Ben controversy on FB

[TBS]

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.

Respectfully, the lower Sharpe ratio from the perspective of a US investor diversifying from all US (no currency risk) to international stocks is not the relevant number to be considering here. We'd need the yen-based Sharpe ratio difference between switching from US to global stocks. Both sides of that coin have (different) currency risks, and that would change the returns and the volatility entering in to the Sharpe ratio calculation (i.e. it won't be the same as the number on that graph).

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.

I suspect that this reflects in part how gloriously wealthy you are with investments compared to your current income
If you are coming from a base of 100% US stocks, in the recent climate of low US dividend yields, it could take a decade or two for this rebalancing strategy to reach 80/20, even if the US was not outperforming the RoW.

[TBS]

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...

No, this is exactly the opposite of what Ben Felix would recommend. Please do not pollute another thread with your delusions on timing forex markets & future country stock market returns.

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.

Do you not see the internal contradiction with what you say above then write here a few sentences later?

[Gulliver]

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.

OK I’m gonna have to address this because the idea seems to be snowballing lately.

The concept of recency bias originated as an attempt by a 19th century psychologist to explain certain kinds of cognitive biases. It has subsequently become trendy to attempt to apply the idea to economic theory. Many investors, unfortunately, use the concept as a basis for their arguments. This practice however, results in the fallacies of equivocation and causal reductionism.

In layman’s terms: The idea is bogus to begin with and, even if it weren’t, its components are logically incomplete (its correlation to investing is weak and an individuals reasons for investing are manifold).

As a result, a person using this term is often unwittingly exhibiting cognitive bias (a sort of learned bad behavior in this case) themselves and any arguments based therefrom are invalid.

If one were to try to find similarities (however spurious they actually are) between recency bias and investor behavior, the practice of panic buying and selling would be more apt- I.e. placing more relevance on a recent events rather than historical records.

To a certain extent, aren’t we all betting on the past, the future or a little of both?

Otherwise I appreciate your input!

In related news, Michael Burry (what is everyone’s estimation of his recency bias?) bet $1.6 billion that the S&P 500 and NASDAQ 100 will crash .

[TokyoBoglehead]

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.

As a result, a person using this term is often unwittingly exhibiting cognitive bias (a sort of learned bad behavior in this case) themselves and any arguments based therefrom are invalid.

A fallacy may weaken one's arguments, but it certainly doesn't make them automatically invalid.

In layman’s terms: The idea is bogus to begin with and, even if it weren’t, its components are logically incomplete (its correlation to investing is weak and an individuals reasons for investing are manifold).

In polite conversation, the correct terminology is that which makes a person's ideas understood.

In this case, it is appropriate as the US has only outperformed in recent memory.

https://www.investopedia.com/recency-av ... as-5206686

In related news, Michael Burry (what is everyone’s estimation of his recency bias?) bet $1.6 billion that the S&P 500 and NASDAQ 100 will crash

This is incorrect. The notional value is 1.6 billion. The "bet size" is likely between 50-70 million. These options can be resold for a profit or loss, or go to zero if held and never exercised.

[Gulliver]

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.

As a result, a person using this term is often unwittingly exhibiting cognitive bias (a sort of learned bad behavior in this case) themselves and any arguments based therefrom are invalid.

A fallacy may weaken one's arguments, but it certainly doesn't make them automatically invalid.

I think you misunderstood my point which was that the phrase used here not only manifests fallacies but also cognitive bias making the argument invalid (or as you alluded to, too weak to withstand scrutiny). If he would’ve stuck to the numbers instead of pseudo-psychology it would’ve been a much stronger argument. I’m sure we could run around in circles on this. Let’s not.

[Gulliver]

In this case, it is appropriate as the US has only outperformed in recent memory.

Historical-Performance-of-U.S.-Stocks-vs.-International-Stocks-740x553.png

https://www.investopedia.com/recency-av ... as-5206686

I think your idea of a recent memory and mine are different…

[TokyoBoglehead]

In this case, it is appropriate as the US has only outperformed in recent memory.

Historical-Performance-of-U.S.-Stocks-vs.-International-Stocks-740x553.png

https://www.investopedia.com/recency-av ... as-5206686

I think your idea of a recent memory and mine are different…

Definition
noun/idiomatic What is commonly remembered by most people, especially in terms of recent historical developments.
from Wiktionary, Creative Commons Attribution/Share-Alike License.

Simply put, most investors today have not experienced, or were not conscious investors, during significant periods where international stocks outperformed. Their lived experience has taught them to assume US outperformance is the norm.

[Deep Blue]

Simply put, most investors today have not experienced, or were not conscious investors, during significant periods where international stocks outperformed. Their lived experience has taught them to assume US outperformance is the norm.

This is a great thing to remember across all of investing. Low interest rates are another - all investors in their thirties and most in the fourties won't have experienced high inflation and these high interest rates. Actually there was an article in the Nikkei this week talking about Japanese banks trying to recruit people with experience of non-zero interest rates and failing to be able to find anyone...

We all tend to extrapolate the recent past forward - this is one of the reasons momentum investing works - people like buying what is going up.

I don't have any strong view on US vs non-US stocks but I do believe this coming period of sustained high interest rates (ex Japan at least) is going to lead to many things people have not experienced in their careers/investing lives. Old assumptions may not be as valid as they used to be.

[TokyoWart]

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.

Respectfully, the lower Sharpe ratio from the perspective of a US investor diversifying from all US (no currency risk) to international stocks is not the relevant number to be considering here. We'd need the yen-based Sharpe ratio difference between switching from US to global stocks. Both sides of that coin have (different) currency risks, and that would change the returns and the volatility entering in to the Sharpe ratio calculation (i.e. it won't be the same as the number on that graph).

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.

I suspect that this reflects in part how gloriously wealthy you are with investments compared to your current income
If you are coming from a base of 100% US stocks, in the recent climate of low US dividend yields, it could take a decade or two for this rebalancing strategy to reach 80/20, even if the US was not outperforming the RoW.

Just wanted to reply to acknowledge your comments because I am at least partly in agreement with you.

First, I agree that the situation is different for those of us living in Japan because of the currency risk issue. I feel like I live in both the US and Japan because my expenses are split between yen- and dollar-based expenses both in the near and long term. I highlighted that graph in Ben Felix's video because it is such a surprise to me that even over that very long period, for the US based investor there was not just less absolute return if they diversified into foreign stocks but even the risk-adjusted Sharpe ratio return is lower. That is remarkable and makes me reluctant to criticize my US friends who are not more internationally diversified (but maybe I still should ).

Regarding rebalancing, if we have just one more stretch like 2000-2009 I think my portfolio will meet that asset allocation target quickly. I'm old enough that the amount I save each year is small relative to my total portfolio, but that doesn't require being "gloriously wealthy" (which sounds like fun). If we're aiming for 25X living expenses saved by the age of retirement and are saving an aggressive 20% of income that might be 2-3% in new funds added to a portfolio each year when you've passed 還暦 like I have. When the US outperformance is larger than 2-3% you just keep falling behind.

But, bottom line, I also feel like the US is relatively over-valued and that Ben Felix's advice on this is better than mine. Thanks for the comment.

[TBS]

Just wanted to reply to acknowledge your comments because I am at least partly in agreement with you.

First, I agree that the situation is different for those of us living in Japan because of the currency risk issue. I feel like I live in both the US and Japan because my expenses are split between yen- and dollar-based expenses both in the near and long term. I highlighted that graph in Ben Felix's video because it is such a surprise to me that even over that very long period, for the US based investor there was not just less absolute return if they diversified into foreign stocks but even the risk-adjusted Sharpe ratio return is lower. That is remarkable and makes me reluctant to criticize my US friends who are not more internationally diversified (but maybe I still should ).

...

But, bottom line, I also feel like the US is relatively over-valued and that Ben Felix's advice on this is better than mine. Thanks for the comment.

There have been three excellent posts on the US vs global diversification debate the Bogleheads reddit recently:
https://www.reddit.com/r/Bogleheads/com ... _exus_not/
https://www.reddit.com/r/Bogleheads/com ... ot_part_2/
https://www.reddit.com/r/Bogleheads/com ... ot_part_3/

The author looked at all time periods within the past 120 years, using market cap data backed out from this graph:

The posts truly are excellent. They add much more than just looking at one timeframe (e.g. the 1970~1980 to present timeframe considered in the thread and in the graph shown in Ben Felix's video). The posts are too long for me to summarize here, so I encourage people to read them themselves.

The analysis is not perfect. For instance using market cap data means dividend reinvestments are not taken into account. This is not too much of an issue if dividend US and RoW dividend yields are comparable over the past 120 years. In recent times US dividend yields have been lower than RoW I believe, so actually the analysis for those years may flatter the US a little.

But I will leave the conclusion from post two:

The only thing we can do is to buy both the winner and the loser. It doesn't matter if it's a fixed asset allocation, 70/30, or 60/40, or 50/50, or market cap, or inverse market cap, we can know which asset allocation is the best only in hindsight. But it's very important that we hold both the winner and the loser, because even the loser will grow in the long term, and it's better to turn out average than to risk going all-in on the loser.

I'll also re-emphasize my point from earlier that the 60+% global market cap of the US today means the potential upside of betting on the US now is very much lower than the situation of betting on the US the 80s & 90s when the US market cap way mostly below 50%. If the US does continue to out-perform from now, a diversified investor will end up taking most of those gains too. However if the US falters, a diversified investor's returns will likely steamroll those of the US-only investor, mirroring what happened the last time the US market cap was so high:

If you started investing in the US during the spectacular plateau of 1950-1970, when US market cap hovered between 65% and 73%, you were in really bad shape.

Thank you also, TokyoWart. And agreed, the three situations of a US-based, Japan-based, or Japan-based investor with US expenses are all distinct and need separate consideration.