International Equities

[ripper1]

I keep reading and hearing from the talking heads that Emerging Markets and Europe in particularly are going to make a strong comeback. My total allocation to RERFX and VGTSX is 30% of my stock portion. I am considering allocating another 5% to these funds. Any thoughts?

 

[Lsbcal]

If I have an international component in my equity mix, I split it between large and midcap. Recently the split was 60/40 using VEU and VINEX.

That was before I sold VEU at the end of October. No tax consequences for me on this though.

 

[Gatordoc50]

I'm 10% international LG and 5% EM. Probably not enough to make much difference but it keeps it interesting.

 

[CCdaCE]

What's your timeframe? GMO 7-Year Asset Class Real Return Forecasts* | The Big Picture

Why not invest in some Emerging Markets funds? Like the ETF VWO.

-CC

 

[Huston55]

I keep reading and hearing from the talking heads that Emerging Markets and Europe in particularly are going to make a strong comeback. My total allocation to RERFX and VGTSX is 30% of my stock portion. I am considering allocating another 5% to these funds. Any thoughts?

According to this article ( Foreign Stocks For The Long Run ), your 70/30 US/Foreign equity allocation is optimal. The data also indicates that the range of 80/20 - 60/40 outperforms allocations outside that band. So, moving to 65/35 is likely fine.

 

[MichaelB]

Our portfolio has always had very large allocations to international and emerging markets (along with resources). That has been a real boost over the years. This year has been painful, but I doubt we will make any meaningful change.

The one thing that does bother me is the high percentage of non-QDI from the Vanguard funds. It is becoming increasingly difficult to find tax efficient options and this might lead me to increase the US allocation.

 

[dmpi]

If you do hold Foreign stocks try to hold them outside of a 401K or IRA so you can claim the Foreign tax credit on your income tax.

 

[Onward]

Just read a great, recent article by Rick Ferri on this subject. (Sorry, don't have the link.)

Historically, international equities underperform U.S. equities, but add significant diversification.

Historically, the optimum mix is 70/30 U.S/international.

 

[Huston55]

Just read a great, recent article by Rick Ferri on this subject. (Sorry, don't have the link.)

Historically, international equities underperform U.S. equities, but add significant diversification.

Historically, the optimum mix is 70/30 U.S/international.

It's the link I provided above in post #5; good article.

 

[Ed_The_Gypsy]

Be aware that 'optimal' is in the eye of the beholder.

Way back when, Bill Bernstein had a couple of risk/annualized return charts that showed that the relationship between foreign and domestic equities shifted back and forth over time. My take on it was to go 50/50 and that is where I am trying to stay.

Less Antman and Paul Merriman provided information presented in other ways that continued to suggest that 50/50 was best for me in terms of a balance between volatility and long-term returns.

I have a high tolerance for market risk, BTW, and almost 100% equities and very little bonds or cash.

All of my international equities are in a tax-protected account and that does have an impact. Often, an international stock will have 30% of the dividends withheld as taxes in the country of origin (e.g., RDS-A). I can't get credit for those taxes, but fortunately foreign companies often pay higher dividends than US companies.

It sounds like MichaelB and I have similar investment philosophies, perhaps because we have both worked internationally in the energy business.

Nice article. The message bears repeating every once in a while.

 

[karluk]

The one thing that does bother me is the high percentage of non-QDI from the Vanguard funds. It is becoming increasingly difficult to find tax efficient options and this might lead me to increase the US allocation.

If you do hold Foreign stocks try to hold them outside of a 401K or IRA so you can claim the Foreign tax credit on your income tax.

MichaelB and dmpi both make valid, but conflicting, points. I used to hold Vanguard's total international stock market index fund in a taxable account. I noticed over the years that it tended to generate a lot of non-qualified dividends. The rough plotting I did indicated that this disadvantage more than outweighed the benefit of being able to claim the foreign tax credit, so I sold my taxable account and now hold the international stock index in my Roth IRA. So it's not completely clear whether or not one's foreign stocks are better off in a taxable or tax-advantaged account. YMMV.

 

[MooreBonds]

If you do hold Foreign stocks try to hold them outside of a 401K or IRA so you can claim the Foreign tax credit on your income tax.

...

All of my international equities are in a tax-protected account and that does have an impact. Often, an international stock will have 30% of the dividends withheld as taxes in the country of origin (e.g., RDS-A). I can't get credit for those taxes, but fortunately foreign companies often pay higher dividends than US companies.

Be wary of this assumption. I used to also blindly assume this, but then I started doing some calculating.

Assuming your income tax rate is lower in retirement than now, and assuming the foreign taxes aren't that high, it's better to hold your highest "effective taxable yield" (equating qualified dividends to non-qualified) in tax deferred/ROTH accounts.

There are many ETFs holding foreign stocks that pay dividends which are unqualified. This means you are effectively 'doubling' the tax hit of your dividend yield. (ex. a stock/ETF that yields just 2% non-qualified dividends has the same taxes owed as a stock/ETF that yields 4% and pays out qualified dividends!)

Since I hold many individual stocks and ETFs, and my goal is to produce an income-generating portfolio for my eventual ER, it's more of a factor for me than for a Boglehead.

Which do you hold in your taxable?

Assume marginal federal income tax bracket of 28%, state income tax bracket of 6%.

ETF "A" pays out 6% yield, but only 1/3 of the dividends are qualified, and withholds 10% foreign income tax.

6% dividend, 10% foreign tax withheld = 0.60% foreign tax withheld
2% of that yield is qualified (taxed at 15% max fed/6% state in the US = .42% taxes)
4% of that yield is non-qualified (taxed at full marginal income tax rate in US = 1.36% taxes)
Total Federal/State taxes = 1.78% less 0.60% FT credit = 1.18% net tax

ETF "B" pays out 3% yield, with 100% of the dividends are qualified, with no foreign income tax.

3% qualified dividend = 0.63% net tax

It might not look like a big difference....but multiply it by 20-30 times over 20-30 years, and multiply it another 50 times for 50 positions, and you're starting to add up some real money.



I set up a spreadsheet with 2 tables, 3 columns per table:
Table 1
Dividend yield
% qualified dividends
% foreign taxes withheld
For $1 in dividends from a stock, I then calculate the net after-tax dividend for taxable, tax-deferred, and then ROTH accounts.

I then put the same info on a contrasting stock in the other table to see which combination of holding them in which accounts produces the highest net after-tax money.

For me, if the foreign tax withheld is about 15% or greater, AND if the dividend is mostly qualified, then it makes sense to hold the stock/ETF in taxable. However, because qualified dividends are taxed at HALF of non-qualified, any foreign holding that has more than 50% non-qualified is in tax-deferred/ROTH, because losing the foreign tax credit is dwarfed by the higher taxes at the marginal tax rate.

For the few countries that withhold like 30% foreign taxes (Sweden?), it can make sense to keep it in taxable, but most of my foreign holdings that pay high yields (more than 3% or so) are in tax-deferred, since I have many domestic holdings that yield nothing or just 1%-2% and are qualified.

The one thing you have to keep in mind is that short-term capital gains distributions from ETFs are recorded as dividends/taxed at marginal rates, so you have to go to the Fund Sponsor and download their end-of-year tax summaries to see what % of the dividend is truly "dividends", and what is short-term capital gains...some of the sponsors like SPDR, iShares and Global X are pretty good about breaking that out, but others like VanEck don't tell you.

Also, keep in mind different countries have different rules, and a few stocks have dividend 'options':

(e.g., RDS-A).

I realize this isn't too common, but RDS actually offers shareholders the option of receiving dividends in shares rather than cash, in order to get around the high tax-withholding of their native European country. The trick is you have to tell your broker that you want to sign up for this (I use TD Ameritrade, and I don't have foreign taxes withheld on my RDS dividends, whether it's in a taxable or retirement account, but I had to e-mail them about it).

Also, a few countries like Canada (they might be the only ones?) actually have legislation to NOT withhold foreign taxes if your holdings are in qualified retirement accounts, while they DO withhold foreign taxes if you hold it in a taxable account (note: I just transferred some Canadian stocks to my retirement accounts, so I can't personally vouch for this working yet...but I have seen printed statements clarifying this).

 

[pb4uski]

Just read a great, recent article by Rick Ferri on this subject. (Sorry, don't have the link.)

Historically, international equities underperform U.S. equities, but add significant diversification.

Historically, the optimum mix is 70/30 U.S/international.

Interesting. That is the mix that I target when I rebalance. I also hold most of my international equities in my taxable account to tax advantage of the foreign tax credit but will have to take a look at it. IIRC ~72% of my international dividends are qualified.

 

[NW-Bound]

Currently, I have 42% in domestic stocks and 26% in foreign stocks. Of that foreign stock AA, quite a bit is outside of developed areas like Europe and Japan.

Here's something to think about. It is estimated that China's economy will surpass that of the US by 2016. That's a lot sooner than earlier estimates just a few years ago, I thought.

See: By The Time Obama Leaves Office, U.S. No Longer No. 1 - Forbes.

The Chinese stock market is not investable for an outsider like myself, but one can look at other countries that are its trading partners.

 

[galeno]

I like the GMO forecasts. They are very close to my forecasts.

 

[Midpack]

My equity allocation is 2/3rds domestic and 1/3rd international with a few tilts in each, hasn't changed in 8 years. I won't say that'll never change, but I don't seen any reason to change based on anything I've seen. I don't follow the experts reading tea leaves or monkeys with darts. YMMV

 

[Lsbcal]

Here are some Vanguard fund numbers:

equity  intl  intl/equity
63        9       14                Wellington
60       12       20                Lifestrategy Conservative Growth
62       19       30                Target Retirement 2020

 

[galeno]

Our 65/35 port is 30% USA + 35% non-USA equities. Next year we'll go to 60/40: 25% USA and 35% non-USA. 10% of non-USA is always in EM.

 

[Gearhead Jim]

I keep reading and hearing from the talking heads that Emerging Markets and Europe in particularly are going to make a strong comeback. My total allocation to RERFX and VGTSX is 30% of my stock portion. I am considering allocating another 5% to these funds. Any thoughts?

Uh-oh...