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Beyond Borders: The Benefits of International Diversification

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As humans, we’re drawn to the familiar — we follow the same routines, take the same routes, and frequent the same places. This natural inclination to stick with what we know extends to our investment choices, resulting in a phenomenon known as home bias.

What Is Home Bias and Why Does it Exist?

Home bias is the tendency of investors to favor the stocks of companies based in their home country, even when similar or more attractive opportunities may exist beyond their borders.

Consider the automotive industry: Ford and General Motors are household names for American investors, while international giants like Toyota or Volkswagen may receive less attention despite their global scale and history of innovation.

In the U.S., several factors may contribute to investors’ home bias:

  • Familiarity and comfort: Investors often feel more confident investing in companies and industries they understand, particularly those that enjoy widespread media coverage.
  • Perceived risks: Concerns about political instability, currency issues, or other economic uncertainty abroad can deter investors from diversifying internationally.
  • Barriers: Certain foreign markets have less developed exchanges, higher transaction costs, and more complex tax implications for U.S. investors.

It’s also natural to want to participate in local successes; it’s why we sometimes jump on the bandwagon when our sports teams win in the postseason. When the home country’s market performs well, investors may regret allocating their money internationally.

Home Bias Is a Global Phenomenon

While loyalty to the home team is stronger in America than in other countries, Americans are not alone in exhibiting home bias. A 2021 study by Martin Wallmeier and Christoph Iseli revealed that:

  • U.S. investors allocate nearly 82% of their stock holdings to domestic companies, the highest share among developed nations.
  • Japanese investors follow close behind, with 81% of their stock portfolios held in Japanese companies. Japan comprises just 7% of the world’s total stock market capitalization.
  • Investors in Norway and the Netherlands have the lowest levels of home bias, with domestic investments making up just 18% and 33% of their stock holdings, respectively.
  • Investors in India, Egypt, and the Philippines allocate close to 100% of their stock portfolios to companies based in their respective local markets, despite those countries’ tiny share of aggregate global market capitalization.

The Risks of Home Bias

Overweighting a portfolio with domestic investments can significantly impact its expected return and risk.

The chart below shows performance for the top five and bottom five countries in international developed markets from 2014–2023, ranked by calendar year returns. For comparison, we’ve also included the U.S. among these best and worst performers.

Interestingly, the average return of the worst-performing countries over this period was -17.4%, while the average return of the best performers was 28.6% — a difference of 46% per year. Clearly, the benefits of picking “the best” and avoiding “the worst” have been significant.

But distinguishing the best from the worst is only clear with the benefit of hindsight.

Who would have guessed that Austria, the top-performing market in 2017, would have been the worst just a year later? Or Finland, the best performer in 2018, finishing as the worst-performing developed market in 2019?

The chart above clearly shows how well the U.S. stock market has performed over the past decade. While never “the best,” i the U.S. has been among the top five performers in eight of the past 10 years. This is also why valuations for U.S. stocks are near their highest levels since the early 2000s.

This contrasts sharply with the global stock performance in the 10 years from 2004 to 2013 (not shown), when the U.S. was among the top five performing countries just four times — and among the worst performing countries five times! These years coincided with the “lost decade” for U.S. stocks, the stretch from 2000 to 2009 during which $1 invested in the S&P 500 turned into just 91 cents.

Overcoming Home Bias

These period-to-period fluctuations and changes in country leadership highlight the risks of attempting to pick next year’s winner and of home bias in general. While loading up on domestic investments might feel familiar and comfortable — particularly after a period of stellar recent performance — doing so can leave portfolios vulnerable to the volatility of a single economy.

Home bias may be a global phenomenon, but the solution is universal. Diversifying internationally can help protect investors in times when their home country’s stock market disappoints.

A typical Vista portfolio owns over 15,000 stocks across 46 global economies. By expanding the opportunity set beyond U.S. stocks, we increase our expectation of harnessing returns where they materialize, while reducing the risks inherent to investing solely in one’s home country.

The Underperformance of Value: Is This Time Different?

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In the world of finance, few strategies have been as widely celebrated as value investing. 

Pioneered by Nobel laureate Eugene Fama and his colleague Ken French in the early 1990s, the “value premium”—the compelling return advantage of value stocks over growth stocks—has been hailed for decades as a cornerstone of smart, disciplined investing. 

From Wonderful to Woeful?

Historically, value stocks have outperformed growth stocks, delivering an annualized return of 12.7% compared to growth’s 9.9%. This gap of nearly 3% per year is known as the “historical value premium.”

But in the last decade, the script has flipped. Value stocks have returned a solid 9.9%, yet growth stocks soared with 14.4% annual returns, leaving value stocks lagging by nearly 5% per year.

This has led many people to declare that value investing is dead.

Underperformance in Context: Value vs. Growth (1926–2023)

Source: Dimensional Fund Advisors. Data reflects the Fama/French US Value Research Index and US Growth Research Index from December 1926 to December 2023.

Putting Things in Perspective

While skepticism is a healthy investor trait, we believe the reports of value’s death are overblown.

Every risky asset—whether U.S. stocks, international equities, growth stocks, value stocks, or real estate—has endured periods of underperformance. Take the “Lost Decade” from 2000 to 2009, when the S&P 500 Index returned nearly -1% per year, shrinking every dollar invested to just 91 cents. Or the stretch from 1965 to 1974, when U.S. stocks trailed cash by over 4.5% per year. Should investors have abandoned stocks after such painful episodes? Not at all.

These periods of disappointment are an inherent part of investing. This is the nature of risk, and why risky asset classes have historically outperformed risk-free options like Treasury bills over the long term. 

And yet, even in this challenging period, value stocks have returned nearly 10% per year—a solid return on an absolute basis. The real challenge lies in their comparison to growth stocks, which have been propelled by exceptional performance from a handful of companies. This surge is what has fueled claims of value investing’s demise. 

The Role of Valuations 

What do recent returns for value and growth stocks mean for future expectations?

The key lies in valuations—a measure of the price paid for an asset relative to its underlying value, such as earnings, cash flow, or book value.

Take the price-to-book ratio, for example. This metric shows how much investors are willing to pay for a company’s net assets, or underlying book value. While this ratio has limited predictive power for next year’s returns, valuations do matter in the long run. Historically, lower valuations have paved the way for higher returns, while higher valuations have often led to more modest gains.

As shown in the graph below, growth stocks are currently priced well above their historical average, while value stocks are aligned with theirs. This contrast could hold clues for the years ahead.

Value vs. Growth: Lessons from History

Source: Dimensional Fund Advisors. Data reflects the Fama/French US Value Research Index and US Growth Research Index from June 1926 to December 2023.

Reasons for Optimism

Historically, some of the best periods for value investing followed years of underperformance. 

Take March 1940, for example, when the value premium was a staggering -16.8% per year over the prior three years. Just three years later, value stocks had their best three-year performance ever, outperforming growth stocks by an annualized 30%.

More recently, at the end of June 2020, the three-year value premium stood at -17% per year. By April 2023, value stocks had staged a remarkable comeback, outperforming growth stocks by 11% per year over the subsequent three years.

And it’s not just a U.S. phenomenon—the value premium has thrived globally. Over the past 30 years, value stocks have outperformed growth stocks by 4.6% per year in emerging markets and by 3.4% per year in developed international markets.

From a longer-term, global perspective, claims of value’s demise seem not only premature, but a genuine cause for optimism. With patience and a strategic mindset, value investing remains as viable as ever, ready to deliver returns for those who stay the course.

An Alphabet Soup of Yields

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When someone says their word is their bond, it means you can count on them. In similar fashion, investors expect to be able to depend on reported data for their bond investments.

And with higher interest rates dominating headlines, many investors are more curious to know how the yield—how much income an investment produces—on their cash, money funds, and bond investments has changed in recent months.

To be clear, this isn’t a post about the role of bonds in a portfolio. And it’s not intended to explain how rising interest rates may impact bond returns going forward.

My goal is to simply acknowledge that many websites report multiple (and different) yields for the same bond fund, and to help explain the differences and simplify the confusion.

Consider Vanguard’s Total Bond Market Index Fund (VBTLX), the largest bond fund in the United States and a good proxy for the performance of the U.S bond market:

  • On Thursday, February 23, Charles Schwab’s retail investor website reported a 30-day SEC Yield of 3.89% and a distribution yield of 2.39%.
  • Vanguard’s own investor site reported a 30-day SEC Yield of 4.17% and distribution yield of 2.81%.
  • Popular financial advisor website YCharts reported a 30-day SEC yield of 4.14% and distribution yield of 2.65%, while also providing a “Current Yield” of 2.95% and a “Yield to Maturity” of 4.62%

That’s three websites, four yield measures, and eight different reported figures, ranging from 2.39% to 4.62%.

So, which is it?

A Primer On Yields

While some of the discrepancies above are due to the different reporting dates, a few definitions may help explain the differences in these various yield measures:

Current Yield: The current yield for an individual bond is the annual coupon (interest income) paid by a bond, divided by the current price. For a bond fund, the current yield is the weighted average current yield of each bond held in the fund.

Current Yield = 12 Months’ Interest Income / Current Price

Distribution Yield: The distribution yield measures all distributions paid by a fund over the previous twelve months, divided by price. This includes coupon income plus any gains or return of capital and, thus, applies to bond funds and not to individual bonds.

Distribution Yield = Previous 12 Months’ Fund Distributions / Price*

*Why “price” and not “current price” for distribution yield? Because some sources use current price, while others (like Vanguard) use the average price of the fund over the past month. Thus, why reported distribution prices for the same fund on the same day can differ.

While current yields and distribution yields accurately reflect a bond fund’s past distributions, those measures may not best reflect what a fund might yield in the future. Two forward-looking measures are:

Yield to Maturity (YTM):  YTM is the expected return of a bond assuming it is held to maturity and all interest payments are reinvested at the same rate. Given these assumptions cannot be known in advance, this is a theoretical yield measurement of a bond’s expected return, not its actual return. A bond fund’s YTM is the weighted average of the YTM for each bond held in the fund.

30-Day SEC Yield: The 30-Day SEC yield takes accounting information from the past 30 days and reflects it as an annualized figure to estimate the total return of a bond fund over the average maturity of the fund’s holdings.

Tying It Together

So which measure is better? The answer depends on what you’re using it for.

Estimating future performance: If you’re looking to estimate what a bond fund might return in the future, its 30-Day SEC yield is a good measure. As it reflects information from the past 30 days, the SEC Yield will quickly reflect fluctuations in interest rates, providing a new snapshot of returns.

If seeking to compare the SEC yield of two different funds, however, keep in mind the risk exposure of each fund may differ—and a higher yield may indicate higher risk.

Determining what you were paid: If you instead want to know the amount of cash a bond fund has generated, the Distribution Yield is the best measure.

Determining what you will be paid: During a period of stable interest rates, Distribution Yield is also a good measure of the cash likely to be distributed. It will understate the amount of cash a fund produces during rising rates and overstate the amount during declining rates.

The Bottom Line

Taking it back full circle, the 30-Day SEC Yield of the Vanguard Total Bond Market Index Fund as reported by Vanguard for February 21, 2022 was 4.17%. While future performance for any investment is highly uncertain, that’s as good an estimate as any of what the fund might return over the next 12 months.

Vanguard’s reported distribution yield for the fund is 2.81%. That, too, is an accurate reflection of the cash generated by the fund, but likely understates what is expected to be received going forward given recent changes in interest rates.

Regardless of the measure, today’s bond fund yields are generally higher than they were a year ago, reflecting both the lower prices of existing bonds and the higher coupon payments of newly acquired bonds.

And as starting bond yields have historically been a reliable indicator of future returns, today’s higher yields should be interpreted as a relative measure of good news.

Consider Long-Term Care Options Today for Peace of Mind Tomorrow

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When it’s time to begin thinking about long-term care options for yourself or a loved one, a little preparation can go a long way.

This holds true whether you’re searching well in advance of needing long-term care or must move more quickly due to unforeseen circumstances.

Either way, understanding the costs and level of care associated with two popular long-term care options—senior living communities and continuing care retirement communities (CCRCs)—can give you confidence as you proceed.

Notes Before You Begin Your Search

If you have already acknowledged you or a family member may one day need some level of care, you are ahead of the game. Many people do not consider their options until illness or infirmity demand a decision be made.

Exploring options does not mean you or a family member will necessarily need long-term care down the road. Studies show about one-third of today’s 65-year-olds may never need long-term support.

But approximately one-fifth of this same population will need care for more than 5 years.1 Most people wish to stay in their homes as long as possible. Planning early gives you more say and flexibility—and relieves other family members from having to make decisions for you.

Senior Living Communities: No Guarantee of Ongoing Care

Many people find the difference between senior living communities and CCRCs a little confusing. There are important differences, however, both in levels of care available and costs.

Senior living communities include independent living, assisted living, and memory care. Typically, there is no fee (other than a deposit) to move in. Rent is paid month-to-month and costs depend on location, amenities, and level of care.

In the Portland area, residents of a senior living community can expect to pay between $4,000 and $8,000 in monthly fees. In 2021, average monthly costs for assisted living in the Rose City were about $5,000—roughly $500 more than the national average.

Unlike CCRCs, there is no guarantee of care at senior living communities. If a resident’s medical need becomes too great, they can be asked to leave at any time.

CCRCs: Care for a Lifetime

Structured to provide all the care a person could need for the rest of their life, CCRCs ensure access to advanced healthcare support such as assisted living or memory care without the hassle of moving.

Most CCRCs require residents to be in good health upon moving in.

In keeping with the range of care offered, CCRCs typically have hefty entrance fees. In the Portland area, these fees range widely, from $100,000 to $1 million+, depending on the unit and types of amenities a facility offers.

The upside: Regardless of your health in the future, you will not need to relocate.

If a resident moves or passes away early, most CCRCs will refund a portion of the entrance fee, the amount amortized over a period of time. Refund amounts can be anywhere from 50% to 90% of the entrance fee.

Monthly fees, in addition to the entrance fee, are comparable to those of senior living facilities and vary based on facility location, amenities, and level of care. These fees typically cover most or all living expenses such as housekeeping, meals, utilities, transportation, and so on.

Good to Know: Costs Are Trending Upward

Since 2004, national average assisted living costs have increased 4.65% per year.2

Demand for care, a shortage of qualified health care workers, caregiver turnover, and increasingly complex care needs contribute to rising costs, which are anticipated to continue on an upward trajectory.

Medical expenses for those who live at both senior living communities and CCRCs are tax deductible on the portion of costs that surpass 7.5% of a person’s adjusted gross income.

In many cases, long-term care insurance can also be used to cover monthly fees, but it is important to acknowledge that long-term care benefits are typically triggered by an individual’s inability to perform two of the activities of daily living.

An Important Conversation

When it’s time to look at retirement living options, there’s no one size fits all solution. But there’s one clear way to ensure a better experience: plan ahead.

By evaluating long-term care options today, you stand to improve the quality of your later years, ease the burden of choice that can sometimes fall to other family members, and enjoy peace of mind in your later years.

 

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1 LongTermCare.gov. LTC Home | ACL Administration for Community Living. Accessed October 11, 2022.

2 Genworth. Cost of Care Trends & Insights. Median Cost of Nursing Home, Assisted Living, & Home Care. Accessed October 11, 2022.