Foreign Index Funds

[maddythebeagle]

My deferred compensation plan has 4 index funds (large, mid, small caps and a developed asia/europe).

I invest in the large, mid, and small cap domestic funds with expense ratios from 0.03-0.09%. The asia/europe fund has an expense ratio of 0.10% and mostly Great Britain, Japan followed by developed European countries.

I am looking for some foreign exposure possibly. We have an option for a self directed option with Schwab and the foreign index funds there have expense rations of no less than 0.6% or so.

So, what do folks out there feel? Is foreign exposure crucial? I have heard that you really dont reduce risk because the world is more connected and a lot us companies are expanding overseas anyway (so already have the growth). That difference in expense ratios makes me feel that not worth the bother. Might be able to add the exposure to my roth account. Anybody have ideas about a low fee  foreign ETF?

 

[cute fuzzy bunny]

I've seen reports that clearly show the benefits of foreign exposure in the 10-15% range.

I've seen some that show no benefits at all.

There are periods of time when US stocks ying and foreign stocks yang. If japan ever 'gets it' their stock market could see one hell of a surge over a multi-year period.

In other periods, both foreign and US stocks rise or fall at the same time.

Some argue that large cap US stocks are largely multinational and with more globalized economies and homogenous systems like the internet enabling location free transactions and business arrangements makes 'international' stocks largely irrelevant.

So the answer is yes and no, maybe maybe baby.

The .10 expense ration vs 03-.09 is a nit. Those are supercheap funds.

I'd dial in 5-10% and see how it goes for 10 years, then revisit and review...

 

[azanon]

Yes, international investing is worth it.   I recommend 15-40% total foreign investments.  I cant say I recall ever reading advise from a reputable individual that actually suggested you avoid foreign invesments, and most everyone that spoke on the issue considered it a critical thing to do.

By adding foreign stocks to your portfolio, you get a rare opportunity for investment alchemy;  you increase returns and reduce overall portfolio risk (volatility) at the same time.

 

[bow-tie]

Moody, www.efmoody.com  often comments on the diversification aspects of foreign investments.  If memory serves me, correlation between foreign and domestic investments varies over time, and as of late has diluted the diversification benefits, thereby taking away the 'bang for the buck'.  I can't speak to the validity of the assertion, but he often includes links to different studies.

 

[ats5g]

My deferred compensation plan has 4 index funds (large, mid, small caps and a developed asia/europe).

I invest in the large, mid, and small cap domestic funds with expense ratios from 0.03-0.09%. The asia/europe fund has an expense ratio of 0.10% and mostly Great Britain, Japan followed by developed European countries.

I am looking for some foreign exposure possibly. We have an option for a self directed option with Schwab and the foreign index funds there have expense rations of no less than 0.6% or so.

So, what do folks out there feel? Is foreign exposure crucial? I have heard that you really dont reduce risk because the world is more connected and a lot us companies are expanding overseas anyway (so already have the growth). That difference in expense ratios makes me feel that not worth the bother. Might be able to add the exposure to my roth account. Anybody have ideas about a low fee  foreign ETF?

My guess is that the def comp foreign fund is actually an MSCI EAFE index fund [thus the 0.10% expense ratio fund], which is mostly GB + Japan + others. The foreign index funds through Schwab will also likely be MSCI EAFE index funds, so there is really no benefit to using the self directed account for this, unless you like paying useless fees. 

Here are a whole host of articles on the benefits of international diversification.  Some are readable by the layman.  Personally, I use the MSCI EAFE index fund in my wife's TSP.

- Alec

 

[azanon]

If memory serves me, correlation between foreign and domestic investments varies over time, and as of late has diluted the diversification benefits, thereby taking away the 'bang for the buck'.

Emerging market funds still, very clearly, do not correlate very well with the U.S. Market. 
When you get right down to it, neither do standard International funds.  Case and point, in the 90s the U.S. market roared while International funds were lackluster.  In the 80s, the situation was the opposite;  There's nothing that's happened since then that ive seen that suggests they're going to start going the same direction and all of a sudden be correlated now.

 

[saluki9]

One problem with large Cap international is that if you look at the semi variance and not just the covariance you will find that in times of major domestic economic contraction that there is little to zero diversification benefit.

That being said, I still do it.

 

[preben]

Of course you should add international - cheap and simple so why not take the extra diversification? Cheers!

 

[FlipnSf]

try this article from fidelity making the case for international investing... good luck

http://personal.fidelity.com/news/p...pdf#search='international equities investing'

 

[wildcat]

Good info from others but I say yes. The developed markets will move closely with US. Much harder to find protection there when we experience big drops. But I say "yes" you should have intl' exposure. Although volatile emerging markets have a much lower correlation with the US markets and I think it has its place in a portfolio as well. Should be able to get it via Schawb.

To me the markets are maybe moderately overpriced and I believe BUffet when he says 7% equity returns unless valuations drop. So what is the smart thing to do? DCA and stay vey diversified to protect and grow your portfolio.

 

[lazyday]

Anybody have ideas about a low fee foreign ETF?

Look into VWO, VPL, VUG.

I'd suggest examining the self directed option carefully to see if there are extra fees. If fees there are bad, might make sense to use the four cheap funds instead, and use other accounts to get other asset classes.

 

[lazyday]

I cant say I recall ever reading advise from a reputable individual that actually suggested you avoid foreign invesments, and most everyone that spoke on the issue considered it a critical thing to do.

The only Bogle book I ever read advised against it. I didn't agree with him, but I would say he is reputable. His accomplishments have made a huge difference for individual investors.

Happily, I have heard he has backed down from his anti-foreign stance somewhat. I didn't read his last book.
Maybe this could be an example that we shouldn't blindly follow our heroes? (Someone who read the book in 1999 and followed the advice wouldn't have done as well as one who did slice&dice).

I think there are still some people, such as on the Diehards board, that believe in buying only US total stock and bond markets. Keeps expenses low.
IMO adding other asset classes and rebalancing reduces risk and improves returns.

 

[justin]

Maybe Bogle changed his portfolio for all seasons after he saw how well it could have done over the last few years with a different allocation. He was using the benefit of hindsight to make himself look smart.

 

[maddythebeagle]

Very good discussion. I added the MSCI EAFE index fund with the low 0.10% fee (highest of any of my index funds). It looks to track a lot in Japan and Europe. Beyond that, I dont think I want to pay 0.60% for any of the other index funds at Scwab for a self directed account.

 

[preben]

Emerging market ETF VWO is only 0.3% - a bargain for that asset class! Cheers!