Author Topic: International Stock Allocation Questions  (Read 7051 times)

MrDelane

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International Stock Allocation Questions
« on: March 05, 2016, 03:50:32 PM »
We (my partner and I) were so focused on savings in the recent past that we never really concerned ourselves with asset allocation.  Yeah, I know, not the best plan - but getting savings ramped up was top priority.

The bulk of our holdings are in VTSAX right now.
We have enough now that I think I need to really consider our asset allocation moving forward.
I'm considering 10% bonds, 90% equities (which is close to where we are currently).

Within those equities I'm debating how much I should keep in international holdings (planning on VTIAX right now), and whether I should keep them in my 401K and Roth IRA or my taxable account (or if that makes no difference).

I've read people suggesting anything from 10% to 50% - I realize there is no 'right' answer, but I was curious about two things:

1)  What percentage of your total equities do you keep in international holdings?

2)  Do you keep them in taxable or tax deferred accounts (and why)?


Thanks so much for any info.

GGNoob

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Re: International Stock Allocation Questions
« Reply #1 on: March 05, 2016, 08:37:00 PM »
1) In my portfolio of 100% stocks, 40% is international.
2) The majority of my portfolio is ETFs and I will buy any of my stock ETFs (US or international) in my taxable account as needed to rebalance with contributions. The REIT ETF stays in my tax-advantaged accounts.


themagicman

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Re: International Stock Allocation Questions
« Reply #2 on: March 05, 2016, 10:12:13 PM »
100% of our allocation is in stocks. We make our allocation based on what the global stock allocation is. You can do this by buying VT (vanguard's total world fund) or buying a domestic and international mix (currently about 48% international)

I think not having a fully global allocation is just tilting and assuming a certain country will out preform, usually with a home country basis. I think having this home country basis can cause your portfolio not to be diverse enough.

As far as taxble vs non, it is very close but international is probably better because of foreign tax credit

Interest Compound

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Re: International Stock Allocation Questions
« Reply #3 on: March 06, 2016, 09:39:33 AM »
I am 100% stocks. Within those stocks I am 52.9% US, 47.1% international. Whenever I make contributions, I simply pull up this page and scroll down to see the current global weights:

https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0628#tab=2

The best part about it, is I never have to rebalance. When you invest at market weight, your portfolio rebalances itself. So if the US grows to 60% of the world one month, and I open my portfolio to see where I'm at, I'll see my portfolio is already 60% US.

Vertical Mode

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Re: International Stock Allocation Questions
« Reply #4 on: March 08, 2016, 10:15:19 AM »
I'm posting to follow this thread, as I'm in a similar boat to the OP. Exclusively in VTSAX, which I had thought I recalled having more of an international component until MDM corrected me on that in another thread just this morning. Also considering VTIAX for this purpose and curious to see what others' thoughts on the matter may be.

Interest Compound, I see you've linked to the VTWSX page - how do you feel about this fund vs. VTIAX and/or VIHAX?

A 90/10 split is defensible, plenty of people around here make the case for being 100% stock but not everyone cares to be that aggressive. (I do, FWIW, 100% stocks here)

Eric

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Re: International Stock Allocation Questions
« Reply #5 on: March 08, 2016, 10:35:50 AM »
...Investing jargon...

That was a really long and complicated non-answer.  Probably not the best way to drive people to your site, FYI.

Eric

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Re: International Stock Allocation Questions
« Reply #6 on: March 08, 2016, 10:40:12 AM »
I do a 50/30/20 portfolio of US/Int'l/Bonds.  Why?  Because I decided on an 80/20 stock/bond split and then I looked up Vanguard's closest Target Date Fund, which happens to be the 2035 fund, and it has about a 50/30 US/Int'l split.

I hold most in my taxable account, in order to take advantage of the foreign tax credit.

https://www.bogleheads.org/wiki/Tax-efficient_fund_placement


Interest Compound

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Re: International Stock Allocation Questions
« Reply #7 on: March 08, 2016, 10:49:48 AM »
I'm posting to follow this thread, as I'm in a similar boat to the OP. Exclusively in VTSAX, which I had thought I recalled having more of an international component until MDM corrected me on that in another thread just this morning. Also considering VTIAX for this purpose and curious to see what others' thoughts on the matter may be.

Interest Compound, I see you've linked to the VTWSX page - how do you feel about this fund vs. VTIAX and/or VIHAX?

A 90/10 split is defensible, plenty of people around here make the case for being 100% stock but not everyone cares to be that aggressive. (I do, FWIW, 100% stocks here)

VTWSX is the total world market. This includes the US market. VTIAX is the total world market, excluding the US market. VIHAX is International High Dividend Yield.

Here are the fees:

VTWSX total world market - 0.25%
VTIAX total world market excluding US - 0.12%
VIHAX total world market excluding US High Dividend Yield - 0.30%

VTWSX is only suitable if it's your only stock holding. If you can put all your stocks in this fund (which probably isn't possible since it's not available in your 401k), this is a fine option. It's the easiest way to own the full cap-weighted world stock market. If you go this route, I'd actually recommend the ETF version:

VT total world market (ETF) - 0.14%

https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT

VTIAX is what most people use with a standard 3 fund portfolio. It has lower fees, especially when combined with a USA fund with a 0.05% expense ratio, and allows you to balance your portfolio considering you probably don't have any good international options in your 401k.

VIHAX should not be considered. It has high fees, and reaching for dividend yield is a common investing fallacy. This has been discussed a lot on these forums. Don't fall for it.

Vertical Mode

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Re: International Stock Allocation Questions
« Reply #8 on: March 08, 2016, 11:11:37 AM »
I'm posting to follow this thread, as I'm in a similar boat to the OP. Exclusively in VTSAX, which I had thought I recalled having more of an international component until MDM corrected me on that in another thread just this morning. Also considering VTIAX for this purpose and curious to see what others' thoughts on the matter may be.

Interest Compound, I see you've linked to the VTWSX page - how do you feel about this fund vs. VTIAX and/or VIHAX?

A 90/10 split is defensible, plenty of people around here make the case for being 100% stock but not everyone cares to be that aggressive. (I do, FWIW, 100% stocks here)

VTWSX is the total world market. This includes the US market. VTIAX is the total world market, excluding the US market. VIHAX is International High Dividend Yield.

Here are the fees:

VTWSX total world market - 0.25%
VTIAX total world market excluding US - 0.12%
VIHAX total world market excluding US High Dividend Yield - 0.30%

VTWSX is only suitable if it's your only stock holding. If you can put all your stocks in this fund (which probably isn't possible since it's not available in your 401k), this is a fine option. It's the easiest way to own the full cap-weighted world stock market. If you go this route, I'd actually recommend the ETF version:

VT total world market (ETF) - 0.14%

https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT

VTIAX is what most people use with a standard 3 fund portfolio. It has lower fees, especially when combined with a USA fund with a 0.05% expense ratio, and allows you to balance your portfolio considering you probably don't have any good international options in your 401k.

VIHAX should not be considered. It has high fees, and reaching for dividend yield is a common investing fallacy. This has been discussed a lot on these forums. Don't fall for it.

Excellent, thanks. Yes, for my question I was assuming that I'd keep the VTSAX position I already have and build out toward something like the 3-fund portfolio you linked to (although at this point in time, I don't see much reason to add bonds to the mix since I'm relatively early on in the accumulation phase and can weather the volatility...) 401k is 100% VFINX, since the other options are all ~1% MER mutual funds.

RE: dividends/VIHAX - thanks for sharing your perspective on this, I saw the higher ER and was curious whether others thought it would be worth pursuing. Perhaps you can tell that I don't venture over here to the Investor Alley section of the forum all that often :-)

MrDelane

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Re: International Stock Allocation Questions
« Reply #9 on: March 08, 2016, 06:49:43 PM »
Thank you so much for all the answers.
This is all very helpful.

Eric - I may wind up copycatting your approach.
Mirroring the allocation of the target date fund seems to make sense...moreso than my just picking a percentage out of the air.

And it looks like putting those holdings in my taxable accounts makes me the most sense.


Curbside Prophet

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Re: International Stock Allocation Questions
« Reply #10 on: March 08, 2016, 06:59:35 PM »
A lot of the allocations are misleading because in the global economy there is so much overlap.  For instance, a fund that invests in the S&P 500, would this be considered 100% "US stocks" even though almost half of their revenues are derived overseas?

whodidntante

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Re: International Stock Allocation Questions
« Reply #11 on: March 08, 2016, 07:15:01 PM »
I have a third of my stocks ex-US.  No currency hedging.  I keep them in taxable and tax advantaged accounts.

Eric

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Re: International Stock Allocation Questions
« Reply #12 on: March 08, 2016, 07:29:49 PM »
Eric - I may wind up copycatting your approach.

Cool!  Keep an eye out for my invoice.  I'll get it out shortly.  :)

Mirroring the allocation of the target date fund seems to make sense...moreso than my just picking a percentage out of the air.

Yep, that was my thought process too.  The Vanguard people are pretty smart and do this for a living, so no need to try to re-invent the wheel. 

Personally, I chose to invest in the underlying funds so that my AA wouldn't change over time as the target date funds are set up to do.  But of course, just buying the target date fund would be a valid option as well.

MrDelane

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Re: International Stock Allocation Questions
« Reply #13 on: March 08, 2016, 08:57:49 PM »
Cool!  Keep an eye out for my invoice.  I'll get it out shortly.  :)

Will do.
:)

Quote
But of course, just buying the target date fund would be a valid option as well.

True - but, I assume like you, I'm trying to keep my fees as extremely low as possible.

johnny847

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Re: International Stock Allocation Questions
« Reply #14 on: March 08, 2016, 09:21:29 PM »
I wrote up an answer to question 2 a while back:

http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-%28u-s-version%29/msg721598/#msg721598

Many people will say put international funds in taxable, because if you put it in a retirement account you won't be able to get the foreign tax credit.

However, it's not that simple because foreign funds often issue a greater percentage of dividends (which are subject to tax) and of those dividends, less of them are qualified (meaning higher tax rates apply).
« Last Edit: March 08, 2016, 09:27:34 PM by johnny847 »

Interest Compound

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Re: International Stock Allocation Questions
« Reply #15 on: March 08, 2016, 09:32:04 PM »
A lot of the allocations are misleading because in the global economy there is so much overlap.  For instance, a fund that invests in the S&P 500, would this be considered 100% "US stocks" even though almost half of their revenues are derived overseas?

(Mostly copied from VTSAX - Why don't just put all $$ in this Index fund?

The dozen large companies in NY state are closely linked to the global 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 is nonsense to think that correlation is always so strong, or that doing business in other countries alone is an excuse to not own all stocks in a market. Indexing makes sense globally as much as it makes sense domestically.  The currency risk does not outweigh the diversification benefits.  Here's an example of what can go wrong during retirement, when you're 100% US stocks (blue), vs 50/50 US Stocks/International Stocks (red):


jaizan

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Re: International Stock Allocation Questions
« Reply #16 on: March 09, 2016, 02:41:19 PM »
I have 75% of my portfolio in International stocks.

Disclosure:  I'm British, so domestic stocks (25%) means UK, although that includes 10% of British multinationals.

For reference, it's just 2.1% in the US, due to mainly to high PE ratios suggesting low returns over the next 10 years.

themagicman

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Re: International Stock Allocation Questions
« Reply #17 on: March 09, 2016, 02:56:12 PM »
Disclosure:  I'm British, so domestic stocks (25%) means UK, although that includes 10% of British multinationals.


Out of curiosity, do many people do this in the UK? It seems that you are over weight on your domestic side( By more than 3x) . I am wondering if many people in various countries typically over weight to their home country (as many Americans do)

MustacheAndaHalf

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Re: International Stock Allocation Questions
« Reply #18 on: March 09, 2016, 04:24:44 PM »
A lot of the allocations are misleading because in the global economy there is so much overlap.  For instance, a fund that invests in the S&P 500, would this be considered 100% "US stocks" even though almost half of their revenues are derived overseas?
What if you reverse your thinking: how many of the international stocks also have exposure to U.S. market?
In which case, owning both may involve overlap - but overlap in both directions.

For someone just starting out with an international allocation, I'd recommend a 20% comfort zone even though mine is a much higher 50%.  With too high an international allocation, you might watch emerging markets fall suddenly and question why you have so much international exposure.  Or U.S. could beat Europe for years, and again you may question your allocation.  So while you're asking what each of our allocations might be, keep in mind we have different levels of tolerance to bad performance.

Seppia

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Re: International Stock Allocation Questions
« Reply #19 on: March 09, 2016, 08:05:27 PM »

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


Amen!

USA stocks have this image of over performance maybe because lately (since 2008) they've done significantly better than the rest of the world.
Plus the historically strong dollar vs the euro has amplified this perception.


webguy

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Re: International Stock Allocation Questions
« Reply #20 on: March 09, 2016, 09:06:12 PM »
Our current asset allocation is:

20% bonds/cash
40% US stocks
30% International stocks
10% REITs

I keep them in taxable accounts for two reasons; 1) the international tax credit, and 2) to make room in my tax-deferred accounts for bonds which aren't as tax efficient as stocks.
« Last Edit: March 09, 2016, 09:07:43 PM by webguy »

Mr FrugalNL

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Re: International Stock Allocation Questions
« Reply #21 on: March 10, 2016, 04:18:13 AM »
Out of curiosity, do many people do this in the UK? It seems that you are over weight on your domestic side( By more than 3x) . I am wondering if many people in various countries typically over weight to their home country (as many Americans do)

Most investors the world over have a home bias. The lower their country's market capitalisation, the more pronounced the home bias tends to be. If 50% of your holdings are domestic stocks, it makes a huge difference whether your home is the US (in which case you'd have no home bias) or, say, the UK (in which case you're overweighting your home market by a factor of about 7!).

https://pressroom.vanguard.com/content/nonindexed/6.26.2012_The_Role_of_Home_Bias.pdf

Such analysis provides one perspective of how investors might think about global asset allocation. On the other hand, financial theory suggests that investors should construct their asset classes in line with global-market capitalizations, which differ from the allocations shown in Figure 1. For example, as of December 31, 2011, U.K. equities accounted for 8.6% of the global equity market. According to the theory, then, U.K. investors should hold 8.6% of their equity portfolio in U.K. stocks—as should U.S. investors, Australian investors, and, indeed, all other equity investors globally. Of course, we know from industry data that few investors actually adhere to either of these approaches. For example, instead of holding 8.6% of their equity allocation in U.K. stocks per global market weightings, or 80% in U.K. stocks per the minimum-volatility portfolio in Figure 1, U.K. investors collectively held 72% in 2001 and 50% in 2010.

Personally, I do the same thing as the magicman and Interest Compound in that I have no home bias in the equity part of my portfolio. To do otherwise would be tantamount to assuming that my own country's stocks will outperform and that I somehow know this while the rest of the market doesn't. That would be foolish, because there is just no way that I know something that stock investors as a group don't.

cerat0n1a

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Re: International Stock Allocation Questions
« Reply #22 on: March 10, 2016, 05:35:49 AM »
Disclosure:  I'm British, so domestic stocks (25%) means UK, although that includes 10% of British multinationals.


Out of curiosity, do many people do this in the UK? It seems that you are over weight on your domestic side( By more than 3x) . I am wondering if many people in various countries typically over weight to their home country (as many Americans do)

I would say most UK investors I know are far more home biased than that, for a couple of reasons. One is that our tax-privileged, non-retirement accounts (ISAs) originally did not allow international shares. Some providers still don't do it. Another is taxation. If I buy a UK share in my ISA, I don't pay income tax on dividends and I don't pay capital gains on any sale profit. I don't even have to do any paperwork to tell the tax authorities about it. If I buy a dividend-paying US share, I have to fill in W8-BENs and there will be withholding tax taken by the US government and so on. 

The argument that is applied above to New York companies also applies to us - there are big multi-nationals listed in London who have almost no UK earnings or employees.

Familiarity is a further factor - particularly for investors who buy individual shares. Many big US companies are completely unknown here.

I'm like Jaizan, in that I have only a small %age in the US and the rest of of my non-UK investments are in Europe, Asia/Pac and Emerging Markets, because the US P/E ratio looks scary. Equally, I completely get Mr FrugalNL's argument that markets are mostly efficient and I don't have any special insight as to why one market should out-perform another and the higher P/E probably relates to expectations of future growth, security of earnings and so forth.

Mr FrugalNL

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Re: International Stock Allocation Questions
« Reply #23 on: March 10, 2016, 05:52:08 AM »
I'm like Jaizan, in that I have only a small %age in the US and the rest of of my non-UK investments are in Europe, Asia/Pac and Emerging Markets, because the US P/E ratio looks scary. Equally, I completely get Mr FrugalNL's argument that markets are mostly efficient and I don't have any special insight as to why one market should out-perform another and the higher P/E probably relates to expectations of future growth, security of earnings and so forth.

I too might have opted for a home bias if my country's tax system encouraged it. Or if domestic funds had significantly lower expense ratios than international funds. I think both of those are valid reasons for having a home bias.