I'm not a 50 or 60% international guy, I'm more 30%, but you realize the statement above is a good argument for international, right? Everything reverts to the mean, which means future US returns should be lower. In an earlier post you said you didn't think the US market was overvalued. You should check out the PE of the S&P 500 vs historic valuations and see if you change your mind.

I'm aware of the historic PE and so is everyone else, it's not a secret. The issue is if there is real tax reform it could change the valuation and stocks aren't as expensive as they appear.

Is this not common knowledge? I'm at a bit of a loss here.

Wil might be the guy to better address this. I wouldn't say it's wrong, but the US has been the dominant market and growth engine since WWII, so overweighting it makes some sense. If you live in another country you might not want to overweight your home country too much.

I guess maybe I don't have as much faith in the current administration to avoid the big faux pas that creates a market event to the downside.

I don't believe this is true. I just read this morning that recently worldwide wealth in markets has increased 3.4 trillion and 2.1 trillion of that was US based.

I was always under the impression that we should be investing in thing we know and are comfortable with. We simply have more info on what's going on in the US markets than India or China. I'd rather have my money invested here, and as I've said, we already have a winning formula. Why mess with it?

I'm not trying to market time my 401k. I'm trying to do my periodic investments and go with long term growth. That's it.

I agree that if you work for a company you shouldn't be overly invested in that company. I believe you should spread out your investments to reflect the overall US market, since we know long term it will almost assuredly grow in value. That's it. It's a simple, easy plan with no real work needed.

Again, I am no expert in any of this and I don't mean to be overly critical of anyone elses strategy, but with what we know there is no reason to deviate from the playbook. I don't agree with looking for undervalued emerging markets and putting a significant percentage of your retirement in it, just as I wouldn't if you did it in the energy sector or healthcare or financials. Keep it simple and steady and safe. If you want to trade, trade, but that's not a good strategy for the regular shmoe, like me, because the room for error is huge.

The 'playbook' is maximum diversification while keeping fees to a minimum. Overweighting USA#1 makes for a less diversified portfolio, with negligible cost savings. Therefore overweighting USA#1 is suboptimal.

Fine. Prove it to me with data, and define "maximum diversification", and which asset classes, in which sectors, if applicable.

Your statement means absolutely nothing.

You seem strangely combative and entrenched in your self-admittedly non-expert opinion. But if you're actually open to learning, start here... https://www.bogleheads.org/wiki/Domestic/International

"Despite the potential drawbacks of a perceived higher risk, the impact of currency fluctuations, higher investment costs, and an aversion to short-term underperformance relative to domestic markets, international stock investments provide a diversification benefit relative to an all-U.S. equity allocation."

I see nothing in here that would sway me from changing my original suggestion of 80/20, US/international, especially with the smaller data set of the international returns unless a spec play was in mind. If someone went 50/50 I think they are needlessly gambling. To each his own.

It is interesting how the models have adjusted, though. I worked at vanguard and remember their recommendations. 50% international 12 years ago was unheard of.

It's funny, we all seem to have our own little take on this. Wil is 80/20, I'm more like 70/30, Noob and kaby appear to be 50/50, and Jalexander is 40/60.
One of us will be more right than the other, but I suspect the overall difference in returns will not be large.

Actually my portfolio is ~20% EM ~20% europe ~30% us ~small cap 30% us large cap. Just super boring world-economy properly weighted for actual size.

The point I was making is that if markets are efficient and capital is located efficiently, the EV of investing a dollar in EM or US large cap should be the same. Yes, EM might be higher risk due to the factors described by wil, but that means they offer higher EV or nobody would put any money in them. So one could put everything in US domestic o everything in EM and the EV is roughly the same (after factoring in the premium you get for taking on the currency/political risk).

So this should all have equal EV (after risk) imo. What Wil was saying is correct only if the lack of information/country stability etc is NOT accounted for in the price of stocks, which it should be.

Basicly, if both USA and emerging markets had an EV of 9% returns, why would anyone ever invest in emerging markets (due to the risks described)? So price of EM stocks goes down, until the difference is big enough to draw money to them, to the point where for most people (actually, most money), there's an equilibrium where the risk premium balances out the extra risk.

Correct me if I'm wrong, please.

This misses benefits of diversification though.

Say you have two investment options, entirely uncorrelated:
A) Mean = +1, SD = 1
B) Mean = +1, SD = 1.1

You would never invest in B over A if you had to choose a single option. But a mix of A & B has a lower SD (say 50/50 mix, SD=0.74ish) than the individual options, so B would still be used.

Yeah, I get that point, that's essentially why you index the US stockmarket and not just buy a single company in it (which should have the same EV, but much more variance)

However, in the case of EM, you're actually being paid for the extra risk since it's in the form of currency/political instability and not just due to lack of diversification. Correct?

I believe EM is expected to have higher long term returns, yes. But this doesn't automatically follow from the observation that there is investment in EM and EM has higher risks. Even with efficient markets there could still be investment in EM in your theoretical example where EM offers the same returns at higher risk.

So I'm fairly sure the following is not correct, some mixes should be strictly better than others:
(I'm just an investment newb though, take this with a shovel of salt.)

Wil:

I clearly do believe that EAFE & EM will outperform the US market in the next 5-10 years. I think relative valuations justify this and I'm willing to live with the increased volatility. I do not believe that the tax environment in the US will fundamentally change to make up for the differences in valuation.

I'm personally very willing to adjust my portfolio allocations to take advantage of macro level trends. For example, in early 2015 I intentionally added an allocation to Energy after it cratered. In that case, when I rebalanced early this year, I took the 25% gain off the table and basically eliminated that 'extra' allocation, falling back to just a normal allocation to energy in my normal equity index allocation.

*shrug* If I'm wrong, you can laugh at me for gambling.




To the discussion about returns of asset classes...some examples of long term projected return thinking are here:

https://www.bogleheads.org/wiki/Hist...pected_returns

You can also google 'expected returns by asset class' and get a ton of white papers put out by different companies...Vanguard, Blackrock, JP Morgan, etc. providing their view on asset classes. These are updated, so you can find very current thoughts. Obviously, these are somewhat throwing darts, but there's a reason there's a lot of general consensus....because we have alot of historical data on asset classes (return & volatility) to look at.


Also, if you aren't familiar with it, I love the periodic table of investing. Several folks put these out with different asset classes broken out. They are pretty interesting to illustrate the advantages of diversification.

Yes it makes sense. It's a similar paradigm shift as some things in Lifecycle Investing (like treating your expected Social Security PV as a relatively safe bond investment).

Some say currency "risk", I say currency diversification.

You seem to be using the term EV when you really mean risk-adjusted return. I think that is confusing people.

The EV of EM should be greater than US large caps for example. However, the risk-adjusted return may be similar if markets are efficient.

Yeah good point, I didn't know the term risk-adjusted return

http://pangeafamilyoffices.com/getat...20Returns.aspx

See above link. Clearly you should only invest in Australia and South Africa.

There's a lot of ****ing data in that link.

South Africa it is.

So I just changed jobs and am about to rollover a 401k into a vanguard IRA. I'm having trouble deciding whether to convert to a traditional or Roth IRA.

I'm 34, income of 80k, single. Still early in my career, eventually in 5-10 years I'll probably move up to the 28% tax bracket. Although I have no idea what my income will be when I actually retire. I'm in NYC now, so pretty high taxes right now but dunno if I'll be here or move somewhere with less taxes in the future.

Other accounts I have is a Roth IRA, HSA, and taxable account. I have no traditional IRA at the moment. Also, the $ to pay for the taxes if I do convert to a Roth will come out of a bank account and not from the 401k, so I can invest the entire amount. My retirement is so far off that I have no idea how to evaluate the tax situation of the future.

So should I rollover to a traditional or Roth IRA or is it close enough that'll not really matter which I choose?

I don't think it matters much. It also depends how much you have in your bank and how much you would have to pay in taxes. Since you already have Roth money, I'd be inclined to just roll it into a traditional and save my cash on hand.

If you are above the mAGI limit to get a taxable income deduction for a tIRA but below the mAGI limit to contribute to a Roth IRA which is the better choice?

Do you have access to a retirement plan at work?

Yeah. I guess some backstory. Already maxed the Roth IRAs this year on first possible day. Maxing 401k and HSAs reduces mAGI to the range where I won't get the taxable income decrease for the tIRA but am still eligible to contribute to the Roth IRA. If I'm wrong and the income is a bit lower than I'm calculating (hard to estimate that far in advance with OT/etc), I guess I can convert to tIRA, right? For next year (2018 tax year), I know for sure I will be in the middle range I discussed in original post.

Makes sense. You should definitely still do the Roth if you can after maxing out 401k/HSA, even if you have too much AGI to do Traditional. If it turns out that you can do Traditional, there definitely should be some path to remove/recharacterize the contribution to traditional. The only complication would be gains on the contributions if you're talking about it sitting in there for a year. I haven't had to deal with that personally, so not sure how all that works.


Quick Edit - I honestly would probably just leave it roth, especially if you can max out the roth's after maxing pre-tax options. That effectively puts more money to work, since it's already tax paid. If you would invest the difference in a taxable account, that's obviously moot.

It's also a nice thing in retirement to have multiple pools of money to draw on (Traditional, Roth, Taxable Account). Gives you more flexibility to manage your taxes in retirement.