Gyroscopic Investing

I'm curious to see the views of those of you who use the permanent portfolio whether you hold foreign stocks in your stock allocation. I go back forth as to whether I should add them to my portfolio. Harry Browne was against them, and I buy into his arguments. But it just feels undiversified sometimes!

In my "test" permanent portfolio I'm only holding the S&P 500.  If I decide to transition to a "permanent" permanent portfolio I'm planning on 5% international (Vanguard Total International).  I want a taste of emerging markets, and while US and developed markets might be expected to track together closely they just might not.

15% of my stock allocation is in an internatiinal equity index fund.

i had a small amount of international/foreign index in taxable, but gave it up for re-balancing/move to full  25% x 4,
i would have kept it if i had a bigger portfolio, but i needed the money moved into tax advantaged and to make the 4x split work..

Here are the reasons why I only use the domestic total stock market:

The premise of the PP is that "the economy" can be in one of four conditions, and there is an asset tied to each condition.  For the PP to work as designed, "the economy" needs to mean the same thing in each case.  If cash is US T-bills prepared for US recession, and bonds are US T-bonds prepared for US deflation, then stocks need to be US stocks prepared for US prosperity.

Total stock funds are dominated by large multinational companies that operate in overseas markets.  So a TSM fund already has a built-in mechanism for profiting from whatever's going on in international economies.  I think management at these companies is in a better position to decide where to invest working capital than I am.

There are cogent arguments for adding international stocks to a traditional stock/bond portfolio.  Such a portfolio has no currency hedge, and mixing in stocks denominated in foreign currencies has a strong diversification effect.  However the PP already has a strong currency hedge from the 25% gold allocation.  Adding a currency hedge to a non-hedged portfolio has a big effect; adding a second hedge has a much smaller effect.  IMO many of the arguments and studies about international diversification are not relevant to the PP.

International funds have higher expenses than domestic ones, and adding a fifth asset class increases transaction costs.

Since the PP holds a relatively small amount of stock, the international stock allocation may end up being an insignificantly small piece of the overall portfolio anyway.  20% (say) of 25% is 5%, and it's questionable whether tilting 5% of the portfolio has any meaningful effect.

Straying from the 4x25 allocation can be a slippery slope.  There's risk that tinkering with one asset class will lead to tinkering with others, to the detriment of the portfolio.

I'll be saving this for future copy-pasting since this question seems to get asked at least once a week .  Or maybe we could sticky this thread?

Stock earnings may track prosperity but stock prices don't always track earnings well at all. Demographics can make a big impact on stock prices. When the baby boomers were adding to their pension funds, that bloated up stock prices. When more people are drawing down pensions than are paying in, it can create a secular bear market. Also "irrational" momentum trading effects can make savings from all over the world flood into say Japanese stocks then shun them for decades irrespective of the fact that Japanese firms include multinationals with a global customer base. I now realize that the kosher PP thing to do is to have a  domestic total stock market tracker but I haven't been persuaded away from what I do which is to have an equal split between  UK large cap,  UK small cap and emerging market investment trusts. I can believe that a large cap tracker open ended fund could work OK but an  tracker open ended fund that includes relatively illiquid small caps sounds a nightmare. The constant buying and selling of illiquid stocks by an open ended fund would be a constant cost drag. The relative allocation amongst such stocks in a tracker fund would probably be bad because the market capitalization of each would be influenced by such things as employees and friends owning stock etc. Am I right in thinking that illiquid stocks can often represent the best value and also best fit into the "prosperity" role in the PP? 

I guess, the PP logic is that when domestic stocks are  really underpriced due to a demographics induced secular bear market or whatever, then that is precisely when you want the full 25% of them so as to buy up those bargins. I can see the logic but I'm still faltering . In the case of Japanese stocks, they have huge cash reserves. So a Japanese PP investor buying Japanese stocks does not get that much earning from them.

Clive, I take your general point but I was trying to figure out which of the other PP asset classes would be most likely to show an unwelcome correlation to emerging market stocks but not UK (or for someone in the US, US) stocks. Do emerging market stocks have an unwelcome correlation to gold? If so, it isn't obvious to me but I'm happy to be corrected.

How did Gold vary so much currency-to-currency?  Wouldn't that imply massive swings in exchange rate between the dollar, pound, and yen? 

If so, I didn't realize that was the case in 2008.

moda in the UK we really noticed that drop in the pound. My sister in law is Japanese but living in the UK. Visits to Japan suddenly seemed very expensive. The "inflation" we have in the UK is just that collapse in the pound slowly trickling through. Someone I know who imports from the USA to the UK held UK prices until this year thinking that things would revert. They haven't so he hiked prices 30%. It probably has helped save UK jobs compared to people in the eurozone. Its a way of lopping 30% off house prices and wages without anyone complaining.

moda with gold, the "unsustainable bull market" idea has to be compared against something like the cost of extraction rather than the price in your own currency. For a Nigerian, the 1980s and 1990s would have been a bull market for gold.

I hold a very small amount of international stocks.
I agree with Kevin W's reasons above.

Clive, if you compare PP from Japan, UK and USA from the turn of 2000 until now, I guess they all did about the same with respect to their local currencies (Yen, GBP, USD) and also lost about half of their gold (is that right? would they now have 5000 ounces each if they had started with 10000?). Am I on track in presuming that a Brazilian PP starting at the same time with 10000 ounces of gold, would now have 20000? Is that also true for other countries (Indonesia, Kazakastan ??). What sticks out for me is that in terms of dividend yield from stocks and the ratio of house prices to wages, is Brazil set for another decade of doubling and us for a second decade of halving? I might be very wrong about my presumptions but I included emerging market stocks  because of them and dithered with the temptation of including emerging market local currency debt.

So your approach is to give Brazil  a wide berth because momentum is against it? I'm just intrigued by Brazil looking a bit like USA 1982 with high (13%?) interest rates, and a recently faltering stock market despite having a better dividend yield than most places. 

Nope, my large caps have sufficient international exposure.  Look how much revenue they derive offshore.

I think what the PP needs is more small-cap exposure.

AgAuMoney wrote: Nope, my large caps have sufficient international exposure.  Look how much revenue they derive offshore.

I think what the PP needs is more small-cap exposure.

A total market index helps with this a bit as opposed to using an S&P 500 fund. 

Adding 15% in a small cap index to the equity portion might not be a bad idea.  It wouldn't hurt too much and it might help a lot during a strong bull market.

Whatever a person decides to do on this front, I would just say be consistent. 

Yes, but in the VP only.