Author Topic: Why do International Index Fund?  (Read 1852 times)

andysandp

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Why do International Index Fund?
« on: July 28, 2018, 03:25:10 PM »
Curious why it seems most recommend 20-40% International Index Fund?

Vanguard's VGTSX International Index Fund always seems to be lagging the 500 Index fund for a very long time.

I know Buffet has recommended 90% 500 Index Fund and 10% Bonds, and no recommendation for International Index Fund.

I don't see Bogle recommending International Index Fund either.

Vanguard seems to recommend 20-40% International Index Fund.

Any data to back up the International Index Fund?
« Last Edit: July 28, 2018, 03:43:01 PM by andysandp »

DreamFIRE

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ILikeDividends

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Re: Why do International Index Fund?
« Reply #2 on: July 28, 2018, 10:58:07 PM »
Curious why it seems most recommend 20-40% International Index Fund?

Vanguard's VGTSX International Index Fund always seems to be lagging the 500 Index fund for a very long time.

I know Buffet has recommended 90% 500 Index Fund and 10% Bonds, and no recommendation for International Index Fund.

I don't see Bogle recommending International Index Fund either.

Vanguard seems to recommend 20-40% International Index Fund.

Any data to back up the International Index Fund?

Inflation is specific to a country's own currency, and at any given time inflation is at different levels across the countries of the world.

Likewise, at any given time, progression through the stages of a business cycle is different, depending on the country in question.  Here's a pretty interesting article on the topic:

https://www.researchaffiliates.com/en_us/publications/articles/682-where-is-the-global-economy-going.html

Also, asset valuations can differ radically, depending on which corner of the world you're talking about in a given period; e.g., emerging market equities are currently at about half the average valuation of the S&P 500.  See:

https://www.researchaffiliates.com/en_us/publications/articles/679-pundits-predicting-panic-in-emerging-markets.html

IMHO, the US performance over the last 10 years is an aberration, more a result of an unprecedented central bank experiment than anything else, that you shouldn't expect to continue in perpetuity.  QE has ended, and QT has already commenced to unwind the QE.  The road ahead, and the end result of the experiment, has no historical guide, and is as yet unknown.

In short, adding foreign exposure diversifies risk and expected returns pretty much the same way buying an index diversifies single-stock risk and expected returns, but at a global level.
« Last Edit: July 28, 2018, 11:24:43 PM by ILikeDividends »

MustacheAndaHalf

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Re: Why do International Index Fund?
« Reply #3 on: July 29, 2018, 02:39:39 AM »
Curious why it seems most recommend 20-40% International Index Fund?
Vanguard's own white paper on global diversification probably guides their view:
https://www.vanguard.com/pdf/ISGGEB.pdf
If international makes you nervous, you could use the lower end of the allocation (20%).

You quoted the allocation Warren Buffet uses in his will.  The allocation of 90% S&P 500 and 10% short-term bonds is intended for his wife (currently in her 70s) who inherits billions of dollars.  He wanted a simple allocation for his widow, which doesn't mean it's the allocation everyone else should use.

DavidAnnArbor

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Re: Why do International Index Fund?
« Reply #4 on: July 30, 2018, 08:03:47 PM »
I do international index funds because of the Japan problem.

jacoavluha

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Re: Why do International Index Fund?
« Reply #5 on: July 30, 2018, 11:25:23 PM »
Diversification.

bizkitgto

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Re: Why do International Index Fund?
« Reply #6 on: July 31, 2018, 02:23:33 PM »
I've thought about $IOO, the S&P World 100, but it's mer was 0.40

grandep

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Re: Why do International Index Fund?
« Reply #7 on: July 31, 2018, 02:32:42 PM »
Here's one reason


Indexer

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Re: Why do International Index Fund?
« Reply #8 on: July 31, 2018, 07:04:53 PM »
Thanks grandep, I was going to post the same thing.

I would like to point out something else. Domestic and international trends change over time. Domestic might outperform for awhile, then international, etc. Sometimes that outperformance can last 6-7 years in a row. Think of it this way. When everyone is convinced one thing will do better because it has been doing better, maybe they put more in it driving the price up. BTW, the OP's question is an example of this behavior. That leaves the out of favor asset class priced lower giving it more room to run, which leads to a period of out performance in the future.

On that note, while US has outperformed international most of the past 7 years you will pay a lot more for US corporate earnings than international right now. VFIAX(500 index) PE ratio =  21. VTIAX(International) PE ratio = 14. 

Let's look at a historical example of international outperformance. On that chart look specifically at 2002-2007. In each of those years the emerging markets and the MSCI ex-US world index both outperformed the S&P 500. This was after a period where the US outperformed most years(the late 90s). It is entirely possible that could happen again, and given the valuation differences I wouldn't be surprised if we were going into a period of international outperformance.