Should a retiree own International funds?

[Midpack]

I am about 21% Intl Eq** (47% Dom Eq, 25% Bonds, 7% Cash), and I am comfortable there come what may. Been retired since Friday .

I am well aware of the risk in each of my holdings, expected and built in, basic risk vs return decision for all ages. I may live another 30-40 years so I'm still a long term investor IMO and therefore not ready to avoid all risk (or the long term returns), can't afford to most likely. I plan to gradually get more conservative with AA in the decades ahead, but to make a blanket statement that retirees need to avoid risk doesn't make sense to me. My recommendation at age 55 would be very different than age 80. YMMV

I may be mistaken, but I always thought one of the added benefits was having Intl and Dom holdings is a good way to neutralize exchange rate/currency risk to some extent, the dollar vs other currencies.

** 2/3rds Tax Managed Intl and 1/3rd Emer Mkts.

 

[LOL!]

Here are some foreign companies: Toyota, Honda, Pfizer, BP, Mercedes, Nissan, Subaru, GlaxoSmithKline, AstraZeneca, Royal Dutch Shell, Teva, Taiwan Semiconductor, etc that all do significant business in the US.

Here are some US companies: CocaCola, MacDonalds, Bayer, ExxonMobil, YUM! Brands, Ford, Cisco, Apple, Microsoft, Boeing, Google, etc that all do significant business overseas.

The world is flat. One should own a piece of all the companies of the world.

 

[devans0]

I diversify in US and foreign equities in approximately the same ratios that world money is. Sixty percent of world money is outside the US. I don't want to over allocate my money to local bias.

Smart? Time will tell, but I sleep soundly. BRIC improved my FIRE independence money very nicely and I did reallocate.

 

[Nords]

Some people on another web site feel that a retiree should not own international or emerging market funds due to the risk. What do you think?

I still don't understand their logic. Due to the risk... of what?

 

[clifp]

Here are some foreign companies: Toyota, Honda, Pfizer, BP, Mercedes, Nissan, Subaru, GlaxoSmithKline, AstraZeneca, Royal Dutch Shell, Teva, Taiwan Semiconductor, etc that all do significant business in the US.

Here are some US companies: CocaCola, MacDonalds, Bayer, ExxonMobil, YUM! Brands, Ford, Cisco, Apple, Microsoft, Boeing, Google, etc that all do significant business overseas.

The world is flat. One should own a piece of all the companies of the world.

I agree the world is flat. My AA is 15% international all in index funds except for Diageo (the big UK beverage supplier). Diageo largest market is in North America. So a bad US market hurts Diageo profits, in fact it probably hurts Diageo profits more than say Intel which has about 75% of its sales overseas. So if I am try diversify away from the US economy/capitalizing on emerging markets, I am probably off holding Intel and Boeing rather than Honda, and Diageo. But for purposes AA the former are listed as domestic and the later international.

The argument for investing in internationally equities was that increased your diversification while providing a similar returns to domestic equities. That was true 20+ years ago. It hasn't be true for the last decade and certainly not true during the crisis when the correlation between International stocks reached a very high level of .9 vs the S&P 500, according to this study/eye chart. I don't think there is anything wrong with holding a large percentage in international equities, nor in slicing or dicing (small, large, growth, value funds). I am just not convinced that you are giving up much but not owning any international funds, unless you go out of your way to hold US equities with minimal international sales, which frankly is pretty tough to do. If you want to diversify you need to own bonds, or gold, maybe commodities, but pretty much any broad equity fund behaves similarly in today's interconnected economy.

 

[Ed_The_Gypsy]

Three sources convinced me that 50/50 US/International was the way to go:
1) Bill Bernstein: Efficient Frontier
2) Paul Merriman: http://www.merriman.com/wp-content/uploads/2011/01/FineTuning2011.pdf
3) Les Antman SimplyRich

(These links have changed a lot since I first read them over 10 years ago. It might take some hunting to find the same stuff today.)

I learned that
1) a 50/50 portfolio had less volatility than 100% of either one.
2) a 50/50 portfolio recovered faster than either one alone. Last time I looked, Les Antman was saying 5.5 years.

Yes, world markets are more correlated now than ever before--they tend to move together more often now. Even so, they ARE different markets.

I am still 50/50 both in equities and in the very small bond fund position I have (thinking about dumping separate bond funds altogether). It has worked for me through very rough times.

 

[mickeyd]

I particulary like the Vanguard Total International Stock Index fund (VTIAX). Other than a few hundred shares of a Canadian company, that fund IS my international allocation.

Admiral shares had a 6 month TR of 16.11% and a ER of 0.20% along with a turnover rate of 3%.

The way that they now mix the market diversification seems to make more sense than the way it was prior to last Fall (no longer a FOF).

 

[WilliamG]

I particulary like the Vanguard Total International Stock Index fund (VTIAX). Other than a few hundred shares of a Canadian company, that fund IS my international allocation.

Admiral shares had a 6 month TR of 16.11% and a ER of 0.20% along with a turnover rate of 3%.

The way that they now mix the market diversification seems to make more sense than the way it was prior to last Fall (no longer a FOF).

Yep. And now they hold some smaller capitalization stocks and Canada.

 

[gerntz]

Less risk for now, maybe. Will they tell you when it is time to make that investment?

As part of a diversified portfolio, I believe you are reducing your total portfolio risk by including those international funds in your portfolio. They have about the same average annual returns and will behave somewhat differently over longer periods of time. Ideally, you would like portfolio components that really varied like crazy (one definition of risk) so that you could rebalance and increase your return significantly. You just don't want them to do the same thing all the time. Which is exactly what more U.S. equities added to a U.S. equity portfolio are guaranteed to do.

Also, imagine doing that in Japan, Japanese equities only, where returns have been crummy for a long time. We may be heading in that direction in the future, while EM's may look more like the U.S. of the past. You don't know who's going to do best. Spread your bets.

Agree 100% on the diversification part. How much rebalancing helps - is it worthwhile effort? - is debatable I think.

 

[gerntz]

A comment from the SEC:
International Investing


Our current direct allocation (those funds invested directly in foreign based companies) in stock is about 10% of all securities and about 22.5% of the stock.

But our indirect investment is not as well quantified. If 1/2 of S&P 500 companies had 40+% of their sales from other countries.... I may have more international stock exposure than I know about (or at least have quantified). I am sitting tight for now. Once I get a better understanding of how to analyze it. I will make some adjustments.


Anyone know of a good (easy way) to do this analysis and track it?.... for allocation purposes!

Guess I wonder why you want to track it. If you believe in being highly diversified, then having companies from many areas of the globe and of varied size is the way to go. Also, being concerned that US companies have a lot of foreign investment works the other way around too. E.g., buying Toyota gets you a lot of USA exposure. Finally, why do you want to do all that work vs. living?

 

[Tadpole]

Which foreign investment grade economies are the most independent on the US economy?

 

[Ed_The_Gypsy]

Finally, why do you want to do all that work vs. living?

That is my personal test. I am almost on cruise control now. And I am still w*rking.

 

[Nords]

Finally, why do you want to do all that work vs. living?

Some of us enjoy studying this crap long enough to arrive at a decision and put it on autopilot.

 

[bamsphd]

Three sources convinced me that 50/50 US/International was the way to go:
1) Bill Bernstein: Efficient Frontier
2) Paul Merriman: http://www.merriman.com/wp-content/uploads/2011/01/FineTuning2011.pdf
3) Les Antman SimplyRich

Interesting link to the Merriman article. I'm no longer interested in slicing and dicing that finely, but otherwise I'm pretty close to their recommendations.

I've definitely been strongly influenced by Bernstein and Antman. Though I remain skeptical about Les's recent love affair with allocating assets to commodities. I think the historical commodity indexes have too much data-mining bias, and the fees are just too high. However, that is another thread.

Basically the experience of an investor in Japan is what convinced me to go with a 50/50 domestic/international split to my equity allocation. Even if they invested the day the Japanese market peaked, a Japanese 50/50 investor recovered in a reasonable amount of time. I'm not sure someone who invested 100% in Japanese stocks the day the Japanese market peaked has recovered yet!

While I don't think the US is too likely to follow the same path as Japan, if the ___________ party manages to take simultaneous control of the white house, both houses of congress, and the supreme court for long enough... However, that is also another thread. In fact, probably another thread for each possible value of __________ party.

 

[veremchuka]

Interesting link to the Merriman article. I'm no longer interested in slicing and dicing that finely, but otherwise I'm pretty close to their recommendations.

I have looked at their website and studied those tables showing allocations from 100/0 to 0/100 and how they fared. To me the 40/60 (equity/fixed) looks to be the best AA. It doesn't take much of a hit in bad times and grows moderately well when the market is doing well. I'm 35/65 now, I might go as high as 50/50. I don't need the drama or have the need to take on extra risk so the days of 60/40 or more are over.

 

[freebird5825]

7% of my measly 32% in equities is international.

I have a very conservative overall AA of 32/63/5.

 

[easysurfer]

Early on in my investing life I too stayed away from international funds.

I guess the question that I ask is when international funds outperform domestic funds in a year, am I content to watch that play out? The answer for me is no. I want part of the action, as they say. So of my allocation is equities, I decided 40% of that goes in international and 60% goes in domestic. (Total allocation in equities decreases a little each year as I age).

 

[obgyn65]

Thank you for answering my question, Braumeister.

Simply to diversify the holdings. Some of my best returns in recent years have been from Canadian, Swiss, and Swedish securities. Their currencies have also been extremely strong against the dollar, and they're extremely stable countries. What's not to like?