> Have some exposure to outside of the US markets.
This is the part that kills my ability to "set it and forget it". So many things bother me about this. I know I have to do it (because Japan), but how much and on what markets?
* I don't like the idea of investing in emerging markets. Having grown up in one, I know how shady those can be and how cooked the books are. Growth is often an illusion. If an emerging market is "promising", I'd rather wait until it achieves developed status.
* Developed market indexes are dominated by Japanese stocks, which have gone nowhere in almost 3 decades. You have to accept that a good chunk of your money is going into a no-growth sink.
* I don't know what to expect from Europe. Or even Canada for that matter. When I look at those countries from a distance, I see that 1) their large corporations have been established looong ago (i.e. no new ones are created) and 2) heavy taxation and regulations in those countries doesn't seem to leave much room for profits, at least not as much as in the US. I'm probably wrong though, so please educate me.
I know home bias is supposedly wrong, but the American market is well studied, well known, highly liquid, and there's a cultural aspect to its growth in that its part of the general population's mindset to invest in it for long term goals. I don't think that's the case in all (or even most) countries.
Part of me wants to go full jlcollinsnh/Bogle/Buffet, folks who say you don't need international diversification. Another part of me wants to go as blind as possible into it and just invest in a "world index" ETF like ACWI or VT. And yet another part of me wants to do something in between but has no idea what to do :)
Well, that's why the original commenter mentioned exposure. You don't invest all your money into just one market. The idea is once again for things to balance out at the end of the day/year/decade.
Invest into multiple emerging markets, chances are they won't all do bad at the same time, especially if they are in different parts of the globe (take India, Brazil and Indonesia for example), put some into an european index fund, etc.
You seem to be most comfortable with the US market, so the bulk of the assets you decided to invest in equities go there, say 70% and to make things easy put 15% into Europe and 15% into emerging markets. Now you have some diversification, but could still feel comfortable enough to not be worried about your money disappearing over night.
Brazil is a disaster. In LA Chile has a quite stable economy and cautious banks (but it could be a pain to bring money into the country because of this).
Vanguard Target Retirement Funds. Pick the one that most closely corresponds to your anticipated year of retirement (or earlier, if you're conservative; later if you want to be aggressive). They will do all of the above for you.
Actually, I've tried doing that. It worked for a while until one at I thought, "does Vanguard keep the course?" Turns out that when you look at it, they've made numerous "tweaks" throughout the years, and often bad calls. They definitely chase performance. Increased stock allocation right before the housing bubble crash. Increased international allocation when they saw it was performing well. Besides, they hold international currency-hedged bonds, something that no one seems to be able to come up with a good reason for.
> Turns out that when you look at it, they've made numerous "tweaks" throughout the years, and often bad calls... Increased stock allocation right before the housing bubble crash.
So what? If your target retirement date was 20+ years in the future, this is arguably the right call. If your retirement date was closer, they still more heavily weighted you toward safer assets.
The fact that they did this before a market crash is irrelevant — nobody can predict these things with any reliability. Not you, not me, not Vanguard.
> They definitely chase performance.
They definitely do not.
> Increased international allocation when they saw it was performing well.
Increased international allocation to track overall market better.
> Besides, they hold international currency-hedged bonds, something that no one seems to be able to come up with a good reason for.
From their website: The fund employs currency hedging strategies to protect against uncertainty in future exchange rates, so investment returns are expected to reflect the underlying performance of international bonds.
Appply same principle of buying and holding for 10+ years and get the Motley Fool Stock Advisor newsletter and buy their pics periodically. Excellent stock research.
I'm not in a position to know myself, but Patrick (author of the blog post that originally kicked off this discussion) does not think highly of The Motley Fool.
The only other data point I have to add is that a year or two ago, The Motley Fool published a breathless blog post announcing that 3D printing was about to destroy Chinese manufacturing, and that everyone should invest in companies that make 3D printers or CAD software.
They are a "diversified financial brand" which does a lot of e.g. telling people to get out of credit card debt (a good idea!) and save for retirement (a good idea!). Then they also tell people that "with just a little work, you too can read company numbers and outperform the stock market" (a really bad idea!) and "if you want to do less work, buy our newsletters and we'll give you picks which mumble mumble maybe mumble mumble will make you into Warren Buffet" (a really bad idea!).
I have a word of warning on Motley Fool. I once invested in a Chinese stock pick that they were promoting, and it shortly went to zero due to being fraudulent. Their research is often second hand and no better than the research you could do yourself.
Here's a simple illustration of why diversification is considered "good" in general. If you think of your portfolio as a weighted average of returns, the variance of the portfolio decreases as you add uncorrelated assets (i.e. diversify)[0]. In the simplest case, imagine two assets with the same expected return whose returns are uncorrelated. If you don't believe in stock-picking ability, diversifying between the two is a good idea. When you try to be more sophisticated about this, you get modern portfolio theory.
I've invested comparatively little in emerging markets for the reasons in your penultimate paragraph plus the standard bogle/buffett advice. I definitely also have a nagging feeling that I could be very wrong about this strategy. For better or worse, I've viewed emerging markets in the same way that patrick views investing in startups: I have little reason to think/presume they will outperform the US markets on average, but I also couldn't successfully argue that they wouldn't.
The "trick" is probably to pay someone else to think about those problems by buying an international index fund like VXUS. If you're not comfortable with emerging markets, find one that excludes them
Yes, he doesn't invest in indexes himself, but it isn't just for the little people. He recommends it for his family. The big secret to Buffet's success is not his picking ability, it is his management ability and good business sense. Yes, of course he does pick to an extent, but he also buys large enough positions to sit on the board and install the right people to make things happen. He also uses his already large portfolio to help create opportunities between the companies he owns.
It's unlikely even Buffet himself could replicate his initial stock picking success over a long period of time and he would be the first to admit that.
What I meant was that he recommends that the average investor should invest in the S&P 500 or total US market only. He doesn't seem to think people should invest their money abroad.
There's a decent argument that American companies are multinational and therefore already exposed to foreign markets. I don't subscribe to that, but it's not totally unfounded.
I thought the Bogleheads usually do recommend intl exposure for us investors. Like, for a not-too-agressive balance, 40% total-stock-market, 40% intl, 20% bonds.
Vanguard recommends it, lots of folks on Bogleheads.org seem OK with it (they tend to recommend a three fund portfolio), but Vanguard founder Jack Bogle has said he thinks a two fund portfolio is sufficient because the US markets list big international companies rather than only those in the US.
In his Little Book of Common Sense Investing, Mr. Bogle recommends a simple portfolio of only two funds for many investors: Vanguard Total Stock Market Index Fund and Total Bond Market Index Fund:
I had similar biases and wasn't able to make a decision because of it, so eventually went with one of the robo advisors (Vanguard) for those reasons. While I don't like not having more control, letting others make decisions has essentially taken my bad behavior out of the equation.
FWIW Vanguard has about 35% allocated to international for me, so it's surprising to see that Bogle wouldn't recommend international exposure.
If you dont want to invest in emerging markets, its not the end of the world.
The risks can be higher but so are the rewards. The most important thing is to not just invest in a market blindly. Try your best to understand that market and keep tabs on that market.
You don't have to diversify for the sake for diversification. You can invest domestically and diversify by industries.
For the most part of the last 5 years, the risks have been higher and the words have been significantly lower than investing in the USA[0]: +75% versus -11%.
You don't need to invest in a foreign company to invest in a foreign market. Take a couple of US companies and see where their revenues come from geographically and diversify your holdings in that way.
> I don't know what to expect from Europe. Or even Canada for that matter...
Yeah, this is an over-generalization. There are plenty of index funds for European companies at a variety of risk levels, just like in the U.S.
Also, there are worldwide funds too. Capital World Growth and Income Fund (CWGIX) [0] is one example that covers the U.S., Europe, and Asia. Note that this is a mutual fund, not an index fund.
Edit: Perhaps the downvotes are because this is an actively managed fund. The point of giving the example was trying to counter the specific concern OP stated. For passive, a specific Vanguard fund that's similar, at least the closest I found, is Vanguard Total World Stock Index Fund (VTWSX) [1]. It is very diversified.
S&P500 index funds are up 77% over the past 5 years. I would say that's kind of proving the point, except international indices have done poorly over that time period and I think that explains most of the difference. (VXUS is up only ~7% over the 5 year period.)
(All figures quoted above are "price" and ignore dividends, which is bad but I don't have easy access to dividends-included figures.)
Yeah, I think it'd be a more valid comparison to put it next to something someone would actually invest that's also international. I'm not sure if there is a similar Vanguard fund.
Edit: I think I found one — VTWSX is +35% over the same time period. Accounting for fees vs the managed fund, probably means a better return here.
This is the part that kills my ability to "set it and forget it". So many things bother me about this. I know I have to do it (because Japan), but how much and on what markets?
* I don't like the idea of investing in emerging markets. Having grown up in one, I know how shady those can be and how cooked the books are. Growth is often an illusion. If an emerging market is "promising", I'd rather wait until it achieves developed status.
* Developed market indexes are dominated by Japanese stocks, which have gone nowhere in almost 3 decades. You have to accept that a good chunk of your money is going into a no-growth sink.
* I don't know what to expect from Europe. Or even Canada for that matter. When I look at those countries from a distance, I see that 1) their large corporations have been established looong ago (i.e. no new ones are created) and 2) heavy taxation and regulations in those countries doesn't seem to leave much room for profits, at least not as much as in the US. I'm probably wrong though, so please educate me.
I know home bias is supposedly wrong, but the American market is well studied, well known, highly liquid, and there's a cultural aspect to its growth in that its part of the general population's mindset to invest in it for long term goals. I don't think that's the case in all (or even most) countries.
Part of me wants to go full jlcollinsnh/Bogle/Buffet, folks who say you don't need international diversification. Another part of me wants to go as blind as possible into it and just invest in a "world index" ETF like ACWI or VT. And yet another part of me wants to do something in between but has no idea what to do :)