John Bogle: Not a Believer in Foreign Investing

Includes: EWJ, EWU
by: Roger Nusbaum

Morningstar posted a short interview with Jack Bogle that is worth discussing (hat tip to ETF Trends for posting this). Most noteworthy are Bogle's comments about why he is not a big believer in foreign investing.

The general tone of this post will be to disagree with Bogle's comments but I would make a couple of points before I do. As I have said many times here, despite Bogle's belief that no one can predict the what the market will do he is actually pretty good at recognizing market extremes. Not something he does often of course but he has been correct at several important points in the past. Given who he is, it is not too shocking to me that he would have some ability to assess the big picture for equities.

To this most recent interview. Bogle believes that foreign markets will perform about the same as the US market over the next ten years. He notes risks associated with foreign markets include "unforeseen risks, currency risks, sovereign risks and more that could equalize the markets." Because of this equal performance he sees coming he would not allocate more than 20% to foreign.

Based on what I know of Bogle I doubt this is a new conclusion he has drawn. I cannot recall him saying 20% foreign before but assuming this is not new from him then it turned out to be very wrong, as in not enough, during the last decade. I've made a point of referencing the data from Bespoke Investment Group that shows the S&P 500 going down in the last decade by 24% on a price basis versus many other countries that had normal returns for the decade.

Bogle notes that Great Britain is in "poorer shape" than the US and that Japan is still in the same trouble from 20 years ago. So he is pointing at countries that should be avoided, and of course there are others. He did not mention any specifics as to what he looked at to make those comments but he obviously has some understanding of these countries and for all we know his knowledge could be vast.

If someone can look at the data and conclude a country is on shaky ground I believe they can also look at the data from another country and conclude that it is on firm fundamental ground. I think it is obvious that a country that either has lower debt levels than the US, better growth prospects that the US, has something the world needs (be it resources or labor) or any combination of the three offers the opportunity of being a superior long term investment. This sort of conclusion is a far cry from needing to be correct, from a portfolio standpoint, about what the S&P 500 will do this year.

One way that I might agree with Bogle about foreign doing the same as the US is in terms of the broadest foreign indexes which are heaviest in the the countries he feels are worse off than the US. A long running theme here has been that the broadest foreign funds are an inefficient way to add foreign to a portfolio because they tend to be heaviest in the wrong countries and blend away the various attributes of the smaller countries.

It is not clear to me why if Bogle can recognize that the UK and Japan are hurting why he does not see that for the US. While he has always been skeptical of ETFs because they facilitate speculation (not sure why he does not direct that to the speculators instead) but between iShares, Market Vectors, GlobalX and Emerging Global there are many ways to build a portfolio that includes country by country analysis and selection. As I've been writing for a long time, this made sense during the last decade and makes sense still, going forward.

Unfortunately easy access does not mean less of a work load in terms of analysis and follow up. I used to be a big fan of Ireland as an investment destination. It had a very low corporate tax rate, high per capita income and was becoming increasingly more important in the world economic order. We owned a bank stock that was a very good performer for quite a while but the story on the ground changed in an obvious way and so we sold, down from the peak but a long way from implosion territory. Where this sort of thing can happen in one country it can happen in other countries too and recognizing this requires work. If this is plausible to you then you need to be open to the US' deterioration as an investment destination--although it is nowhere near the magnitude of Ireland.