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 ~3600 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 .11). 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 .19). This fund invests all over the world, including 50% in the USA. With it you no longer even need to hold VTSAX.
(A less expensive .10 ER Admiral Shares version is now available: VTWAX This would be my choice.)
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 https://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.
Addendum 2:
12/09/14 Jack Bogle wouldn’t risk investing internationally
12/17/14 Jack Bogle: US companies are international companies.
Addendum 3:
An excellent take from Go Curry Cracker…