Is Large Increase in Foreign Holdings Justified?

[explanade]

Hmm, I have VTIAX and VFWAX but no foreign small caps.

US small caps have been underwhelming

 

[2017ish]

Hmm, I have VTIAX and VFWAX but no foreign small caps.

US small caps have been underwhelming

Depends upon the time frame. Recently, sure, but not so much over longer periods. I'm slowly putting our long-term passive portfolio together, and see the small tilt (esp. small value) as worthwhile for the next fifty years of DW's planned-for life. (Of course, at some point, one would expect the positive differential performance to disappear, but until then...)

 

[ejman]

Right - it does seem like the horse has left the barn. I bought more international in Jan, due to rebalancing after a tough 2014. Been a sweet reward so far.

But just because they are up YTD doesn't mean they will end the year that way.

Aren't large moves such as a major return shift from domestic to international (or vice versa) generally multi year events reflecting major shifts in economic conditions of one region vs another? It would seem that if that's not the case, then timing of one's move is more like casino gambling. If international over perfomance YTD means the horse already left the barn does that mean it is already too late to shift some equities to international?

 

[Lsbcal]

Aren't large moves such as a major return shift from domestic to international (or vice versa) generally multi year events reflecting major shifts in economic conditions of one region vs another? It would seem that if that's not the case, then timing of one's move is more like casino gambling. If international over perfomance YTD means the horse already left the barn does that mean it is already too late to shift some equities to international?

My personal view is that longer term relative results will depend on future events so cannot be predicted. All one can say is that momentum, which is recognized by even academics as a return factor, favors international right now. Next month things could reverse. Should the Greek situation, for example, bring about an institutional failure (which is not now envisioned by the markets) then international versus US performance could indeed reverse.

 

[Christine]

Living in a small country I have most of my investments in foreign holdings. And USA and (most of) Europe are equally foreign. For me this means putting money into Euro funds each month to rebalance since the US funds have climbed hight thanks to both stocks and dollars going up.

But I'm not selling US funds to buy Euro funds. I do not know enough to time the market.

 

[LOL!]

If international over perfomance YTD means the horse already left the barn does that mean it is already too late to shift some equities to international?

Yes, if that is the case, then it is too late to make the shift. However, one may effect a shift simply by not rebalancing, too, until after international equities have increased to become a larger than desired percentage of your portfolio.

For folks who already had the market weights of international in their portfolio, they just need to keep on keeping on. Even Vanguard is not advocating overweighting international equities; they are just advocating having the market weights of international which is really old news. By the same token, Vanguard and others advocate having the market weights of US equities, too.

 

[Totoro]

Just a side remark to consider in the "how much of what".

One can also just buy VTI and be done with it.

Or VT + VXUS in the same proportion as in VTI (for a slightly lower cost).

 

[eta2020]

Just a side remark to consider in the "how much of what".

One can also just buy VTI and be done with it.

Or VT + VXUS in the same proportion as in VTI (for a slightly lower cost).

And keep that at fixed ratio of 50/50 or 60/40 unless you desire low investor returns instead of getting high fund returns. Shifting ratios in chase of latest greatest is recipe for getting investor returns. So no I will not increase/decrease anything.

BTW I think you wanted to say VTI + VXUS and not VT + VXUS. 50/50 in those 2 ETFs probably outperforms 90% of mom and pop investors who lack discipline in investing.

Why The Average Investor's Investment Return Is So Low - Forbes

 

[sengsational]

If I were to do anything, I'd be selling international now. But the international allocation hasn't exceeded the trigger band, so it's a "do nothing" right now. But since I did rebalance to the center of the band last year, international allocation is threatening the upper band.

 

[NW-Bound]

35% of my equity holdings are international. Yes, they have gained roughly 11% YTD, but looking back 1 year and 3 years, their performance still trails the S&P badly. I am not selling yet.

 

[eytonxav]

DODFX, VTIAX, TBGVX, MACSX, MINDX, and SFGIX for me

 

[photoguy]

Rebalancing tends to correct these problems and take advantage of opportunities. Don't retire without it.

+1

The past few years, US equity outpaced my international holdings and all I did was direct a little new money to foreign equities to rebalance.

This year international has done well and I'm almost exactly at my 60-40 target allocation. According to my spreadsheet I'm $408 over target in US.

 

[TwoByFour]

I occasionally use Vanguards Portfolio Watch Tool to analyze my portfolio. Recently, this tool has taken a hard turn to international holdings in that its recommending 30-50% international equity and I just checked it and it's also suggesting 20-50 % in foreign bond holdings.

In the past for many years I followed Bogle's advice that since most large US companies have significant foreign exposure there is little need to explicitly buy a lot of foreign holdings. Vanguard has obviously significantly changed this tune recently. Thoughts?

Vanguard has great funds, but personally I am very cautious of their white papers and recommendations that point an investor to something they just happen to be selling. International is probably a worthwhile investment, but I would not just take VG's word for that rather than doing your own research. I have found it telling the VG is mute on commodities and gold, neither of which they have a fund for.

As to Mr. Bogle's statements - it is quite different to invest in a US domiciled company that has overseas offices and operations, and to invest in a foreign domiciled company. The former is controlled by the SEC and is denominated in US dollars, while the latter is not. These things may be good or may not; you need to do the research and decide for yourself.

Personally I worry about the effect of currency exchange rate and trade imbalances so I am a bit cautious. I am currently at 10% foreign, and will grow that to between 15 and 20%.

 

[gcgang]

Is large increase in foreign holdings justified? For the vast majority of US investors, yes.


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[eta2020]

If you own for example 100k of KO which generates 75% international sales do you count that as 75k international exposure?

What about 100k of PM which is 100% international sales a 0% US.

Traveling in Latin America and seeing everybody smoke Marlboros and drink Coke tells owning some KO and PM is probably not too bad idea.... as a part of International exposure. Those two as we all know are 100% US companies though.....

 

[Ed_The_Gypsy]

Paul Merriman, Bill Bernstein and Less Antman showed that historically, 50/50 US/foreign gave lower volatility and a little better ROI. While non-correlation has narrowed in the past decade or two, I figure there are enough differences between the markets for me to keep 50/50.

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[MichaelB]

Around 55% of our portfolio is non-US, a mix of emerging, int'l developed, and Europe. First time ever, last year I hedged a large part of the int'l allocation (HEDJ).

 

[tulak]

I have a 50/50 split. It's hurt over the last few years, but this year has been better. I expect that International will do better than the US (lower PEs), but my allocation won't change.

 

[ejman]

Around 55% of our portfolio is non-US, a mix of emerging, int'l developed, and Europe. First time ever, last year I hedged a large part of the int'l allocation (HEDJ).

For ignoramuses like moi in international investing (actually in most things) - What does this hedging mean and what do you hope to accomplish by doing it?

 

[clifp]

OTOH, China's GDP is declining, which is also hurting the economies of emerging nations, like Brazil.

I guess PIIGs are no longer a concern either?

Naw China GDP isn't decline what is declining is their growth last quarter it was only up 1.3% the lowest level in many years.

On the other hand that still translates to a GDP growth rate of 5.3% annualized a rate which every leader of developed country would sell his/her entire family for.

 

[Lsbcal]

For ignoramuses like moi in international investing (actually in most things) - What does this hedging mean and what do you hope to accomplish by doing it?

Of course I'm not Michael but you can see it in action today. The Euro went down against the dollar so:

FXE = - 1.2% (Euro vs. dollar)
VGK = - 0.6% (Vanguard European stocks)
HEDG = + 0.6% (hedged European stocks)

If you think the dollar will be strong versus the Euro (like today) you buy HEDG to get European exposure without currency risk.

 

[MichaelB]

For ignoramuses like moi in international investing (actually in most things) - What does this hedging mean and what do you hope to accomplish by doing it?

Of course I'm not Michael but you can see it in action today. The Euro went down against the dollar so:

FXE = - 1.2% (Euro vs. dollar)
VGK = - 0.6% (Vanguard European stocks)
HEDG = + 0.6% (hedged European stocks)

If you think the dollar will be strong versus the Euro (like today) you buy HEDG to get European exposure without currency risk.

Right. When you invest in international assets you are buying other currencies. If you think the US$ will strengthen over time, this will cause your investment to lose value. Currency hedging removes the devaluation risk. So, by investing in a hedged Europe ETF I hope to get the change in value of the European stock markets without any currency impact.

Tweedy Browne has a good paper on hedging, here http://www.tweedy.com/resources/library_docs/papers/HowHedgingOct2014Fund.pdf

Since last year about 2/3 of our international allocation is in Europe, and it is pretty evenly divided between VGK and HEDJ.

 

[ejman]

Right. When you invest in international assets you are buying other currencies. If you think the US$ will strengthen over time, this will cause your investment to lose value. Currency hedging removes the devaluation risk. So, by investing in a hedged Europe ETF I hope to get the change in value of the European stock markets without any currency impact.

Tweedy Browne has a good paper on hedging, here http://www.tweedy.com/resources/library_docs/papers/HowHedgingOct2014Fund.pdf

Since last year about 2/3 of our international allocation is in Europe, and it is pretty evenly divided between VGK and HEDJ.

Thank you. Interesting paper although it will require further study to fully understand. One note from the paper that caught my eye "However, we believe that studies and our own experience have generally shown that over long measurement periods, the returns of hedged portfolios have been similar to the returns of portfolios that have not been hedged. "

I don't know what the "long measurement period" is that the paper refers to but based on the comments @ this thread its starting to look to me that successful international investing is highly dependent on proper timing.

Sadly, I've demonstrated to my entire satisfaction that I don't have the ability to time much of anything financially speaking. Whenever in the long ago past I've tried to time investments I've come to realize in hindsight that what I thought at the time was independent thinking in reality was just following the flavor of the day/month in the financial porn industry.

 

[MichaelB]

Thank you. Interesting paper although it will require further study to fully understand. One note from the paper that caught my eye "However, we believe that studies and our own experience have generally shown that over long measurement periods, the returns of hedged portfolios have been similar to the returns of portfolios that have not been hedged. "

I don't know what the "long measurement period" is that the paper refers to but based on the comments @ this thread its starting to look to me that successful international investing is highly dependent on proper timing.

Sadly, I've demonstrated to my entire satisfaction that I don't have the ability to time much of anything financially speaking. Whenever in the long ago past I've tried to time investments I've come to realize in hindsight that what I thought at the time was independent thinking in reality was just following the flavor of the day/month in the financial porn industry.

I think I get your point, it does seem that when investing in equities there is a "right time", which is usually in the past or before the current run-up, and a wrong time, which is now.

Regarding hedging, the point Tweedy Browne make (and I agree with) is that over a long period, which I think is probably 5 years or so, the hedged vs non-hedged int'l investment in a developed market will probably produce about the same return. Their point would be that you can choose either, but you need to stick with the choice you make. IMO that favors unhedged int'l, the investment options (funds and ETFs) are far better. Thee are just a couple of hedged options.

If I were considering adding international equity to a portfolio that has none I would probably set a target allocation and then do it in batches over a year or so.

 

[ejman]

A further comment, according to the Vanguard portfolio analysis tool I already have 12.5% in international allocation without specifically owning international funds. I guess it wouldn't take much to nudge the allocation to about a 20-25% intl allocation by buying an international index fund. I like MichaelB's suggestion of doing so gradually over the next year or so.