Are International Funds Safer?

[Cheesehead]

We are 64 and 59, recently retired, and are getting worried about our 34% AA in Fidelity's US Total Stock Market Index, the other stock percentage of 13% is in Fidelity's International Stock Index. We look to stocks for growth, we have enough revenue streams for 80% of our recurring needs, we need the stocks to throw off revenue for the 20%.

With all the doom and gloom articles about a coming correction, is it safer to move from the US to International?

Meanwhile we are considering moving into Vanguard Intermediate Term Treasury Fund (VFITX), currently yielding 1.6 percent as recommended by Kiplinger. What do you folks suggest?

Thanks,

Nick

 

[eytonxav]

If there is a "major" market hit, all equities will sink (e.g. all boats rise or fall with the tide), and sometimes international more than domestic. I usually like international to be 20-30% of my total equity position.

 

[Mr._Graybeard]

Greetings from Oconomowoc, Cheesehead.

At 1.6%, you might as well move your fixed-income money into a CD. I've got money in PIMIX/PONDX, which yields about 5%. If you have $100K to invest, you can take advantage of the lower expense ratio of PIMIX.

For stocks, I like SCHD, an ETF that tracks the Dow Dividend 100 index. It's underperforming the broader domestic stock indexes this year, but I'm OK with that, as it should be less volatile in the event of a correction (there are "low-volatility" index funds out there as well if you are worried about the market taking a dive, but I think SCHD has a lot of the same characteristics). It also throws off about 2.8% in dividends.

Since it holds stock primarily in the country's biggest corporations, it has significant international exposure because the companies do business worldwide.

Just a couple ideas to toss out there. Of course, all investing entails risk, and past performance is no indicator of future results.

 

[Senator]

Of course stocks from failing International countries are safer. And the earnings numbers from Chinese companies can be 100% trusted.

 

[jazz4cash]

If there is a "major" market hit, all equities will sink (e.g. all boats rise or fall with the tide), and sometimes international more than domestic. I usually like international to be 20-30% of my total equity position.

+1
There's a chart that is posted here occasionally that shows risk vs performance for international equity allocation. It shows that adding international to your equity allocation reduces risk...up to a point. I recall 30% is the optimum international exposure so if you have total equity allocation of 70 pct, .3x.7=21pct.

 

[OldShooter]

@Cheesehead, I think you're on the right track for the wrong reason:

The reason you're thinking about this is that you are trying to time the market. This is impossible.

That said, international is half of the world's investable assets. There are very credible arguments that we should have our portfolios invested worldwide rather than having the heavy home country bias that we often have and that you have. Nobel prize winner Eugene Fama says; "We have to hold the market portfolio." Which is everything.

There is also a credible argument that holding a significant fraction of our portfolios in international stocks is a way to minimize volatility. The article that @jazzforcash mentions is probably this one: https://www.vanguard.com/pdf/ISGGEB.pdf It contains a graph showing that the sweet spot for minimum volatility is about 30-40% international.

My suggestion is that you research these arguments, do some internet reading on the subject of "home country bias" and strongly consider increasing the % of international stocks in your portfolio.

Of course stocks from failing International countries are safer. And the earnings numbers from Chinese companies can be 100% trusted.

Silly.

 

[Chuckanut]

The 'safety 'is in diversification not any particular fund, domestic, international, sectors, small cap, large cap, baseball caps, or whatever.

I put the word safety in quotes because there is no 100% guarantee, of course.

 

[Mr._Graybeard]

Of course, 98% of the holdings in Fidelity's FSIVX fund are in developed markets (i.e., Europe and Japan) and are giant-cap companies that have the same kind of national allegiance that American giant-caps have: They go wherever in the world the money is. That's the same whether they're Nestle or General Mills, Roche vs. Pfizer or Exxon Mobil vs. Shell.

The monetary market might give international funds a slight boost if the dollar continues to lose value against the euro.

As far as the specific funds in question, it might pay to look at their sector exposure to consider their relative safety. FSTVX has nearly a quarter of its holdings in information technology while financials are the biggest play in FSIVX. Tech is looking pretty frothy these days. They're both diversified funds, but I'd expect FSTVX to swoon a little bit further than FSIVX in the event of a correction.

 

[Cheesehead]

Thanks everyone!

 

[OldShooter]

Thanks everyone!

Let us know what you decide.

 

[pb4uski]

....With all the doom and gloom articles about a coming correction, is it safer to move from the US to International?

Meanwhile we are considering moving into Vanguard Intermediate Term Treasury Fund (VFITX), currently yielding 1.6 percent as recommended by Kiplinger. What do you folks suggest?

Thanks,

Nick

No... don't try to time the market. Stay the course with your current allocation to international of 28% of your total equities.

VFITX has a duration of 5.3 years.... which is a little long for my liking. VSBSX has a 1.9 year duration and an SEC yield of 1.5% with a lot less interest rate risk.... or VFSUX has a 2.1% SEC yield and duration of 2.6 years.