Jack Bogle, the founder of Vanguard, is one of my heroes. Earlier this year, there was a petition to award him the Presidential Medal of Freedom (that I asked you to sign) and he wasn’t even close to getting enough signatures for the President to consider the petition. I was both surprised and disappointed.
I’ve read several of his books and whenever I see him interviewed, I pay attention. A few years ago, I read that he didn’t believe in international investing and that he thought that exposure to the total US stock market (large, mid and small) was sufficient.
Over the weekend, I watched an interview where he said he ‘doesn’t do international’ (which you can see here). I hate disagreeing with an industry pioneer, but I think he’s got this one wrong.
He starts by saying that developed and emerging market stocks are cheap, which we’ve talked about before (here and here).
His argument is that the world is very uncertain right now and while the US faces challenges, he says that at least we know that the US has the most innovative, productive and technologically advanced economy and that we have shareholder protections.
As a red-blooded American, I agree that we have the best looking economy in the world right now (it’s not great looking, but it’s the best looking of the bunch). While China is cutting rates and Europe and Japan are still actively engaged in quantitative easing, the Federal Reserve is close to raising rates (theoretically, anyway).
It’s the very fact that the rest of the world is struggling that makes non-US markets cheap right now. If we all had the same economic outlook, then valuations would be about the same. It’s actually the risk that makes non-US markets appealing at this point.
But even if that wasn’t the case right now, I still think global diversification makes a lot of sense. Because the world moves at different speeds, the markets aren’t perfectly correlated, which can create an attractive opportunity for diversification.
Even if the US and the rest of the world had the same expected return over the next decade, the imperfect correlation would suggest that diversification makes sense. Since we believe that valuation matters, we don’t think that the expected returns over the next decade are the same – we think that overseas markets should outperform the US.
Over the last five years, having non-US stocks hasn’t been as good as a US-only portfolio. That wasn’t true for the first six or seven years that we were in business, but it has been true more recently.
It’s tempting to apply the recent past into the indefinite future (an effect known as recency), but that performance-chasing behavior is exactly what gets investors into trouble.
I don’t think that’s what Bogle is doing, but I do think that he’s missing some real opportunities here for protection, diversification and higher returns.