Crudely Approximating Total International Stock Market

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Crudely Approximating Total International Stock Market

Postby 555 » Sun Jul 14, 2013 10:30 pm

Normally I don't want to slice/dice and would rather use "total" funds, in a mostly 3 fund portfolio. But due to a fund lineup change in my 401a, I can move from
CREF Stock (70% TSM, 30% TISM) (ER 0.49%) to
TIAA-CREF S&P 500 Index Fund (Institutional)TISPX (ER 0.07%)
saving 0.42%/year on about 30% of my portfolio, which is very significant.

But then I have to reshuffle funds in various other accounts to get the right asset allocation. In my 457b I have available
BlackRock EAFE Equity Index CTF (ER 0.12%) which can partially replace the TISM that is in CREF Stock, and
BlackRock Russell 2000 Index CTF (ER 0.04%) which I can pair with SP500 to approximate TSM(~86%SP500,14% R2k) according to Bogleheads Wiki Approximating Total Stock Market
http://www.bogleheads.org/wiki/Approxim ... ock_Market

As to Approximating Total International Stock Market
http://www.bogleheads.org/wiki/Approxim ... ock_Market
it seems that an EAFE fund is missing Emerging Markets (EmM), International Small Caps (ISmCap), Canada, South Korea. There's no way I can fill in the 2 country gaps, so I won't even try. I can only get EmM and ISmCap in limited Vanguard IRA space, and only by sacrificing a small REIT holding to make space.

So, how about Approximating Total International Stock Market by
100% EAFE. Is that too crude? (Is it much worse than approximating TSM by 100% SP500?)

How about
78% EAFE, 22% EmM? No smallmidcaps, but most countries are covered.

How about
68% EAFE, 19% EmM, 13% ISmCap?

The extra funds cramp the limited Vanguard IRA space (and REITs would have to go, which doesn't bother me that much).

I don't really want to use Vanguard FTSE All-World ex-US Small-Cap Index Fund Investor Shares (VFSVX) due to the buy/sell fees, and I don't want to deal with ETFs just for one fund.

So for ISmCap, how about Vanguard International Explorer Fund (VINEX) (active, $3k min, ER 0.43%)?

I can hold some of the TISM as the single "total" fund in 529 plans (at least for the moment). The upshot is that these EmM and ISmCap would only be 1%-2% each of portfolio, but could increase to 3%-5% each as the 529s get used or shifted to cash.

Should I bother with the little funds?

[I put this in the General Investing forum, since it's really a general question about cobbling together an assset allocation from constrained fund lineups and limited IRA space to plug the gaps.]
555
 
Posts: 4217
Joined: Thu Dec 24, 2009 8:21 am

Re: Crudely Approximating Total International Stock Market

Postby hoppy08520 » Mon Jul 15, 2013 8:26 am

555, having written the original Approximating Total International Stock Market page, partly as an academic exercise and partly because 65% of my retirement funds are in plans that have an MSCI EAFE fund but no "total market" international index fund, I have followed a number of threads on this topic.

Despite having spent so much time poring over these numbers, looking at this one chart makes you wonder if it's it worth it to diversity out of a MSCI EAFE fund.

Image
Pretty dramatic, huh?

I wrote more about this in this thread:

hoppy08520 wrote:Whether you hold I Fund (which is a MSCI EAFE index fund) or VG TISM, is probably not incredibly high stakes and an investor shouldn't lose too much sleep over it. When you compare performance of VT TISM to the MSCI EAFE benchmark over 20+ years, the VG fund barely beats is. Note, however, that the VG fund has changed its composition and its own target benchmark over time, and of course past performance does not predict future results. See Morningstar chart.

This is from the following post: viewtopic.php?f=1&t=108882#p1582879

The bottom line is, at least historically, that the ~62% EAFE component of Vanguard's TISM is so dominant that taking out emerging markets, small-caps, Canada, and now South Korea (owing to the fact that the Vanguard emerging markets fund's new (as of 2013) benchmark omits South Korea), has almost no impact on return -- looking backwards (and accounting for the fact that this chart is a moving target because the underlying composition and benchmarks of Vanguard TISM have changed over time).

Incidentally, the same pattern is true with the S&P500 and the extended market index fund. At current market cap, to approximate total US stock market you need about 80% / 20%. But when you look at the returns of Vanguard's TSM vs S&P500, there's hardly any difference! Despite the fact that people make such a big deal about "owning the total market."

If you really want to move the needle, it seems that you need to significantly overweight the smaller funds or else you'll wind up getting the same returns as the dominant EAFE or S&P500.

All that being said, I'd strive to own the total market, and in your shoes I'd probably aim for the EAFE/EM/Small-Cap split you wrote up in your OP, but I wouldn't lose too much sleep if you can't easily do so.

I hope these insights help.
User avatar
hoppy08520
 
Posts: 1556
Joined: Sat Feb 18, 2012 12:36 pm

Re: Crudely Approximating Total International Stock Market

Postby 555 » Tue Jul 16, 2013 3:46 am

Yes it is very helpful. I'd like to fill in the gaps left by S&P 500 and MSCI EAFE funds, but if the constraints of fund lineups and account size mean I can't fully fill the gaps, I won't worry too much.
555
 
Posts: 4217
Joined: Thu Dec 24, 2009 8:21 am

Re: Crudely Approximating Total International Stock Market

Postby Garco » Tue Jul 16, 2013 10:31 am

I appreciate the sage advice by both the OP (555) and Hoppy. Sometimes we just "do the best we can" with the options we have available in our 401k's or other retirement plans. We "optimize" under limited conditions, rather than "maximize" under ideal conditions. And sometimes we do even better optimizing than slavishly trying to achieve some ideal. We spend less time, and sometimes less money, for essentially the same or even a better total return with little to no added risk.
User avatar
Garco
 
Posts: 383
Joined: Wed Jan 23, 2013 3:04 am

Re: Crudely Approximating Total International Stock Market

Postby House Blend » Tue Jul 16, 2013 10:40 am

hoppy08520 wrote:Incidentally, the same pattern is true with the S&P500 and the extended market index fund. At current market cap, to approximate total US stock market you need about 80% / 20%. But when you look at the returns of Vanguard's TSM vs S&P500, there's hardly any difference! Despite the fact that people make such a big deal about "owning the total market."

I've seen comments like this a lot, but they don't jibe with me. Maybe we just have different standards regarding how large a difference can be considered negligible.

I look at a morningstar 10 year growth chart of Admiral TSM vs. Admiral 500 Index, and I can see a difference. And when I measure it, I see that TSM has outperformed by 0.7%/year over that stretch.

Sure, maybe there are or will be other 10 year stretches where TSM does worse, but I just don't understand the "hardly any difference" attitude.
User avatar
House Blend
 
Posts: 2362
Joined: Fri May 04, 2007 2:02 pm

Re: Crudely Approximating Total International Stock Market

Postby Garco » Tue Jul 16, 2013 11:06 am

Hi House Blend. I agree with you if the comparison is S&P500 fund vs. TSM, but I think a more apt comparison might be S&P500 (VFINX) vs. extended market (VEXMX), i.e., the rest of the market. If you stick with the prescribed proportions, of roughly 80/20 or 75/25 (VFINX/VEXMX) of course you get essentially the TSM result. But if -- staying with index funds -- you move to, say, 60/40 or 55/45 VFINX/VEXMX it makes a more substantial difference. Your expenses are no different. Your risk is slightly higher. Your return is likely to be better over the longer term.
User avatar
Garco
 
Posts: 383
Joined: Wed Jan 23, 2013 3:04 am

Re: Crudely Approximating Total International Stock Market

Postby 555 » Tue Jul 16, 2013 5:26 pm

House Blend wrote:
hoppy08520 wrote:Incidentally, the same pattern is true with the S&P500 and the extended market index fund. At current market cap, to approximate total US stock market you need about 80% / 20%. But when you look at the returns of Vanguard's TSM vs S&P500, there's hardly any difference! Despite the fact that people make such a big deal about "owning the total market."

I've seen comments like this a lot, but they don't jibe with me. Maybe we just have different standards regarding how large a difference can be considered negligible.

I look at a morningstar 10 year growth chart of Admiral TSM vs. Admiral 500 Index, and I can see a difference. And when I measure it, I see that TSM has outperformed by 0.7%/year over that stretch.

Sure, maybe there are or will be other 10 year stretches where TSM does worse, but I just don't understand the "hardly any difference" attitude.


Yes it's certainly true that missing 20%-30% of the market can make a difference. You could do better or worse, but either way you are missing some of that "diversification free lunch".

So I want to fill the gaps (and I'd rather have "total" funds to start with) but it's a question of cost and possibility. I don't want to use 1.2% ER actively managed funds to get Emerging Markets and Small Caps. And I have one account with a brokerage window option, but the fees and rules make it not worthwhile.

So Vanguard IRAs are the place to fill the gaps, but there's not enough room, so you do the best you can.
555
 
Posts: 4217
Joined: Thu Dec 24, 2009 8:21 am

Re: Crudely Approximating Total International Stock Market

Postby House Blend » Tue Jul 16, 2013 8:12 pm

^This I can agree with. There are some combinations of ER and active management that aren't worth paying to get that missing 25% of diversification.

On the topic of your OP, I went through a stretch where I had two international options (besides CREF Stock): an EAFE index fund, or an actively managed fund that included Emerging Markets and an ER of something like 0.90%. I wasn't happy with either choice, and even tried a mix of both for a while.

Nowadays I have international in taxable and am content to TLH between TISM and FTSE Large. I don't mind that the FTSE fund omits the smallest 10% of the market. (It would be nice to be able to pull up a 10 year chart of VTIAX vs. VFWAX. On second thought, what I'd really like to see is a 10 year chart comparing the current benchmark of TISM with the FTSE Large index.)

In your shoes, I think I would use the first option you mentioned: the EAFE index, plus Emerging Markets in your IRA. I gather that you don't have a taxable account.
User avatar
House Blend
 
Posts: 2362
Joined: Fri May 04, 2007 2:02 pm

Re: Crudely Approximating Total International Stock Market

Postby 555 » Tue Jul 16, 2013 9:44 pm

House Blend wrote: I gather that you don't have a taxable account.


Right.
555
 
Posts: 4217
Joined: Thu Dec 24, 2009 8:21 am


Return to Investing - Theory, News & General

Who is online

Users browsing this forum: Bing [Bot], Google [Bot] and 26 guests