Background: Vanguard is forecasting global equities (ex-U.S.) to return significantly more over the next 10 years than domestic equities.

• U.S. equities: 3.7%-5.7%
• Global equities (ex-U.S.): 7.0%-9.0%

Source: Vanguard December Outlook

Over the past several years, I have probably been "overweight" on U.S. equities. While it has served me well, I am starting to slightly increase my international allocation as I invest my excess cash. With valuations where they are, global equities are increasingly looking like the better value to me. As of the last update on Vanguard's website (11/30/2020), VTSAX had a P/E ratio of 27.7x, while VTIAX had a P/E ratio of 19.1x. I haven't done the math, but I assume the FAANG and Tesla stocks drive the VTSAX ratio up pretty significantly, so I understand P/E isn't the end-all be-all in this assessment.

At the same time, I do question whether the same factors that have allowed the U.S. stock market to flourish in recent years (e.g., governmental policy, tech innovation, sociocultural aspects, etc.) will continue to push the U.S. to outperform other countries. Is it inevitable that we are going the way of Europe? It does feel like I've been reading these types of articles/white papers for a few years now and the forecast hasn't materialized yet. This article from Fidelity a year ago seems relevant to the discussion, as I imagine similar arguments may surface.

Curious to get the board's opinion and what moves everyone is making, if any.

It probably makes sense to add incremental exposure to international, especially emerging markets. Just like the out performance of growth over value, domestic equities have far outpace gains in international.

With continued printing of the US$, emerging markets should make some headway. I think it has already started.

Agree. Emerging markets have done pretty well lately, and the outlook is strong overall for international equities. It's probably one of the biggest shortcomings of the average American investor - - adding international exposure actually reduces risk of one's portfolio. We've seen the past few weeks that we're not immune from geopolitical risk, here.

I agree with Vanguard's assessment. But I'm more of a value investor than someone who likes to dabble in speculative high growth stocks (like Tesla). While it's easy to get caught up in the tech mania of huge returns, those also tend to correct swiftly once the speculators realize there's no more greater fools to keep pumping up the price to irrational levels of exuberance.

I think US stocks are certainly richly valued. It doesn't mean the next 10 years will be poor returns, but I don't see as much upside given the amount of growth that has occurred. I also tend to think International stocks have been undervalued. The combination of a weakening dollar plus mean reversion of valuations could mean that international has much greater returns over the next decade.

But you never know. I have about 33% US and 66% International, as I feel this is probably an "appropriate" market cap distribution for global equities even though the current valuations favor something closer to 50:50.

I am comfortable with this at the end of the day, which is all that really matters as an individual investor and whether or not you can stay the course.

These things also tend to mean-revert. Whenever one side gets significantly overvalued compared to the other, returns shift. See: US stocks roaring in the 60s, only to correct in the 70s and early 80s (where international dominated). US stocks then roared again in the 90s, only to lose out in the 00s to international. International then roared back in the 2010s....what will happen in the 2020s? Nobody knows. These trends can happen for unpredictably long periods of time, but if I were to venture a guess I would say international is poised to perform better over the next decade.

The following chart only goes to 2017, the US has continued to outperform beyond that to present day.

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I can't vote internationally. At least here my vote has a say on policy.

And they've been saying that for the last 10 years.

When shtf.....it all comes to the USA.

The correlation between the domestic and international markets are currently at 97%


It's really simple, and it all depends on fund flow

Look at iefa, and the top 10 holdings.
Or iemg and the top 10 holdings

Now look at Nasdaq top 10 or s&p top 10.

Which would you rather own.

FunkyKO said:

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Look at iefa, and the top 10 holdings.
Or iemg and the top 10 holdings

Now look at Nasdaq top 10 or s&p top 10.

Which would you rather own.

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Looking backwards or forwards? From a valuation perspective, I've added to international.

FunkyKO said:

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I can't vote internationally. At least here my vote has a say on policy.

And they've been saying that for the last 10 years.

When shtf.....it all comes to the USA.

The correlation between the domestic and international markets are currently at 97%


It's really simple, and it all depends on fund flow

Look at iefa, and the top 10 holdings.
Or iemg and the top 10 holdings

Now look at Nasdaq top 10 or s&p top 10.

Which would you rather own.

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Thanks for the feedback. A few questions, if you'll indulge me:

1. From a purely financial perspective, does your vote really matter? That seems more like "warm fuzzies" than rational investment advice. Isn't the better course of action is to analyze how the political discourse is trending for the entire population?
2. Looking at the cyclical nature of international vs. domestic equities, couldn't you use your "10 year" comment as an argument for increasing your international asset allocation?
3. I don't understand your comment about "fund flow"? Are you just referring to how mutual funds invest their money?
4. The top holdings in IEFA don't trouble me that much. If you're concerned about nationalization, CCP influence, etc., I can understand why you don't like IEMG though. Admittedly, my international exposure is light on China and I'm not sure how I feel about that. Probably means both lower risk and lower return in the coming years.

I construct portfolios using forward looking capital market assumptions (CMAs). If you look at Mercer, JPM, Goldman, PIMCO, Research Affiliates, etc... all of their projections suggest international will do better over the next 7-20 years. The biggest theme underlying this is an expectation of the dollar weakening. Of course this has been true the last 7-8 years, but hurt as US has outperformed.

More specific than international. Emerging markets are widely considered to be most favorable from a forward looking risk/reward perspective, assuming you are investing strategically over the long -term.

1. Yes it matters, and we have no say in how Europe or China or whoever, changes tax code or regulations in their respective country.

2. Show me a time frame where the USA has been near zero and international has been positive 14% for a ten year stretch. I've use capm, cape shiller, rob arnott, (cape and arnott were right in 2017), and many others....

3. Fund flow. Where is money funds flowing to.

Example. Top fund flow etfs 2020. VOO VTI QQQ IVV ESGU and this is how big money invests, why? They understand that active mgmt is hit or miss.
Those etfs they all have the top 5 stocks in common.

4. Correlation is near equal for both USA and international, so what are we really getting. Having to explain why our portfolio return stinks but is allocated correctly according to some backward looking model suggested by someone who has no skin in your game.

Set Nasdaq 100 as your baseline and work from there. If it helps, keep it, if I'd doesn't dump it. You can always fall back on ndx100

Sorry I keep editing.

Looking at iemg top five holdings.

Tsm. Vs nvda. Gimme nvda
Baba vs Amzn. Gimme Amzn
Tencent....not really a great compare to one us equity.
Samsung vs aapl. Gimme aapl
Meituan. A hybrid.....shopping plus travel entertainment dining. So Amzn Priceline Yelp

So what is iemg really giving me that the QQQ USA doesn't have already.

Compare iefa, what am I getting really that VOO or esgu doesn't already have?

Volatility correlation is practically 100

It sounds like you know what the market will do next. That must be nice

IMHO, adding international - both developed and emerging, is probably a smart play right now.

I don't.

But fund flows will tell you, and funds are flowing to USA.

They have been, they will.

4 trillion in cash right now. Plus 2k of stimulus coming.

It's not as difficult as it seems

FunkyKO said:

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2. Show me a time frame where the USA has been near zero and international has been positive 14% for a ten year stretch. I've use capm, cape shiller, rob arnott, (cape and arnott were right in 2017), and many others....

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I posted a chart that clearly shows many periods like that. Why you decide to ignore that evidence, I do not know. There have been plenty of periods with low US returns and much higher International returns.

FunkyKO said:

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I don't.

But fund flows will tell you, and funds are flowing to USA.

They have been, they will.

4 trillion in cash right now. Plus 2k of stimulus coming.

It's not as difficult as it seems

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Yeah, fund flows tell you what has happened. Not what will happen. I'm more of a contrarian. To each his own.

So am I. But that 4 trillion cash is going to follow 70 USA 30 international cookie cutter standard.

Who gets more flow.

That chart show rolling 3 year returns.

And no one ever said but how did you do vs intl index

Until it doesn't

Here ya go. The best 10 countries by price to earnings price to book price to sales price to cash flow. Etc

Apply statistics to determine forward looking expected return.

Use single country etf to gain exposure.

FunkyKO said:

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That chart show rolling 3 year returns.

And no one ever said but how did you do vs intl index

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Great. Now do the next ten.

Until you read the investment strategy of calpers, teachers retirement system, Govt pension, United auto workers etc etc.

Comparing the ten before was a tome where information didn't flow as freely. So what's the point.

The point is the next ten years probably won't look like the last ten. You don't have to believe it. Invest however you feel works best for you.

However they will be more correlated than ever.

Sounds good.

There ya go. Statistically ranked by forecast next ten ten years.

USA is at the bottom. But it's been this way for the last 20 years. A d we know how that worked out.

Good luck

You bet. Cathy Wood sure could use it

Bill Miller was pretty good, too.

True but Miller did it in a time before the information flowed as freely. Congrats to him for taking advantage of it.

FunkyKO said:

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You bet. Cathy Wood sure could use it

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I can name a dozen hot fund managers that came and went, she will too. Her recent outperformance is unlikely to be persistent as we have seen time and time again.

FunkyKO said:

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However they will be more correlated than ever.

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Correlation isn't the issue.

In many of the scenarios I posted, US and International were correlated and would have had neutral or positive returns. However, the magnitude of the returns was significantly different.

I'll leave it at this. I have no idea what the market will do tomorrow. So I will have some international in my portfolio.

Statistical correlation say .97%.

Bloomberg terminal says 96.6%.

Now correlated more than ever. Borders don't matter as much any longer.

And hot fund managers have a hard time beating qqq. Which goes back to what I said way back up there.

Artyx would be my choice.

FunkyKO said:

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Statistical correlation say .97%.

Bloomberg terminal says 96.6%.

Now correlated more than ever. Borders don't matter as much any longer.

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You don't understand the difference between correlation and total return.

US stocks and International were highly correlated this past decade (and have been longer than that), yet one had much greater returns.

It's worthwhile to invest in both. You are arguing that it would be fine to invest in either exclusively just because they are "correlated". That's not what diversification means.