Stocks — Part XI: International Funds

Photo by tonynetone

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 two funds invested in stocks and bonds, plus a little 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 two 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.

As are the S&P 500 which make up ~75% of VTSAX. This article has a cool graphic of showing the international exposure the S&P 500 companies have. Who would have guessed almost twice as much in Africa as in South America?

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 .14).  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 .27).  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,
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.

Addendum 2: 

12/09/14 Jack Bogle wouldn’t risk investing internationally

12/17/14 Jack Bogle: US companies are international companies.

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  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 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:


            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….

      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” (

    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? :)


    • 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.

  13. Clint
    Posted December 9, 2014 at 6:27 pm | Permalink

    Very interesting (and complimentary) thoughts today from Jack Bogle on International investing:

    “I wouldn’t invest outside the U.S. If someone wants to invest 20 percent or less of their portfolio outside the U.S., that’s fine. I wouldn’t do it, but if you want to, that’s fine.”

    • jlcollinsnh
      Posted December 9, 2014 at 6:38 pm | Permalink


      I happened to catch that today and made it an addendum above.

      But thanks for bringing it to my attention!

    • Adam
      Posted December 15, 2014 at 3:44 am | Permalink

      Interesting, but being non-US-based this quote above struck a chord:

      “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.”

      This is probably my last comment before I actually take the plunge!

      Jim, I know you are in favour of a US-centered aproach, but it does seem a bit silly for a non-US-based person to go all-in in a country when we never intend to live there, especially adding currency risks. I thought about doing 100% US Market but my finances being UK-based I decided to mix in 20% international funds (all my funds are from Vanguard UK – which is owned by Vanguard US). What do you think of this allocation, even though it is likely not to perform as well as 100% US (although we don’t know that)?

      80% US Whole Market (0.10%)
      10% UK Whole Market (0.08%)
      7% Developed Europe ex-UK (0.12%)
      3% Japan (0.23%)

      • jlcollinsnh
        Posted December 15, 2014 at 7:13 pm | Permalink

        Hi Adam…

        Just to clarify, I favor a US centric approach for those of us in the US. We live in a country with a major part of the world economy and investing in the US market gives us international corporations that benefit from the success of the rest of the world. Plus we get to do this all with funds that have dirt cheap ERs.

        My concern for those readers in other countries is that their home markets are simply too small to provide the diversification I’d like to see.

        Were I in that situation, I would look to one of Vanguard’s world funds that included the US market. They are more expensive than VTSAX, but not too bad. In fact, if costs were equal, this would be my first choice for US investors as well.

        As for your allocation, I think it is just fine. It will track the US performance very closely and will outperform, or not, mostly depending on how the UK and Europe do in comparison. Who knows?

        I hesitate a bit over the Japan fund, simply because of the .23% ER and the narrow country focus. Is there a broader Asia fund with a lower ER?

        If there is, maybe 70/10/10/10?

        Or even, more like the world funds: 55/15/15/15

        If you haven’t already, you might also check out:

        • Adam
          Posted December 16, 2014 at 8:13 am | Permalink

          Hi Jim, thanks for the response.

          I did read the European post and comments in detail – they were very helpful, and I also posted a comment while I was still working out the allocation, but I didn’t get a reply that time. :-)

          The fund Mrs EconoWiser suggested, the All World fund, is available, but it’s an ETF at 0.25% (compared to the 0.08 – 0.23 of the individual funds). I should note that I also have to pay 0.25% platform fees on top whatever I do, so I prefer the funds route for now as there are no trading costs to buy more/rebalance, unlike with ETFs. There are fixed-free brokers available too with no percentage charge, but the stash is still modest enough for the percentage option to be cheaper for now.

          Regarding Japan, there is a pacific-ex Japan fund available, also for 0.23%, so if I did that I’d probably need to combine it with the Japan fund. The higher cost and the sluggishness of Japan are the two reasons it’s only at 3% – but I thought you never know what will happen a decade from now! As you said it’s a shame there isn’t a combined one.

          Your suggested allocations are interesting. I’ve got a few days for my funds to clear so I’ll ponder over them before coming to a decision. Thanks!

          • jlcollinsnh
            Posted December 16, 2014 at 11:12 am | Permalink

            Clearly, Adam…

            You are thinking this thru carefully and I think you’re process is on target. Costs are critical.

            In fact, once you make your final call, please take a moment to post what you are doing and why on that European post. It will be very helpful for the next person who reads thru it.


          • Adam
            Posted December 18, 2014 at 2:32 am | Permalink

            I found this (long and dry) report from Vanguard regarding international stocks, which is relevant to this post:


            It focuses mainly on reducing ‘volatility’ rather than on increasing returns. The conclusion seems to be, as always, who knows? But 20-30% probably isn’t going to do you any harm and *may* smooth the ride. Interestingly they advise against 50% US Stocks because the costs involved of >50% international stocks outweigh the benefits.

  14. MarredCheese
    Posted January 11, 2015 at 11:48 pm | Permalink

    Am I wrong to think that international funds (especially emerging markets) are riskier than US stocks and should therefore have higher returns over the long term? I would think the same thing of small cap funds compared to total US market funds. I know at least Vanguard ranks them a 5 instead of a 4 in terms of riskiness. Shouldn’t a young person who is planning to buy and hold for many decades target the most volatile yet diversified fund possible? Or is my assumption naive that the market rewards risk fairly?

    • jlcollinsnh
      Posted January 12, 2015 at 1:10 pm | Permalink

      I’ve never really looked at the comparative riskiness of International and Small Cap v. Total. My guess is that they are. But this doesn’t mean you’d enjoy outsized results as a reward for accepting their volatility. The market doesn’t necessarily reward this risk fairly.

      The issue is that these sectors go in and out of favor. They can out-perform for years and then lag as long or longer.

      Personally, I’d rather own it all in a Total Market Fund.

  15. Ravis
    Posted March 22, 2015 at 5:18 pm | Permalink

    Hey Jim,

    First, I’m loving your blog. Been following MMM for a couple years now and just recently came over here when he mentioned the Chautauqua, I checked it out and thought it sounds awesome! but alas it’s sold out… maybe next year for me and the Mrs. In the interim i’m tearing through your blog, super great stuff!

    My question is related to that I see you recommend the VFWAX and I saw another comment where you said you recommended it over VIAX because VIAX had a higher % in North America. That post was from a year or two ago and I just double-checked (because I’m currently using VIAX) and I didn’t really see much difference between the two anymore… just wondering if you had looked at them recently and maybe they’ve grown closer together? Or maybe I’m missing something?

    I’m already following the vanguard strategy, mostly in VTSAX but I do have some REITs and international, so you got me rethinking some of this… lots of good ideas to ponder!

    really appreciate what you’ve done here!

    • jlcollinsnh
      Posted March 22, 2015 at 8:31 pm | Permalink

      Welcome Ravis…

      Glad you found your way here and are enjoying it.

      Can you point me to the comment to which you refer? I am unfamiliar with VIAX and think this might be a typo.

      In the post above I do say this:

      “VFWAX FTSE all-World ex-US Index Fund (expense ratio .14). 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 .27). This fund invests all over the world, including 50% in the USA. With it you no longer even need to hold VTSAX.”

      In both cases the ERs have come down and I’ve updated the post to reflect this. They used to be .18 and .40

      These are very low for these types of funds and for those who seek international these are still the way I’d go. But VTSAX is only .05

      Does this help?

      • Ravis
        Posted March 22, 2015 at 9:08 pm | Permalink

        Hi Jim — Thanks for the quick response… sorry about that, yes that was a typo… I mean to say VTIAX (left out the “T”). My question/comment was in regards to another posters comment (posted by Tara C on September 26, 2012 at 2:13 pm). Where she mentioned that VTIAX was the usual international Vanguard fund, which is why I have it. You two had an exchange about perhaps the % in VTIAX of North America was greater than that of VFWAX. However, when I compared VTIAX and VFWAX, they seemed to have the same % not just in North America, but also in other locations. Even most of the same top holdings. So my question was whether they have grown closer and there is no longer a significant difference? or am I missing something and would you still recommend VFWAX over VTIAX?

        Thanks and sorry again for the confusion!

      • jlcollinsnh
        Posted March 22, 2015 at 11:09 pm | Permalink

        Got it.

        Both funds are international ex the US and their performance is just about equal.

        VTIAX: “… employs an indexing investment approach designed to track the performance of the FTSE Global All Cap ex US Index, a float-adjusted market-capitalization-weighted index designed to measure equity market performance of companies located in developed and emerging markets, excluding the United States. The index includes approximately 5,550 stocks of companies located in 46 countries.”

        VFWAX: “… employs an indexing investment approach designed to track the performance of the FTSE All-World ex US Index, a float-adjusted, market-capitalization-weighted index designed to measure equity market performance of international markets, excluding the United States. The index includes approximately 2,364 stocks of companies located in 46 countries, including both developed and emerging markets.”

        As you’ve observed, they are very similar and both invest across 46 countries. The difference is they track different indexes and one holds twice the number of stocks.

        Both have the same ER these days and so I think either would work fine as a companion to VTSAX.

        • Ravis
          Posted March 23, 2015 at 10:46 am | Permalink

          Thanks for the clarity! Since I’m already in VTIAX I think I’ll stick with that for now.

          Oh yeah, looks like maybe my typos rubbed off on you, you listed VFWAX as FFWAX in your response above!

        • jlcollinsnh
          Posted March 23, 2015 at 12:51 pm | Permalink

          Typo? Me? What typo?

          (Ah, the power of the “edit” feature…) 😉

  16. Dan
    Posted June 26, 2015 at 8:36 pm | Permalink

    Hi Jim,

    I have come to agree with you about not needing international stocks. I have about 16% of my equities in international. Over what time period do you think I should transfer my funds from total international to total stock market?

    • jlcollinsnh
      Posted June 27, 2015 at 7:58 pm | Permalink

      Hi Dan…

      My take is, once you decide on an asset allocation that works for you and/or you think is better than what you have, why wait? Make the change and get on with your life.

      The only exception is if you have to sell appreciated shares in a taxable account that will generate a capital gains tax. Then you’ll want to look closely at your tax bracket and what your cap gain rate will be. For instance, in the 10% & 15% the cap gain rate is 0 and so is not a issue.

      If you will be hit with large cap gains you might want to transition more slowly.

      Good luck!

  17. Kalergie
    Posted June 28, 2015 at 7:08 am | Permalink

    Hi Jim,

    First of all, thank you for sharing your ideas and thoughts with like-minded people. I believe you have an easy to understand, very no-BS way of explaining your investment approach.

    If I may, I would like to add an additional point to your list of risks when investing internationally. It’s tax risk. More specifically, foreign holdings are subject to dividend withholding taxes from their respective home countries.

    For example, looking at the iShares MSCI EAFE ETF (EFA), the foreign withholding taxes were averaging at 7.5%. The current dividend yield of EFA is 3.5%. This results in a much higher real cost for the investor:

    Total cost = MER + (withholding tax% * dividend yield%)
    Total cost = 0.33% + (7.5% * 3.5%)
    Total cost = 0.56%

    Another example would be Vanguard’s Total International Stock ETF (VXUS). withheld dividends amounted to roughly 10.5% last year and the current dividend yield is 2.75%. Let’s run the numbers:

    Total cost = MER + (withholding tax% * dividend yield%)
    Total cost = 0.14% + (10.5% * 2.75%)
    Total cost = 0.29%

    I am not an accountant or by any means a professional investor. But if I am correct, this is a strong argument against international investing.

    Total cost comparison:
    VTI: 0.05%
    EFA: 0.56%
    VXUS: 0.29%

    In a nutshell, I believe international diversification has its justification depending on individual factors. However, one has to understand the true cost of going down that road and assess for themselves if it is worth it.

    I hope I could help add some value to this discussion.

    Sources: Ishares annual report, Vanguard annual report

  18. sbvol98
    Posted August 19, 2015 at 3:18 pm | Permalink

    Marketwatch article that backs up your point about 50% or more of the revenue of large companies are generated internationally.

    • jlcollinsnh
      Posted August 19, 2015 at 7:03 pm | Permalink


      Very cool graphic in the article. Who would have guessed they have almost twice as much exposure to Africa as South America? 😉

      I just added a comment and link to the post

  19. David
    Posted August 26, 2015 at 7:06 am | Permalink

    I’m still trying to decide on VFWAX or not.

    I’m 44 in age and most of my portfolio is in VFIAX (S&P 500) in a 401k since I don’t have access to a total stock market there.

    OVerall Breakdown looks like this:
    28% VTSAX taxable account
    6% VTSAX Roth
    19% VTSAX Traditional IRA
    47% VFIAX 401k

    Over time, my taxable account will grow the fastest as I save more after maxing out my 401k. I have no good international options in my 401k.

    Given that I have nearly half (and growing) in VFIAX instead of VTSAX, am I still covered in international or should I consider adding some? If adding some, it would have to come from my IRA and Roth which the percentages of those compared to my total portfolio will shrink dramatically over time.


    • David
      Posted August 26, 2015 at 7:25 am | Permalink

      Oh, and I’m 100% in equities at 44. I am now saving 60% after tax income while maxing out my 401k so I thought this would not be so bad. If I add a total bond to the mix It has to come from my traditional IRA too because I have no good Bond options in my 401k. I have federal capital preservation and federal treasury obligations. That’s it for bonds in my 401k which I plan to have until 60 when I retire and move my 401k to vanguard.

      Any opinion on this as well?

    • jlcollinsnh
      Posted August 26, 2015 at 9:58 am | Permalink

      The S&P 500 makes up ~75% of VTSAX.

      So with both VTSAX and VFIAX you are well covered internationally in my view per the reasons outlined in the post. To see how well covered, click the link in the post:

      “This article has a cool graphic of showing the international exposure the S&P 500 companies have. Who would have guessed almost twice as much in Africa as in South America?”

      Or in the comment directly above.

      If you decide to add bonds your IRAs are the place for them. This post might help you decide:

      • David
        Posted August 26, 2015 at 6:33 pm | Permalink

        Thank you for your time and blog!

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