Stocks — Part XI: International Funds

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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.

Addendum 1:  

In rethinking my position on REITS, I came across a very interesting concept: International Stock Funds as both an inflation and deflation hedge. This might just give me a reason to add them. For a full discussion as to why please see: Stepping away from REITs

But here’s my reply in response to one of the questions in the comments on that post:

As you know from this http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/,
I don’t buy into the traditional reasons for owning international funds. Plus I see additional risks in them.

And as Paul points out international exposure “seems to correlate more and more with US performance.”

While the idea that being invested in other countries provides a hedge against inflation/deflation in the US is very intriguing, it occurs to me that the US is such a massive portion of the world economy that were it to enter either of these spirals the rest of the world would be sucked right along.

So, for now, simplicity wins and I’ll do without international.

That said, I don’t think they are a bad idea and for those who like them they can certainly be a part of a Simple Path to Wealth portfolio. If I were to add them to mine they’d be 25% along with 25% bonds and 50% VTSAX.

Further, for non-US investors, I’d say investing outside their home countries is an essential idea and the added inflation/deflation hedge very real.

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32 Comments

  1. Bob
    Posted September 26, 2012 at 1:07 am | Permalink

    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.

  2. Tara C
    Posted September 26, 2012 at 2:13 pm | Permalink

    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.

    • Posted September 26, 2012 at 3:12 pm | Permalink

      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!

      • Tara C
        Posted September 26, 2012 at 3:29 pm | Permalink

        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…

        • Posted September 26, 2012 at 3:38 pm | Permalink

          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…. :)

          • Tara C
            Posted September 26, 2012 at 3:51 pm | Permalink

            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).

          • Rockstache
            Posted July 31, 2013 at 3:37 pm | Permalink

            I am not sure if you still check these old conversations or not but…I was wondering if you could tell me where you found the distributions for VTSAX? My company offers VIGSX and VISGX (small and large cap), but not VTSAX, and I would like to use these together to try to put together a package like Tara has done. Unfortunately, I can’t seem to find the percentages of each to use. Thanks for your help….this is an excellent series.

          • jlcollinsnh
            Posted July 31, 2013 at 10:32 pm | Permalink

            Hi Rockstashe…

            I’m not entirely sure what you mean by “distributions.” My guess is that you are asking what allocations VTSAX has in large, mid and small cap stocks?

            It is a tough question as Vanguard isn’t clear on this. Morningstar, however, offers a breakout you can find here:

            http://portfolios.morningstar.com/fund/summary?t=vtsax

            As you’ll see it is about

            72% large cap
            19% Mid
            9% small

            Hope that helps? Glad you like the series!

          • Rockstache
            Posted August 1, 2013 at 9:10 am | Permalink

            Yes, I meant allocations. I am still learning all the correct terminology. Thank you for your help, that is exactly what I was hoping for. So, if I have only the large cap and small cap to work with, would you recommend just using those two, or bringing in a third (non-vanguard) fund to make up for my loss of a mid cap fund? My 401K is in a (shady) high fee company, and I don’t really like having my money in their target funds, which is where I have it now.

          • jlcollinsnh
            Posted August 1, 2013 at 11:58 pm | Permalink

            Unless that third fund was a low-cost mid-cap index fund I wouldn’t bother.

            Too bad about your 401k, but you are not alone.

  3. JEH
    Posted September 26, 2012 at 8:09 pm | Permalink

    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.

    • Posted September 26, 2012 at 9:45 pm | Permalink

      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.

  4. Posted September 26, 2012 at 8:48 pm | Permalink

    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.

  5. W
    Posted September 27, 2012 at 7:19 pm | Permalink

    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.

    • Posted September 27, 2012 at 7:29 pm | Permalink

      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.

  6. Prob8
    Posted September 27, 2012 at 10:06 pm | Permalink

    Yet another enlightening post. You may have just convinced me to jettison my international fund and dump the money into my VTSAX fund.

  7. RW
    Posted September 29, 2012 at 7:42 am | Permalink

    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.

  8. Posted August 6, 2013 at 2:07 pm | Permalink

    Does this advice also apply to bonds? I noticed that Vanguard now includes VTIBX (Total International Bond Index Fund) in most of their “all-in-one” funds.

    I could see it going both ways: the added risks and expenses are still there for bonds, yet wouldn’t an international bond fund diversify one’s portfolio in a way that an international stock fund wouldn’t.

    In other words, does the “we’ve got it covered” section in this article apply to bonds?

    • jlcollinsnh
      Posted August 6, 2013 at 2:49 pm | Permalink

      Great question!

      In short, no.

      The difference is that the total bond fund is made up of US company issue bonds. So they are US bonds even if the companies have substantial overseas business revenue. To have exposure to the international bond markets, you really do need something like VTIBX.

      Since I only hold bonds for the deflation hedge and, to a lesser extent, for the income I don’t feel the need for international.

      Most often those buying international bonds are after higher yields. But remember, higher yields are also a barometer of higher risk.

      • Posted August 6, 2013 at 4:07 pm | Permalink

        Thanks! I already hold an international stock fund in addition to the ones you recommend (bringing my total number of funds up to a crazy unmanageable 5!), so I don’t want to make things more complicated.

  9. kyle
    Posted December 5, 2013 at 10:05 am | Permalink

    When the U.S. sneezes the rest of the world catches a cold :) Let’s hope this continues to stay true for the remainder of our time here on Earth.

  10. Jimmy Mac
    Posted December 6, 2013 at 12:18 pm | Permalink

    Let’s play Devil’s Advocate. If international funds truly aren’t necessarily for a diversified portfolio, why do some many financial authors recommend them? What are their best selling points on why International stocks are necessary for a balanced portfolio?

    • jlcollinsnh
      Posted December 6, 2013 at 1:28 pm | Permalink

      Hi Jimmy…

      and welcome.

      If I were going to make the case for them, it might look like this:

      1. There are some great companies based in countries other than the USA and international index funds are the way to own them. (This is the one that seems valid to me, but I’m unwilling to pay the higher ERs these funds have)
      2. The USA is on a long term decline and I want some of my money outside that country. (I don’t happen to believe this, but for those that do…)
      3. Other parts of the world offer greater growth potential than the USA. (but they are also more risky and volatile)
      4. Other parts of the world offer less expensive stock valuations at the moment. (but choosing them and timing your entry and exit is the same losing game as individual stock picking)

      More cynically:

      1. International funds are very profitable for the companies that run and market them.
      2. Some FI authors fall prey to this marketing. Some, especially investment advisors, profit from recommending them.
      3. Many FI authors fail to understand the international exposure baked into a broad-based total US stock market index fund like VTSAX.
      4. Many FI authors are sheep. They read others recommending international funds and jump on board with out doing their own thinking on the subject.

  11. Jam Dough
    Posted January 1, 2014 at 7:18 am | Permalink

    Thanks for another great article !

    2014 will be me first year as an investor, and as a UK reader the closest Vangurd fund i can find here to the VTSAX is the ” Vanguard LifeStrategy™ 100% Equity Fund” (https://www.vanguard.co.uk/documents/portal/factsheets/lifeStrategy100_equity.pdf).

    Do you think such fund is comparable ?

    The management fee seems to be a little higher (0.33%) with an additional (0.22%) charge on the principal but it does have international diversification (which you mentioned in a previous article was a good thing) but I am not sure if a) such fund is comparable and b) if the higher management fees will be justified.

    HAPPY NEW YEARS and thanks for such an incredible resource !

    Jam Dough

  12. Richard
    Posted June 6, 2014 at 8:24 pm | Permalink

    As you say, it seems that it is most commonly recommended to hold some International funds in your portfolio, but I think you point out some really good reasons as to why it might be desirable not to go that route.

    I was thinking that there could be an additional benefit of holding both an international index fund and US index fund and re-balancing: it could help force both funds to be sold on the highs and bought on the lows (relative to each other).

    But I suppose in the end, if the international fund doesn’t grow as much, the money that would be allocated for it could’ve grown more quickly in the US fund and could very well outweigh the benefit of the re-balancing.

    And it sounds to me like you believe the US fund will grow more than the international fund anyway, and therefore it would be better to just put it all in a US index fund. (along with the 3 reasons you describe in the post of course).

    Does that all make sense? Is my thinking sound to you on all this? :)

    Thanks!
    Richard

    • jlcollinsnh
      Posted June 9, 2014 at 1:43 pm | Permalink

      That’s the concept behind holding different investments in an asset allocation: smooth the ride and enjoy the benefit of rebalancing. Bonds play that role for me these days, but international could too. Although some contend that international and US stocks are growing steadily more correlated, reducing this effect.

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