I had an idea which I think is good but runs completely counter to traditional investment advice. I wanted to make my pitch for it and see what everyone thinks and what Im missing.
tl;dr – Based on the studies below, I think an internationally focused, diversified equity portfolio has a higher chance of netting 3% per annum over a 35 year time horizon than a traditional domestic focused stock/bond portfolio.
My situation – Im in my mid 20s. No debt and work in a moderately high paying field (IT) with a fairly secure career. Thanks to living at home for a year after college, starting investing when I was a teenager and saving like crazy, I saved quite a bit of money. Assuming I keep up IRA contributions and get 3% matching on 401k contributions for my career, I need a real return of about 3% to retire comfortably.
My Idea
Given this, I think traditional advice would be to hold a decent portion of the portfolio in fixed income (bonds/CDs) and put the rest in mostly domestic stocks. I don't want to do anything particularly close to that. Here's my pitch for it:
- According to Jeremy Siegel (U Penn prof. Stocks for the Long Run), over 20-30 year time periods stocks show strong mean reversion and have a lower variance than bonds. (link that shows this) looking at returns since 1800 in the US. In the Return on Everything Paper (Harvard/The Fed) which looked at global and US returns, this was more or less confirmed.
- So, I think that over my time horizon, stocks should be less risky than bonds. Its not to say I don't need to transition to bonds toward the end of my career, for retirement, but I don't think holding them until I need to is helpful. (Im very risk/fluctuation tolerant)
- That said, I don't totally trust US equities. Our current environment matches Carlo Cipola's criteria (Economic Decline of Empires) for an economically declining world power pretty closely and the last decade or so has seen us move closer and closer to the characteristics he identifies as common in these situations. I also don't see the US as particularly effective or cohesive socially or politically.
- On top of this Jeremy Siegel notes that returns generated over longer periods of time have much more to do with valuations at the start of investing than the GDP growth of the country. PE ratio, although crude, does hold a decent bit of explanatory power and it is considerably higher for the US (20 or so) vs. internationally diversified ETFs (low teens).
- Ray Dalio's Bridgewater & Associates published a piece which suggested that an equal-weight portfolio among developed countries would have returned something close to what the US market returned with much less volatility over the 20th century, which included 2 world wars which devastated Europe.
- That said, I don't plan on leaving the US permanently (although I think living in another country for a few years would be cool) so whatever happens here economically will have an outsized effect on me vs the rest of the world and I want to make sure I don't totally miss growth here. Also a lot of our larger companies have significant revenue from abroad (40% for the S&P last I heard) so I will get some international exposure through that. Although, as Bridgewater points out, the country the business is located in matters a lot, irrespective of revenue.
- Also, for buying international ETFs, buying an equal weighted basket of international equities is pretty expensive compared to buying internationally diversified index funds.
So, Im thinking of putting about 35-40% in the US (VTI or similar), 25% in emerging markets (IEMG so I can get S Korea exposure) and the remainder in a mostly developed market, diversified etf (IXUS).
This totally goes against most investment advice I've seen (60-70% in the US, often including some bonds, and 20-30% international).
I imagine there are pretty good reasons why the typical advice is to invest a lot more in the US than overseas, but I don't know what they are. What am I missing here?
Submitted June 29, 2019 at 05:25PM by NjalBorgeirsson
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