Ben controversy on FB

[TBS]

To get a more real world sense of what a middle class tax sheltered investment would be like, I input your 7.7% iMSCI World return versus an approximate 11.6% for S&P 500. I invested $1000 a month for 40 years and came out with $2,892,787 vs $8,319,595 respectively. Does that sound right?

I am not sure where you got those 7.7% and 11.6% numbers. Can you say more?

Over that time window, MSCI World Total Return average yearly growth was 9.9%, MSCI USA Total Return was 11.3%. Putting those numbers in your calculator for the 40 year $1000/month investment scenario results in $5,212,406 & $7,655,916 respectively, i.e. investing just in USA gives just 1.47 times more than the World. So no where close to the difference you calculated.

The reason why 1.47x is lower than the 1.6x (actually 1.62x) in my earlier post is because in the monthly investment scenario, the investments are made continually, so many don't experience the full 40 year time to benefit from the (recent historical) rate difference. By contrast the first scenario, one lump sum investment at the start, has the full time to benefit.

For clarity btw MSCI USA is not the same as S&P500. MSCI USA covers 627 large and mid cap stocks, so it's pretty close to S&P500 but not exactly the same. Likewise MSCI World is a developed markets index, so not the same thing as MSCI All Country World Index which includes emerging markets (and is what the popular eMAXIS Slim All Country fund tracks).

For price returns (not reinvesting dividends), MSCI World returned 7.4% over the past 40 years compared to MSCI USA's 8.7%. So maybe you compared MSCI World's non-dividend figure to an S&P500 total return figure or something...

All figures I'm quoting are USD-based btw

[TBS]

Another way to understand that the USA cannot produce such outsized returns compared to the All Country World Index in future is to consider this:

The USA currently makes up 62% of the ACWI index. So $100 invested in an all country index fund today is $62 invested in the USA. In the apocalyptic scenario that the $38 value of the rest of the world's stock drops to $0 tomorrow, you will still have $62 invested in the USA. So 40 years down the line, you will still have 62/100ths of the return of someone who invested in $100 today in the USA only. I.e. the investor going gung-ho on Uncle Sam will have just 100/62=1.61x more than the ACWI investor - in the absolutely worst scenario for the ACWI investor.

The upside of going all in on the USA today is capped. A main explainer of why some people think the USA is the best is recency bias. The USA has done best over the past 30 years, but also it was trounced by the rest of the world from 1970 to 1989, and again between 2000 and 2009. And it is also because they haven't thought about the numerous more valid arguments raised in Ben Felix's video.

[adamu]

https://www.youtube.com/watch?v=1FXuMs6YRCY (Ben Felix - International Diversification)

Great video. He kind of glossed over the point about value/small cap stocks. I realise it was a secondary point but it made my ears prick up as MSCI ACWI does not include small cap

[captainspoke]

One aspect of various market/index performances compared/contrasted at different times is globalization. A buzzword, sure, but it's a trend that colors a lot of data that might be corralled and used for on perspective or another.

International trade, and the internationalization of the economies supporting that, has grown remarkably over the decades, and the businesses that make up various indexes have also internationalized. There's lots of data showing what part of the S&P500 depends or relies on foreign trade, when looking at company revenues, profits, etc. The most extreme cases might be apple and microsoft--those with the largest proportion of 'foreign' revenue--which also happen to be the largest S&P500 companies. But on down the index, in terms of market cap, there are others like CAT or PG, which, over the decades, have also become multinationals. The proportion of GM's auto sales by region/country has shifted remarkably between 1970 and 2022.

That's the US side, but I think it's also the case (a lot of the time, IMO) globally. Could Samsung or TSM even exist if they were just domestic businesses? (And setting aside how they might look very recently...) Would any big Japanese companies (world brands) have thrived as they did without globalization?

An outlier might seem to be China, where trade policies of china and its trading partners both allow and disallow internationalization--most all the top brands there (tencent, alibaba, etc) are domestic, but its exports/imports (and the strength of its market) are still a huge portion of its GDP, and China might not even be on the map without its integration into the world economy.

I guess my point is that, "It's different now", or "It's different this time". (famous last words?) Buying an index like the S&P500 in 1970 was buying the US market. Today it's like buying a world index (and its US/world proportions vary depending factors used--revenues, profits, etc). And while that argument may be strongest (best?) for the S&P, the developed/world/non-US markets are also now very global. Bottom line: buying the S&P500 now is a pretty good bet on the world.

What do you think?

[adamu]

What do you think?

I think you didn't watch the video

[TokyoBoglehead]

What do you think?

The video above refutes almost all of your points...

https://www.youtube.com/watch?v=1FXuMs6YRCY (Ben Felix - International Diversification)

Great video. He kind of glossed over the point about value/small cap stocks. I realise it was a secondary point but it made my ears prick up as MSCI ACWI does not include small cap

https://thoughtfulfinance.com/ftse-glob ... cwi-index/

Small caps are 6% of the FTSE All Cap, and are expensive to trade and track. Only huge US-based institutions (Vanguard/Blackrock) can manage it.

I do not think it is worth worrying about, you catch the winners once they enter mid-cap status.

MSCI ACWI held locally in a reinvesting mutual fund is at least equal to VT/or a MF VT Wrap. You could grab a low-cost Small Caps ETF, but I would say it is too much hassle until a nice MF solution comes along.

[captainspoke]

Apart from for entertainment, I rarely watch videos--I've tried, and now and then try again, but IMO videos suck as a mode of presenting information. This is an unfortunate personal quirk when these days, everyone and their brother (or sister) think making videos/youtubes will have some appeal, get them clicks or views, create more impact, or whatever the reason is that they decided to expand what is a page or two of information (or at least the key points) that you can see at a glance whether it's going to be useful or valuable, or worth spending the time on, into 8-20 minutes of what frequently turns out to be wasted time. At a minimum video presenters should, outside of the video presentation, present a summary and outline of the talk, with links embedded so that you can navigate directly to a particular point.

That's rare.

Give me that same information in text form and I'll read and read and read, bookmark it, or leave it open as a tab that I'll come back to when I want to check on or confirm something in it, or scan over again what was said.

Unfortunately for me, video-izing what could be better and more effectively presented in text is far more common in photography (one of my hobbies). Much more so than personal finance. (And photographers as videographers can even be excellent at video presentation--managing and using the technology--when a lot of bloggers (vloggers?) are, to put it politely, a ways down the skill chain. But in spite their expertise, I rarely watch.)

I suppose this point of view on it all is due to my browsing habits (vs the habits of many, many others, and the way the world operates now). I spend lots of time online, on a big laptop (too much time, actually), which is very suited to reading text along with any graphs/charts or pictures--and the text there can include links to other things*, so it's easy to open those things in another tab or window, jumping away and coming back. *Versus a video presenter saying "click on the link in the upper right (or bottom) for another great video to explain that other thing."

On the other hand, I almost never open a browser on my phone. The last time that may have happened was in early July when I was bored while waiting my turn to see a doc at the hospital (nothing important, just followup). And I think it may be the reason, or one of the reasons for the trend toward video-izing so much of what was previously text. Videos can be consumed on phones, while the same or comparable info via text would be awkward. (I have nothing against phones. I have an 11pro, and have been on the fence for a while, whether to go ahead on a 14pro, or, what now looks more likely, a 15pro.)

Back on topic, here's a long article on the S&P. That's the kind of format and depth that I spend time on. But, since it's not a video, someone on a phone would not try to stumble thru it.

[TokyoBoglehead]

Apart from for entertainment, I rarely watch videos--I've tried, and now and then try again, but IMO videos suck as a mode of presenting information. This is an unfortunate personal quirk when these days, everyone and their brother (or sister) think making videos/youtubes will have some appeal, get them clicks or views, create more impact, or whatever the reason is that they decided to expand what is a page or two of information (or at least the key points) that you can see at a glance whether it's going to be useful or valuable, or worth spending the time on, into 8-20 minutes of what frequently turns out to be wasted time. At a minimum video presenters should, outside of the video presentation, present a summary and outline of the talk, with links embedded so that you can navigate directly to a particular point.

That's rare.

Give me that same information in text form and I'll read and read and read, bookmark it, or leave it open as a tab that I'll come back to when I want to check on or confirm something in it, or scan over again what was said.

Unfortunately for me, video-izing what could be better and more effectively presented in text is far more common in photography (one of my hobbies). Much more so than personal finance. (And photographers as videographers can even be excellent at video presentation--managing and using the technology--when a lot of bloggers (vloggers?) are, to put it politely, a ways down the skill chain. But in spite their expertise, I rarely watch.)

I suppose this point of view on it all is due to my browsing habits (vs the habits of many, many others, and the way the world operates now). I spend lots of time online, on a big laptop (too much time, actually), which is very suited to reading text along with any graphs/charts or pictures--and the text there can include links to other things*, so it's easy to open those things in another tab or window, jumping away and coming back. *Versus a video presenter saying "click on the link in the upper right (or bottom) for another great video to explain that other thing."

On the other hand, I almost never open a browser on my phone. The last time that may have happened was in early July when I was bored while waiting my turn to see a doc at the hospital (nothing important, just followup). And I think it may be the reason, or one of the reasons for the trend toward video-izing so much of what was previously text. Videos can be consumed on phones, while the same or comparable info via text would be awkward. (I have nothing against phones. I have an 11pro, and have been on the fence for a while, whether to go ahead on a 14pro, or, what now looks more likely, a 15pro.)

Back on topic, here's a long article on the S&P. That's the kind of format and depth that I spend time on. But, since it's not a video, someone on a phone would not try to stumble thru it.

Sources:

van Binsbergen, Jules H. and Hua, Sophia and Wachter, Jessica A., Is The United States A Lucky Survivor: A Hierarchical Bayesian Approach (March 1, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3689958 or http://dx.doi.org/10.2139/ssrn.3689958

Barber, B. M., & Odean, T. (2013). The Behavior of Individual Investors. Handbook of the Economics of Finance, 1533–1570. doi:10.1016/b978-0-44-459406-8.00022-6

Bailey, W., Kumar, A., & Ng, D. (2011). Behavioral biases of mutual fund investors. Journal of Financial Economics, 102(1), 1–27. doi:10.1016/j.jfineco.2011.05.002

Ritter, J.R. (2012), Is Economic Growth Good for Investors?. Journal of Applied Corporate Finance, 24: 8-18. https://doi.org/10.1111/j.1745-6622.2...

Viceira, L., Wang, Z. (K. (2018). Global portfolio diversification for long-horizon investors. https://doi.org/10.3386/w24646

Asness, C. S., Israelov, R., & Liew, J. M. (2011). International Diversification Works (Eventually). Financial Analysts Journal, 67(3), 24–38. doi:10.2469/faj.v67.n3.1

Anarkulova, A., Cederburg, S., & O'Doherty, M. S. (2021). The long-horizon returns of stocks, bonds, and bills: Evidence from a broad sample of developed markets. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3964908

BEKAERT, G., HODRICK, R. J., & ZHANG, X. (2009). International Stock Return Comovements. The Journal of Finance, 64(6), 2591–2626. doi:10.1111/j.1540-6261.2009.01512.x

Zixuan (Kevin) Wang and Luis Viceira. Working Paper. “Global Portfolio Diversification for Long-Horizon Investors”. Copy at https://tinyurl.com/ycvedksg

Bekaert, G., Hoyem, K., Hu, W.-Y., & Ravina, E. (2017). Who is internationally diversified? Evidence from the 401(k) plans of 296 firms. Journal of Financial Economics, 124(1), 86–112. doi:10.1016/j.jfineco.2016.12.010

Sinquefield, R. A. (1996). Where are the gains from international diversification? Financial Analysts Journal, 52(1), 8–14. https://doi.org/10.2469/faj.v52.n1.1961

Lewis, K. K. (1999). Trying to Explain Home Bias in Equities and Consumption. Journal of Economic Literature, 37(2), 571–608. doi:10.1257/jel.37.2.571

Jacquillat, B., & Solnik, B. (1978). Multinationals are Poor Tools for Diversification. The Journal of Portfolio Management, 4(2), 8–12. doi:10.3905/jpm.1978.408629

Senchack, A. J., & Beedles, W. L. (1980). Is indirect international diversification desirable? The Journal of Portfolio Management, 6(2), 49–57. doi:10.3905/jpm.1980.408729

Rowland, P. F., & Tesar, L. L. (2004). Multinationals and the gains from international diversification. Review of Economic Dynamics, 7(4), 789–826. doi:10.1016/j.red.2004.05.001

Heston, S. L., & Rouwenhorst, K. G. (1994). Does industrial structure explain the benefits of international diversification? Journal of Financial Economics, 36(1), 3–27. doi:10.1016/0304-405x(94)90028-0

If you do not have access to a scholarly database, use this -> https://sci-hub.se/

[TokyoWart]

https://www.youtube.com/watch?v=1FXuMs6YRCY (Ben Felix - International Diversification)

Great video. He kind of glossed over the point about value/small cap stocks. I realise it was a secondary point but it made my ears prick up as MSCI ACWI does not include small cap

Because of this exchange I actually watched that video . I'm a fan of the Rational Reminder podcast for which Ben Felix is one of the hosts. Ben makes the point that international diversification is a "free lunch" pathway to better risk adjusted returns according to the CAPM model but that does not mean that returns are higher with diversification only that risk-adjusted returns should be better with a mix of different assets than just one. However, if you look at the graph the comes up on the video very briefly at 5:05 you see that from 1974-2021 (longer than my investing lifetime) US domestic investors actually lowered their Sharpe ratio if they diversified internationally. That result is counter to what CAPM would predict and the length of time for which diversification worked against the US domestic investor is long enough that it shouldn't be dismissed too quickly.

I agree with Ben that US stocks are richly priced now compared to other markets and for years now I have been trying to diversify my US portfolios so they have 20% international and "only" 80% US stocks but the relative outperformance of US stocks has meant that even when I put nearly all new cash and dividends into international indexes I can't get the allocation up to 20% international.

[Tkydon]

https://www.youtube.com/watch?v=1FXuMs6YRCY (Ben Felix - International Diversification)

Great video. He kind of glossed over the point about value/small cap stocks. I realise it was a secondary point but it made my ears prick up as MSCI ACWI does not include small cap

Because of this exchange I actually watched that video . I'm a fan of the Rational Reminder podcast for which Ben Felix is one of the hosts. Ben makes the point that international diversification is a "free lunch" pathway to better risk adjusted returns according to the CAPM model but that does not mean that returns are higher with diversification only that risk-adjusted returns should be better with a mix of different assets than just one. However, if you look at the graph the comes up on the video very briefly at 5:05 you see that from 1974-2021 (longer than my investing lifetime) US domestic investors actually lowered their Sharpe ratio if they diversified internationally. That result is counter to what CAPM would predict and the length of time for which diversification worked against the US domestic investor is long enough that it shouldn't be dismissed too quickly.

I agree with Ben that US stocks are richly priced now compared to other markets and for years now I have been trying to diversify my US portfolios so they have 20% international and "only" 80% US stocks but the relative outperformance of US stocks has meant that even when I put nearly all new cash and dividends into international indexes I can't get the allocation up to 20% international.

That video is the Opposite side of the Trade from Japan.

In his video, Ben Felix is discussing this subject of International Diversification from the standpoint of "Both Canadian and US-based investors often have US-Centric Portfolios", and "In this video (he is) referring to stocks outside the US as International".

Ben Felix is taking the viewpoint of US (and Canadian) Investors based in US Dollars, investing in US Denominated Assets, and now the US Dollar is so strong it is probably a good time to diversify by buying Foreign Assets (from the US viewpoint, any assets outside the US) to take advantage of the strog dollar today and any weakening of the US Dollar in future...

This is exactly the opposite for a Japan based Yen Denominated Investor, who should probably not be diversifying into Foreign Assets (from the Japan viewpoint, any assets outside Japan) until the Yen strengthens...

Not only are US stocks richly priced now compared to other markets but due to the Weak Yen You are only getting 68.6 cents for you Y100,
whereas two and a half years ago you would have bought 96.3 cents for your Y100, which now is worth Y134.8 just on the exchange rate movement.

The question is what will today's 68.6 cents be worth in JPY in a couple of years time? Who knows ??? That is Foreign Exchange Risk.