Thoughts on the necessity of holding international stocks?

[Zoot Allures]

JL Collins makes a persuasive case (to this novice investor, anyway) that it's not necessary to diversify your portfolio with international stocks, because (in part) so many U.S. companies are international in scope these days.

But the Bogleheads, and others I'm sure, recommend a three-fund portfolio: domestic stocks, international stocks, and bonds.

Thoughts? Was I reckless to move from one of Vanguard's LifeStrategy funds (80% stocks--mostly domestic and some int'l--and 20% bonds) to a two-fund portfolio consisting of the total US stock market index and the total US bond market index? The LifeStrategy expense ratio is very low, but the total stock/bond index fund fees are so low that they're practically zero. So that was one attraction.

[JamesL]

I personally don't invest in international stocks, because like you said so many companies are global economies. Not to mention so many other countries are falling apart, especially in Europe (although the same could be said for U.S.). I did a few comparisons and it seems like many of those international stocks perform worse in the long run than domestic. I may add in 20% eventually though just for some more diversification.

[arebelspy]

While I agree with Jim's argument, I still like holding some international, simply for the companies that AREN'T U.S. based.

Essentially even if the U.S. economy goes in the tubes, the U.S. companies still being global will sell there, so you're good.  That's fine, but any overseas companies that have explosive growth that aren't here, you miss out on.

So I like some international indices, but how much is a personal preference.

[strider3700]

I'm holding 20% international    I'm happier being more widespread internationally then 100% north american.

[arebelspy]

I'm holding 20% international    I'm happier being more widespread internationally then 100% north american.

I take it you didn't read the linked article.  It's almost impossible to be "100% north american" if you're invested in broad index funds, which is his whole point.

[aclarridge]

I like to own the emerging markets index mainly because over the long term, in my mind, it should be a higher volatility, higher reward index, and I feel aggressive enough to get a piece of it at least.

I see US stocks as safer in general, and hence in the long term shouldn't they provide a bit less of a reward? I'd think a super aggressive investor might be totally focused on developing countries for the higher risk, higher returns (of course there are other barriers like taxes etc. which could be the reason most people don't, but theoretically). BTW I think higher risk is really fraud/political in nature, not due to any inherent disadvantage of a foreign company. Either way it's like lending club in a very general way - you make the most money off the people with the lowest credit rating.

As for international exposure - yeah if the international exposure of the US index isn't enough for you, then sure, get some more directly because these days, the management fees for doing so aren't too bad. Everything in moderation. Don't see any reason why US stock portfolio should always win in the long run, that just seems racist.

[tooqk4u22]

If your domestic allocation is in the S&P 500 then there is more international exposure weighted but if it is in something like vanguard total domestic market then not as much as the smaller companies don't have as much international revenue/operations. 

Because I use vanguard total market I also use vanguard total international - and just like US companies do business internationally, international companies do business domestically - in addition the direct international exposure gives you more spread againts currency changes, political risk, economic events, etc.

[clifp]

If your domestic allocation is in the S&P 500 then there is more international exposure weighted but if it is in something like vanguard total domestic market then not as much as the smaller companies don't have as much international revenue/operations. 

Because I use vanguard total market I also use vanguard total international - and just like US companies do business internationally, international companies do business domestically - in addition the direct international exposure gives you more spread againts currency changes, political risk, economic events, etc.

To me the best argument for owning international stocks, is small companies in emerging markets.   I frankly wouldn't bother with something like EAFE (large cap international).   GM sells more cars in China than the US, and the head of Coke, and Pepsi are a Turkish man, and India woman so while we think of them as American companies they really have been so for a least a generation. The US is become a relatively small share of profits and even less a growth area for the S&P 500.

I personally own VEU, but I recently bought a small amount emerging market small cap ETF DGS

[tooqk4u22]

If your domestic allocation is in the S&P 500 then there is more international exposure weighted but if it is in something like vanguard total domestic market then not as much as the smaller companies don't have as much international revenue/operations. 

Because I use vanguard total market I also use vanguard total international - and just like US companies do business internationally, international companies do business domestically - in addition the direct international exposure gives you more spread againts currency changes, political risk, economic events, etc.

To me the best argument for owning international stocks, is small companies in emerging markets.   I frankly wouldn't bother with something like EAFE (large cap international).   GM sells more cars in China than the US, and the head of Coke, and Pepsi are a Turkish man, and India woman so while we think of them as American companies they really have been so for a least a generation. The US is become a relatively small share of profits and even less a growth area for the S&P 500.

I personally own VEU, but I recently bought a small amount emerging market small cap ETF DGS

I get it that is why I use both total domestic and total international....I used to be in some emerging market etfs but the more I researched the less I liked the mix of companies and a lot of them weren't as diversified by country as I would have liked.....a lot of china.

[MooreBonds]

I personally own VEU, but I recently bought a small amount emerging market small cap ETF DGS

I get it that is why I use both total domestic and total international....I used to be in some emerging market etfs but the more I researched the less I liked the mix of companies and a lot of them weren't as diversified by country as I would have liked.....a lot of china.

My goal has been to steadily increase my direct holdings of foreign companies to about 50%-60% long-term (currently about 35%-40%). I have some ETFs, but it's difficult to hold the general foreign ETFs, since there are soooo many small/mid cap companies that I would never have exposure to. As a result, most of my foreign exposure is through a big basket of country-specific ETFs, as well as some active mutual funds and individual stocks, to compliment the various index ETFs.

[CanuckExpat]

We hold what is probably a relatively large international equity allocation: 50% of my total equity allocation. (This I believe is roughly close to the market cap weighted value of international equities vs US equities.)

I can understand some reasons for holding less or no international: extra costs, taxes, currency risk, and strong correlation between US and international equity indexes.

I however, don't buy the argument that because so many US companies are international in scope that you don't need international equity exposure. You want to own international equities because you want the diversification across more companies, not because you want the diversification to other markets. It may be all well and good that Apple sells phones all over the world, but that doesn't help me if Samsung eats their lunch. I want to own a bit of all companies, so I own international equities.

[sheepstache]

To what extent is it a concern that companies may leave the US, slowly, over time, to headquarter themselves instead in countries with better business treatment?  If the premise is that US companies are international in scope, it would be easy for them to stop being US companies and become, say, EU- or India-based companies, if the situation arose where that was advantageous.  I'm not talking about companies trying to hide profits overseas; an international etf is not going to solve your problem there.  And I'm not saying the US is not business friendly or will become so.  Nor am I forgetting that you could just keep an eye on what's held in your domestic index fund. 

Also I have read that depending on the fund it could be a currency hedge but I am too sleepy to think about that now.

[smedleyb]

Given the high degree of correlation between global markets (the all seem to rise and fall together, save a couple outliers), I think JLC is right.  Think of International funds as more portfolio beta rather than outright diversification.

[Zoot Allures]

Thanks for the thoughts, everyone. I may go back to the LifeStrategy Growth fund, which has the right allocation for me (80/20) and does include international stocks. I don't really see a compelling reason NOT to include at least some international stocks in my portfolio. The LifeStrategy fund has about 56% total domestic stocks, 24% total international stocks, and 20% total domestic bonds. I do like the simplicity of having just one fund that does its own rebalancing.

[capital]

I've noticed that Vanguard's bundled funds (this LifeStrategy Growth fund, as well as the Target Retirement Date funds) are only available holding the higher-fee Investor Shares. I wonder why they don't offer any lower-fee Admiral Share versions of them.