Has anyone read Vanguard's February whitepaper on international investing? I noticed it seems to replace their 2012 study. Similar text, new data.
Here is the PDF: Global equity investing: The benefits of diversification and sizing your allocation (Feb 2019)
It's fairly short, but if you don't feel like reading it, here's what I gleaned:
- The U.S. represents 55.1% of the equity market, versus 44.9% for international, as of Sept. 2018. Image.
- U.S. stocks have the lowest volatility of any country, but a global market provides the lowest volatility. Image.
- Vanguard's data suggests maximum volatility reduction was achieved with a 40-50% international allocation (but why not just invest in a global market cap weighted index?).
- Emerging markets should be market weighted, too. They have delivered "higher average returns, albeit with higher volatility, than those of developed markets." However, individual EMs are uncorrelated, so the risk of investing in all of them is lower.
- Currency exposure risks from international investing are minimal, and in some cases, reduce volatility.
- U.S. investors don't benefit as much from international as investors in other countries. Vanguard's ten year, forward-looking model showed maximum volatility reduction in the U.S. at 4%, the UK at 9%, Canada at 11%, and Australia at 15% (roughly). Image.
- Over-weighting U.S. or international stocks leads to sector overexposure and risk. U.S. companies skew towards technology, biotech, and software, while other countries have more "old world" industries such as electrical equipment and automobiles (Vanguard's 2012 study). A global portfolio more accurately captures the market weight of all these industries.
Vanguard also responds to the question if U.S. multinationals provide enough international exposure:
First, simply focusing on domestic companies means an investor has no stake in leading global companies that are domiciled outside their home market. Second, many firms seek to hedge away currency fluctuations of their foreign operations. Although this can help smooth revenue streams, foreign exchange can be a diversifier for an investor’s portfolio. Finally, a portfolio made up solely of domestic firms is likely to have less-diversified sector exposures than the global equity market portfolio.
The report summarizes the benefits of global investing:
By including both broadly diversified U.S. and non-U.S. equities in a portfolio, the investor should obtain a return that falls between those of the U.S. market and those of the non-U.S. market. For example, in the mid-1980s and most of the 2000s, exposure to diversified non-U.S. equities would have allowed a U.S. investor to participate in the outperformance of those markets. On the other hand, exposure to U.S. equities for most of the 2010s would have benefited global investors domiciled outside the United States.
My prediction: VTWAX will eventually replace VTSAX and VTIAX in all Vanguard target date funds.
What do you think?
Submitted February 27, 2019 at 03:06AM by VegetableJunkie https://ift.tt/2XnsIxT
