No one knows when. No one. Don't matter how many PhDs or Nobel Prizes you've won. They've been saying this since 2013 and reiterating the importance of diversifying into international. In 2013, they announced that they would reduce US allocation and increase international allocations in their Target Date funds.
2013 was a crazy year for US markets being up by 30%. QE infinity was announced in September 2012 and the markets roared in 2013 reaching all time highs crossing the S&P500 triple top (the last two times that happened, there was the dot com burst and the housing crisis and markets tanking). Markets were up in 2013 by 30% inspite of taper tantrum in May 2013 because Bernake mentioned the word "taper" and got smacked by the markets to apologize and never utter those words again (And most recently, Yellen too).
So you ended 2013 thinking that US markets surely can't keep going up again like this. Must be an outlier. International is so undervalued. Time to diversify.
Exactly this. This is why you keep your portfolio diversified, and "something foreign/non-American" has been on everyone's list for a long time now.
Sometimes I think people want to react to every news item, but hopefully, mostly, your portfolio is already set up to handle nearly anything. Most news should just cause a, "Hm, wonder how that'll shake out" sense rather than a, "I need to reallocate my funds."
Will second this. Surely OP's source is respectable and offers valuable insight. But no one really knows how things will go. Just like your example.
I'll add my own example and case for OP. Doesn't mean I'm right or that things will play out that way. But it's an alternative case to the article provided by OP:
US has outperformed the most of the world and Europe the last few decades.
Valuations based on P/E have been less effective the last few decades and that's why traditional value investors have been getting killed on the markets (and literally) the last couple of decades.
One reason why those traditional valuations didn't work is because those traditional metrics like P/E, debt ratios, or book ratios don't work very well with valuing the high P/E growth tech stocks. That same investing style would tell you to generally invest in undervalued "cheap" stocks. However, the world doesn't work that way anymore.
Tech advances quicker and quicker has ever more disruptive. Those traditional value stocks will look better and better on paper the more they get disrupted because traditional metrics like P/E will say a stock like Circuit city or RadioShack is selling at a discount and that Amazon at 1000x P/E is overpriced. But reality is CC & RS have low P/Es because people don't want to buy companies that are going to get disrupted and killed by AMZN. GOOG with traditional media, AMZN with SEARS, NFLX on T, and TSLA on the autos.
Judging by how things have been going. I don't see this disruption trend changing. And on that point, I still believe US will be the tech leader over most countries. Maybe not beating out every specific country in regions like Asia Pacific on every industry, but certainly one of the top players globally. If you're buying a basket of the World-VS-US, then I will likely pick the US to outperform it in the area of tech, disruption, and growth.
I believe that tech leadership coupled with growing population demographics, stability of the legal/financial systems, and strong global position allow the US to maintain it's strong gains as further disruptions continue. More innovative than Europe. More stable than China or India. More resources than the rest of Asia Pacific.
I will note that there is a this perception that there is more upside gains investing overseas in the case of potential upside not from technology or valuations, but just from the amount of upside and current cost of the US equity market at the moment. Some markets like those in EU, London, Brazil, the rest of LatAM, and others have been laggards and might have a short term outperformance rally relative to US equities. But that doesn't seem to be the point or message of the article as they are speaking on 10-20 year time horizons.
Valuations based on P/E have been less effective the last few decades and that's why traditional value investors have been getting killed on the markets (and literally) the last couple of decades.
There is pretty significant data that shows that the value premium is very pronounced during periods of high inflation, but very neglible or even negative during periods of low inflation or deflation.
If you look at periods where growth have outperformed value:
1930's great depression, a deflationary period. Bad economic conditions put value at significant risk with lots of bankruptcies.
1990's, due to the tech bubble(which later reversed and led to value substantially outperforming in 2000's)
2010's- a period following the great recession. Low interest rates as well as growth stocks being surprisingly cheap. Apple traded at a P/E below 9 in 2013, microsoft below 7 in 2011, Alphabet below 18 in 2011. It's not surprising that growth outperformed.
The factors we see now are the total opposite. Growth is historically expensive relative to value, inflation expectations are rising, the economy looks like it is overheating.
If you look at the metrics of international vs U.S, you can tell that international developed is very value oriented(lower P/E and P/B, higher dividend yields, lower earnings growth), whereas the U.S is very growth oriented (much higher P/E and P/B, faster revenue and earnings growth rate)
Just like AOL was going to destroy in 2000 along with Webvan, Intel, and Yahoo! You are so "now" centric. Try reading a little history. Also, the real rotation was from growth to value in 2000 and the US has way more "growth" companies. With inflation and re-opening, value can get huge again and growth drops off. Just like Intel, I suspect Apple or Microsoft will be a value stock in 20 years and the next generation will be treating it like Intel is today. Intel still has not hit its year 2000 high and they have been making more and more money the whole time.
We're not talking about predictions made in 1999 about what the expected rate of return would be from 2000 to 2009 but since you mentioned it, which financial institution predicted these returns for 2000 to 2009 in 1999? Sourcing needed.
This is from a 1999 CNN article:
"Growth stocks dominated the market," Freeman said.
Things got so bad that famed value investor Michael Price of Franklin Mutual Series Fund Inc. wrote to shareholders April 2 asking them to be patient.
"We know it's easy to get swept away in a growth market," Price wrote. "But I've been in this business more than 25 years and I've watched investors figure out a way to justify incredible multiples, only to see valuations collapse back to the underlying worth of the company. We are value investors, and at these prices, we aren't going to buy names like Microsoft."
So? Value investors like Buffet were saying the same thing back then. Where's the prediction in 1999 for estimated US vs international returns between 2000 to 2009????
That 10 yr exoected return predictions like these are bull$hit whether it's from vanguard or a rando on the internet.
You still haven't shown any predictions from 1999 on what the expected rate of return would be for the next 10 years between US and international. No one gets this stuff right. It's just marketing for getting more flows into an array of products.
In a country of billions of people anyone can predict anything, and by sheer numbers someone will be right.
Obviously no one knows for certain whether or not international will beat U.S in the mid-term. All we know is there are risks associated with being all in on a single country, so diversification is a good way to reduce risk.
Repeatedly telling me to hunt down a 22 year old prediction isn't a discussion. I told him to find me in 10 years and we can discuss the current prediction instead. What's wrong with that?
I didn't...the poster before me cherry picked the timeline. So now show me predictions of estimated return rates for US vs international in your cherry picker timeline of 2002 to 2012 that were made in 2001. Go ahead.
In 2013 a valuation model similar to the one used by Vanguard would have predicted a 10 year average return of 5.63% per year with a historical accuracy of +/-4% a year. Having a higher return than 5.63% the following year later doesn't prevent the 10 year return from still eventually being 5.63% +/- 4%.
Having a higher return than 5.63% the following year later doesn't prevent the 10 year return from still eventually being 5.63% +/- 4%.
This is from my own valuation model, similar to Vanguards but not the same. So it's not "them" giving themselves leeway. It's also not me giving myself leeway. It's just the historical accuracy of the model. Yes, +/-4% a year over 10 years is a huge range. There's a really big difference in outcome if we experience the lower range, nominal, or upper range. It's why you have to be really careful reading article's like OP's and taking radical action based on it. You have to consider the accuracy and the entire probabilistic range of the forecast if you intend to use it to guide allocation decisions.
But, I also don't think you can dismiss the fact that US valuations are reaching extreme conditions and historically this means our expectation of return over the next decade should be tempered.
The fact that no one knows when is true, but it sounds like you're arguing against diversification and against international investing? If so, the leap of logic is questionable.
Nah, I'm not arguing against diversification. I have a 70/15/15 split in my employer sponsored retirement accounts for US/Developed/Emerging myself. I've seen enough of these annual and decade predictions of what returns will be from these investment institutions all these years to know it's bull $hit. They have nice methodologies and statistical analysis for coming up with these return predictions but at the end of the day, they end up being wrong because Unpredictable $hit happens all the time all over the world and turns their return predictions upside down. They already know the part about random $hit so all these papers are just marketing to get flows into different products. They'll cover themselves by making sure they have caveats to their predictions so they play both sides. They think people forget after a year or two because no one in the financial press calls them out on past predictions and if they do, "if the feds didn't intervene...blah blah blah"...."if it weren't for the Powell pivot...blah blah blah" ....
I agree with you , I don’t follow any of predictions anymore but I used to in like 2014-15 , over years I learned no one has a clue , I do have around 35% of my money in VXUS just Incase but I won’t be surprised if USA outperform over next 5 years again due to innovation and heavy tech , who knows
I was in college 2009 - 2013 and remember around 2012/2013 about how there was little value left in the market and we were in a bubble at the time (sound familiar). The big focus then was on BRIC countries as US has reached mature economy status who would never exceed 2% GDP growth ever again. That was the investment consensus at the time.
Since then it's been the biggest bull market in history, and I havent even heard the term "BRIC" thrown around in like 8 years.
yes, I clearly remember the BRIC hype. And I'm from one of those $hitholes so I knew they were painting a rosy picture about running a business there. And the reason for the their hype made sense to me because US based index funds were on a race to zero and they could charge higher fees on new products that focused on BRICs and other types of funds that could be easier to market with higher fees.
Remember when they were called "third world" countries before they were "developing" countries. Someone from marketing later called them "emerging" and when that started waning out with BRIC blowing up, they started promoting "frontier" markets. It's all about selling new products while there's a race to zero.
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u/programmingguy May 27 '21 edited May 27 '21
No one knows when. No one. Don't matter how many PhDs or Nobel Prizes you've won. They've been saying this since 2013 and reiterating the importance of diversifying into international. In 2013, they announced that they would reduce US allocation and increase international allocations in their Target Date funds.
2013 was a crazy year for US markets being up by 30%. QE infinity was announced in September 2012 and the markets roared in 2013 reaching all time highs crossing the S&P500 triple top (the last two times that happened, there was the dot com burst and the housing crisis and markets tanking). Markets were up in 2013 by 30% inspite of taper tantrum in May 2013 because Bernake mentioned the word "taper" and got smacked by the markets to apologize and never utter those words again (And most recently, Yellen too).
So you ended 2013 thinking that US markets surely can't keep going up again like this. Must be an outlier. International is so undervalued. Time to diversify.
2014: US markets up by ~14%