they react violently, or at least hedge against certain economic conditions that are tied to currency. Stocks are the only exception. Prosperity is not a currency based phenomenon. Thus I am somewhat more comfortable with a global index fund. We live in a world today where economics have become globalized to a degree not seen since before the First World War. Prosperity in particular is likely to be seen and felt throughout most of the developed nations at the same time.

Additionally there are some advantages already alluded to. Chiefly that a global stock fund adds a degree of insurance against a severe currency based crisis, i.e. inflation or deflation , which, with the exception of the early 1930's, have historically not been global phenomenons. Are there added risks? Yes. An SHTF event that could jeopardize the globalized economy, think World War I, would hurt. But you still have the other three legs of the PP. And lastly I have long been dubious about non-US PPers concentrating stocks in a single stock market because IMHO there are really only a few that are big enough to serve as the fourth leg of the PP. Those being the United States, the EU and probably Japan.

All of which said my PP uses a Total US Index. VT is my variable portfolio.

[tnt]

From a PP perspective I wonder if we are approaching a point with these broad index funds where they are so broad they don't mean anything.  The foundation of the PP is looking for opposite correlations that are volatile enough to compliment each other and also some back testing data to back it up helps.  In a VP, a guy can do whatever works for them but the PP is different.  Is an "All Universe" fund next from Vanguard?  Not downing anyone, just asking the question, this is a good conversation.

I think that's a very good question. In general I advise against tinkering with the PP. The LTTs, gold and cash are all there because they react violently, or at least hedge against certain economic conditions that are tied to currency. Stocks are the only exception. Prosperity is not a currency based phenomenon. Thus I am somewhat more comfortable with a global index fund. We live in a world today where economics have become globalized to a degree not seen since before the First World War. Prosperity in particular is likely to be seen and felt throughout most of the developed nations at the same time.

Additionally there are some advantages already alluded to. Chiefly that a global stock fund adds a degree of insurance against a severe currency based crisis, i.e. inflation or deflation , which, with the exception of the early 1930's, have historically not been global phenomenons. Are there added risks? Yes. An SHTF event that could jeopardize the globalized economy, think World War I, would hurt. But you still have the other three legs of the PP. And lastly I have long been dubious about non-US PPers concentrating stocks in a single stock market because IMHO there are really only a few that are big enough to serve as the fourth leg of the PP. Those being the United States, the EU and probably Japan.

All of which said my PP uses a Total US Index. VT is my variable portfolio.

Have you back tested the global index with the remainder of PP intact?  I need to go back and look and some of the VP's and see how they have done with international mixes.  Some I have seen use way to many funds.

[Stewardship]

Living in the United States, which I consider to be in decline, I've also considered diversifying in international stocks.  While I've ultimately decided to do this for my VP, I've decided against it for my PP because I feel it throws it disrupts its synergy and throws it a little off balance unless ALL of your PP is international.

I look at it this way:

• US Dollar performs during US recession
• US Stock performs during US prosperity
• International cash performs during International recession
• International stock performs during International prosperity

I think the problem with an "international HBPP" or HBPP of any country other than the United States is that the gold allocation is more reactive to US inflation than that of any other country, so it would be a less adequate hedge against local (non-US) inflation.