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Today’s conversation was sparked by the excellent piece penned by today’s guest, Victor Haghani, back in November of this year: There’s No Place Like Home: The Case For And Against Extreme Home Bias In Equity Investing. With U.S. equities outperforming their international counterparts by as much as 170% over the past decade, it’s no wonder that surveys show that U.S. investors typically allocate as much as 80-85% of the equity portion of their portfolios to U.S. domiciled stocks, a condition Victor refers to as “extreme home bias.”
In the aforementioned article, Victor lays out 10 different arguments investors often make in favor of “extreme home bias,” and then debunks them one by one. During our conversation, we take a step back and start by evaluating the evidence for being properly “globally” diversified. We then get into some of the arguments Victor lays out against “extreme home bias,” trying to stress test them where we can. Finally, we end with a discussion of the specific ETFs Victor and his partner James White use in constructing properly diversified portfolios – both for their clients and themselves. (Note: We like people that eat their own cooking, so to speak, here at Seeking Alpha.)
Many of you will be familiar with Victor’s work. He appeared on episode 9 of Let’s Talk ETFs, “Past Results, Future Returns: A Smart Beta Skeptic Speaks. If you haven’t already listened to that episode, I highly recommend you go back and do so when you have a chance.
For those that are less familiar with Victor, he is a 35-year veteran of the investment management industry. He is currently the Chief Investment Officer of Elm Partners, the firm he founded in 2011. From Salomon Brothers in the 1980s to Long-Term Capital Management in the 1990s, Victor has often found himself at the center of the action in the investing world. His transformation from “hyper-active” investor/gambler to evangelist for dynamic asset allocation using low-cost index ETFs is nothing short of remarkable (his firm Elm Partners now charges just 12 basis points in management fees).
I hope you find this conversation as useful to becoming a better, more disciplined investor as I did.
- 2:30 – Why do “long-form” research? You never learn anything as well as when you have to “teach” it.
- 5:00 – Dynamic vs. static asset allocation: Establishing a baseline for global allocations.
- 7:30 – How to allocate a portfolio globally: Getting specific.
- 12:00 – Discussion of “Home Bias” issues.
- 13:30 – How much should momentum be applied to country ownership allocations?
- 16:15 – How much should expected returns be applied to country ownership allocations?
- 21:30 – How does geopolitical risk factor into allocations?
- 25:00 – Why isn’t “invest in what you know” relevant for international investing (or possibly ever)?
- 31:30 – Breaking down the data: Historical returns from home biased vs. globally diversified portfolios.
- 36:00 – Why shouldn’t US investors limit themselves to just dollars? Currency hedged equity funds.
- 43:30 – 9 basis points: Expense ratios on international index funds are now negligible.
- 48:00 – Specific ETF suggestions for building low-cost, globally diversified portfolios: (VXUS), (VT), (VGK), (VPL), (VWO), (IEMG), (IEUR), (IPAC).
- ETF to avoid: (EEM) and its 67 basis-point expense ratio.
Disclosure: I am/we are long VXUS, VT, VGK, VPL, VWO, IEMG, IPAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: For disclosures, Victor Haghani invests most of his personal money with Elm Partners, using the same strategies he uses for his clients.
Victor is long – either for himself, his clients or both – the following ETFs mentioned in today’s show: VXUS, VT, VGK, VPL, VWO, IEMG, IEUR, and IPAC
Jonathan Liss is long IEMG and VWO