Author Topic: International Index Funds - get rid of them entirely?  (Read 19738 times)

rolliefingers

  • 5 O'Clock Shadow
  • *
  • Posts: 70
International Index Funds - get rid of them entirely?
« on: April 02, 2016, 06:30:55 AM »
As many of you know, international index funds have massively underperformed the S&P over the past several years.  Given that I keep 20% of my holdings in SCHF/OAKIX, it is disappointing to think of "what might have been" had I just plowed this same amount into VTSAX/SCHB.

Granted, the pundits say the future opportunity for the most growth is international, but given the nature of most US corporations (growing global revenues) today are these strictly international funds even a necessity anymore?

Thanks for any comments.

ender

  • Walrus Stache
  • *******
  • Posts: 6965
Re: International Index Funds - get rid of them entirely?
« Reply #1 on: April 02, 2016, 06:40:53 AM »
Do you base all your investing decisions exclusively over the past few years?

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8239
Re: International Index Funds - get rid of them entirely?
« Reply #2 on: April 02, 2016, 07:20:08 AM »
As many of you know, international index funds have massively underperformed the S&P over the past several years.  Given that I keep 20% of my holdings in SCHF/OAKIX, it is disappointing to think of "what might have been" had I just plowed this same amount into VTSAX/SCHB.

Now imagine what you'd say if you sold them and VTSAX under performs for several years? The point of diversification is not getting the highest gains all the time...it's to reduce volatility.



Looking back a few years of course it's easy to pick the winners. Sadly without a time machine nobody knows what we'll be looking back on 5yrs from now.

All that said an investment plan/asset allocation only works if you believe in it and follow it through thick and thin. So given your attitude/feelings you need to evaluate your investment plan and decide what you are really comfortable with. If you switch to 100% US stocks and Int'l does 15%-20% for 3yrs straight and US stocks are flat....can you stick to that plan or will you go chasing past returns?

GrowingTheGreen

  • Bristles
  • ***
  • Posts: 355
    • Growing The Green
Re: International Index Funds - get rid of them entirely?
« Reply #3 on: April 02, 2016, 07:27:36 AM »
Just for the record, retire-Canada posted one of my favorite charts of all time.

rolliefingers

  • 5 O'Clock Shadow
  • *
  • Posts: 70
Re: International Index Funds - get rid of them entirely?
« Reply #4 on: April 02, 2016, 07:31:15 AM »
Do you base all your investing decisions exclusively over the past few years?

I understand your point.  I guess my perspective is influenced by those who are disregarding the pure international funds and stressing the point that large, US holdings are covering this base.  In turn, I glance at recent performance (to your point) and find myself a bit befuddled.  Thanks for your point -- taken.

Rollin

  • Handlebar Stache
  • *****
  • Posts: 1208
  • Location: West-Central Florida - USA
Re: International Index Funds - get rid of them entirely?
« Reply #5 on: April 02, 2016, 08:11:26 AM »
I was not (am not) happy with returns on international and realize that over the next few (or more) years it has a very good chance of improving. However, the poor returns have caused me to reevaluate my AA because I feel too exposed and don't think I can handle the next two years with significant negative numbers. I decided that 15% international was a little too high, partly because so much US has $$ overseas. I am still DCAing into int., but at 10% instead of 15% (did not rebalance the holdings to 10%).

Before/After

Bonds 40%/40%
Stocks 60%/60%
-US 45%/50%
-Int. 15%/10%

If the Int. does better over the next few years, great. So when I rebalance it will be a win because I'll do it on a high.

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1430
Re: International Index Funds - get rid of them entirely?
« Reply #6 on: April 02, 2016, 08:12:40 AM »
Just for the record, retire-Canada posted one of my favorite charts of all time.

Hey! That's MY favourite chart of all time!

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1430
Re: International Index Funds - get rid of them entirely?
« Reply #7 on: April 02, 2016, 08:15:14 AM »
It's also the reason I have 3% emerging markets, when two advisors didn't recommend EM because they are low this year. 

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1430
Re: International Index Funds - get rid of them entirely?
« Reply #8 on: April 02, 2016, 08:40:22 AM »
. I am still DCAing into int., but at 10% instead of 15% (did not rebalance the holdings to 10%).

Before/After

Bonds 40%/40%
Stocks 60%/60%
-US 45%/50%
-Int. 15%/10%

If the Int. does better over the next few years, great. So when I rebalance it will be a win because I'll do it on a high.

It's not called rebalancing if you let you US grow and increase it AA while letting intl reduce its AA.  The point of rebalancing via contributions is that you continue to buy intl now because they're cheap. 

Are the percentages shown your percentages that you contribute regularity, or the asset allocation of your total account?

dandypandys

  • Pencil Stache
  • ****
  • Posts: 525
  • Age: 46
  • Location: USA
Re: International Index Funds - get rid of them entirely?
« Reply #9 on: April 02, 2016, 09:14:44 AM »
I just upped my future contributions of international up to 16% today. I was back and forth a bit there, but feel comfortable with this now- even after listening to Bogle talk about not needing extra international with VSTAX. Anyway, interested in listening in on this convo.

forummm

  • Walrus Stache
  • *******
  • Posts: 7375
  • Senior Mustachian
Re: International Index Funds - get rid of them entirely?
« Reply #10 on: April 02, 2016, 09:37:50 AM »
My personal philosophy is to own everything. So I have about half in international (which is about what the global market cap is). I don't think the US will have a multi-decade stall like Japan has. But who knows.

neil

  • Stubble
  • **
  • Posts: 215
Re: International Index Funds - get rid of them entirely?
« Reply #11 on: April 02, 2016, 11:19:56 AM »
This thread reminded me about my initial forays into investing.  When I started in 2003, I remember emerging markets being a very popular area.  As a curiosity, I punched in VEIEX vs VTSAX into Morningstar from 9/1/2003 to today.  I thought it was an mildly interesting coincidence to see that VEIEX outperformed VTSAX for the entire period until 2015 , where they are now basically even.

I am not saying one should or should not be invested in international funds or that changing your IPS is a absolute no-no.  However, basing it on recent performance is definitely not the best criteria for it.  Someone would probably not notice much changing an allocation from 15% to 10%, but constant fiddling based on recent performance is likely to end up being a long term drag on performance.

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 655
Re: International Index Funds - get rid of them entirely?
« Reply #12 on: April 02, 2016, 11:55:29 AM »
As many of you know, international index funds have massively underperformed the S&P over the past several years.

...

are these strictly international funds even a necessity anymore?

Sometimes International wins, and sometimes Domestic wins. It all depends on when you're looking. Had you sat down in January 2014 and ran the numbers, you'd see International ahead since 1971! 43 years of International outperformance!



Instead you're looking at it today, just when Domestic crossed over and started winning:



To be blunt, because honestly it's what this community needs to hear, once you understand this dynamic, you'll see how silly your question was. This right here is why the average investor underperforms the market.


Rollin

  • Handlebar Stache
  • *****
  • Posts: 1208
  • Location: West-Central Florida - USA
Re: International Index Funds - get rid of them entirely?
« Reply #13 on: April 02, 2016, 08:01:45 PM »
. I am still DCAing into int., but at 10% instead of 15% (did not rebalance the holdings to 10%).

Before/After

Bonds 40%/40%
Stocks 60%/60%
-US 45%/50%
-Int. 15%/10%

If the Int. does better over the next few years, great. So when I rebalance it will be a win because I'll do it on a high.

It's not called rebalancing if you let you US grow and increase it AA while letting intl reduce its AA.  The point of rebalancing via contributions is that you continue to buy intl now because they're cheap. 

Are the percentages shown your percentages that you contribute regularity, or the asset allocation of your total account?

I'm contributing less into international (was 15% and now 10% of total contribution every two weeks/pay period), but leaving the balance where it stands (presently at 14% of my total). So, I'm still contributing/purchasing with the idea that ultimately I will lower the proportion of international in my portfolio to 10%. If it does really well then I will have to do so redistributing instead of what I consider a subtle way of rebalancing.

Are you seeing something incorrect that I should know about?

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1430
Re: International Index Funds - get rid of them entirely?
« Reply #14 on: April 02, 2016, 08:13:27 PM »
Yes.  If you are dropping your intl AA from 15% to 10% because they aren't doing well now, and then increase back up to 15% when they do well, you will miss out on the opportunity to buy low now.  Instead you'll buy at higher prices later and see no gains.   

Keep it (your total value of intl) at 15% by contributing enough to maintain that level, and you take advantage of today's lower intl prices and own more units today that will increase in vslue ince tgey do better.

« Last Edit: April 02, 2016, 08:16:23 PM by Heckler »

steveo

  • Handlebar Stache
  • *****
  • Posts: 1941
Re: International Index Funds - get rid of them entirely?
« Reply #15 on: April 02, 2016, 09:43:49 PM »
Just for the record, retire-Canada posted one of my favorite charts of all time.

Yep. That chart is awesome.

dandypandys

  • Pencil Stache
  • ****
  • Posts: 525
  • Age: 46
  • Location: USA
Re: International Index Funds - get rid of them entirely?
« Reply #16 on: April 03, 2016, 05:15:56 AM »
Yes.  If you are dropping your intl AA from 15% to 10% because they aren't doing well now, and then increase back up to 15% when they do well, you will miss out on the opportunity to buy low now.  Instead you'll buy at higher prices later and see no gains.   

Keep it (your total value of intl) at 15% by contributing enough to maintain that level, and you take advantage of today's lower intl prices and own more units today that will increase in vslue ince tgey do better.
That makes sense. Got it now.

Tjat

  • Pencil Stache
  • ****
  • Posts: 570
Re: International Index Funds - get rid of them entirely?
« Reply #17 on: April 03, 2016, 07:35:20 AM »
I maintain about 9% of my asset allocation in international, and am thinking of reducing to around 6%. A few reasons why

1) Large US companies still make about 50% of their money abroad
2) I trust US accounting practices more than other countries
3) I believe the US economy will be much stronger and stable than international


forummm

  • Walrus Stache
  • *******
  • Posts: 7375
  • Senior Mustachian
Re: International Index Funds - get rid of them entirely?
« Reply #18 on: April 03, 2016, 10:04:54 AM »
I maintain about 9% of my asset allocation in international, and am thinking of reducing to around 6%. A few reasons why

1) Large US companies still make about 50% of their money abroad
2) I trust US accounting practices more than other countries
3) I believe the US economy will be much stronger and stable than international

Perhaps 80% of international (say VTIAX) is countries like Canada, UK, Germany, France, Japan, Australia, etc. I don't think their accounting practices are any worse than the US. I trust all of them more than China and other developing markets. But EM is the small minority of VTIAX.

And I would guess that about 50% of the earnings from VTIAX stocks comes from the US. The top holdings are things like Nestle and Toyota. So it's not like you're investing is rusty fishing boats. It's mostly blue chips. Maybe you don't need international. But I don't think it hurts in the long run to have it. Over the last 40 years (when the US has generally been doing well too), it has helped to have international.

LAGuy

  • Bristles
  • ***
  • Posts: 318
  • Age: 48
  • Location: Los Angeles
Re: International Index Funds - get rid of them entirely?
« Reply #19 on: April 03, 2016, 06:44:21 PM »
Right now, I think everything for international is pointing up. This is speculation of course, but the time to buy international is when it's beaten down (duh), but also when the US currency is strong. Finally, it's also a bit more commodity heavy than US markets which are more heavy on the financials. Right now, I think all those indicators favor international and I actually upped my AA when the dollar was around $1.05 to the euro. The dollar has started to fall back again. Maybe once it hits the $1.20's I'll consider reducing my AA back to standard.

For me, I'm all stocks. I'd say my "standard" international AA would be about 30%. Right now I'm at 40%. I break it down into 10% EM and 30% developed when I don't otherwise have the option of just picking a worldwide ETF/fund. That may sound like a lot, but I'm still in 60% US equities.

My best performing funds the last few months have been EM. They've been slaying it. Developed international, however, has been lagging.

Does the quilt above include reinvested dividends? One thing to keep in mind when looking at international returns, is to make sure it includes dividends...they pay more than US domestic equity.

missmoneymachine

  • 5 O'Clock Shadow
  • *
  • Posts: 39
Re: International Index Funds - get rid of them entirely?
« Reply #20 on: April 04, 2016, 02:16:45 PM »
As many of you know, international index funds have massively underperformed the S&P over the past several years.  Given that I keep 20% of my holdings in SCHF/OAKIX, it is disappointing to think of "what might have been" had I just plowed this same amount into VTSAX/SCHB.

Now imagine what you'd say if you sold them and VTSAX under performs for several years? The point of diversification is not getting the highest gains all the time...it's to reduce volatility.



Looking back a few years of course it's easy to pick the winners. Sadly without a time machine nobody knows what we'll be looking back on 5yrs from now.

All that said an investment plan/asset allocation only works if you believe in it and follow it through thick and thin. So given your attitude/feelings you need to evaluate your investment plan and decide what you are really comfortable with. If you switch to 100% US stocks and Int'l does 15%-20% for 3yrs straight and US stocks are flat....can you stick to that plan or will you go chasing past returns?

Is this chart a part of a calculator that's out there somewhere?

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1430
Re: International Index Funds - get rid of them entirely?
« Reply #21 on: April 04, 2016, 02:21:47 PM »
Google "asset class periodic table". I think Callan is the source.

dandypandys

  • Pencil Stache
  • ****
  • Posts: 525
  • Age: 46
  • Location: USA
Re: International Index Funds - get rid of them entirely?
« Reply #22 on: April 04, 2016, 04:52:28 PM »
Similar thread over on bogleheads right now too: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=188291

i still haven't upped mine- not sure what to do now. It is still at 6%  thinking of putting it up to 25%

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8239
Re: International Index Funds - get rid of them entirely?
« Reply #23 on: April 04, 2016, 05:51:18 PM »
For my equities my AA is 10% Int'l Developed and 10% Int'l Emerging Markets. I have no idea what's going to happen so I'm maintaining those ratios. 80% of my equities are North American which is more than enough "local"exposure.

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 20506
  • Age: 41
  • Location: Toronto, Ontario, Canada
Re: International Index Funds - get rid of them entirely?
« Reply #24 on: April 04, 2016, 06:20:33 PM »
Similar thread over on bogleheads right now too: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=188291

i still haven't upped mine- not sure what to do now. It is still at 6%  thinking of putting it up to 25%

Stop trying to time the market.  Pick an asset allocation that makes sense long term, and rebalance a few times a year back to that allocation.  This forces you to buy low and sell high on a regular basis.

dandypandys

  • Pencil Stache
  • ****
  • Posts: 525
  • Age: 46
  • Location: USA
Re: International Index Funds - get rid of them entirely?
« Reply #25 on: April 04, 2016, 06:25:53 PM »
I made a decision already for future contributions, 20% international, (15 developed 5% emerging) 20% bonds (half my age) 80% VSTAX

 I am hesitating on all the transfers I have to do to bring my account into alignment, so I am trying to come up with an IPS.
Still learning :)

dungoofed

  • Pencil Stache
  • ****
  • Posts: 661
Re: International Index Funds - get rid of them entirely?
« Reply #26 on: April 04, 2016, 06:33:08 PM »
Slightly related, I'm in favour of getting rid of international index funds from my portfolio entirely, and replacing them with country-specific ETFs. Yes I'm a dirty ETF-picker but as we saw with BRIC, arbitrarily grouping unrelated countries together can be counter-productive. I'll allow myself this much granularity.

Anyone with me on this?

MrMonkeyMustache

  • 5 O'Clock Shadow
  • *
  • Posts: 61
Re: International Index Funds - get rid of them entirely?
« Reply #27 on: April 04, 2016, 06:46:59 PM »
If you think indexing is the way to go, bying into every market according to their market cap is the only thing that makes sense.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1193
Re: International Index Funds - get rid of them entirely?
« Reply #28 on: April 04, 2016, 07:36:56 PM »

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8239
Re: International Index Funds - get rid of them entirely?
« Reply #29 on: April 04, 2016, 09:20:36 PM »
I made a decision already for future contributions, 20% international, (15 developed 5% emerging) 20% bonds (half my age) 80% VSTAX

Unless I am missing something 20% + 20% +80% = 120%.

cerat0n1a

  • Handlebar Stache
  • *****
  • Posts: 2335
  • Location: England
Re: International Index Funds - get rid of them entirely?
« Reply #30 on: April 05, 2016, 02:53:50 AM »
For reference, here's Jack Bogle's opinion.

http://time.com/money/3991717/vanguard-jack-bogle-investing-foreign-markets/

Intrigued to know what Britain's "unusual electoral practices" are that would make him not want to invest here. I thought we did the same as the US - hold our noses and try to work out which is the lesser evil and vote for them, albeit without the billions of dollars spent on campaigning.

All of the reasons given for why the US is a better place to invest are surely already taken into account by a vaguely efficient market - hence the S&P500 PE ratio being way higher than those in Europe? If you believe in indexing, then owning a little bit of everything according to its market cap is the only rational choice unless there are tax or other reasons to favour domestic vs international.

Cyaphas

  • Bristles
  • ***
  • Posts: 493
  • Age: 39
  • Location: DFW, TX
Re: International Index Funds - get rid of them entirely?
« Reply #31 on: April 05, 2016, 03:05:16 AM »
I would personally stick to Domestic funds only. The moment war breaks out, the international funds are shot. Debt contagion would also knee cap the International funds. The US may have really shady business practices, but they've consistently made it clear that some darling corporations will never fail. I don't think you'll see that kind of backing with a lot of the Internation Fund's Corps.

Metric Mouse

  • Walrus Stache
  • *******
  • Posts: 5279
  • FU @ 22. F.I.R.E before 23
Re: International Index Funds - get rid of them entirely?
« Reply #32 on: April 05, 2016, 05:02:01 AM »
I made a decision already for future contributions, 20% international, (15 developed 5% emerging) 20% bonds (half my age) 80% VSTAX

Unless I am missing something 20% + 20% +80% = 120%.

Where can I get those kinds of returns? :D

dandypandys

  • Pencil Stache
  • ****
  • Posts: 525
  • Age: 46
  • Location: USA
Re: International Index Funds - get rid of them entirely?
« Reply #33 on: April 05, 2016, 05:57:20 AM »
I made a decision already for future contributions, 20% international, (15 developed 5% emerging) 20% bonds (half my age) 80% VSTAX

Unless I am missing something 20% + 20% +80% = 120%.
LOL yes- i mean 60% vstax, thanks!

forummm

  • Walrus Stache
  • *******
  • Posts: 7375
  • Senior Mustachian
Re: International Index Funds - get rid of them entirely?
« Reply #34 on: April 05, 2016, 08:10:47 AM »
I would personally stick to Domestic funds only. The moment war breaks out, the international funds are shot. Debt contagion would also knee cap the International funds. The US may have really shady business practices, but they've consistently made it clear that some darling corporations will never fail. I don't think you'll see that kind of backing with a lot of the Internation Fund's Corps.

What? Are the UK, Canada, Switzerland, Japan, Germany, France, and Australia at huge risk of being bombed to bits? Those countries account for 62% of VTIAX holdings. And a bunch of the rest are other stable, developed European countries. It's 82.5% developed economy holdings. Those countries are very stable. Are Nestle, Toyota, Novartis, Roche, Unilever, Shell, and Samsung going anywhere?

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 655
Re: International Index Funds - get rid of them entirely?
« Reply #35 on: April 05, 2016, 08:21:16 AM »
My favorite post on this:

------------------------

http://forum.mrmoneymustache.com/investor-alley/statistics-personal-experience-and-risk-management/msg629210/#msg629210

Don't fall into the trap of convincing yourself to hold less international stocks, because VTSAX companies also sell products internationally.  Those same international stocks also sell products to the US, but does anyone ever make the argument that you aren't truly exposed to the US if you don't own international?  These are all just rationalizations for a home-bias, to keep all your money in the US.

The dozen large companies in NY state are closely linked to both the international economy, and the US economy.  Why shouldn't I just buy them? GE often follows movements in the S&P 500, why not just own one stock?

If Samsung beats Apple in the multi-billion smartphone business, how much will it help me that Apple also sells phones in South Korea?  Why would I want to own Chevy and Ford and skip Honda and Toyota, or BMW and Mercedes, if you could own them all at low cost?

Consider that in international markets you will find...

  • 7 of the 10 largest automobile companies
  • 7 of the 10 largest diversified telecommunications companies
  • 8 of the 10 largest metals and mining companies
  • 6 of the 10 largest electronic equipment and instruments companies
  • 5 of the 10 largest household durables companies

It's nonsense to say that a companies participation in a market, is an excuse to not own all stocks in that market.  I tried to find some correlation between companies with a strong foreign presence, and the performance of the international/domestic market, but was unconvinced.  Looking at Fidelity's Export and Multinational Fund - FEXPX, which invests "primarily in securities of U.S. companies that are expected to benefit from exporting or selling their goods or services outside of the United States."



Let's look at the first three phases:

1.  International greatly underperformed the US, so we would expect the export fund to be pulled down, yet it outgrows domestic.

2.  International drop just about matches the US drop (might have dropped a bit further), yet the export fund is almost flat, not pulled downward.

3.  International greatly outperforms the US, but the export fund is in-line with the US.

In short, you shouldn't make investment decisions, based on expectations like "US company share price with a strong foreign presence will be pulled by economic performance in those countries in the long run." unless you have data showing this effect (if it exists) is strong enough to make an impact on your portfolio.  Do you have this data?

Indexing makes sense globally as much as it makes sense domestically.  Here's an example of what can go wrong during retirement, when you're 80/20 US stocks/US bonds, vs 40/40/20 US Stocks/International Stocks/US Bonds (global market cap portfolio):



In this catastrophe scenario, the USA only portfolio would have dropped to 0, while the 3 fund portfolio would have grown to $920,365 an overall gain of over 30%.  Also, the obligatory 25 year Japan chart:



WerKater

  • Bristles
  • ***
  • Posts: 351
  • Location: Germany
Re: International Index Funds - get rid of them entirely?
« Reply #36 on: April 05, 2016, 08:23:15 AM »
I would personally stick to Domestic funds only. The moment war breaks out, the international funds are shot.
So I should not invest in the US in case "war breaks out"?

FIPurpose

  • Handlebar Stache
  • *****
  • Posts: 1889
  • Location: WA
    • FI With Purpose
Re: International Index Funds - get rid of them entirely?
« Reply #37 on: April 05, 2016, 09:02:00 AM »
My favorite post on this:

------------------------

http://forum.mrmoneymustache.com/investor-alley/statistics-personal-experience-and-risk-management/msg629210/#msg629210

Don't fall into the trap of convincing yourself to hold less international stocks, because VTSAX companies also sell products internationally.  Those same international stocks also sell products to the US, but does anyone ever make the argument that you aren't truly exposed to the US if you don't own international?  These are all just rationalizations for a home-bias, to keep all your money in the US.

The dozen large companies in NY state are closely linked to both the international economy, and the US economy.  Why shouldn't I just buy them? GE often follows movements in the S&P 500, why not just own one stock?

If Samsung beats Apple in the multi-billion smartphone business, how much will it help me that Apple also sells phones in South Korea?  Why would I want to own Chevy and Ford and skip Honda and Toyota, or BMW and Mercedes, if you could own them all at low cost?

Consider that in international markets you will find...

  • 7 of the 10 largest automobile companies
  • 7 of the 10 largest diversified telecommunications companies
  • 8 of the 10 largest metals and mining companies
  • 6 of the 10 largest electronic equipment and instruments companies
  • 5 of the 10 largest household durables companies

It's nonsense to say that a companies participation in a market, is an excuse to not own all stocks in that market.  I tried to find some correlation between companies with a strong foreign presence, and the performance of the international/domestic market, but was unconvinced.  Looking at Fidelity's Export and Multinational Fund - FEXPX, which invests "primarily in securities of U.S. companies that are expected to benefit from exporting or selling their goods or services outside of the United States."



Let's look at the first three phases:

1.  International greatly underperformed the US, so we would expect the export fund to be pulled down, yet it outgrows domestic.

2.  International drop just about matches the US drop (might have dropped a bit further), yet the export fund is almost flat, not pulled downward.

3.  International greatly outperforms the US, but the export fund is in-line with the US.

In short, you shouldn't make investment decisions, based on expectations like "US company share price with a strong foreign presence will be pulled by economic performance in those countries in the long run." unless you have data showing this effect (if it exists) is strong enough to make an impact on your portfolio.  Do you have this data?

Indexing makes sense globally as much as it makes sense domestically.  Here's an example of what can go wrong during retirement, when you're 80/20 US stocks/US bonds, vs 40/40/20 US Stocks/International Stocks/US Bonds (global market cap portfolio):



In this catastrophe scenario, the USA only portfolio would have dropped to 0, while the 3 fund portfolio would have grown to $920,365 an overall gain of over 30%.  Also, the obligatory 25 year Japan chart:



This is powerful stuff. I dare say you've nearly convinced me to increase my exposure to international stock going forward.

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: International Index Funds - get rid of them entirely?
« Reply #38 on: April 05, 2016, 09:33:52 AM »
Let's look at the first three phases:

1.  International greatly underperformed the US, so we would expect the export fund to be pulled down, yet it outgrows domestic.

2.  International drop just about matches the US drop (might have dropped a bit further), yet the export fund is almost flat, not pulled downward.

3.  International greatly outperforms the US, but the export fund is in-line with the US.

In short, you shouldn't make investment decisions, based on expectations like "US company share price with a strong foreign presence will be pulled by economic performance in those countries in the long run." unless you have data showing this effect (if it exists) is strong enough to make an impact on your portfolio.  Do you have this data?

Dodge, I'm not understanding the association here. If it's a US firm that's exporting its services (ie doing business abroad), why would you expect a correlation to the performance of international firms? If anything, doesn't this support that US Companies are able to outclass Internationals, operating in their own territories?

Perhaps the lesson to take from the graph you presented is that outside of a brief period from 1999-2002, the Fidelity fund did not outperform a total US fund. I don't think there's much correlation you can draw between international performance and FEXPX performance. Just look at the list of Companies in there today (which was not the same composition as back in 1999 when it outperformed): http://portfolios.morningstar.com/fund/holdings?t=FEXPX&region=usa&culture=en-US

Almost a mirror of VTSAX: http://portfolios.morningstar.com/fund/holdings?t=VTSAX

Actually leads to a separate point that I'm sure you'll 100% agree with - an investor in FEXPX is paying extra for nothing, just buy VTSAX and you'll have almost the same composition of security holdings

forummm

  • Walrus Stache
  • *******
  • Posts: 7375
  • Senior Mustachian
Re: International Index Funds - get rid of them entirely?
« Reply #39 on: April 05, 2016, 10:25:18 AM »
I would personally stick to Domestic funds only. The moment war breaks out, the international funds are shot.
So I should not invest in the US in case "war breaks out"?

It seems like the US would be extra risky because we probably either started or will end up fighting the war. It's definitely more likely than some other developed nation being involved to such a degree that their stock markets tank.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2479
  • Location: EastCoast
Re: International Index Funds - get rid of them entirely?
« Reply #40 on: April 05, 2016, 01:04:13 PM »
The U.S. markets, on the other hand, represent ..., good policy, ....

Had to lol at this! Yes, subsidizing record corporate profits in part by welfare payments that let employers pay low, stagnant wages, paid for by government debt. That's good, sustainable policy!

Interest Compound

  • Pencil Stache
  • ****
  • Posts: 655
Re: International Index Funds - get rid of them entirely?
« Reply #41 on: April 05, 2016, 01:18:32 PM »
If it's a US firm that's exporting its services (ie doing business abroad), why would you expect a correlation to the performance of international firms?

Precisely. You shouldn't expect correlation here. Investing in US companies which do business overseas, is a poor substitute for investing directly in foreign companies.

Kaspian

  • Handlebar Stache
  • *****
  • Posts: 1533
  • Location: Canada
    • My Necronomicon of Badassity
Re: International Index Funds - get rid of them entirely?
« Reply #42 on: April 05, 2016, 01:48:18 PM »
There's a reason people have diversification.  It's because winners rotate.

international index funds have massively underperformed the S&P over the past several years.

Umm... From what I can tell the S&P 500 has gone pretty much nowhere since November 2014?  I'd be hesitant to say the internationals 'massively underperformed' the S&P if the latter hasn't performed at all.  More like "it's down against" the S&P over a 2 year period. 

Anyway, what does your Personal Investment Policy say?  Does it say you can go fucking around with the plan if something doesn't do well?

dougules

  • Magnum Stache
  • ******
  • Posts: 2885
Re: International Index Funds - get rid of them entirely?
« Reply #43 on: April 05, 2016, 01:57:24 PM »
Most of you seem to believe in the idea behind VTSAX, that research has shown the market to be more efficient than you if you're not doing the ridiculous amount of homework that Warren Buffett and his team of experts does.  If you are going with that philosophy,  then why not expand it out to the world as a whole?  VTWSX distributes by market cap across all stocks the same way that VTSAX does for just the US.  That still puts over half of your assets in the US and most of the rest in other respectable countries.  China is a whopping 2%.

The other philosophy behind VTSAX holds too, that more diversification is LESS risk.  You don't know what US markets will look like in a decade or two, so why not have a few assets everywhere with the market doing the work to balance the risk for you? 

As a side note I only use VTWSX as a guide since the expense ratios aren't the lowest.   You can mimic its distribution using VTSAX and VTIAX.   

laughing_paddler

  • 5 O'Clock Shadow
  • *
  • Posts: 80
  • Age: 40
  • Location: MN
Re: International Index Funds - get rid of them entirely?
« Reply #44 on: April 07, 2016, 11:23:53 AM »
I'm a little late to this party, but as I was searching/thinking about this recently I thought I'd share what I found.

https://personal.vanguard.com/pdf/icriecr.pdf

Regarding diversification benefits (page 6):

"the maximum historical diversification benefit would have been
achieved by allocating approximately 40% of an
equity portfolio to non-U.S. equities (although the
difference between 30% non-U.S. and 40% non-U.S.
is within 0.01%), with a net reduction in volatility of
75 basis points. Allocating 20% of an equity portfolio
to non-U.S. stocks would have captured 63 of those
75 basis points, or about 84% of the maximum
possible benefit. Allocating 30% to non-U.S. stocks
would have captured about 99% of the maximum
possible benefit."

Conclusion (page 13):
"In light of quantitative analysis and qualitative
considerations, we have demonstrated that
domestic investors should consider allocating
part of their portfolios to international securities,
and that a 20% allocation may be a reasonable
starting point. Although finance theory dictates
that an upper asset allocation limit should be based
on the global market capitalization for international
equities (currently approximately 58%), we have
demonstrated that international allocations exceeding
40% have not historically added significant additional
diversification benefits, particularly accounting for
costs. For many investors, an allocation between
20% and 40% should be considered reasonable,
given the historical benefits of diversification.
Allocations closer to 40% may be suitable for
those investors seeking to be closer to a marketproportional
weighting or for those who are hoping
to obtain potentially greater diversification benefits
and are less concerned with the potential risks and
higher costs. On the other hand, allocations closer
to 20% may be viewed as offering a greater balance
among the benefits of diversification, the risks of
currency volatility and higher U.S. to non-U.S. stock
correlations, investor preferences, and costs."

Of course the past is not the future etc. etc....

forummm

  • Walrus Stache
  • *******
  • Posts: 7375
  • Senior Mustachian
Re: International Index Funds - get rid of them entirely?
« Reply #45 on: April 08, 2016, 06:43:06 AM »
I would personally stick to Domestic funds only. The moment war breaks out, the international funds are shot.
So I should not invest in the US in case "war breaks out"?

It seems like the US would be extra risky because we probably either started or will end up fighting the war. It's definitely more likely than some other developed nation being involved to such a degree that their stock markets tank.



????

Aphalite

  • Bristles
  • ***
  • Posts: 425
Re: International Index Funds - get rid of them entirely?
« Reply #46 on: April 08, 2016, 01:22:09 PM »
One thing that I forgot to mention - in regards to international funds/indexes, we're not there yet, but theoretically, depending on political policies, we could end up at a point where US Companies will begin to spinoff their foreign subsidiaries into a different company, listed on a foreign exchange (sort of like Philip Morris, except instead of Philip Morris International listed on the New York Stock Exchange, it would be listed on the London Exchange). This might not really ever happen, but if the US continues to insist on taxing corporations at some of the highest tax rates in the world, as well as taxing money made in other countries, we could theoretically get there eventually. So this scenario would be "score one for international indices"

Seppia

  • Pencil Stache
  • ****
  • Posts: 616
  • Age: 42
  • Location: NYC
Re: International Index Funds - get rid of them entirely?
« Reply #47 on: April 08, 2016, 03:44:30 PM »
Most of you seem to believe in the idea behind VTSAX, that research has shown the market to be more efficient than you if you're not doing the ridiculous amount of homework that Warren Buffett and his team of experts does.  If you are going with that philosophy,  then why not expand it out to the world as a whole?  VTWSX distributes by market cap across all stocks the same way that VTSAX does for just the US.  That still puts over half of your assets in the US and most of the rest in other respectable countries.  China is a whopping 2%.

The other philosophy behind VTSAX holds too, that more diversification is LESS risk.  You don't know what US markets will look like in a decade or two, so why not have a few assets everywhere with the market doing the work to balance the risk for you? 

As a side note I only use VTWSX as a guide since the expense ratios aren't the lowest.   You can mimic its distribution using VTSAX and VTIAX.


So much agree.
The latest Bogle interview was hilarious
"Why would you hold international? How well would you have done if you had Brazil in the last year?"
Incredible how stupid that sounded from a genius like him.
50% of market cap resides in the USA.
Let's own that.
I'm a big fan of diversification so why not own the other 50% as well.

forummm

  • Walrus Stache
  • *******
  • Posts: 7375
  • Senior Mustachian
Re: International Index Funds - get rid of them entirely?
« Reply #48 on: April 08, 2016, 04:18:23 PM »
Most of you seem to believe in the idea behind VTSAX, that research has shown the market to be more efficient than you if you're not doing the ridiculous amount of homework that Warren Buffett and his team of experts does.  If you are going with that philosophy,  then why not expand it out to the world as a whole?  VTWSX distributes by market cap across all stocks the same way that VTSAX does for just the US.  That still puts over half of your assets in the US and most of the rest in other respectable countries.  China is a whopping 2%.

The other philosophy behind VTSAX holds too, that more diversification is LESS risk.  You don't know what US markets will look like in a decade or two, so why not have a few assets everywhere with the market doing the work to balance the risk for you? 

As a side note I only use VTWSX as a guide since the expense ratios aren't the lowest.   You can mimic its distribution using VTSAX and VTIAX.


So much agree.
The latest Bogle interview was hilarious
"Why would you hold international? How well would you have done if you had Brazil in the last year?"
Incredible how stupid that sounded from a genius like him.
50% of market cap resides in the USA.
Let's own that.
I'm a big fan of diversification so why not own the other 50% as well.

And Brazil is 1.2% of VTIAX. So if it totally tanked and went down 25% your VTIAX holding would be down  0.3% if everything else was constant. Whereas if the US went down 25% (not that that's ever happened before...) and you only had VTSAX, you'd be a little more on edge.

He's a smart guy but I wouldn't say a genius. He did a lot to help a lot of people, but he admits he kind of stumbled into/was forced into creating index funds sort of by accident. And his advice/insights are usually good. But he's biased by the strong performance of the US during his long life.

Seppia

  • Pencil Stache
  • ****
  • Posts: 616
  • Age: 42
  • Location: NYC
Re: International Index Funds - get rid of them entirely?
« Reply #49 on: April 08, 2016, 04:29:35 PM »
Agree
We should probably define what "being a genius" means.
I believe similarly to many "extreme" situations, being very smart is a necessary condition, but you also need luck/situational context.

Example: there's probably another 2000 people wired like Buffet, but only one of them was born at the right time in the right place.

Still, bogle is a genius to me, as is buffet
Probably others could have done the same/similar.
Fact is they stand out among billions

 

Wow, a phone plan for fifteen bucks!