Advisor just recommended higher percentage international equity

[stephenson]

I’m out of workforce for about a year, and while I do my own accounts management - nothing fancy - my Fidelity provided advisor who is assisting with the transition (including estate planning, etc) noted, for the first time (over eight teleconference meetings) that he felt the 5-10% international equity funds we had in Fidelity, Vangaurd and some nonqual accounts, was too low. He recommended considering as much as 20% - mainly in the IRA accounts.

This seemed like a “new topic” ...was wondering if others with advisors had heard this and consider it a “shift,” and if this seems reasonable? My advisor has always been thoughtful and patient with spouse and I ...never pushy or too directive.

If a shift, then is it financial company wide, or limited ...does it mean something?

 

[Ready]

The general line of thinking is that your international exposure should be between 30-50% of total equity holdings. I think 50% is too high so I've kept mine at 30%.

With the US markets going on such a long bull run, I would agree that only have 10% in international holdings is not a good strategy right now.

 

[38Chevy454]

I hold about 20% in international equities, FWIW. Just part of the diversification strategy.

Your advisor could also be a little bit of following the herd, as international has been getting more attention lately, and is doing pretty well. A lot driven by the fear of US volatility and potential for pullback.

 

[Dtail]

I also hold 20% in international equities. Hopefully the Cape 10 concept works out abroad.

 

[OldShooter]

I think @Ready is correct on the general consensus.

You have to be a lilttle careful, though, and ask "% of what?" Whole portfolio? Just the equity portion?

A few years ago, Vanguard did a study and determined that setting international exposure in the area of 30% of equities gave minimum volatility. With due respect to Dr. Markowitz, I think volatility is only a small part of risk, but if low volatility is your cup of tea, Vanguard's graph gives you the recipe: http://www.vanguard.com/pdf/ISGGEB.pdf

Other voices, like Ken French, recommend a "market portfolio" that includes cap-weighted international stocks just like we buy cap-weighted US stocks: https://famafrench.dimensional.com/videos/home-bias.aspx (If you don't know who French is, search "Fama French" and you will see.)

Coincidentally I was talking to my Schwab guy the other day and he showed me a 60/40 model portfolio where international was only 15% of the total, so 25% of the equities. I remarked that the international looked low and he said yes, that there is a new set of model portfolios coming where Schwab has increased the allocation to international.

Finally, one of the raps against holding non-US assets is that you are taking on currency risk. Yes, but for a long-term investor the % variations in currency will be swamped by the % variations due to asset valuations, hopefully increasing asset valuations. Personally, I think the dollar has nowhere to go but down over the long term, so that will make my international assets more valuable.

For DW's and my portfolio our equities are about 50/50 US and international because the US market cap is roughly 50% of the world market cap. A good chunk is in VTWSX, Vanguard's total world fund. So obviously, I think your advisor's recommendation is too low.

HTH

 

[stephenson]

Thanks ...was thinking about keeping it simple and using VTIAX for the international counterpart to my VTSAX in Vanguard ... maybe use FIENX at Fidelity as counterpart to FSTVX - sloughs off the lower 20% with slightly higher returns historically ...

All IRA accounts.

Thoughts?

 

[OldShooter]

... Thoughts?

Well, for historical reasons a big chunk of our portfolio is 50/50 between VGTSX and Fidelity Spartan Total Market (FSTVX). The rest is in VTWSX. The advantage of VTWSX is that the home country vs internationaL ratio automatically tracks as % of world market cap. Holding VGTSX and FSTVX means, in theory, that we have to adjust the split between them as the US market cap waxes and wanes vs the rest of the world.

Personally I would not touch a fund like FIENX. First of all, there is a mountain of evidence showing that past performance really does not predict anything. Ref the semiannual S&P Manager Persistence reports. (If you are not familiar with those reports you should download a few and read them, also download and read the S&P SPIVA reports.)

Second, studies show that the one thing that is correlated with performance is low fees, and FIENX is at 59 basis points, three or four times what I pay for my funds.

The cynic in me would say that "Enhanced" in the FIENX fund name refers to the manager fees.

YMMV

 

[brokrken]

FWIW, I am at 20% international as a% of my total equity allocation. Total allocation is 80% Equity 10% Fixed Income 10% Cash

 

[brokrken]

A good chunk is in VTWSX, Vanguard's total world fund. So obviously, I think your advisor's recommendation is too low.
HTH

Shooter, If I look at the top 10 holdings of VTWSX I don't see a very international picture.

1. Apple
2. Microsoft
3. Amazon
4. JP Morgan
5. Facebook
6. Alphabet C
7. Johnson & Johnson
8. Exxon
9. Tencent
10. Bank of America

There's only one non-American company in the group. And, if you take it further and look at the top 25 holdings there are only 3 non-American companies.

 

[OldShooter]

Shooter, If I look at the top 10 holdings of VTWSX I don't see a very international picture. ...

Truth be told, I have never looked at the fund's holdings. Per the prospectus: "The Fund employs an indexing investment approach designed to track the performance of the FTSE Global All Cap Index, a float-adjusted, market-capitalization-weighted index designed to measure the market performance of large-, mid-, and small-capitalization stocks of companies located around the world."

That said, your results surprise me a little bit. IIRC US large caps comprise about 40% of the world market cap so I would definitely expect to see them well represented but 9 out of 10 is unexpected.

Regardless, I'll take Jack's and the boys' word for it that I own a world index stock fund.

Thanks for the post.

 

[Texas Proud]

One of the problems with international is tax.... in that there are foreign taxes paid....

I had a fund in my IRA and saw that it had about $1,000 of foreign taxes paid... but I was not able to use that as a foreign tax credit on my tax return since the income was in the IRA...

Also, some funds of funds do not give you that FTC.... IOW, if you owned the funds that made up the FOF you would get the credit, but since it is washed through the FOF you lose it...

 

[flintnational]

International has been 30% of our equity allocation for at least 18 -20 years. IIRC, I selected this allocation based on efficient frontier modeling. At the time it showed a historical 70/30 US/International mix at the efficient frontier.

So yes, IMHO it would be reasonable to increase international, but only as a long term adjustment and not a market timing decision. I rebalance in our IRAs to avoid tax issues.

 

[OldShooter]

One of the problems with international is tax. .. about $1,000 ...

I have never looked at that. What is the $1K as a percentage of the asset?

International has been 30% of our equity allocation for at least 18 -20 years. IIRC, I selected this allocation based on efficient frontier modeling. At the time it showed a historical 70/30 US/International mix at the efficient frontier. ...

It might be interesting to revisit that. I believe the correlation of the two markets has increased quite a bit over that time period. Seems like that should have affected the efficient frontier curves.

Your allocation does, though, seem to track with the Vanguard study that saw minimum volatility (= risk to an efficient frontier guy) at 30%, and the Vanguard study was in 2014.

... only as a long term adjustment ...

Agreed. Though with the run in US equities, someone who believed in regression to the mean would argue that this is a good time to increase international exposure and reduce US.

 

[pb4uski]

.... All IRA accounts.

Thoughts?

When you say all IRA accounts do you mean that you have no taxable or that all your international is in IRAs.

If you have taxable accounts, that is the best place to hold your international.

for me for the last two years, the foreign tax credit has exceeded any tax on dividends so the provide me with a net tax credit that I can use against other taxes due.... small, but still a net credit.

 

[copyright1997reloaded]

As of this morning I am 27% international in terms of equity holdings. (I also own a tiny bit of foreign debt, but pretty much irrelevant). In reality my portfolio is exposed to non USA considerably more than 27% as many large cap US companies derive a significant portion of their revenue and profit from foreign sources.

 

[stephenson]

pb,

Sorry wasn’t clear ... discussion relates to my IRA accounts. They make up about 50% of total assets, not including real estate.

 

[Texas Proud]

I have never looked at that. What is the $1K as a percentage of the asset?
/snip/ .

When you say all IRA accounts do you mean that you have no taxable or that all your international is in IRAs.

If you have taxable accounts, that is the best place to hold your international.

for me for the last two years, the foreign tax credit has exceeded any tax on dividends so the provide me with a net tax credit that I can use against other taxes due.... small, but still a net credit.

As pb said.... it is not a big % but it is money that is being lost.... even if it were only $100, you lose that $100 if it is in an IRA that you do not lose if in taxable account... the foreign tax is being paid no matter where you keep your investment, the question is does it help you out or not...

BTW, if you do not owe any taxes (like me know) then you do lose the FTC anyhow as it is not a refundable credit....

 

[Texas Proud]

As a different perspective... I have very little 'foreign' investments now... but it does not mean I do not have foreign exposure.... All the big companies are now global and as such you are invested globally if you own them...

IIRC, they said Apple is like 60% foreign income... I would bet that Exxon is also over 50% (big guess, no backing)....


I do have some money in an emerging market fund in my old 401(k), but it is not even 1% of the total...

 

[ownyourfuture]

Your advisor could also be a little bit of following the herd, as international has been getting more attention lately, and is doing pretty well. A lot driven by the fear of US volatility and potential for pullback.

Agree with Chevy. This guy appears to be 'following the heard'
I checked my 401(k) account

2017 returns
Vanguard Int Growth Fund (VWILX) 43.16%
Vanguard 500 Index Investor (VFINX) 21.67%

 

[Totoro]

Most of that was the recent drop of the USD though. Look back a few years and you'll find the opposite.

 

[pb4uski]

As pb said.... it is not a big % but it is money that is being lost.... even if it were only $100, you lose that $100 if it is in an IRA that you do not lose if in taxable account... the foreign tax is being paid no matter where you keep your investment, the question is does it help you out or not...

BTW, if you do not owe any taxes (like me know) then you do lose the FTC anyhow as it is not a refundable credit....

Unless you have some other constraint on income, like ACA subsidies, you can "use" the credit by doing what are effectively tax-free Roth conversions sufficient to use the credit so it doesn't go to waste.

 

[pb4uski]

I hold about 20% in international equities, FWIW. Just part of the diversification strategy.

Your advisor could also be a little bit of following the herd, as international has been getting more attention lately, and is doing pretty well. A lot driven by the fear of US volatility and potential for pullback.

Agree with Chevy. This guy appears to be 'following the heard'
I checked my 401(k) account

2017 returns
Vanguard Int Growth Fund (VWILX) 43.16%
Vanguard 500 Index Investor (VFINX) 21.67%

Vanguard and others target date funds have had a significant AA to international equities for many years... IIRC Vanguard increase it from 20% to 30% about 5 years ago... no following the herd in my opinion. In any given year one may outperform the other.... the price of diversification is that we never know which will outperform in advance.

 

[OldShooter]

... In any given year one may outperform the other.... the price of diversification is that we never know which will outperform in advance.

Did you mistype? I would say that "the value of diversification ..." or maybe "the purpose of diversification ... "

 

[audreyh1]

20% of our equities are in international funds. I rebalance annually - currency variation contributes to the diversification.

 

[braumeister]

23% international right now. It fluctuates, but generally in the 25% range, plus or minus a few percentage points.