In Part VI of this series we looked at some portfolio ideas to build and keep your wealth. Last time, in The Smoother Path to Wealth, we did much the same and we discussed the concept of Asset Allocation a bit as well.
In keeping with the overall financial theme of the blog, we strive to keep our investments as simple as possible. Simple is not only easier, it is more effective. The most complex portfolio I suggest consists of only three funds invested in stocks, bonds and REITS (Real Estate Investment Trusts), plus cash.
Most advisors recommend far more funds and asset classes. Indeed, scared witless after the recent market implosion, many would now have us invest in everything in the hopes a couple of those puppies pull thru. To do this properly would require a ton of work understanding the asset classes, deciding on percents for each, choosing how to own them, rebalancing and tracking. All for what will likely be sub-par performance.
We talked about this in Part I and we’ve looked at better alternatives throughout the series.
Still, for some, even my three fund Wealth Preservation and Building Portfolio seems incomplete. The readers of jlcollinsnh are an astute bunch and the missing asset class they ask about most frequently is International Stocks. Since almost every other allocation you come across will include International, why not the Simple Path? Three reasons. Added risk, added expense and we’ve got it covered.
Added Risk:
Currency risk. When you own international companies they trade in the currency of their home country. Since those currencies fluctuate against the US dollar with International Funds there is this additional dimension of risk.
Accounting risk. Few countries, especially in emerging markets, offer the transparent accounting standards required here in the USA. Even here, companies like Enron occasionally cook their books and blow up on their investors. The weaker the regulation the greater the risk.
Added expense:
VTSAX has a .06 expense ratio for rock bottom costs. While cheaper than comparable funds, even low cost Vanguard International Funds have expense ratios at least three times that level.
We’ve got it covered:
With VTSAX you own 3277 companies, virtually every publicly traded company in the USA. More to the point, the largest of these are all international businesses, many of which generate 50% or more of their sales and profits overseas.
The top ten holdings of VTSAX, for example, are all international in scope. Apple, GE, IBM, Exxon/Mobil and the like.
Since these companies provide solid access to the growth of world markets, while filtering out most of the additional risk, I don’t feel the need to invest further in international specific funds.
Your world view however may lead you to a different conclusion. If it does, and you feel the need for even more international exposure than that imbedded in VTSAX, our friends at Vanguard have some excellent options. Here are two I suggest:
VFWAX FTSE all-World ex-US Index Fund (expense ratio .18). This fund invests everywhere in the world except the USA, which you’ll have covered with VTSAX.
If you prefer to keep things as simple as possible, look at VTWSX Total World Stock Index Fund (expense ratio .40). This fund invests all over the world, including 50% in the USA. With it you no longer even need to hold VTSAX.
It all depends on how much of the world you want and how comfortable you are with the cost in money and risk it takes to get it.
16 Comments
Vanguard’s Total World ETF “VT” is 0.22, at least according to Yahoo, and trades commission free at Ameritrade. Its some combo of SPY, EFA, and EEM, or rather their Vanguard equivalents.
Good point, Bob.
The ETF version holds exactly the same portfolio as the Investor Shares Fund, but with the lower expense ratio of .22 vs. .40. Unfortunately, as they have still lower expense ratios, there is as yet no Admiral Shares version.
The traditional problem with ETFs is that they are bought and sold just like stocks with the commissions that includes. But that’s changing.
You can also now buy Vanguard ETFs commission free as well: https://personal.vanguard.com/us/insights/article/commissions-05042010
Detail on the ETF here: https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT
I believe the usual intl fund recommended in the Vanguard 3 fund portfolio is VTIAX – Vanguard Total International Fund (Admiral shares)… expense ratio is 0.18. It says it has 8.6% North American stocks, which I assume is Canada. I really can’t decide how much intl I want… I agree with your argument above, but then I worry about putting all my eggs in the US stock market basket. Still pondering the question.
Hi Tara….
VTIAX https://personal.vanguard.com/us/funds/snapshot?FundId=0569&FundIntExt=INT#hist=tab%3A0 is also a good choice. But as you point out, it holds only 8.6% in North America and that’s why I didn’t include it.
My feeling is that if your portfolio includes VTSAX you don’t need that additional 8.6%. VFWAX seems a better fit.
If you are not including VTSAX, and you want one fund that gives you the whole world, I’m more comfortable with VTWSX and its 52% in North America. Seems a better balance of coverage based on the relative size of the various countries’ economies.
Good luck with your decision!
Currently my whole portfolio is an approximation of VTSAX (my 401K does not offer VTSAX, so I have cobbled together the approximate corresponding percentages of VIIIX, VMCIX, and VEXRX which are large cap, mid cap and small cap US stocks). So far this is working great for me, but I have been pondering the international question… I guess if I don’t have a strong feeling in favor of the international, I can just leave well enough alone.
It hasn’t been doing that great lately so that is making it easier for me to just leave it out…
Nice job of putting together your funds, Tara. It is surprising to me your 401k would offer those but not VTSAX. Ah well.
As you know, I don’t see the need for adding an international fund but….
…if I were going to…
…the fact that they have been underperforming would be a plus. Buy low and all that….
Yes I had that thought as well.
(buy low and hope it goes up later) We do have a very odd assortment of funds in my 401K…they do offer the VG target funds though, so I assume they figure if you want VG total stock/total bond/total intl you can just invest in one of those. But I prefer the 0.02 expense ratio of VIIIX (which is the largest portion of the portfolio).
Sort of off topic, but…I’m having trouble figuring out the difference between VTSAX and VITSX. Their top holdings are the same, they’re both broad indexes. I only ask because this is the only Vanguard fund I can acquire through my 401k.
Hi JEH….
VITSX https://personal.vanguard.com/us/funds/snapshot?FundId=0855&FundIntExt=INT
is the Institutional Shares version of VTSAX. Both are the Total Stock Market Index and they hold exactly the same portfolio.
Institutional Shares versions of Vanguard funds are for, well, institutions. VITSX has a slightly cheaper expense ratio than VTSAX: .05 v .06. Oh, and the initial buy in is $5,000,000.
No, I didn’t hold the zero key down too long by mistake.
If it’s offered in your 401k plan, go for it! And thank your benefits manager.
I agree with you. Most American fortune companies benefit most with global expansion. For example, Apple and Google and even Price Line are all getting sizable revenue from their international markets. Even good ole’ MCD is getting more revenue growth from foreign countries. So, why not invest in the best American fortune companies? It’s as good as or even better than risking your capital in foreign markets with currency and political risks.
Exactly!
Man, I took a whole post to say that!
Do you think it makes more sense to add an international component if you think you might live internationally at some point? My wife is from Northern Europe and her parents and brothers are still there. We don’t have any plans to move but it certainly seems possible that we might end up there.
It seems like it might make a bit more sense in out case, but I’m still invested in VASGX pretty much exclusively.
Nope. Where you live and where you invest are two different things.
I may well live outside the USA at some point. My investments will be unchanged by this.
Yet another enlightening post. You may have just convinced me to jettison my international fund and dump the money into my VTSAX fund.
I love your simple and effective approach to investing. They called it the KISS method in the military (keep it simple stupid) At least that’s what the Drill Sgt. called it. It works on so many levels.
Thanks RW….
….that’s the whole idea!
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