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Revisiting International Allocation
Hi BigERN and forum,
Long time reader and lurker, first time poster.
I'm curious if your thoughts have changed since your post 4 years ago on international diversification, particularly in the context of super high CAPE ratios for US stocks. I recently stumbled across this blog post, which suggests that out-performance of US stocks vs international over the last 40 years is driven by valuation not organic earnings growth.
I'm overall about 90:10 VTI:VXUS or equivalents at this point in equities and I don't want to rebalance (which is really just market timing), but I'm thinking about shifting new monthly contributions in 401k and after-tax accounts to something closer to 60:40.
Some background context: my wife and I are still relatively early in accumulation phase, no kids and enjoying careers, and we managed to recently buy a house in April of last year before things got too crazy. Earliest FIRE date is 2025-2030 with a large window depending on kids and job (startup going bust or cashing in on stock options). I have no illusion that increasing international exposure will reduce downside risk, but am I missing out a chance every month to get cheap(er) equities in our portfolio?
Good question! My main messages from that post are still intact: 1) Int'l diversification doesn't help you during the recession. If the US market tanks, all other countries have a bear market too. 2) Diversification works mostly during the recovery. Sometimes the US is doing better (post-2009) and sometimes the non-US is better (post-2001).
So, in the back of my mind, I always thought I'll wait until the next bear market and then revisit the US/Intl allocation at the bottom. Then came 2020 and the turnaround was so rapid that I missed the boat getting out of the US (partially) and into non-US stocks. In hindsight, not a bad decision because the US recovery has been better than abroad.
But, certainly, I'm a bit worried about the high US-CAPE. But the US is where the innovation takes place. Outside of the high-flying Tech companies, the CAPE isn't much higher than in Europe. Other places are cheaper, but they are cheaper for a reason: they lack growth. So, I'm still comfortable with a US-centric equity portfolio.
Makes sense. I think I'm still going to moderately ramp up new contributions to like 10-20% outside the US. Working for a Bay Area (bio)tech company in a specialized field my career opportunities are highly correlated with the appetite VC has for growth in US tech companies. I just don't like having 15% or more of each month's contribution going to the FAANGs (and now apparently close to 1% of my net worth is in Tesla too!).
This general fear of being 100% long a tech-heavy US market had led me to be a long time SPY put seller in my Roth IRA (2+ years) but had always done a 45-60 DTE strategy with rolling about two weeks out. Great returns with lower vol year over year but got absolutely hammered during VIX expansion like in March of last year. Found your option selling series and have started to implement your approach in after-tax account with IBKR. Looking forward to comparing notes in that part of the forum!