First Vanguard ETF?

[Mr.GrowingMustache]

Hi all,
I have about $7k of Mutual Funds (WPFRX, and PREMX) that I would like to transfer to and index/stockmarket ETF. And I have been looking at VOO which tracks the S&P500? Anything else I should be looking at? VTI?

I also have a Betterment Build Wealth (approximately 90% stocks, 10% bonds) account with $19k in it which has several Vanguard ETFs ( VTI@16%, VTV@16%, VOE@5%, VBR@5%, and VEA@36%. VWO@10%). So about 42% in US stock market and 46% in the Developed/Developing markets. The more I look at that account the less of a fan I am to those allocations, especially the VEA fund and the state of the global economy compared the US.

I know I should diversify but I feel like I should not allocate almost half my investments in the global economy

I am still new to this, but what is the sentiment around here? Follow an index or there are a few select ETFs that I should be getting?

Thanks

p.s
I should also say that I am risk-tolerant at age 30, almost maxing out my Retirement (90% stock market), and all new savings are going into a low risk emergency fund and house fund.

[Indexer]

No need to make it complicated.

VTI + VXUS = almost all stocks everywhere.

Vanguard has a nice chart I can't find at the moment that shows being 30-40% international actually lowers the risk in the portfolio.

60% VTI 40% VXUS works fine for me. Average ER = 0.086%.  Where else can you buy the whole world for 0.086%? ;)

[BarkyardBQ]

Vanguard has a nice chart I can't find at the moment that shows being 30-40% international actually lowers the risk in the portfolio.

https://personal.vanguard.com/pdf/icriecr.pdf
http://www.vanguard.com/pdf/ISGGEB.pdf

[GGNoob]

VTI + VXUS = almost all stocks everywhere.

This. Then add BND if/when you want bonds.

I also agree that international should be 30-40% of your portfolio.

[Scandium]

I know I should diversify but I feel like I should not allocate almost half my investments in the global economy

Why not? What do you know about the (future) state of the global economy that we don't?

[milesdividendmd]

I would challenge you on your discomfort with international diversification.

Your discomfort is almost assuredly because of recent international underperformance.

Rest assured the U.S. eill underperform the rest of the world just as dramatically at some point in the future.

Diversification, by definition means, that parts of your portfolio will always underperform.

One final point. The recent outperformance of the U.S. means that domestic stocks are expensive relative to the rest of the world.  This means that long term, international funds will almost assuredly outperform the U.S. 

[Mr.GrowingMustache]

Vanguard has a nice chart I can't find at the moment that shows being 30-40% international actually lowers the risk in the portfolio.

https://personal.vanguard.com/pdf/icriecr.pdf
http://www.vanguard.com/pdf/ISGGEB.pdf

Reading this paper actually solidifies the case for a lower than 40% diversification in international funds and rebalancing the allocation depending on "the global market capitalization". It does a great case for reduction in volatility for your portfolio, and is great for implementing it close or in retirement (and even adding bonds), but I see more benefit in an 80/20 allocation.

Here are the 5 takeaways I have.
1) Great for volatility reduction
2) Currency does not correlate well with the stock market
3) Market capitalization matters
4) US and global market will keep trading places in outperforming each other
5) US and global markets are beginning to correlate a lot more

I am looking at a 10-15yr time frame and this leaves me with a few questions. Which market outperforms who most of the time? And which allocation of US and International funds would be most optimal, when willing to ride out volatility over a decade? I guess these are questions that I need to answer for myself.

60% VTI 40% VXUS works fine for me. Average ER = 0.086%.  Where else can you buy the whole world for 0.086%? ;)

Buying the world, definitely reduces your risk, but also affects the reward :)

Why not? What do you know about the (future) state of the global economy that we don't?

"You should go to China."? :)
Quote from Looper

Don't know anything but I know I should make an international investment, and figure out what percentage that should be. Evidence shows 40% might be too high for me.

[Scandium]

How do you figure 40% is too high? I skimmed, but didn't read, the vanguard paper and 30-40% seemed to make sense. And that's my target US/Intl. allocation too.

I'm curious to know what benefits are you referring to for the 80/20 allocation? Vs a higher international I mean.

[milesdividendmd]

The only truly passive equity allocation is 50:50 U.S.:international.

Everything else with more US exposure is an active bet against the value effect and for home field bias.

[Indexer]

60% VTI 40% VXUS works fine for me. Average ER = 0.086%.  Where else can you buy the whole world for 0.086%? ;)

Buying the world, definitely reduces your risk, but also affects the reward :)

Does it?   Buying bonds reduces your risk, but also reduces your return. Buying 1 stock when you already own 1 stock SIGNIFICANTLY lowers risk without affecting your expected return. You can buy uncorrelated or at least loosely correlated RISKY assets and still lower risk.  10 large cap stocks have the same expected return as the S&P 500, but the S&P 500 is much more diversified and lower risk.

60% US, 40% international is lower risk than 100% US or 100% international. International stocks also tend to be higher risk by themselves so having a portfolio made up of US stocks and international stocks actually has the potential for higher returns than being 100% US stocks.

Higher return, less risk. Just look at it on the efficient frontier. 60% US 40% international using VTI and VXUS sits on the efficient frontier. At least the last time I used personal capital's efficient frontier software on their website.

[milesdividendmd]

It depends on the year you check.

But one thing is certain. Investing based on actual global capitalization definitely reduces your idiosyncratic risk. And you will recall that that is the type of risk that pays you no premium.

[a1smith]

Vanguard's recommendation is 60/40 US/Intl for stocks and 70/30 US/Intl for bonds.  They just recently increased the Intl allocation by 10% for both stocks and bonds; the values shown are after the 10% change.

[k9]

I would challenge you on your discomfort with international diversification.

Your discomfort is almost assuredly because of recent international underperformance.

Rest assured the U.S. eill underperform the rest of the world just as dramatically at some point in the future.

This. Don't try to time the market. That's the whole point of indexing.

[Mr.GrowingMustache]

100% international or US has a lot more risk and volatility, and I agree with that. My interest is in why Betterment puts a 45% US 45% Intl and 10% bonds allocation, and weather on not I should adjust that by putting some extra money in a US Vanguard ETF. Reading the Vanguard paper tells me that I should reduce the intl allocation, and consider market conditions if 40% or more is invested in intl.

The article and research suggests that when looking over time a 30% international will give you the most optimal diversification benefit and significantly reduce volatility of your portfolio. There is also a significant diversification benefit and volatility reduction at 20%, but not as good as 30% or 40%.

The allocation also depends on time, and the article also talks about correlating markets, market capitalization, and the affects of currency that affect the allocation.

From what I read in the comments, it seems like the Vanguard Allocation recommendation has changed from 70/30 to 60/40, probably because of some of the deciding factors they talk about.