Author Topic: Diversify to international?  (Read 4066 times)

Bookworm

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Diversify to international?
« on: May 19, 2016, 10:22:35 AM »
First...I am a very, very unsophisticated investor. I've done some reading, but not a whole lot of understanding. While I figure things out, I've got my assets parked here:

traditional IRA - $30,700 VTSAX
Roth IRA - $11,200 VTSAX
taxable account - $4,100 VTSAX + ~ $100 money market

cash emergency fund - $15,000

I am 43 and will probably need to work until traditional retirement age (although I would definitely welcome any circumstances that would reduce that), so I have 20+ years to accumulate. This makes me feel like bonds are too conservative and don't make sense.

I have read a lot of people's posts here, though, suggesting that it is wise to diversify into international funds. My questions are:

1. Is the purpose of adding an international fund to increase the aggressiveness of one's portfolio, or reduce it? I think I understand that an international index fund is more volatile than a US-only fund, but sometimes it seems like people are doing it for the opposite reason, to avoid the eggs-in-one-basket thing.

2. Vanguard only seems to have one low-cost international index fund (VTIAX), and it requires a $10,000 investment. I could do that if I exchanged some of the VTSAX in my traditional IRA. $10,000 is about 16% of my assets, cash included. Is 16% in international stocks a conservative, moderate, or aggressive level of exposure?

3. Am I correct that VTIAX is the only low-cost Vanguard international index fund? One with a lower initial investment of $3,000 or so would be nice. I could gradually add to the money market in my taxable account until I could make that investment, and then add to it in smaller amounts, to avoid freaking myself out.

The emergency fund is, unfortunately, untouchable. I've halved it in the last year, but that has happened gradually and taken a great deal of confidence-building and deep breaths. It's down as low as I can tolerate, given my very low and somewhat unstable income.

Tyler

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Re: Diversify to international?
« Reply #1 on: May 19, 2016, 10:48:54 AM »
VGTSX is the investor shares version of VTIAX.  It's the exact same fund with slightly higher fees but a $3k minimum. 

IMHO, swapping a portion of a total US fund for a total international fund doesn't particularly alter the aggressiveness of a portfolio.  100% stocks is highly aggressive either way.  It's just a bit more diversified.
« Last Edit: May 19, 2016, 10:51:13 AM by Tyler »

forummm

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Re: Diversify to international?
« Reply #2 on: May 19, 2016, 10:50:45 AM »
With <$50k in stocks, you don't need international yet. But it's certainly not a problem to add it. I believe that it decreases risk to hold both US and Intl because of broader diversification. I aim for a 50/50 split.

VTIAX is a great international fund.

Bookworm

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Re: Diversify to international?
« Reply #3 on: May 19, 2016, 10:52:36 AM »
VGTSX is the investor shares version of VTIAX.  It's the exact same fund with slightly higher fees but a $3k minimum. 

IMHO, swapping a portion of a total US fund for a total international fund doesn't particularly alter the aggressiveness of a portfolio.  100% stocks is highly aggressive either way.  It's just a bit more diversified.

Thank you!

Kilbim

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Re: Diversify to international?
« Reply #4 on: May 19, 2016, 10:58:24 AM »
With <$50k in stocks, you don't need international yet.

Can you expand on this?

forummm

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Re: Diversify to international?
« Reply #5 on: May 19, 2016, 11:05:31 AM »
With <$50k in stocks, you don't need international yet.

Can you expand on this?

Not to be unflattering of your portfolio, but it's just not a lot of money* yet, so the decision is less consequential. You're still accumulating and pretty far away from tapping your retirement funds. It's less important now to be extra diversified. If VTSAX underperforms VTIAX by 10%, that's only a few grand you'd be out (depending on your allocation %) vs tens or hundreds of thousands of dollars.

*I remember when I first got to $50k and it felt like a lot to me then. I just mean relatively speaking in relation to your eventual FIRE portfolio.

Scandium

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Re: Diversify to international?
« Reply #6 on: May 19, 2016, 11:11:45 AM »
2) 16% is fairly low international, IMO. 20-40% is commonly recommended as the sweet spot, or efficient frontier.

3) No.
VGTSX. $3k min, 0.19% ER
https://personal.vanguard.com/us/funds/snapshot?FundId=0113&FundIntExt=INT
Or the ETF VXUS with 0.13%

dougules

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Re: Diversify to international?
« Reply #7 on: May 19, 2016, 11:16:58 AM »
With <$50k in stocks, you don't need international yet. But it's certainly not a problem to add it. I believe that it decreases risk to hold both US and Intl because of broader diversification. I aim for a 50/50 split.

VTIAX is a great international fund.

+1 on the 50/50 split, but I don't see any reason to not start putting money into international now.  I don't think I'd move what you've got but just anything you put in from here on out.   

The reason for the 50/50 split is that if you treat countries the same way VTSAX treats companies, then right now you would distribute your funds 53/47 US/non US.  Basically the US (VTSAX) has 53% of the stock value in the world, and the rest of the countries put together (VTIAX) have 47%.  50/50 is close enough and it makes the math easier.  That could change in the future, though, and if it does I'll change my balance with it. 

The only reason I can see for weighting it more towards the US is that from what I can tell the US stock markets have been studied more.  Does anybody else on here know if that's true or not?  Has anybody done research on the SWR for non-US stocks over the long run?

Bookworm

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Re: Diversify to international?
« Reply #8 on: May 19, 2016, 12:20:50 PM »
With <$50k in stocks, you don't need international yet.

Can you expand on this?

Not to be unflattering of your portfolio, but it's just not a lot of money* yet, so the decision is less consequential. You're still accumulating and pretty far away from tapping your retirement funds. It's less important now to be extra diversified. If VTSAX underperforms VTIAX by 10%, that's only a few grand you'd be out (depending on your allocation %) vs tens or hundreds of thousands of dollars.

*I remember when I first got to $50k and it felt like a lot to me then. I just mean relatively speaking in relation to your eventual FIRE portfolio.

It's not at all unflattering...it's true, and I'm calling it a good thing because it means I can learn all this stuff while I have less to lose from mistakes, and lots of accumulation time still ahead of me.

I will say that financial portfolios are a lot prettier right before divorces than right after them! I can attest that the portfolios of my attorneys and real estate agents look much nicer than mine. :)
« Last Edit: May 19, 2016, 12:52:29 PM by Bookworm »

forummm

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Re: Diversify to international?
« Reply #9 on: May 19, 2016, 12:28:23 PM »
Sorry to hear about your divorce (or maybe you are happy about it!).

I should say that I just meant that there was no urgency to get international ASAP. I still think it's good to have. Just feel good about whatever you decide to invest in and stick with that.

Ursus Major

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Re: Diversify to international?
« Reply #10 on: May 19, 2016, 12:32:48 PM »
Has anybody done research on the SWR for non-US stocks over the long run?

I found this article by Wade Pfau from 2014: http://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates. According to this article the US has had among the highest SWRs for a 50/50 stock/bond portfolio.


Seppia

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Re: Diversify to international?
« Reply #12 on: May 20, 2016, 03:21:52 AM »
I think the more diversification, the merrier.
We always claim that as a reason to buy index funds vs individual stocks, so I don't see why an American investor should avoid the other 50% of the world's market cap.

While I see forummm's point, I don't see why not start immediately having a more geographically balanced portfolio (assuming the reshuffling of assets doesn't cost you money).

Vagabond76

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Re: Diversify to international?
« Reply #13 on: May 20, 2016, 05:24:55 AM »
I will say that financial portfolios are a lot prettier right before divorces than right after them! I can attest that the portfolios of my attorneys and real estate agents look much nicer than mine. :)

I doubt it. Attorneys don't make jack shit anymore after paying of the staff, building, liability insurance, student loans, and other costs of the profession. Real estate agents fare a little better on the expense side, but every other person is at least a part-time listing agent. That dilutes the income pool down significantly.

NorCal

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Re: Diversify to international?
« Reply #14 on: May 20, 2016, 07:24:40 AM »

1. Is the purpose of adding an international fund to increase the aggressiveness of one's portfolio, or reduce it? I think I understand that an international index fund is more volatile than a US-only fund, but sometimes it seems like people are doing it for the opposite reason, to avoid the eggs-in-one-basket thing.


It can be either, depending on what you invest in and in what proportions.  Since international stocks are not 100% correlated to to US stocks, by definition, you are reducing your portfolio risk by adding an international component.  That being said, there are many individual international options that are more volatile that US stocks, so it can be used to boost both risk and returns.

For what you're talking about investing in, I would expect international to both boost returns and lower volatility over the long term.  This is why diversification is the only true free lunch in investing.

While the others certainly aren't wrong to recommend waiting for some portfolio growth before buying international, I think you're at right point to be thinking about it in your IRA.  It's an entirely subjective call driven by your willingness to experiment.  I personally invest with Schwab, so I would recommend SCHF and SCHE, but I don't know how complex that would be to set up with your current brokerage.

Bogleheads has a good article on international and risk:

https://www.bogleheads.org/wiki/Domestic/International

MustacheAndaHalf

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Re: Diversify to international?
« Reply #15 on: May 20, 2016, 09:37:08 AM »
In retirement very few people stick with 100% stocks.  Some time in the next decades you're going to want to transition to some bonds.  Since bonds are also better diversification (for a 100% US stock portfolio), I'd suggest starting with 5-20% bonds.  If you insist on all stock, try 5% bonds to foster good habits.  You eventually want to have a lower risk portfolio in retirement, and starting now will open the door for increasing the allocation later.  For example, Vanguard Target Retirement 2040 holds 12% bonds even though it's aiming for retirement 25 years in the future.

forummm

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Re: Diversify to international?
« Reply #16 on: May 20, 2016, 09:47:24 AM »
I will say that financial portfolios are a lot prettier right before divorces than right after them! I can attest that the portfolios of my attorneys and real estate agents look much nicer than mine. :)

I doubt it. Attorneys don't make jack shit anymore after paying of the staff, building, liability insurance, student loans, and other costs of the profession.

Uh, no. Median attorney salary is still 6 figures. Which is more than I make (with a lot more education).

Vagabond76

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Re: Diversify to international?
« Reply #17 on: May 20, 2016, 10:00:50 AM »
Uh, no. Median attorney salary is still 6 figures. Which is more than I make (with a lot more education).

Having been in the profession for over 15 years, I can tell you those numbers are grossly inflated.  It is certainly not a 6-figure median income for those that came out of law school in the last decade.  I don't have more recent statistics, but about 3 years ago, law schools graduated 44k lawyers for a job market that could absorb 24k.  The median aggregate student laws for all of them was about $150k.  That is not favorable math.

forummm

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Re: Diversify to international?
« Reply #18 on: May 20, 2016, 10:36:16 AM »
Uh, no. Median attorney salary is still 6 figures. Which is more than I make (with a lot more education).

Having been in the profession for over 15 years, I can tell you those numbers are grossly inflated.  It is certainly not a 6-figure median income for those that came out of law school in the last decade.  I don't have more recent statistics, but about 3 years ago, law schools graduated 44k lawyers for a job market that could absorb 24k.  The median aggregate student laws for all of them was about $150k.  That is not favorable math.

Yes, there are too many graduates (with too much debt) since the financial crisis. Even so, if you go to a decent law school you get a nice job pretty easily. If you go to a bad school, you do have trouble getting a good job. I know quite a few lawyers from decent schools who got jobs with a starting salary of $165k or more after the crisis.