Foreign stock allocation

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Foreign stock allocation

Postby Calm Man » Fri Dec 21, 2012 10:53 am

I will try to make this brief but I am paralyzed from overanalysis and need your help as my plan will be implemented beginning in January. If this post is convoluted, I apologize a lot, but I am mentally tied up by this. Very simply, I am devoting x amount of dollars into a trust for a developmentally disabled young adult. It is my child and I anticipate it may likely never be needed but I want it there in case long after I'm dead. After she dies I do not care what happens to it. I have decided on about 50/50 bonds and stocks. Here is what is paralyzing me-- US and international allocation. Right now, I am planning on a 1-fund stock portfolio (US TSM) or the 2-fund (TSM + TISM). I am sort of cheap so I know the TISM costs 3x more in ER than TSM but both are inordinately inexpensive so maybe that shouldn't matter. I know diversification is good but is more always better? So specifically: where are the giant tail risks- having only US or having International too? Could it be that the US would tank while the rest of the world could do well? Alternatively speaking, if one went 100% US, could there be a horrible result for that (relatively speaking vs US + Int) compared to adding international and having a horrible result (relative to US alone). And if you conclude that you must include international (which I usually have not and advised against even), is 1/3 too little to matter?
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Re: Foreign stock allocation

Postby NYBoglehead » Fri Dec 21, 2012 11:09 am

I think you should have some TISM, 20-30% of the equity portion. It is 3x more expensive than TSM but we are talking about 6 bps vs. 18 bps so it won't create a drag on portfolio returns.

I think you want international so that you have more exposure to the global economy. While many US companies make a large amount of money in foreign countries, you are missing out on a large percentage of the global equity market by not having any international exposure.

I think it is unlikely in an increasingly global economy for the US to boom while others bust and vice versa. There of course will be years when the US outperforms or the International markets outperform, but I think you are lowering your risk profile by having international equities in the portfolio.

Good luck to you.
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Re: Foreign stock allocation

Postby Valuethinker » Fri Dec 21, 2012 11:23 am

Given US is 50% of developed world indices it is unlikely US will do a Japan and drop by 2/3rds whilst rest of world goes up.

But you never know. 50, 60 years is a long way ahead to think.

a one third allocation to non US global equities is prudent.

This may not be the time to buy them, but the longest possible TIPS you can buy is also a good asset for such a fund.

I would go so far as to suggest 40% TIPS 60% equities (40% US, 20% foreign). *however* at these real rates, TIPS are just not that attractive. If (ever) they hit 2.8% real yields again, you ought to think about it.
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Re: Foreign stock allocation

Postby BBL » Fri Dec 21, 2012 12:20 pm

I am sort of cheap so I know the TISM costs 3x more in ER than TSM


If you are excessively concerned about the ER difference you could choose among 2 options that are only twice as expensive [.12 ER].

Of course you'll be giving up something to get the lower ER but these choices are still fine broad-based international investments:

VDMAX - Developed markets index admiral

VTMGX - Tax managed International admiral

They aren't most of our first choice but they are less expensive and will give exposure to ex-US equity markets.
To win without risk is to triumph without glory. Pierre Corneille
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Re: Foreign stock allocation

Postby InvestorNewb » Fri Dec 21, 2012 12:28 pm

I would not worry about the expense ratio of these two funds. They are both extremely cheap, and you won't find any cheaper.
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Re: Foreign stock allocation

Postby midareff » Fri Dec 21, 2012 12:42 pm

Personally, I prefer to own the world to the greatest extent practical without selecting a particular country or economy to lean on. It is my philosophy for the long (permanent) run. I would not blink at the costs involved in these index funds. If you look at the Callan Table of Asset Class Returns you will see returns are all over the place by asset class and year. Impossible to pick each years winners and losers so own them all to the greatest extent practical and do what we do; take market returns as the superior low cost, low fee, investment methodology.
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Re: Foreign stock allocation

Postby ruralavalon » Fri Dec 21, 2012 7:10 pm

Both are very low expense, don't let the expense ratios influence your decision.

My own preference is 30% of equities in international. That would be very typical for a boglehead -- viewtopic.php?f=10&t=103617 . Historically "[a] 30% allocation to international equities would have provided 90% of the maximum diversification benefit." https://personal.vanguard.com/pdf/icriecr.pdf ( p7).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: Foreign stock allocation

Postby RyeWhiskey » Fri Dec 21, 2012 7:51 pm

Calm Man wrote:I will try to make this brief but I am paralyzed from overanalysis and need your help as my plan will be implemented beginning in January.


Do not be paralyzed any further. Take the simplest route to your goal which is:
50% Total US Bond Market Index VBMFX
50% Total World Stock Index VTWSX

VTWSX:
50% US
13.5% Emerging Markets
23.6% Europe
12.2% Pacific

This way you needn't worry about re-balancing beyond the basic 50/50 split, no need to worry and over-analyze international percentages, no need to watch international vs. domestic and fret about 'what if.' Furthermore you have the total market down to one fund and should someone else need to step in for you, they would be able to understand the process completely.

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Re: Foreign stock allocation

Postby asset_chaos » Fri Dec 21, 2012 8:12 pm

Any amount from zero to 100% of foreign is the right amount if it's an amount that you won't tinker with and will look at calmly no matter what the market does. I used to argue for market weight---and that's what I do myself---but after talking with others about how they responded poorly when markets rose or fell, I've decided the best advice on amount of foreign is use the amount that makes you comfortable, the amount that makes you want to do nothing about it except perhaps rebalance occasionally. Don't sweat it too much, other than to be honest with yourself about where your comfort level lies.

Other options than the ones already mentioned could be to simplify to total world---a bit more cost currently but still very cheap---and let the market decide your weighting of US and non-US stocks. Another option could be to put everything into LifeStrategy conservative or moderate---either are close enough to your chosen allocation that it won't matter---and let Vanguard decide your weighting of US and non-US stocks. (I think these funds are currently around 30% foreign in the stock allocation.)

Best wishes in caring for your child.
Regards, | | Guy
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Re: Foreign stock allocation

Postby epictetus » Fri Dec 21, 2012 8:18 pm

I agree with the poster who suggested consideration of one of the Lifestrategy Funds. there is one 60/40 stocks/bond and one 40/60 stocks bonds. they contain the funds you are thinking about and it would be a one fund solution that would rebalance itself.

just a thought.
The crow of anxiety always finds some branch to land on. -William Kentridge
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Re: Foreign stock allocation

Postby Calm Man » Fri Dec 21, 2012 8:31 pm

Thank you all for your comments. Thus far is has been very helpful and I look forward to more advice as in the typical boglehead way I am getting a range of intelligent comments.
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Re: Foreign stock allocation

Postby Calm Man » Fri Dec 21, 2012 8:32 pm

asset_chaos wrote:Any amount from zero to 100% of foreign is the right amount if it's an amount that you won't tinker with and will look at calmly no matter what the market does. I used to argue for market weight---and that's what I do myself---but after talking with others about how they responded poorly when markets rose or fell, I've decided the best advice on amount of foreign is use the amount that makes you comfortable, the amount that makes you want to do nothing about it except perhaps rebalance occasionally. Don't sweat it too much, other than to be honest with yourself about where your comfort level lies.

Other options than the ones already mentioned could be to simplify to total world---a bit more cost currently but still very cheap---and let the market decide your weighting of US and non-US stocks. Another option could be to put everything into LifeStrategy conservative or moderate---either are close enough to your chosen allocation that it won't matter---and let Vanguard decide your weighting of US and non-US stocks. (I think these funds are currently around 30% foreign in the stock allocation.)

Best wishes in caring for your child.


Thank you for the last line. Nice to have good hearted folks down under.
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