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International Investing - Allocation Adjustment?
Old 05-07-2019, 10:43 AM   #1
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International Investing - Allocation Adjustment?

A little bit of background. Wife and I are young (30s) and are saving up to buy land and build in about 10 years. We have a taxable account with Vanguard with $60k that we will use to purchase said land. Unfortunately, I listened to some not-so-great advice and on February 2018 moved $15.5k into VTIAX and $17.5k into VEMAX. To date, I am down -8% and -10% from the initial investments, respectively.



This may be a "crystal ball" type question, but what should I do?
1) Leave the money in. Vanguard recently said over the next decade International will outperform the US market. That fits our time frame, so ok.
2) Move money into S&P500 and be happy. Going back to Dec 2010, Portfolio Visualizer shows S&P500 blowing those funds out of the water!
3) Something else.
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Old 05-07-2019, 10:53 AM   #2
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Looking at the past does not help with the future. We cannot know what will do "better".

100% stocks for ~10 year money will be volatile. The US market has dropped more than 50% (2008 to 2009) very recently.

If you want this money to "be there" and not drop substantially, then you need to have a lower amount of stocks. You can let it ride for 5 years, but once you get within the 5 year window of the purchase, you have to get it mostly out of stocks. Or accept that the amount may or may not be there.

I would be more aggressive with your 401k/Roth IRAs and dial back. Maybe 50% stocks (70% Total US and 30% Total International) and 50% "safe". Int-Term Tax-Exempt bond index or Int-Term Treasury Index.

International may best US over the next 10 years. Can't know. Good luck!
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Old 05-07-2019, 10:56 AM   #3
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Here is the problem with stock markets, over a short period of time the results tell you nothing how you did.
Right now you are down 10%, but if you were up 10% you would be happy.
Things will go up and down over the years.
However, in 10 years you could be up 30% or down 30% or much more.

I have both these funds
But I do have lots more of VTI.
However, due to the stock market highs, and my heavy stock allocation I am moving more into bonds.

Do you have other investments, or just these 2 funds ?
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Old 05-07-2019, 11:07 AM   #4
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I would be more aggressive with your 401k/Roth IRAs and dial back. Maybe 50% stocks (70% Total US and 30% Total International) and 50% "safe". Int-Term Tax-Exempt bond index or Int-Term Treasury Index.

International may best US over the next 10 years. Can't know. Good luck!

I didn't mention my retirement investments, since I didn't think it was pertinent to my question. Yes, we are 100% stocks with our retirement allocations and they will stay that way for at least 15+ years.


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Here is the problem with stock markets, over a short period of time the results tell you nothing how you did.
Right now you are down 10%, but if you were up 10% you would be happy.
Things will go up and down over the years.
However, in 10 years you could be up 30% or down 30% or much more.

I have both these funds
But I do have lots more of VTI.
However, due to the stock market highs, and my heavy stock allocation I am moving more into bonds.

Do you have other investments, or just these 2 funds ?

Understood. I didn't make it clear but the performance of both of those funds have stunk over the last 8 years, compared to the SP500. The international market has under-performed by 3.3% compared to the US since 1986. Do I look back at the last 30 years, take the tax lost harvesting, and move that money back into the US market? Do I listen to the advice of Vanguard and keep my money where it is at?


Yes, I also have:
$18k - Vanguard Money Market (will have to dip into this next year for other reasons)

$7.9k - MFA (started at $7.5k so I am definitely happy with this one)
$1.5k - CQQQ
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Old 05-07-2019, 11:47 AM   #5
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*OP, a case can be made that 10 years is an adequate (or inappropriate) time horizon for the funds you mention. I will leave that discussion to others. My comments are focused more on how I would approach the broader allocation question and sticking with your decision.

I believe one of the greatest risks to any portfolio is chasing performance. Accordingly, IMO an investor should use sound methods for determining their asset allocation and then stick with the decision. The only time I would make a change is if the reasons used in the decision making process have changed or if your investment horizon or situation has changed.

Over 20 years ago I decided on a stock allocation of 70% US stocks and 30% international stocks. The US portion has value and small cap tilts. The international has a EM tilt (a more recent decision).

Here were my reasons.

1) International provides diversification.
2) While US and international track closely, they are not 100% correlated. Accordingly, annual rebalancing should yield a benefit (forced selling of the winners and forced buying of the losers)
3)Historically, small cap and value outperform the total market. But, they can also under perform for decades.
4) When I bought EM several years ago, it was inexpensive relative to other markets. And, it provided additional diversification and with less than 100% correlation to US and international markets, it provides additional rebalancing opportunities (maybe).

None of these reasons have changed. Nor has my situation changed. Accordingly, I am sticking with my decision. At any given point in time I expect some of my portfolio will under perform and other parts will outperform. I am okay with that.
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Old 05-07-2019, 11:53 AM   #6
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With a 10 year time horizon, I don't think that some money in VTIAX or VEMAX is necessarily bad advice.... but putting 29% into VEMAX is way too much IMO. With 10 year money like that I would probably put it into the Star Fund or VTSAX or WTWAX and then go more conservative with 5 years to go.
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Old 05-07-2019, 12:43 PM   #7
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International is a pain. I have a high allocation to international and naturally, would have been better to invest it in the US markets. But thatís the past. With the US market at record highs, maybe it wonít perform as well?

I debate if I should drop my international allocation (for the last few years), but so far havenít done anything. My overall allocation still beats/matches my benchmark, so in that regard, itís all good.

Personally, Iíd recommend looking at your overall allocation and find a benchmark (mutual fund) to compare it to. If you find that youíre lagging your benchmark after a few years, invest in that and call it good.
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Old 05-07-2019, 11:25 PM   #8
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Without understanding the full picture I might suggest that you stick with your initial allocation. Or if you do change, don't make big changes all at once.

Also it sounds like you have two competing goals (in my mind, maybe not from your perspective) in that it is wise to keep the international part of your total long term investment allocation in a taxable account so that you can claim a foreign tax deduction. Meaning overweight your after tax accounts with your the foreign part of your overall allocation. But foreign investing adds an extra layer of volatility in currency exchange and foreign government issues, that run counter to saving for a 5-10 year goal like buying land. Though not all international markets or tax issues are the same (for instance I am 99% sure that US has a reciprocal tax treaty with Canada so that dividends of each country's citizenry is not taxed when those holdings are held in a retirement account.).

Developing and emerging markets should outpace western growth in the decades to ahead, but many of these countries suffer from corruption and/or governmental control to the point that shareholders might not see the benefits.
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Old 05-07-2019, 11:45 PM   #9
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Developing and emerging markets should outpace western growth in the decades to ahead, but many of these countries suffer from corruption and/or governmental control to the point that shareholders might not see the benefits.
I've had maybe 3% in these foreign and emerging markets for 10 years and have watched them do poorly.

I have recently added a little more to them, so maybe I'm at 5% now. (theory of regression to the mean)

I'm hoping they will do well in one of the upcoming decades and that decade is while I'm still alive
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Old 05-08-2019, 12:30 AM   #10
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+1 what @flintnational said.


We buy the world market cap: VT or VTWSX. So about 45% International.


Same reasons as @flintnational plus I think that the dollar will inevitably decline over the long term, which will make non-US assets look genius.
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Old 05-08-2019, 05:20 AM   #11
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+1 what @flintnational said.


We buy the world market cap: VT or VTWSX. So about 45% International.


Same reasons as @flintnational plus I think that the dollar will inevitably decline over the long term, which will make non-US assets look genius.
I like VT except that you can't rebalance between US and intl. So I do VTI and VEU.
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Old 05-08-2019, 07:39 AM   #12
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20% of equities is plenty big enough international allocation for us. We have even more international exposure via US companies that do international business.
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Old 05-08-2019, 07:49 AM   #13
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I like VT except that you can't rebalance between US and intl. So I do VTI and VEU.
True if you want to have something other than the actual market cap ratio, which is what VT gives you automatically and constantly. But to get a specific percentage like 30 you need a pair of funds as you say.
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Old 05-08-2019, 07:53 AM   #14
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20% of equities is plenty big enough international allocation for us. We have even more international exposure via US companies that do international business.
Just curious; do you have some studies or data that led you to that number?
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Old 05-08-2019, 08:07 AM   #15
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Thanks for everyone's suggestions, I know I was asking folks to look at a crystal ball. I do realize now I needed to re-balance since my exposure was predominately International (VEMAX, VTIAX, CQQQ). Since the market is down this week, today I went ahead and put an order in to use $8k from the Money Market to buy into VFIAX (SP500). When the market rebounds in a few months or a year (Tariff-Tax Tweet), I will replace the Money Market funds from the International. A round-a-bout way of moving from International to more US exposure, but avoiding taking the market bounce Tariff-Tax Tweet hit.


In a few years, I will start moving our overall exposure out of stocks and into bonds or the money market fund.
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Old 05-08-2019, 08:27 AM   #16
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I've had maybe 3% in these foreign and emerging markets for 10 years and have watched them do poorly.

I have recently added a little more to them, so maybe I'm at 5% now. (theory of regression to the mean)

I'm hoping they will do well in one of the upcoming decades and that decade is while I'm still alive
Buy Low You might be on to something.
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Old 05-08-2019, 08:32 AM   #17
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Quote:
Originally Posted by natetheb View Post
...

This may be a "crystal ball" type question, but what should I do?
1) Leave the money in. Vanguard recently said over the next decade International will outperform the US market. That fits our time frame, so ok.
2) Move money into S&P500 and be happy. Going back to Dec 2010, Portfolio Visualizer shows S&P500 blowing those funds out of the water!
3) Something else.
Here is a chart going back to 1996 showing the SP500 (blue), Vanguard Total International Stocks (orange), Vanguard International Explorer (green). I am not a fan of large cap international (orange) and prefer small cap international (green) as an added asset class to a US portfolio.



Personally I trade these using my own system which employs trend following. But that is another thread.
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Old 05-08-2019, 09:01 AM   #18
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Just curious; do you have some studies or data that led you to that number?
Itís been a long time. Might have been the early Armstrong work showing various efficient frontiers.
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Old 05-19-2019, 06:24 PM   #19
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Vanguard recently said over the next decade International will outperform the US market.
I think you misinterpreted the "outperform" part a bit.

What Vanguard really meant was that if over the next decade international drops at ~10% per year, the US equities would be dropping at a faster rate...
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Old 05-20-2019, 04:07 AM   #20
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I have had very little in int'l stocks for many years, to my benefit a major majority of that time.
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