I’m always getting into pissing contests over foreign investment. It just points out how much of bogglehead land is steeped in mythology and dogma. Foreign investment is best characterized by the BH3 the three fund that holds 20% bonds 30% foreign and 50% US. The argument goes somehow owning foreign pays you compared to not owning foreign. Somehow owning foreign improves your “diversity”. If that’s the case there should be metrics to support that. Let’s consider Japan. Japan is a well run economy the 3rd largest in the world.
Here is the Niekki 225 dting back to 1970
And here is a S&P 500 chart dating back to 1950 but including a similar period as above
In the 80’s foreign was the hot topic, especially Japan. You threw some money at Japan and it threw more money back at you, multiples of more money. It was almost as good as buying AMZN in 1997. Then came 1990 and the party was over. Japan deflated. It’s now 30 years later and Japan is still deflated. In my opinion the loss is permanent, at least for anybody relying on Japan to pay them in retirement. If you retired in 1990 with 50% of your dough in Japan and a 4% so called “SAFE” WR you ran out of money decades ago. The contrast is the USA. It’s trajectory is up at a greater rate than 4%. Over 30 years the S&P has grown at 10+% per year and 4% even with a bad SOR is overcome by the monster 10% return. This is the reason 4% is “Safe”. This and no other reason. The reason the S&P grows like that is because US productivity rages at about 4% long term and productivity is the furnace that keeps the balloon inflated. There is nothing inherent in our economy that guarantees 4% productivity. In may respects it’s because we lucked out historically and benefited immensely from creative destruction.
I once owned stock in a Russian mining company. Big company with big profits and superb growth. I was so pleased with that ownership, I dutifully checked it every day. Mining is a big deal in Russia. Russia for example is the second producer of gold in the world along with things like cobalt nickel copper iron etc. One day Putin indited the oligarch prez/major shareholder of this mining company. In addition Putin suggested taxes be placed on this company I owned! The stock plummeted. Without it’s head and with the threat of monster taxes the stock deflated like the Nikkei. Putin was short the stock. I had a Russian partner in my practice and he filled me in on the reality. Being short means you sell high and then buy low at a later date and pocket the difference same as with profit on a long trade. By arresting the head of the company and threatening taxes Putin pocketed billions. As well, he then owned the stock, bought low, and owning the stock was equivalent to owning the gold mines that constituted the property of that company. Just because the stock price fell didn’t change the worth of the underlying property. Putin has a plan to put the world back on the gold standard, and remove the US as the reserve currency. If you make gold the reserve and you own all the gold, you do the math.
This is why foreign is problematic. We live in a bath where the water temp is always fine and sustaining, and we stupidly presume the water elsewhere is equally as pristine so we “diversify” in our doe eyed stupidity.
Here is a graph of the BH3 Efficient Frontier plane with the BH3 described by the point Provided Porfolio.
The global fund is WAY low and right with a piddly 7% return and near 18% risk
Here is US Stocks 11.3% return at 15% risk. 4+% better return with 3% less risk.
Here is the BH3 R/R
8.9% at 12% risk
Here is a Efficient Frontier 2 fund with a 12% risk AND 10.11% return. 1.2% better return for the same risk. If you do the math that 1.2% advantage of the 2 fund over 30 years is a 38% improvement in end portfolio value compared to the BH3. 38% is a lot of money to pay just to wear the badge “diversity”.
Don’t even get me started on the BH4 fund! The BH4 adds TIPS to the BH3 mix. It’s long term return is 6.57% at 12.3% risk MORE RISK LESS RETURN!. Just goes to show you can make a bad thing even worse no problemo.
- Deflation is a real thing
- Foreign is quite open to manipulation and permanent losses
- Rule of law matters
- Productivity and protection of productivity is paramount
- Diversity does not mean “just own everything” and you’ll be safe. It means own the right things and do the right things and you’ll be safer. The right things are easily discernible.