Chapter 15
International funds
As we’ve discussed earlier in the book, most advisors recommend far more funds and asset classes than the two I’ve suggested. Indeed as we’ve seen— scared witless after the 2008-9 market implosion— many would now have us invest in everything in the hope a couple pull through. To do this properly would require a ton of work understanding the asset classes, deciding on percentages for each, choosing how to own them, rebalancing and tracking. All for what will likely be subpar performance.
Still, even for some who accept the advantages of simplicity, my two fund Wealth Preservation Portfolio seems incomplete. The readers of www.jlcollinsnh.com 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 an international component, why doesn’t our Simple Path? There are three reasons: Added risk, added expense and we’ve got it covered.
1. Added Risk
Currency risk. When you own international companies they trade in the currency of their home country. Since those currencies fluctuate against the U.S. 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 U.S. Even here, companies like Enron occasionally cook their books and blow up on their investors. The weaker the regulatory structure in place, the greater the risk involved.
2. Added expense
VTSAX has a .05% expense ratio for rock bottom costs. While cheaper than comparable funds, even low cost Vanguard international funds have expense ratios at least twice that level.
3. We’ve got it covered
The key reasons cited for holding international funds are to avoid being dependent on the U.S. economy and to have exposure to the growth potential of world asset classes not correlated with the U.S. market. But we’ve got those covered.
Looking at the first, the 500 largest stocks in the U.S. make up about 80% of VTSAX. The largest of these 500 are all international businesses, many of which generate 50% or more of their sales and profits overseas.
Companies like Apple, GE, Microsoft, Exxon/Mobil, Berkshire Hathaway, Caterpillar, Coca-Cola and Ford to name a few.
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.
The second frequently cited reason is the expectation that the performance of international markets will not be correlated with that of the U.S. That is to say, when one is up the other might be down. The idea is having them as part of your asset allocation helps smooth the ride and offers the prospect of enhanced returns through reallocations. The problem is, as world economies become ever more closely knit together, this variation in the performance of their markets fades. While there will always be exceptions due to geopolitical events, world markets are becoming increasingly more correlated.
That’s my take. Your worldview, 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 three I suggest:
VFWAX: FTSE all-World ex-U.S. Index Fund (expense ratio .13%) VTIAX: Total International Stock Index Fund (expense ratio .12%)
Both of these invest everywhere in the world except the U.S., which you’ll have covered with VTSAX.
If you prefer to keep things as simple as possible, at a bit higher cost, you might look at:
VTWSX: Total World Stock Index Fund (expense ratio .25%)
This fund invests all over the world, including a roughly 50% allocation in the U.S. With it, you no longer even need to hold VTSAX.
While I don’t feel the need for international funds, for those who do I don’t strongly oppose holding them. Just be sure you understand what you already own in VTSAX and the cost in fees and additional risks these funds entail.