International allocation range?

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Topic Author
Volando
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Joined: Tue Feb 23, 2021 7:52 pm

International allocation range?

Post by Volando »

Hi, everyone! In trying to learn more about the various topics related to investing and the bogleheads method I'm finding that I'm getting stuck when in comes to international allocation. I've read through many of the threads on this site as well as other sites and I really can't make a decision. I think that I find the arguments for anywhere from 20% to just going with a world fund compelling, though they all seem to have their pros and cons. However, everything below market cap makes me feel as though I would be making an arbitrary decision rather than letting the market decide. On the other hand I think I'd prefer to have more control over the allocation and to allow for some degree of domestic bias since I live in the US.

We currently have both our Roth IRAs and my wife's 403(b) in Vanguard TDFs, which has 40% international. My own 401(k) didn't have that many international options so I have 20% in an actively managed international fund (DFIEX), which focused on established markets. Overall this puts us somewhere in the 30% range. I also have a taxable account with just VTSAX. My original plan was to just add total international to the taxable to eventually match the target date fund. However, with this approach I would be locking myself into 40% which I'm not sure I want to do. Part of what appeals to me about the world approach is that it adjusts itself over time so that if the US does end up having a prolonged downturn and international does not it will adjust itself to the other markets.

I know that the typical recommendation is to pick an allocation and stick with it. However, I'm wondering if there's a way to get the best of both worlds by allowing for an allocation range. For example, I could target 40% but then let it drift within a certain range, say +- 10% or so? My thinking behind this is that it would allow for times when international does well, while also allowing for something of a domestic bias. It would also let me keep the two funds separate so that I can have the benefits of things like lower expenses, and tax credit.

Is it reasonable to allow for a range or am I overthinking this? Would it be better to just stick to a target? Thanks for the feedback!
livesoft
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Re: International allocation range?

Post by livesoft »

There is no reason that one cannot modify international allocation between 0% and 50% of equity assets or even to 100%. While you will get a lot of folks writing "Stay the course", I think if you explicitly put in your Investment Policy Statement when you would go to 0% international and when you would go to 100% international, then following that plan is staying the course.

For instance, if I see that AVUV drops 5% in one day while VTI changes by 0%, then I will most certainly be required to buy lots of shares of AVUV in order to increase my allocation to equities. I will get the money to do so by selling bond fund shares. Something like that is explicitly stated in my IPS, so if I didn't do that, then I would not be staying the course.

And no one can predict the future, so no one can tell if you sticking to a fixed target would be better. I think I can tell you that if if internationals goes up 30% in one day and US equities don't change, then adding more to international on that day would be a mistake. :twisted: Instead, if that happened, then I would be selling international equities before the end of that 30% up day.
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Topic Author
Volando
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Re: International allocation range?

Post by Volando »

Thank you! That is reassuring to hear. That's a good point about writing it down. I'm still working out my investment policy statement. I haven't finalized it yet since I'm still cementing what allocation I want to maintain. Doing a range would definitely help me stay the course over sticking to a fixed allocation.
livesoft
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Re: International allocation range?

Post by livesoft »

BTW, you can do some math on this as well. Suppose you change to have another 5% of your total portfolio value added to international from what you normally have. If that extra 5% goes up 10% more than the rest of the portfolio, then your overall portfolio performance will be a mere 0.5% better than not making that 5% move. And by the same token, if that extra 5% lags by 10% then the overall portfolio performance will be a mere 0.5% worse than not making that 5% move. Thus, making these small changes amount to costing you no more than a nice hobby and sometimes make you more money.
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Thesaints
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Re: International allocation range?

Post by Thesaints »

Volando wrote: Mon May 17, 2021 11:01 am On the other hand I think I'd prefer to have more control over the allocation and to allow for some degree of domestic bias since I live in the US.
Shouldn't you plan the exact opposite ? If the US economy tanks, your stocks will follow suit and maybe you even lose your job.
One can make the case that concentration risk trumps the marginally higher expenses of foreign stocks.
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watchnerd
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Re: International allocation range?

Post by watchnerd »

I just hold global market weight.

By doing so, US vs ex-US fluctuates according to performance automatically.
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Topic Author
Volando
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Re: International allocation range?

Post by Volando »

Thesaints wrote: Mon May 17, 2021 7:12 pm
Volando wrote: Mon May 17, 2021 11:01 am On the other hand I think I'd prefer to have more control over the allocation and to allow for some degree of domestic bias since I live in the US.
Shouldn't you plan the exact opposite ? If the US economy tanks, your stocks will follow suit and maybe you even lose your job.
One can make the case that concentration risk trumps the marginally higher expenses of foreign stocks.
Well I’m not sure that’s why I asked :). The way I visualize this is that if the US tanked but I kept it at a floor of 50% I would intend to hold on and rebalance into it until it eventually (hopefully) recovers. If it doesn’t recover I still have a ceiling of 50% in international to tide me over. This is part of where I see the merits of each argument. Rightly or wrongly I still believe the USA has good long term prospects and I’d rather invest in where I live during the bad times to hopefully help companies recover than send me money elsewhere.

If I lost my job well I’d use my emergency fund and do whatever job I could do to support my family in the mean time. I work in an in demand healthcare profession so I have a hard time seeing that there would be zero work for me to do. If it got so bad that I had to jump into my savings then I’m not sure allowing international to go above 50% would really save the day.

On the other hand if international tanked I’d allow it to drop to 30%, letting the US side of things excel.
Last edited by Volando on Mon May 17, 2021 7:41 pm, edited 1 time in total.
Topic Author
Volando
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Re: International allocation range?

Post by Volando »

watchnerd wrote: Mon May 17, 2021 7:17 pm I just hold global market weight.

By doing so, US vs ex-US fluctuates according to performance automatically.
I see the merits of doing this and there’s a part of me that would like to go this route. But I don’t think I’m convinced enough to commit myself to go 100% into a world fund. I think I’d still rather tilt US than go full world while also letting international float based on relative performance to the US.


Maybe it’s a weird strategy but like I said I can’t decide so this is something of a middle ground I think I’d be content with. But maybe I’d be better if just making a decision and sticking with it. I dunno!
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Beensabu
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Re: International allocation range?

Post by Beensabu »

Volando wrote: Mon May 17, 2021 7:36 pm
watchnerd wrote: Mon May 17, 2021 7:17 pm I just hold global market weight.

By doing so, US vs ex-US fluctuates according to performance automatically.
I see the merits of doing this and there’s a part of me that would like to go this route. But I don’t think I’m convinced enough to commit myself to go 100% into a world fund. I think I’d still rather tilt US than go full world while also letting international float based on relative performance to the US.


Maybe it’s a weird strategy but like I said I can’t decide so this is something of a middle ground I think I’d be content with. But maybe I’d be better if just making a decision and sticking with it. I dunno!
How about a mix of Total World and Total US? Two funds. Total World will automatically rebalance for you, so at least you'll be forced to partially rebalance. You can allow Total US to drift if you want to. Just keep adding to Total World. Middle ground. Feels like less of a commitment, and maintains a home bias that just might end up getting smaller over time.
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Thesaints
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Re: International allocation range?

Post by Thesaints »

Volando wrote: Mon May 17, 2021 7:33 pm Rightly or wrongly I still believe the USA has good long term prospects and I’d rather invest in where I live during the bad times to hopefully help companies recover than send me money elsewhere.
That's very altruistic. However, the best way to support domestic corporation is not by buying their stock (unless they are issuing new shares), but by buying their products.
whereskyle
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Re: International allocation range?

Post by whereskyle »

Volando wrote: Mon May 17, 2021 11:01 am Hi, everyone! In trying to learn more about the various topics related to investing and the bogleheads method I'm finding that I'm getting stuck when in comes to international allocation. I've read through many of the threads on this site as well as other sites and I really can't make a decision. I think that I find the arguments for anywhere from 20% to just going with a world fund compelling, though they all seem to have their pros and cons. However, everything below market cap makes me feel as though I would be making an arbitrary decision rather than letting the market decide. On the other hand I think I'd prefer to have more control over the allocation and to allow for some degree of domestic bias since I live in the US.

We currently have both our Roth IRAs and my wife's 403(b) in Vanguard TDFs, which has 40% international. My own 401(k) didn't have that many international options so I have 20% in an actively managed international fund (DFIEX), which focused on established markets. Overall this puts us somewhere in the 30% range. I also have a taxable account with just VTSAX. My original plan was to just add total international to the taxable to eventually match the target date fund. However, with this approach I would be locking myself into 40% which I'm not sure I want to do. Part of what appeals to me about the world approach is that it adjusts itself over time so that if the US does end up having a prolonged downturn and international does not it will adjust itself to the other markets.

I know that the typical recommendation is to pick an allocation and stick with it. However, I'm wondering if there's a way to get the best of both worlds by allowing for an allocation range. For example, I could target 40% but then let it drift within a certain range, say +- 10% or so? My thinking behind this is that it would allow for times when international does well, while also allowing for something of a domestic bias. It would also let me keep the two funds separate so that I can have the benefits of things like lower expenses, and tax credit.

Is it reasonable to allow for a range or am I overthinking this? Would it be better to just stick to a target? Thanks for the feedback!
I am not particularly concerned about keeping a fixed ex-us allocation.

My equity portfolio is roughly 50% global market cap total world equity (Vanguard Total World Stock (VT/VTWAX)), and 50% US total market (VTI/VTSAX and equivalents). This allows for some minor fluctuation depending on US vs. Ex-US outperformance. I think any ex-US allocation between 20% and global market cap is prudent. Just be careful that you don't actively chase returns within that range by investing primarily in whatever has done well lately. That is a good way to decrease overall returns. To avoid that behavioral risk, you should write down a target and invest accordingly.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
jibantik
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Re: International allocation range?

Post by jibantik »

Thesaints wrote: Tue May 18, 2021 1:09 am
Volando wrote: Mon May 17, 2021 7:33 pm Rightly or wrongly I still believe the USA has good long term prospects and I’d rather invest in where I live during the bad times to hopefully help companies recover than send me money elsewhere.
That's very altruistic. However, the best way to support domestic corporation is not by buying their stock (unless they are issuing new shares), but by buying their products.
Yeah seems like the best way to support US business is taking profits from foreign companies and buying products from US companies.

Anyway, you should just invest in global market cap, vtwax, as no one knows what the future holds.
Topic Author
Volando
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Re: International allocation range?

Post by Volando »

jibantik wrote: Tue May 18, 2021 7:02 am
Thesaints wrote: Tue May 18, 2021 1:09 am
Volando wrote: Mon May 17, 2021 7:33 pm Rightly or wrongly I still believe the USA has good long term prospects and I’d rather invest in where I live during the bad times to hopefully help companies recover than send me money elsewhere.
That's very altruistic. However, the best way to support domestic corporation is not by buying their stock (unless they are issuing new shares), but by buying their products.
Yeah seems like the best way to support US business is taking profits from foreign companies and buying products from US companies.

Anyway, you should just invest in global market cap, vtwax, as no one knows what the future holds.
You both make a good point about the way to support US businesses.
whereskyle wrote: Tue May 18, 2021 6:02 am I am not particularly concerned about keeping a fixed ex-us allocation.

My equity portfolio is roughly 50% global market cap total world equity (Vanguard Total World Stock (VT/VTWAX)), and 50% US total market (VTI/VTSAX and equivalents). This allows for some minor fluctuation depending on US vs. Ex-US outperformance. I think any ex-US allocation between 20% and global market cap is prudent. Just be careful that you don't actively chase returns within that range by investing primarily in whatever has done well lately. That is a good way to decrease overall returns. To avoid that behavioral risk, you should write down a target and invest accordingly.
Beensabu wrote: Mon May 17, 2021 9:47 pm How about a mix of Total World and Total US? Two funds. Total World will automatically rebalance for you, so at least you'll be forced to partially rebalance. You can allow Total US to drift if you want to. Just keep adding to Total World. Middle ground. Feels like less of a commitment, and maintains a home bias that just might end up getting smaller over time.
Thanks for sharing this idea. This seems like it might be an easier way to keep international but allow it to float based on relative performance than my prior thought. Keeping 50% VTSAX seems like it would allow me to keep a floor of USA and cap international while also allowing some degree of ambivalence about the relative performance/weight of US v International. I believe this would exclude the possibility of the international tax credit though? But maybe that's not that meaningful of a benefit overall? It would also increase expenses but that's probably not that big of a deal either... Good food for thought. Thanks!
whereskyle
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Re: International allocation range?

Post by whereskyle »

Volando wrote: Tue May 18, 2021 7:49 am
jibantik wrote: Tue May 18, 2021 7:02 am
Thesaints wrote: Tue May 18, 2021 1:09 am
Volando wrote: Mon May 17, 2021 7:33 pm Rightly or wrongly I still believe the USA has good long term prospects and I’d rather invest in where I live during the bad times to hopefully help companies recover than send me money elsewhere.
That's very altruistic. However, the best way to support domestic corporation is not by buying their stock (unless they are issuing new shares), but by buying their products.
Yeah seems like the best way to support US business is taking profits from foreign companies and buying products from US companies.

Anyway, you should just invest in global market cap, vtwax, as no one knows what the future holds.
You both make a good point about the way to support US businesses.
whereskyle wrote: Tue May 18, 2021 6:02 am I am not particularly concerned about keeping a fixed ex-us allocation.

My equity portfolio is roughly 50% global market cap total world equity (Vanguard Total World Stock (VT/VTWAX)), and 50% US total market (VTI/VTSAX and equivalents). This allows for some minor fluctuation depending on US vs. Ex-US outperformance. I think any ex-US allocation between 20% and global market cap is prudent. Just be careful that you don't actively chase returns within that range by investing primarily in whatever has done well lately. That is a good way to decrease overall returns. To avoid that behavioral risk, you should write down a target and invest accordingly.
Beensabu wrote: Mon May 17, 2021 9:47 pm How about a mix of Total World and Total US? Two funds. Total World will automatically rebalance for you, so at least you'll be forced to partially rebalance. You can allow Total US to drift if you want to. Just keep adding to Total World. Middle ground. Feels like less of a commitment, and maintains a home bias that just might end up getting smaller over time.
Thanks for sharing this idea. This seems like it might be an easier way to keep international but allow it to float based on relative performance than my prior thought. Keeping 50% VTSAX seems like it would allow me to keep a floor of 50% USA and cap international while also allowing some degree of ambivalence about the relative performance/weight of US v International. I believe this would exclude the possibility of the international tax credit though? But maybe that's not that meaningful of a benefit overall? It would also increase expenses but that's probably not that big of a deal either... Good food for thought. Thanks!
You are attuned to the issues. The foreign tax credit is available to funds with more than 50% of their assets in foreign equities, so at present, there is no tax credit for VT(WAX) when held in taxable accounts. This would change if foreign assets eventually make up more than half of the fund. I hold this portfolio in tax-advantaged space, so the foreign tax credit is immaterial to me.

In prior discussions about VT(WAX), some posters have pointed out the minimal benefits offered, even in high-dollar portfolios, by the foreign tax credit. Still, I think that the credit is worth considering, and some posters hold VT(WAX) in tax-advantaged and a mix of VTI/VXUS in taxable. Personally, I think that even if held in taxable, if an allocation to VT(WAX) gives you the peace of mind that is essential to long-term buy and hold investing, then I think the trade-off still makes sense.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
jibantik
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Re: International allocation range?

Post by jibantik »

whereskyle wrote: Tue May 18, 2021 8:03 am
You are attuned to the issues. The foreign tax credit is available to funds with more than 50% of their assets in foreign equities, so at present, there is no tax credit for VT(WAX) when held in taxable accounts. This would change if foreign assets eventually make up more than half of the fund. I hold this portfolio in tax-advantaged space, so the foreign tax credit is immaterial to me.

In prior discussions about VT(WAX), some posters have pointed out the minimal benefits offered, even in high-dollar portfolios, by the foreign tax credit. Still, I think that the credit is worth considering, and some posters hold VT(WAX) in tax-advantaged and a mix of VTI/VXUS in taxable. Personally, I think that even if held in taxable, if an allocation to VT(WAX) gives you the peace of mind that is essential to long-term buy and hold investing, then I think the trade-off still makes sense.
I am far from an expert, but what I gathered from this forum is the foreign tax credit was worth about 10 basis points. That's not insignificant, but it's not worth ruining the austere beauty of vtwax over, IMO.
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