International in a 3-fund portfolio

[DayDreaming]

I know there heave been discussions here on whether or not 'international' funds are needed in one's investment portfolio. Looking back a bit historically, I don't see where international funds ever really helped, so I'm wondering - was there ever a time period where international really did well?

For example, my own investments are pretty close to the classic Boggleheads 3-fund portfolio:

• VTSAX - Total Stock
• VFWAX - All-World ex-US
• VBTLX - Total Bond

I did a comparison of:

Portfolio 1: VTSAX 42%, VFWAX 18%, VBTLX 40%
Portfolio 2: VTSAX 60%, VBTLX 40%
and just for kicks:
Portfolio 3: VFWAX 100%

VFWAX 'international' just seems to be a drag on investment performance. In the chart below, I see that it does perform well at times, but never enough to really beat out VTSAX. Unfortunately the chart only goes back to Oct 2011 because of VFWAX.

I'm thinking about moving some (or all?) of my VFWAX to VTSAX, and maybe moving to a 2-fund portfolio, but am wondering if someone can show me a time when VFWAX (or something similar) really made sense.

link to Portfolio Visualizer

 

[Ed_The_Gypsy]

Once, several smart people convinced me that 50/50 US/non-US was the way to go. Maybe it was once, but I don't see that now. John P Greaney also is of the opinion that there is no reason to invest anywhere except the USA. Foreign debt may be different. Maybe.

Be aware that the best way to take advantage of international is to rebalance at the right time and I never got that right.

Sticking with US now.

 

[Red Badger]

A few years ago, my Fido guy talked me into adding an international index fund to my two fund portfolio for "diversification." It's been a dog. If it ever gets back to even, I'm ditching it. I also see it as a dog with additional risk as I'm not sure of the regulatory framework of foreign countries. I'm of a mind that US conglomerates, by their market reach, provide sufficient international exposure (but that's just me).

To get milk, I need not buy a cow.....

 

[RunningBum]

A few years ago, my Fido guy talked me into adding an international index fund to my two fund portfolio for "diversification." It's been a dog. If it ever gets back to even, I'm ditching it.

If you think it's a dog and you want to dump it, why would you wait for it to get back to even? Why not sell now? If it's in taxable, you get a loss to offset gains or other income. If it's in an IRA, it has no consequence.

 

[Rianne]

My international is in Roth. I'm dumping soon. Not sure where to put it. I have 50/50 international/US stock funds.

 

[Red Badger]

If you think it's a dog and you want to dump it, why would you wait for it to get back to even? Why not sell now? If it's in taxable, you get a loss to offset gains or other income. If it's in an IRA, it has no consequence.

I just hate selling low and buying high. Seriously, I'll probably pull the trigger as part of rebalancing this year.

 

[OldShooter]

Sectors wax and wane, always in completely unpredictable ways. In the decade prior to this one I think it was international that was the winner and US lagged. Look at a few of the venerable "quilt charts" here: https://www.callan.com/periodic-table/ and you can see the randomness.

If you care about portfolio volatility, this paper: https://personal.vanguard.com/pdf/icriecr.pdf argues for 30-40% international as the sweet spot for minimum volatility.

Modern Portfolio Theory is primarily based on observing the randomness of asset price behavior. One can quibble about some aspects of course. Nobel Prize winner Eugene Fama advocates the Efficient Market Hypothesis, which says that the current price of an asset incorporates all known information about the asset and, hence, its future value must be random --- depending on future events that cannot be predicted. Again, quibbling is available and is a favorite activity of the behavioral economists like Richard Thaler. The bottom line, though, is that assuming randomness is probably the best starting point. Hence, to your question, the answer is that recent performance of international equities is not predictive.

Fama's frequent statement is that "we have to hold the market portfolio." IOW everything. His research partner, Kenneth French, discusses this here: https://famafrench.dimensional.com/videos/home-bias.aspx For ourselves, we hold Vanguard's whole world fund, which IIRC is about 45% US and 55% overseas. YMMV.

 

[RunningBum]

I just hate selling low and buying high. Seriously, I'll probably pull the trigger as part of rebalancing this year.

Manage for your whole portfolio, not individual holdings. And don't let emotion play a part.

Personally, I'm holding my international stake. I'd actually like to reduce it some, but I've had it for awhile and all my shares are gains, and I can't sell much without losing my ACA subsidy. I don't let tax factors rule my decisions, but they play a part and the hit is too big to overcome.

 

[Dtail]

All of our International is in TIRA, so no tax aspects. Still over time, our exposure has been reduced to 15% from 25%.
Not sure if I will do anything at year end yet.

 

[RunningBum]

All of our International is in TIRA, so no tax aspects.

There is one aspect, you are paying foreign taxes and don't get to recover that with the foreign tax credit.

 

[Dtail]

There is one aspect, you are paying foreign taxes and don't get to recover that with the foreign tax credit.

Yes I learned that from @pb4uski too.
I have 86% of investments in TIRA, so over time as the TIRA becomes a lesser % of the portfolio, will look to take advantage of that aspect.
Right now, using the taxable portfolio to manage low MAGI for ACA.

 

[pb4uski]

I struggle with this issue as well. This chart compares the annual returns of Total Stock with Total International Stock. International outperformed domestic in 8 years by my count.... with a real good run from 2002 to 2007.... with the most recent better year being 2017.

I'll probably keep what I have and let the allocation wander a bit.

 

[dtbach]

I have about 11% in international but a large part of it comes from just a couple of stocks (BP, RCL and CCL) and surpisingly a good bit from Vanguard Wellington, Wellesley and Primecap. Have done OK on all of them although the stocks have slumped of late.


PS - I cruise a lot so bought RCL and CCL mainly to get the stockholder cruise credits. I've gotten more from that than the dividends

 

[OldShooter]

Another thought: There is an argument that performance, though random, tends to regress to the mean. IOW an asset that has lately been outperforming or underperforming its historical mean will tend to reverse course at some point.

Daniel Kahneman, in "Thinking Fast and Slow" discusses this in some detail. Also more here: https://fs.blog/2015/07/regression-to-the-mean/

So based on regression to the mean and their recent relative performance, one might argue for overweighting international and underweighting US domestic stocks.

 

[RunningBum]

I have about 11% in international but a large part of it comes from just a couple of stocks (BP, RCL and CCL) and surpisingly a good bit from Vanguard Wellington, Wellesley and Primecap. Have done OK on all of them although the stocks have slumped of late.


PS - I cruise a lot so bought RCL and CCL mainly to get the stockholder cruise credits. I've gotten more from that than the dividends

Hmm, when I do VG's Portfolio Watch analysis on stocks, it only shows VTIAX as contributing to my international holdings. None from Primecap, but when I look at Primecap's fund profile, it shows 14.8% foreign holdings. I don't own Wellington or Wellesley right now but I don't recall seeing them show up either. I'm not seeing where they show how much international they hold. It disturbs me that I'm a higher on international than I thought based on the portfolio watch.

 

[walkinwood]

We'll be living with this portfolio for 30-40 years after we retire. Things change & diversification is probably the only way to hedge against that.

 

[friar1610]

There are threads ad nauseum on this subject on the Bogleads discussion boards. The bottom line is that there is no real consensus. Some are strong advocates of holding domestic and international equities at relative market weights. Others, supported by John Bogle himself, say you get enough international diversification from a US index which is full of corporations deriving much of their income from multinational sales and that there is no need for an international fund. Stil others, like me, are not fully convinced either way and keep 20-25% in international to hedge our bets without going all-in.

 

[dtbach]

Hmm, when I do VG's Portfolio Watch analysis on stocks, it only shows VTIAX as contributing to my international holdings. None from Primecap, but when I look at Primecap's fund profile, it shows 14.8% foreign holdings. I don't own Wellington or Wellesley right now but I don't recall seeing them show up either. I'm not seeing where they show how much international they hold. It disturbs me that I'm a higher on international than I thought based on the portfolio watch.

This is what showed up when I do a Fidelity Analysis. Does everything that I have in Full View and showed a fair amount of International in all of these. I'm OK with it, as I feel there are times when International will do well (hopefully when US does less well)

 

[Ed_The_Gypsy]

Yes I learned that from @pb4uski too.
I have 86% of investments in TIRA, so over time as the TIRA becomes a lesser % of the portfolio, will look to take advantage of that aspect.
Right now, using the taxable portfolio to manage low MAGI for ACA.

What he said.

 

[ESRwannabe]

DayDreaming,

How well international stocks did in the past doesn't make much difference to me. There is no way I would go any less than 50% international. Even at 50% I feel like I have too much of my net worth tied up in the dollar and the US.

In my opinion the US stock market makes up a large percentage of the world market cap simply because the dollar is the world reserve currency. If we loose the reserve currency, then I think the US market cap will decline in relation to the rest of the world's stocks.

I don't have faith in any country. Best course of action is to spread my net worth out as much as possible. The US population is like 4.4% of the global population. There have been many different reserve currencies in the past. They don't last forever. The US is both a country and an empire. The country can last "forever" but the empire part will not.

For retirement I am not even sure how much of it I will be able to spend in the US. If I retire early (I'm 43 right now), I may need to leave the US until I am old enough for medicare.

 

[mrfeh]

I'm thinking about moving some (or all?) of my VFWAX to VTSAX, and maybe moving to a 2-fund portfolio, but am wondering if someone can show me a time when VFWAX (or something similar) really made sense.

Making such a decision based on 8 years of data makes no sense.

Do a search on bogleheads.org for many, many pages of discussions on this subject.

 

[VanWinkle]

I have kept a consistent 20% in foreign index funds. With all of the angst here about reducing or dropping foreign stock funds, it makes me want to increase my exposure to 30%. In retirement, I feel secure with a less than market cap weight of foreign equities. Diversification requires that you usually have one dog in the house.

 

[OldShooter]

... In my opinion the US stock market makes up a large percentage of the world market cap simply because the dollar is the world reserve currency. If we loose the reserve currency, then I think the US market cap will decline in relation to the rest of the world's stocks. ...

This is an important point and is far from an improbable scenario. Basically everyone in the world hates our reserve currency status and our consequent ability to financially punish people we don't like. Our only salvation is that there are no strong candidates to replace the dollar. At one point people were looking at a basket of currencies including ones like the yuan, the euro, and the ruble. But all three have weakened as candidates in recent years.

A large devaluation will make those of us who hold significant international positions look like geniuses. For example, a 25% decline in the dollar will make our international assets rise by 33% in dollar terms. That will be very helpful as that decline will also create serious inflation in the US as all imports will rise in cost and all products, like food and oil, traded internationally to rise as well. This is inflation beyond the reach of monetary and fiscal policy. It will not be fun, so I am not hoping for it. But it will make our portfolios look genius.

 

[DayDreaming]

Making such a decision based on 8 years of data makes no sense.

And that's the reason I asked this question.

 

[OldShooter]

And that's the reason I asked this question.

So, are you confused at a higher level now or have you come up with strategy?