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Arriving at the "ideal" international weight
Old 01-03-2010, 12:36 PM   #1
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Arriving at the "ideal" international weight

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From Asset Allocation Manager: Over the period 1970-2007, it appears as though a 60/40 U.S./Foreign allocation has produced the ideal combination of lower risk and higher return, providing an annual return of 11.45% over the period compared to the 11.17% you would have gotten with the more traditional 80/20 portfolio. While it may not seem like much, that extra 0.28% adds up over the years.
If you believe this will continue into the future (a big "if," I know) and want to keep things simple, you could invest, say, 60% in Total Stock Market Index (VTSMX) and 40% in FTSE All-World ex-US (VFWIX).

But since more than 40% of S&P 500 revenue comes from foreign markets, should you factor that in and lower the VFWIX investment accordingly? And what about the counterbalance: the percentage of foreign company revenue that comes from the U.S. market? This gets complicated pretty quickly, so should you ignore these factors altogether in the end?





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Old 01-03-2010, 12:43 PM   #2
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There is no ideal, so forget about achieving it. At least one Vanguard white paper showed that the differences between 20%, 30% and 40% foreign is not significant.

VFWIX does not contain small cap foreign, so you cannot use it alone to invest in foreign markets. You need VFWIX and VFSVX or the ETFs: VEU + VSS.

Whether you choose 20%, 30%, 40%, 50% does not matter except in hindsight. You cannot predict the future, so why try?

I assume your 60:40 US:foreign is just for equities and you would have some bonds in there somewhere, right?
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Old 01-03-2010, 01:00 PM   #3
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Thanks, LOL!. Yes, I was just talking about the equity portion of things.

I realize there's no ideal, but being a (somewhat reformed) perfectionist, it's hard not to try to get as close as possible -- a trait I've noticed is shared by many on this forum.

I left small caps out to keep my question simple. But it's also true that I hesitate to invest in Vanguard's small cap international fund because of the current entry and exit fees and the comparatively high expense ratio.
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Old 01-03-2010, 01:33 PM   #4
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If you are a perfectionist, then you will ditch Vanguard and switch to WellsFargo where you can get VEU and VSS without commissions and without entry/exit fees.

Or if the expense ratio of VSS is too high, use a combination of SCZ and DGS.
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Old 01-03-2010, 01:56 PM   #5
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Originally Posted by LOL! View Post
There is no ideal, so forget about achieving it. At least one Vanguard white paper showed that the differences between 20%, 30% and 40% foreign is not significant.
Oh darn! And here I had just determined that my % US vs foreign was 61:39, which is SO close to 60:40. And I thought I was SO smart.
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Old 01-03-2010, 05:15 PM   #6
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80/20 is often recommended because it increases returns and reduces volatility versus 100% US equities. I'm about 50/50.
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Old 01-04-2010, 10:19 AM   #7
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Or just go with a total world stock market MF/ETF like VTWSX/VT for simplicity.

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Old 01-04-2010, 09:22 PM   #8
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Or just go with a total world stock market MF/ETF like VTWSX/VT for simplicity.
It's appealing. But VTWSX's foreign holdings add up to 59%. I haven't heard anyone recommend that high a percentage for a U.S. investor.

I actually do have some funds in VTWSX (the purchase fee and slightly higher expense ratio have kept me from buying more), but my total portfolio foreign holdings are currently at 25%.

I plan to buy Vanguard Total Stock Market Index and FTSE All World ex-US through DCA, which is why I'm trying to find the "ideal" ratio. At this point, I think I'll do 70/30 -- it splits the difference between 60/40 (what the research I quoted found to be a sweet spot) and the traditional 80/20.
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Old 01-04-2010, 09:31 PM   #9
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I think we are about 65/35 for US/international, but we don't have a lot of emerging markets. Most of our international MFs are European and Asian Pacific (Japan and Australia). Might look into something in South America (Brazil) or Taiwan to make it a little more interesting.

(Footnote: I thought this was going to be a thread about Russian supermodels and BMI--I'm very disappointed. )
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Old 01-04-2010, 09:35 PM   #10
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It's appealing. But VTWSX's foreign holdings add up to 59%. I haven't heard anyone recommend that high a percentage for a U.S. investor.
The % of foreign holdings will change with respect to time. It was less than 50% a year ago, I think.
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Old 01-04-2010, 09:38 PM   #11
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(Footnote: I thought this was going to be a thread about Russian supermodels and BMI--I'm very disappointed. )
Whatever gets you to read the thread...
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Old 01-04-2010, 09:41 PM   #12
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The % of foreign holdings will change with respect to time. It was less than 50% a year ago, I think.
Sounds right. The U.S.'s share of the world market keeps getting smaller and smaller.
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Old 01-05-2010, 05:12 AM   #13
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I am sticking with 50/50. The math is easier.
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