Any FIRE calcs with International market historical data ?

Research on Safe Withdrawal Rates

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Delawaredave
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Any FIRE calcs with International market historical data ?

Post by Delawaredave »

I'm wondering if any research has been done on a "magic counter-cyclical" international portfolio of stocks - and how that might have improved returns or reduced cyclicality over the last 20+ years.

Or maybe reduced returns and increased volatility.....

There's been a lot of great analysis on S&P returns - wondering (maybe "dreaming) if similar information exists for global returns.

I keep thinking that having an aggressively internationally diversified portfolio (mirroring global capitalizations - so over 50% international)would allow a greater overall SWR -- not because the stock return would be greater (it may be less) - but because the stock portion volatility would be less - therefore allowing a greater stock allocation.

Or maybe I'm asking for more volatility (and even less sleep at night) - I'm already checking Asian markets before I go to bed each night...

Appreciate any thoughts !
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Post by unclemick »

No and yes - depending on which study you read. Don't have any links handy. But my vague - don't take this as gospel memory says:

Correlation numbers necessary to make a mutli - asset portfolio work have a tendancy to disappear when you need them most - so international doesn't help.

Most of the time - the lower correlation between US asset classes and various international asset classes dampens volitility and does allow higher SWR (maybe 1% boost).

Maybe some posters here - can find some links.

So I'll catagorically state - I don't know. Even though I had up to 30% international thru much of the 80's and into the early 90's - I didn't measure close enough to decide - although Japan dragged in the 90's and affected the Pacific Index.

If you accept MPT, done 'well', over long enough span. it should 'theorywise' lift SWR. In actual practice - WELL - let the debate begin.
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Alec
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Post by Alec »

Here are some links that could answer some of your questions:

The Long Term Risks of Global Stock Markets. Pro international diversification.

International Diversification Can Raise the Retirement Safe Withdrawal Rate - Maybe a Lot!. Pro international diversification.

Does International Diversification Increase the Sustainable Withdrawal Rates from Retirement Portfolios?. Mixed review.

Personally, I wouldn't think that any amount of equity diversification [int'l, size, value, etc.] would prevent a major market meltdown from hurting your portfolio's value. There is really nothing "counter cyclical" about any stocks. In the past foreign stocks have done well when american stocks have floundered, and foreing stocks have done poor when american stocks have done poor. Same deal with small stocks and large stocks, or value stocks and growth stocks.

You could also think about it this way. Case 1 is int'l stocks [or any risky asset for that matter] doesn't provide much diversification from US stocks, and both tank at once. Case 2 is that int'l stocks [or any risky asset for that matter] do provide diversification from US stocks, and don't tank together. If I choose to include Int'l stocks I am no worse off in case 1, but I am better off in case 2. If I choose to exclude int'l stocks, I'm no worse off in case 1, but am worse of in case 2.

Kind of like the "I believe in God because it is more beneficial to me than to not believe." Case 1, there is no God and if I do or don't believe nothing happens. Case 2, there is a God and if I don't believe I go to hell. If I do believe, I'm no worse off in Case 1, but am better off in Case 2. If I don't believe, I'm no worse off in Case 1, but am worse off in Case 2. So, I would choose to believe. Now, I don't know if there is a God, or how well int'l diversification will work, but I'll hedge my bets.
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Post by Mike »

Gummy's new calculator shows the TSE-300 (Canadian stock market) improving retirement portfolios versus the S&P for the 1966 to present period.
hocus2004
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Post by hocus2004 »

Thanks very much for putting forward those links, Alec.

There is some discussion re this topic in the "Out-of-Sample SWR (non-U.S.)" thread. I quoted the following words from William Bernstein in that thread:

Bernstein: "U.S. stock returns of the past 200 years represent a best-case scenario. To get a more realistic view of stock returns, it's important to examime stock returns from as many nations, and over as long a period, as possible. Professors Philippe Jorion and William Groetzmann examined stock returns around the world in the 20th Century, and the picture they draw is not neary as pretty as the American story.

"Remember that, a century ago, the U.S. was an emerging market, and, two centuries ago, England, France, and Holland were also....It is a demonstration that the markets with the best returns survive, and that those with the worst returns do not--survivorship bias, yet again.

"The moral here is that because the most successful societies have the highest past stock returns, they become the biggest stock markets and are considered the most 'typical." Looking at the winners, we tend to get a distorted view of stock returns. It helps to recall that, three centuries ago, France had the world's largest economy, and just a century-and-a-half ago, that distinction belonged to England."

Adrian2 in the earlier thread referred us to a book titled "Triumph of the Optimists," which I hope to be able to take a look at when I have some time open up. It is my hope that that book, which I believe examines a good bit of historical data, might provide some insights re this topic.
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Post by Delawaredave »

Thanks for above posts - great responses.

There was a Goldman Sachs study in 2004 on BRIC economies (Brazil Russia India China) - I'll try to find/post link.

If only 1/2 of the current growth rates of those economies continues, many of these countries will overtake the majority of the G7 economies in 20 some years.

Maybe a lot of outstanding US stock return for 20th century was because the US was an "emerging nation". Maybe other continents/nations will will be moreso in such a position in the 21st century.

Of course, I'm just hoping for an "up" day today for S&P for a change....
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Post by ben »

Hi Dave! you got your up day today :D . Hope more coming!

I am a BIG fan of international diversification. One thing not mentioned is the automatic currency diversification one gets in such a portfolio - to me (international life) that has a high value - to others it might be an unwanted risk. Cheers!
Normal; to put on clothes bought for work, go to work in car bought to get to work needed to pay for the clothes, the car and the home left empty all day in order to afford to live in it...
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Post by Delawaredave »

Well got an "up day" - finally I can sleep tonight....

Here's the link to the Goldman Sachs "BRIC" report - it is just boggling to me the possible changes in "global economic landscape".

http://www.gs.com/insight/research/reports/99.pdf
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Post by unclemick »

Two former hot markets - Egypt and Argentina come readily to mind.

Here's my question: how well does the asset class of interest treat investors - both foreign and domestic - so they can capture 'the other part of MPT' aka the expected long term growth rate.

Chickenheartedness prompts me to ask: would I be better off with a multi national ala Coke, Mac donalds, Duke power, Con Agra Foods, Exxon, 3M, Procter and Gamble, Avon, Citigroup and so on letting them fight domestic local markets and solve my currency problems.

That said - if I were ex-pat dealing with more than one country - I suspect I'd be international in a heartbeat. Worked with a lot of Brits over thirty years who used to quasi benchmark everything against the Swiss.
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Post by Delawaredave »

Regarding Multinationals - certainly US companies are gaining more and more sales/profit globally.

But I think the bulk of the growth/profits from these emerging markets will come from native/regional companies.

Plus the multinational is valued in the "home market". So DuPont gets 60% of its sales internationally - but gets saddled with a 22 PE.

Maybe the Asian chemical company enjoys all the same growth (or more) plus a more reasonable PE valuation ?

Just a thought.
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Post by unclemick »

Value ala Ben Graham - is great if you can effectively capture it.

Heh, heh, heh - I have no immediate plans to zip around the world like Jim Rogers of Investment Biker fame or Mark Mobius of Templeton funds.

Bernstein (Efficient Frontier) used to look around the world for 'whats cheap' --?price to book, P/E. wise?? But I haven't seen anything lately.
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Post by Alec »

Two former hot markets - Egypt and Argentina come readily to mind.
This is exactly why you don't want all your assets in one country or currency. I'll give you two more - Imperial Japan and Nazi Germany. Strong powerful, stable (?) governments. The US has been the "hot market" for the past century, no? Again, the Jorion paper above, and "Triumph of the Optimists" find no safety in any one country. They say owning a globally diversified portfolio, if you're going to own equities, is the only way to lower downside risk.

Just looking at the US is like reading Kiyosaki's "Rich Dad, Poor Dad" and thinking, hey I can get rich in real estate without looking at the people who've gotten really poor.
Chickenheartedness prompts me to ask: would I be better off with a multi national ala Coke, Mac donalds, Duke power, Con Agra Foods, Exxon, 3M, Procter and Gamble, Avon, Citigroup and so on letting them fight domestic local markets and solve my currency problems.
Except multinationals might hedge their currency risks, and therefore provide no currency diversification. Just like Oil companies may enter into contracts to hedge their "oil price shock" risk, and may not benefit from rises in oil prices. Not to mention that the stocks of multinationals, ADR, etc., act like stocks that are traded on that exchange. So a Japanese ADR traded on the NYSE acted more like a US stock traded on the NYSE, not a stock traded in Japan.

See International Investing, and

International Diversification Fallacy of Exchange Listed Securities, deals with ADR and multinational corporations.

- Alec
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Post by unclemick »

Okie dokie - what are the nuts and bolts of how to do international diversification:

1. An American in America.

2. An American in take your pick: Ireland, Costa Rica, Thailand, etc.
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Post by JWR1945 »

Delawaredave wrote:I keep thinking that having an aggressively internationally diversified portfolio (mirroring global capitalizations - so over 50% international)would allow a greater overall SWR -- not because the stock return would be greater (it may be less) - but because the stock portion volatility would be less - therefore allowing a greater stock allocation.
Perhaps not. At least during retirement.

Gummy has published (at his site) a formula that relates the mean (or average) and standard deviation of returns for different years with the annualized return. He has also listed the annual returns for several investment categories from 1928-2000.

annualized return = mean - (1/2)*(standard deviation)^2

I have recently investigated the 30-year historical surviving withdrawal rates with Large Cap Value. All of our early investigations involved the S&P500.

Large Cap Value has a mean (or average return) of 15.9% and a standard deviation of 27.3%. The S&P500 has a mean of 12.7% and a standard deviation of 20.1%. Using gummy's formula, Large Cap Value has had an annualized return of 12.2%. And the S&P500 has had an annualized return of 10.7%.

That is, Large Cap Value has a larger annualized return but the S&P500 index is much less volatile.

My investigation has shown that using Large Cap Value increased the historical surviving withdrawal rate significantly when compared to using the S&P500. I used commercial paper for the non-stock investment in both cases. This is with the best allocations. It is also with allocations that vary with P/E10, a number that is determined from the S&P500 alone.

All of this not withstanding, an investor must be comfortable with his investments if he wants to stay out of danger.

Have fun.

John R.
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Post by hocus2004 »

Large Cap Value has a larger annualized return but the S&P500 index is much less volatile. My investigation has shown that using Large Cap Value increased the historical surviving withdrawal rate significantly when compared to using the S&P500.

This is counter-intuitive, is it not? My presumption without looking at data was along the lines of the one stated by DelawareDave--that less volatility would be associated with lower long-term return potential but also with higher HSWRs.
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