Adding Int'l Index Fund - - - Why?

[Red Badger]

Had a sit down with a local FIDO FA last week. After meet & greet, I explained that I am an index investor. A buy and hold until death kinda fellow, with only one stock fund (total US market) and 2 two bond funds (half total US Bonds fund and half in TIPS). Further explained that I'm not interested in complexity or managed funds; my simple plan got me far enough fast enough.

The reason for my visit was to discuss where to keep about two years of "Beer Money" (that I mentioned in a different posting/different subject here last week). Anyway, we cracked that nut with a money market (about 3 months of $$) with the balance in a CD ladder spread over the remaining 21 months.

So here's the "money shot...." He was surprised I had no international fund. I explained that most megac*rps have substantial juice internationally, and I was getting mine through those conglomerates buried in my funds. In example, the shop I w*rked at had about 40% of revenues from markets outside NA. And, our stock price reflected the waxing and waning of different global regions.

So, while I am not adamantly opposed to adding a little int'l exposure, I don't see any compelling argument to do so. So, to those around here that are far more knowledgeable about investing strategy, is his advice (10% Int'l) just tinkering with a portfolio, or is adding ~10% to Int'l some I need to re-look (but if I did, It would be FIDO's total int'l index fund)?

 

[OldShooter]

Vanguard has a nice piece on international investing here: https://www.vanguard.com/pdf/ISGGEB.pdf One conclusion is that putting 30-40% of an equity position into international is the sweet spot for minimum volatility.

Another international argument is that US stocks are only about half of the stocks in the world on a cap-weighted basis. So to stick with only US stocks is a sort of a sector bet. Gene Fama, speaking of passive investing, says "We have to hold the market portfolio." i.e., everything. So he would argue for funds based on some world-wide version of the ACWI indices. Like VTSMX.

Re TIPS, why pay a bond fund fee? There's no real credit risk, so no need to diversify. Just buy them on the auctions. That's even simpler than laddering brokered CDs.

 

[Trooper]

I see no issue with not including international equities, for the same reasons you cite. I have 5% of my stock holdings in VTIAX, which results in 3% of my total portfolio. Maybe you go a little lower than 10%? If you're considering FTIPX, the .10% ER is pretty good.

 

[pb4uski]

Vanguard has a nice piece on international investing here: https://www.vanguard.com/pdf/ISGGEB.pdf One conclusion is that putting 30-40% of an equity position into international is the sweet spot for minimum volatility. ...

+1 I target 70/30 domestic/international equities for diversification.

US company international operations are a poor substitute for international IMO.... most well developed economies domestic companies have global operations.

I concede that it hasn't worked out great the last decade or so.

 

[foxfirev5]

I can find no compelling reason not to own a little bit of everything. Plus international equities are a little better dividend payers.

 

[capjak]

Also if purchasing emerging markets and even developed European to a lesser extent recommend managed rather than passive as the manager can legally get “tips” which in the US maybe considered insider trading

 

[OldShooter]

Also if purchasing emerging markets and even developed European to a lesser extent recommend managed rather than passive as the manager can legally get “tips” which in the US maybe considered insider trading

Well, that might be a reason to investigate whether active funds in these markets outperform or not, but it is not on its own a reason to invest.

S&P SPIVA Mid-year 2017 reports for Europe and for Latin America show the results that we have seen repeatedly in the SPIVA reports: actively managed funds underperform. No news there.

S&P does not do a SPIVA report specifically for emerging markets, but IMO it's reasonable to expect that the results would be the same as for every other market. Active is a bad bet.

 

[IMATERP]

Had a sit down with a local FIDO FA last week. After meet & greet, I explained that I am an index investor. A buy and hold until death kinda fellow, with only one stock fund (total US market) and 2 two bond funds (half total US Bonds fund and half in TIPS). Further explained that I'm not interested in complexity or managed funds; my simple plan got me far enough fast enough.

The reason for my visit was to discuss where to keep about two years of "Beer Money" (that I mentioned in a different posting/different subject here last week). Anyway, we cracked that nut with a money market (about 3 months of $$) with the balance in a CD ladder spread over the remaining 21 months.

So here's the "money shot...." He was surprised I had no international fund. I explained that most megac*rps have substantial juice internationally, and I was getting mine through those conglomerates buried in my funds. In example, the shop I w*rked at had about 40% of revenues from markets outside NA. And, our stock price reflected the waxing and waning of different global regions.

So, while I am not adamantly opposed to adding a little int'l exposure, I don't see any compelling argument to do so. So, to those around here that are far more knowledgeable about investing strategy, is his advice (10% Int'l) just tinkering with a portfolio, or is adding ~10% to Int'l some I need to re-look (but if I did, It would be FIDO's total int'l index fund)?

What about Budweiser ....

 

[bloom2708]

I do 20% Total International. At this level I am participating in the ups and downs and do not feel like I am missing out. I could just as easily have picked 30% or 35%. I went with 20%.

I think you are fine with no International. When international is lagging you can say "see..". But, when International is stomping on US, then I can say "well I'm at least in the ballpark.."

 

[flintnational]

We keep 30% of our stock allocation in international. As others have mentioned, per Fama and French, theoretically this provides less volatility and higher returns than 100% US allocation. I also like that I have another asset class to rebalance into. But, IMO it is not a slam dunk type of decision. I think Warren Buffet still says you only need US. He is a little better at investing, more intelligent and better looking than I am. So, who's advice are you gonna follow?

FN

 

[Aggie1999]

~30% international index equity fund here also. In the end for the next 50 years or so it probably doesn't matter a great deal. US economy tanks the rest of the world will too.

 

[Totoro]

Vanguard VT, and you're done. Anyway, if you live, earn and spend in the US I really think it hardly matters, because of reasons mentioned above. I don't, so I buy the whole worldwide stack.

Also, the US economic system has outperformed historically, so betting on the consistent winner isn't a silly idea. Then again, China.

That, and the world is converging anyway, not to mention even international stocks have multiple listings these days.

Last but not least, emerging had a serious run-up this year so it's no longer as cheap as it was. That's a short run consideration.

Long run: set and forget would be my advice, then stick to the plan. No use fretting too much, either choice (a bit of int'l or none) has its merits.

 

[Totoro]

Also if purchasing emerging markets and even developed European to a lesser extent recommend managed rather than passive as the manager can legally get “tips” which in the US maybe considered insider trading

Source?

 

[pn3069]

I tend to agree with Red Badger... there is really no reason for US based investors to own international stock.

I am yet to see a time period, measured in years, when International stocks have outperformed US stocks. On the flip side, there are several time periods where US stocks outdid international stocks.

As long as the US remains the largest consumer of world's goods and services per capita, I see no need to hold international stocks separately from the US megacorps.

In turn, as long as key commodities are pegged to the dollar (oil, gold, reserve currency) the US investors need not own international stocks. While Vanguard extols the virtues of Intl, Jack Bogle himself is ambivalent at best.

Keep in mind that fiscal/corporate accounting discipline in international arena is not as stringent as in the US.

Having said all this, one might laugh at me as I just took an opening position in both the global W & W funds from Vanguard primarily because I wanted to get in on the ground floor of brand new mutual funds (which I never did previously).

 

[OldShooter]

... , as long as key commodities are pegged to the dollar (oil, gold, reserve currency) ...

IMO this is an extremely important thought and an extremely important consideration. My belief is that the dollar will eventually decline as the world's reserve currency and hence decline in value. This will make the international side of portfolios rise in value.

Why? We have debt % of GDP very high for an OECD country and can be expected to try to inflate our way out of it. Other countries mostly hate the dollar and the way we can use our financial system as a political weapon. The thing saving us is that all the alternatives are worse. The ruble is off the world stage with self-inflicted wounds. No one trusts the Chinese. The Euro is at least temporarily off the table due to the troubles in the Southern EU and now due to Brexit. Argentina and Brazil have major problems. Japan is, well, Japan. A few years ago there was a serious discussion of pricing oil in a basket of currencies and this is probably where things will end up. A bunch of midgets in a basket with the theory that in numbers there is strength, I guess.

When? I have no idea. Not next month.

 

[jazz4cash]

While I tend to agree with the premise that SP500 companies derive sufficient revenue from international operations to satisfy the need of typical investors, I wonder how much of that revenue makes it back to the US. There is the issue of repatriation of oversees profits, for example. I know that my megacorp had tremendous results oversees but it never seemed to help the domestic operations. OTOH, the oversees operations sometimes impaired operations domestically and/or good results were muted by currency exchange issues. I don't claim to understand this. At the end of the day I believe strongly in diversification and I use the following chart as a guideline for my 30% of equity allocation to international. I don't really have a good yardstick for EM vs EAFE.

 

[rockyj]

You'll find recurring (and well reasoned) threads about target allocations for international over at bogleheads.org (search on international at the top of the page at www.bogleheads.org). Opinions there vary, but seem to roughly revolve around the two camps already represented in this thread - e.g. camp 1) US multinationals have built-in worldwide exposure, US historically has had a good run compared with ex-US, so there's no need for US investors to take on currency and regulatory risk via adding international; versus camp 2) since worldwide market capitalization is roughly split between US and ex-US, since no one can predict the future, and since currency risk works both ways, a prudent US investor should diversify globally. There are additional points in each case, but I think that's the gist of it.

FWIW, years ago, when I first started adding significant and explicit international exposure to our portfolio, I was convinced by three things (listed in no particular order below).

1. The Callan Periodic Table, which rank orders various asset classes (foreign and domestic), by relative performance, for each year since 1997.

https://www.callan.com/wp-content/uploads/2017/01/Callan-PeriodicTbl_KeyInd_2017.pdf

You will see from that chart how things move about quite a bit from year to year, though the chart only reflects annual rank order, and not multi-year comparative performance.

2. My intuition was (and still is) that, going forward, I would rather own automakers GM, Ford, Chrysler, Honda, Toyota, KIA, Volkswagen, Hyundai, SAAB, BMW, etc. than GM, Ford, and Chrysler alone. You can expand the argument by substituting US versus global lists for consumer electronics, pharmaceuticals, or any other sector on down the line.

3. One of the first articles I read that used historic data to illustrate the value over time of diversified multi-asset portfolio construction was Paul Merriman's "The Ultimate Buy-and-Hold Portfolio", which includes a large portion of international equities. I worked from then to augment my existing holdings to achieve something similar to the slice and dice portfolio tracked there, and have roughly stayed with that plan since.

The most recent text version of the Merriman article I can find can be found at:

The Ultimate Buy and Hold Strategy 2015 | Paul Merriman

A 2013 version (with better embedded illustrations of the various portfolios as he builds them out) can be found here:

http://blog.envole.net/doc/U/l/UltimateBuyAndHold.pdf

I should note that these days I am more and more coming around to the idea that something much simpler, along the lines of Vanguard three-fund portfolio, probably captures most of the diversification of slice and dice and will be much easier to manage. So I am moving in that direction, while trying to keep international about where it is now (35% of equities).

Over time, there have been runs during which I was very glad that I had significant international in the mix. For the last decade in aggregate, that hasn't worked out as well. So far for 2017, international has been killing it, based on Vanguard Total US Stock versus Total International Stock, US Small Cap Index versus FTSE All-world ex-US Small Cap, and Emerging Markets.

Being one who likes to hedge his bets through broad diversification, and who believes that past won't necessarily predict the future, neither camp clearly wins the argument in my book. I remain comfortable with fairly large international equity component, albeit while gradually moving to simplify things rather than continuing with extensive slice and dice.

One person's thoughts on this. YMMV.

 

[VanWinkle]

I listen to John Bogle on this one. 20% of equities in International if you feel the need, but no loss to stay with just US equities. I went with the 20%, actually up to 24% due to the great year in International

I am not saying he is correct, I just think you could do worse.

 

[pb4uski]

....I am yet to see a time period, measured in years, when International stocks have outperformed US stocks. On the flip side, there are several time periods where US stocks outdid international stocks.....

I hope you have some beer to wash down that crow that you're eating.

International equities spanked domestic equities in the early 2000s... then the inverse until 2017.

	Annual Returns		5 year moving average
Year	VTI	VGTSX	VTI	VGTSX
1998	23.37%	15.60%
1999	23.93%	29.92%
2000	-10.49%	-15.61%
2001	-10.82%	-20.15%
2002	-20.90%	-15.08%	1.02%	-1.06%
2003	31.55%	40.34%	2.65%	3.88%
2004	12.60%	20.84%	0.39%	2.07%
2005	6.12%	15.57%	3.71%	8.30%
2006	15.69%	26.64%	9.01%	17.66%
2007	5.56%	15.52%	14.30%	23.78%
2008	-36.94%	-44.10%	0.61%	6.89%
2009	28.83%	36.73%	3.85%	10.07%
2010	17.23%	11.12%	6.07%	9.18%
2011	1.09%	-14.56%	3.15%	0.94%
2012	16.42%	18.14%	5.33%	1.47%
2013	33.49%	15.04%	19.41%	13.29%
2014	12.56%	-4.24%	16.16%	5.10%
2015	0.42%	-4.37%	12.80%	2.00%
2016	12.67%	4.65%	15.11%	5.84%
2017	16.42%	23.91%	15.11%	7.00%

 

[RobLJ]

As was just posted in pb4uski's data table, my international funds did quite fine in out-performing in the 2000s and also quite dandy this year (after 5 years of underperformance. International bonds is another issue, since they've done quite well the last few years.)
The assumption is that between them and US equities, they will smooth each other out, which has pretty much been the case--over the long term. This can be an advantage, particularly when one starts to withdraw, but take that for what it's worth. YMMV.

Given a choice between international and bonds, however, I would choose bonds, but that's a false choice.
I would also point out that for the last few years, international has looked comparatively under-valued vs. US stocks, but undervaluation like overvaluation can persist for a long, long, long time before it reverses (like growth versus value and small versus biggie or biggie biggie). So if you're not willing to persist in allocation for a long period, it's probably not worth it, just like other forms of diversification.
In most cases, mean reversion will kick in, until it doesn't (when you're dead or give up or. . . )

 

[Doc0]

The correlation between US stocks and Int stocks is about 0.77 so it doesn't add much diversity, but it does add considerable volatility. If you want some more diversity add 2-5% GLD to a 60:40 stock bond portfolio. Bonds are .07 correlated and gld is -.04

 

[Montecfo]

I am increasing exposure to international developed markets because the stocks are cheaper presently. Also, central banks outside the US are still pursuing stimulative policies, unlike the US.

Also increasing exposure to emerging markets. More value.

Over time, returns run in cycles. US markets have had a long run.

 

[UnrealizedPotential]

My biggest issue with adding international stocks is I wouldn't know what area of the World to invest in. I do not know enough about overseas markets to risk any significant money there. This doesn't mean it's a bad idea if one does so. It could turn out to be wonderful.

I do have a little international exposure in my big bond fund that invests all around the World. There's not a one size fits all that any one can come up with I don't think. I feel most comfortable staying in the U.S. That doesn't mean it's the only way to go, but it's what I personally feel comfortable with.

 

[Senator]

Also if purchasing emerging markets and even developed European to a lesser extent recommend managed rather than passive as the manager can legally get “tips” which in the US maybe considered insider trading

Source?

I think many foreign countries operate on corruption and bribes. Legal or not.

I do not own too much international funds or ETFs. 20% in my 401K and none in my after tax and Roth. Maybe 5-10% max of the total.

I am not too worried about the volatility of the US markets (for now).

 

[Red Badger]

Well, based upon the sage guidance and ideas provided, I am going to add a small slice of international in the near future. I'll plan to share my results about this time next year.

Thanks to all!