of course it can, you only need a -80% with VTI, that only leads to a -40% in VXUS. These things happened in the past, and they can happen again.
2 Likes
In our recent history the largest drops were ~50-55% (depending on what index you’re looking at, VTI or VOO), twice, over ~2.5 years (2000-2002, 2007-2009), ~25% over about a year (2021-2022). Funnily enough the 1987 crash left the S&P500 with a tiny gain from year open to year close.
NASDAQ100 had indeed a 81% drop in 2000, but shrugged off the 2007-2009 drop due to not including financial companies.
The 1929 crash lead to a 90% drop over 3 years but my understanding is that policy was put in place to safeguard this from happening again.
While a 50% drop in VTI is possible, a 80% drop in one’s portfolio is unthinkable in my opinion unless we’re talking leveraged ETFs, crypto, crazy gambling with naked options/shorts etc. And of course, we should be buying on the way down as well as on the way up as many of these drops are not sudden but sustained over 1-3 years.
Just because it didn’t happen in the US (but in other countries)… doesn’t mean it will never happen in the us…
1 Like
I am betting my retirement that it won’t, but keeping a global portfolio regardless.
I suppose the point is not to focus on individual chunks.
Some of them will lag, some will outperform.
What really matters is the long term growth of your entire portfolio.
But I agree, Value had a bad hit (in comparison to Growth) the last 10+ years.
History shows though that this is to be expected. At least based on the past, the factor(s) overperform.
Psychologically of course everything matters 
. That’s why even the most ‘fanatic’ of factor investing they Tilt and not go 100%!
US stocks seem quite pricy (mostly because of ABC, Meta, Nvidia and so on):
Source of graph.
This suggests lower expected returns for someone investing in the whole world, market cap weighted.
Is this a valid argument to overweight non-US stocks?
(by e.g. buying VTI + VXUS and overweight VXUS).
In theory the total market portfolio (e.g. VT) maximizes returns and minimizes variance. So, messing with manual weights will create something suboptimal.
What is a sensible manner to come up with manual weights for VXUS and VTI, otherwise?
Bonus: VTI + VXUS seems cheaper and more complete than VT.
1 Like
Based on capital market projections: the expected returns of US stocks will be lower than international for next 10 years. Many firms try to do this projection. One of those studies is at link here. Similar studies can be found at JP Morgan, black rock etc.
The challenge is that these are just predictions. No one actually knows what would happen. There is a chance that US continues to outperform and hence valuations in US are justified. On other hand, there is a chance that predictions come true.
So, if you really believe in this theory (and are willing to accept lower returns if the theory doesn’t hold true) , then VTI / VXUS could be a good option. Otherwise accept the market average returns whatever they are (VT)
Thanks, didn’t see that one! Should I close this question?
1 Like
What about the efficient market hypothesis?
Everybody knows about these forecasts,
so prices should already be “fair” and therefore,
the market portfolio should already be optimal.
I think the US market is still extremely undervalued. It outperformed the other markets for decades and keeps doing so. While the US produces amazing new companies the best Europe come up with in the last decade was Wirecard.
For that reason I‘m 70% into US (10% of it being 3x leveraged).
7 Likes
The efficient market hypothesis applies to the participants as a conglomerate but each of them is in there with different circumstances and for different reasons.
While I am currently searching for a single ETF with broad diversification and low US exposure for the very reason you have stated (high valuations), I find it difficult to do so because part of the high valuation of US stocks can objectively be justified by:
- low dividends → favorable tax treatment (doubly so for Swiss investors).
- favorable tax treaties with other countries (doubly so for Swiss investors).
On a personal level, I’m still willing to take a hit from these advantages and reduce my allocation to US stocks, though not by as much as I would if it was just a valuation/expected future returns question with all else being equal.
1 Like
Shiller p/e is pretty clear, that US is overvalued.
It has NEVER been this high, except before 2022 bear market and before dotcom.
Also there was NEVER in history a sustained bullmarket after these valuations.
You are right.
Efficient Market hypothesis suggests that every stock is rightly priced with all available info and hence consistent alpha generation is not easily possible.
What you are trying to do is to generate alpha. Hence your suggestion would be that Europe is undervalued versus what market is pricing it to be.
Same goes for people who are overweighting US, they are also trying to generate alpha.
I think very few people are actually 100% VT which is true global market exposure across caps.
My personal situation is that I am automatically underweight US because of my Home Bias allocation to CH and IN. So for me nothing needs to change.
Pretty weak correlation to future stock marke returns anyway. Good for retirement planning, not investing.
1 Like
Even if you think the US is overvalued. Where to invest instead? The stock markets of all regions are highly correlated.
So if there is a correction in the US, all other markets will follow.
2 Likes
Momentum is an important factor not to be messed with
Pricy growth stocks get pricier longer than you can stay in value stocks.
Old chines proverb.
1 Like
That‘s a common fallacy people make. Short term the markets are very correlated, but not as much longterm.
Markets can stay correlated while outperformance shifts, it doesn’t require a correction, just lower returns than what the rest of the world gets (i.e.: investors shift to investing in other markets).
2 Likes
JustETF suggested me this morning to Check India, which seems faring better than others.
I compared VWRL with Franklin FTSE India UCITS ETF and I got a +44% vs +12% (vwrl) in 3 years.