How do I select my international AA

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wholeinone04
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How do I select my international AA

Post by wholeinone04 » Mon Aug 20, 2012 5:32 pm

I'm a 25 yo investor and I've had a 90/10 Stocks/Bonds AA since I started my retirement accounts 3 years ago. I am very comfortable with this AA and I usually rebalance twice a year(doing my second rebalance of the year right now). I max out my 401k, Roth IRA, HSA(although I don't count the hsa as part of my portfolio). I have 18k in VFIAX(500 index) in my Vanguard Roth IRA and in my 401k I have 18k in FSTVBX(spartan total market), 14.5k in FSIVX(spartan international) and 6.3k in FSITX(spartan us bond index). So my target us stock is 54%, I'm at 63%, my target int'l stock is 36%, I'm at 26%, and my bond target is 10%, I'm at 11%.

Here's my question. I selected a 60/40 us/int'l stock allocation and I honestly don't remember why. I have that AA written down and that's all. I know my spartan int'l fund invests in developing markets and I believe that is less volatile? How do I know which int'l AA is right for me? Is 60/40 us/int'l a good split for someone who is 90/10 stocks/bonds? I'm assuming there is some correlation between the two AA's??

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hoppy08520
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Re: How do I select my international AA

Post by hoppy08520 » Mon Aug 20, 2012 6:12 pm

I think your international allocation of 40% of stocks is reasonable and on the high end of the band that is generally recommended around here.

Here's some reading links that might help you:

* Domestic/International - page from Bogleheads.org wiki with lots of good information and other links.

* https://personal.vanguard.com/pdf/icriecr.pdf - Vanguard research paper explaining their rationale for how much of equities to invest internationally. Vanguard advocates 70%/30% US/International, based on their allocations in the LifeStrategy and Target Date funds. Because of that, you see a lot of people around here almost consider 30% as a default international holding.
wholeinone04 wrote:Is 60/40 us/int'l a good split for someone who is 90/10 stocks/bonds? I'm assuming there is some correlation between the two AA's??
Based on what I've read, I don't believe there's really any recommendation for tying your overall Stocks/Bonds AA and what your US/International is within stocks. They are separate formulas independent of each other. If you want to be 60/40 US/International, then that goes whether you're 90/10 stocks/bonds or 30/70 stocks/bonds or anywhere in between. That being said, I have seen a tendency of people who are more conservative overall also being more US-based in their US/International ratio. I don't know if there's any research behind that or if it's just a personal preference or a conservative orientation.

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wholeinone04
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Re: How do I select my international AA

Post by wholeinone04 » Wed Aug 22, 2012 6:42 pm

Thanks for the detailed reply. I reviewed the links you sent me and it looks like I'll be leaning towards a 30-40% international allocation within the stocks portion of my AA. Any reason to include emerging markets within this other than more diversification? I like my 3 fund portfolio and I'm not sure the returns(if any) would justify the extra work.

Thanks for the help!

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hoppy08520
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Re: How do I select my international AA

Post by hoppy08520 » Wed Aug 22, 2012 7:39 pm

Keep in mind that the Vanguard TISM fund, as a TOTAL stock fund, includes emerging markets at their market weight. Currently that is ~23%.(EDIT: corrected wrong number in initial post.)

If you want to overweight emerging markets, or any asset class, just be sure to understand why you're doing it and what you hope to accomplish by deviating from the market weighting. See http://www.bogleheads.org/wiki/Slice_an ... ernational for more on this
Last edited by hoppy08520 on Wed Aug 22, 2012 8:43 pm, edited 1 time in total.

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gnosis
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Re: How do I select my international AA

Post by gnosis » Wed Aug 22, 2012 8:42 pm

If you currently consider Taiwan and South Korea as emerging markets, then Vanguard's Total Int'l Stock Market fund would be ~24% emerging.

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G-Money
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Re: How do I select my international AA

Post by G-Money » Wed Aug 22, 2012 9:01 pm

An international allocation of 30-40% of equities is perfectly reasonable. Any reason you're not holding Vanguard Total International in your Roth and just Spartan Total Market and US Bond Market in your 401k? Fewer funds to track, same AA, and better diversification. Also, emerging markets (which is in Vanguard Total International) have historically been less correlated with domestic equities. Since you can hold them at no additional cost, would seem there is little reason not to have them.
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Re: How do I select my international AA

Post by pingo » Wed Aug 22, 2012 9:38 pm

I thought I loosely read somewhere that Larry Swedroe feels 40% is in some kind of sweet spot considering true global market weighting vs. currency risk vs. some such other really smart stuff. I can't seem to find a source now.

Of course, that doesn't mean you should automatically do 60/40 US/Int'l. Being that you're already there, I say stay there. I'm a little influenced by the fact that 40% makes intuitive sense to me, but I do not do it because our portfolio is based on the willingness and need of me and my wife. :D

I also highly recommend you read the following thread: Too much in international?
Last edited by pingo on Wed Aug 22, 2012 9:41 pm, edited 1 time in total.

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Re: How do I select my international AA

Post by pingo » Wed Aug 22, 2012 9:41 pm

G-Money wrote:Any reason you're not holding Vanguard Total International in your Roth and just Spartan Total Market and US Bond Market in your 401k? Fewer funds to track, same AA, and better diversification. Also, emerging markets (which is in Vanguard Total International) have historically been less correlated with domestic equities. Since you can hold them at no additional cost, would seem there is little reason not to have them.
+1

Looks like we may need to take a look under the hood. Looks like this may be a job for Asking Portfolio Questions. :D

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baw703916
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Re: How do I select my international AA

Post by baw703916 » Wed Aug 22, 2012 9:59 pm

Here's some bulletized conclusions from a paper on the Vanguard site (actually, the same paper as hoppy08520 linked above, but a different link on the Vanguard site):
• International stocks should be considered for inclusion in a domestic portfolio.
• Empirical and practical issues suggest a starting allocation to international stocks of 20%, with an upper limit based on the proportion of the global market they represent.
• The exact allocation to international equities will depend on the investor’s view regarding the short- and long-term tradeoffs.
The U.S. proportion of the world equity market is about 40%; i.e. the market weight of international is about 60%. 40%, it turns out, is right in the middle of the range (20%-60%) which the paper suggests.

No one knows, of course, exactly what % international will be optimum going forward. But I think it's unlikely that something in the 30%-40% range will look like a big mistake 15 years from now.

Brad
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Re: How do I select my international AA

Post by livesoft » Thu Aug 23, 2012 6:37 am

wholeinone04 wrote:... I know my spartan int'l fund invests in developing markets and I believe that is less volatile?
FSIVX invests in developed markets. It does not invest in developing markets.
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Re: How do I select my international AA

Post by baw703916 » Thu Aug 23, 2012 9:19 am

livesoft wrote:
wholeinone04 wrote:... I know my spartan int'l fund invests in developing markets and I believe that is less volatile?
FSIVX invests in developed markets. It does not invest in developing markets.
Investor looking for a Fidelity Spartan fund which includes EM may want to consider Fidelity Spartan Global ex U.S. Index Fund (FSGUX) (wiki page on Fidelity)
Most of my posts assume no behavioral errors.

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wholeinone04
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Re: How do I select my international AA

Post by wholeinone04 » Thu Aug 23, 2012 3:50 pm

G-Money wrote:An international allocation of 30-40% of equities is perfectly reasonable. Any reason you're not holding Vanguard Total International in your Roth and just Spartan Total Market and US Bond Market in your 401k? Fewer funds to track, same AA, and better diversification. Also, emerging markets (which is in Vanguard Total International) have historically been less correlated with domestic equities. Since you can hold them at no additional cost, would seem there is little reason not to have them.
Good point, I currently own vanguard 500 index in my roth ira, and spartan 500 index, int'l and bonds in 401k. I could add vanguard total international to roth and that way I'd hold vanguard 500 index and total int'l in roth and spartan 500 index and bond market in 401k. My next question was going to be about emerging markets, are there advantages other than the correlation(less) with domestic equities?

I think I'll definitely go with 30-40% international after a little more research, maybe just call it 35 for now :) One other question though, I gathered form the vanguard paper that one reason to hold international funds is to provide diversification. What are the other reasons? Are they hoping that int'l stock will return more than US stocks in the future. How would you answer the question: Why should I hold international stock?

EDIT: I did just re-read this http://www.bogleheads.org/wiki/Domestic/International so the main reason to invest in int'l may be because some of the world's largest companies are outside the US?

Thanks!

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Re: How do I select my international AA

Post by hoppy08520 » Thu Aug 23, 2012 4:31 pm

wholeinone04 wrote:
G-Money wrote:An international allocation of 30-40% of equities is perfectly reasonable. Any reason you're not holding Vanguard Total International in your Roth and just Spartan Total Market and US Bond Market in your 401k? Fewer funds to track, same AA, and better diversification. Also, emerging markets (which is in Vanguard Total International) have historically been less correlated with domestic equities. Since you can hold them at no additional cost, would seem there is little reason not to have them.
Good point, I currently own vanguard 500 index in my roth ira, and spartan 500 index, int'l and bonds in 401k. I could add vanguard total international to roth and that way I'd hold vanguard 500 index and total int'l in roth and spartan 500 index and bond market in 401k. My next question was going to be about emerging markets, are there advantages other than the correlation(less) with domestic equities?

I think I'll definitely go with 30-40% international after a little more research, maybe just call it 35 for now :) One other question though, I gathered form the vanguard paper that one reason to hold international funds is to provide diversification. What are the other reasons? Are they hoping that int'l stock will return more than US stocks in the future. How would you answer the question: Why should I hold international stock?

EDIT: I did just re-read this http://www.bogleheads.org/wiki/Domestic/International so the main reason to invest in int'l may be because some of the world's largest companies are outside the US?

Thanks!
wholeinone04, I recommend (as another responder wrote) that you make a new thread and consider posting your whole portfolio for review. It's good to ask pointed questions about one topic or another, but you might benefit from an overall review.

For example, I see one potential hole in your portfolio: unless I'm missing something, I don't see that you have any US small cap stocks. If your only US equities are in the S&P 500 index, then you have only 75-80% of the whole US stock market in your portfolio.

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Re: How do I select my international AA

Post by wholeinone04 » Thu Aug 23, 2012 4:34 pm

Yes this is a good point, thanks!

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Re: How do I select my international AA

Post by baw703916 » Thu Aug 23, 2012 5:18 pm

Both Vanguard and Fidelity have a Completion Index Fund, for the part of TSM not included in the S&P 500 (Vanguard's has the ticker VEXMX).
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Re: How do I select my international AA

Post by pingo » Thu Aug 23, 2012 6:00 pm

wholeinone04 wrote:...I currently own vanguard 500 index in my roth ira, and spartan 500 index...
The initial post had said Spartan "Total Market", which is different than Spartan 500. :confused
wholeinone04 wrote:...int'l and bonds in 401k. I could add vanguard total international to roth and that way I'd hold vanguard 500 index and total int'l in roth and spartan 500 index and bond market in 401k. My next question was going to be about emerging markets, are there advantages other than the correlation(less) with domestic equities?
In my opinion, you've chosen pretty darn well, but there is a degree more completeness and efficiency that may be achieved. Above you speak of adding complexity without adding diversification where there are some holes in the portfolio.

Consider this:
1.
If I have only one account, I might achieve diversification with with several funds.
2. If I have several accounts, I might be able to maintain equal diversification as #1 by placing only one of the several funds in each account, thereby maintaining simplicity.
3. If I have several accounts and I duplicate all or most holdings in each account, I may have equal diversification, but I have done so with unnecessary complexity.
4. The exception to #3 might be if you have excellent balanced or target fund options for each account. Holding one in each count achieves the highest simplicity even though technically, you've place several (underlying) funds in each account.


Here is an illustration, but it is hypothetical and (not a recommendation) because we don't have all the pieces:

401k
54% Spartan Total Market
15% Spartan US Bond Index

Vanguard Roth IRA
32% Vanguard Total International - Admiral (VTIAX) ER 0.18%

What have I achieved above?
1. 63/37 US vs. Int'l.
2. Now I have all the world's large, mid, small and even micro cap stocks.
3. Now I include developed and emerging markets.
4. 15% bonds gets me closer to the minimum that tends to be recommended around here (20%) without giving up any meaningful equity return.
5. Zero duplication.

My example has it's limitations, but what do you wanna bet we can help you keep a simple portfolio with greater diversification and slightly higher expected long-term return and even with slightly lower long-term risk?

We don't know enough to help beyond the information constraints in this thread. If you'd like more portfolio help, it helps to have less narrative and more information formatted and update in your inicial post (or a new thread) based on the Asking Portfolio Questions link.
Last edited by pingo on Sat Aug 25, 2012 9:13 pm, edited 10 times in total.

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Re: How do I select my international AA

Post by Cash » Sat Aug 25, 2012 6:35 am

wholeinone04 wrote: EDIT: I did just re-read this http://www.bogleheads.org/wiki/Domestic/International so the main reason to invest in int'l may be because some of the world's largest companies are outside the US?
It sounds like you haven't done enough reading yet. I usually recommend this thread to see a full debate on domestic v. international:

http://www.bogleheads.org/forum/viewtop ... 10&t=91149

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Re: How do I select my international AA

Post by abuss368 » Sat Aug 25, 2012 8:11 am

The Total International Stock Index fund can not be beat:

- low costs
- diversification
- emerging markets and Canada exposure
- now quarterly dividends
- no manager or style drift
- foreign tax credit

You may be able to do better, but you could do a lot worse.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success." || Buy Total Stock until it hurts. Then find a way to buy even more!

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Re: How do I select my international AA

Post by am » Sat Aug 25, 2012 9:57 am

And do not forget that total international includes small cap exposure while Fidelitys most broad international index fund does not and has a higher expense ratio of .28. So total international is the best in my opinion.

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wholeinone04
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Re: How do I select my international AA

Post by wholeinone04 » Tue Aug 28, 2012 2:53 pm

pingo wrote:
G-Money wrote:Any reason you're not holding Vanguard Total International in your Roth and just Spartan Total Market and US Bond Market in your 401k? Fewer funds to track, same AA, and better diversification. Also, emerging markets (which is in Vanguard Total International) have historically been less correlated with domestic equities. Since you can hold them at no additional cost, would seem there is little reason not to have them.
+1

Looks like we may need to take a look under the hood. Looks like this may be a job for Asking Portfolio Questions. :D
I've created a new topic :) thx for the help
http://www.bogleheads.org/forum/viewtop ... 1&t=101746
hoppy08520 wrote:
wholeinone04 wrote:
G-Money wrote:An international allocation of 30-40% of equities is perfectly reasonable. Any reason you're not holding Vanguard Total International in your Roth and just Spartan Total Market and US Bond Market in your 401k? Fewer funds to track, same AA, and better diversification. Also, emerging markets (which is in Vanguard Total International) have historically been less correlated with domestic equities. Since you can hold them at no additional cost, would seem there is little reason not to have them.
Good point, I currently own vanguard 500 index in my roth ira, and spartan 500 index, int'l and bonds in 401k. I could add vanguard total international to roth and that way I'd hold vanguard 500 index and total int'l in roth and spartan 500 index and bond market in 401k. My next question was going to be about emerging markets, are there advantages other than the correlation(less) with domestic equities?

I think I'll definitely go with 30-40% international after a little more research, maybe just call it 35 for now :) One other question though, I gathered form the vanguard paper that one reason to hold international funds is to provide diversification. What are the other reasons? Are they hoping that int'l stock will return more than US stocks in the future. How would you answer the question: Why should I hold international stock?

EDIT: I did just re-read this http://www.bogleheads.org/wiki/Domestic/International so the main reason to invest in int'l may be because some of the world's largest companies are outside the US?

Thanks!
wholeinone04, I recommend (as another responder wrote) that you make a new thread and consider posting your whole portfolio for review. It's good to ask pointed questions about one topic or another, but you might benefit from an overall review.

For example, I see one potential hole in your portfolio: unless I'm missing something, I don't see that you have any US small cap stocks. If your only US equities are in the S&P 500 index, then you have only 75-80% of the whole US stock market in your portfolio.
pingo wrote:
wholeinone04 wrote:...I currently own vanguard 500 index in my roth ira, and spartan 500 index...
The initial post had said Spartan "Total Market", which is different than Spartan 500. :confused
wholeinone04 wrote:...int'l and bonds in 401k. I could add vanguard total international to roth and that way I'd hold vanguard 500 index and total int'l in roth and spartan 500 index and bond market in 401k. My next question was going to be about emerging markets, are there advantages other than the correlation(less) with domestic equities?
In my opinion, you've chosen pretty darn well, but there is a degree more completeness and efficiency that may be achieved. Above you speak of adding complexity without adding diversification where there are some holes in the portfolio.

Consider this:
1.
If I have only one account, I might achieve diversification with with several funds.
2. If I have several accounts, I might be able to maintain equal diversification as #1 by placing only one of the several funds in each account, thereby maintaining simplicity.
3. If I have several accounts and I duplicate all or most holdings in each account, I may have equal diversification, but I have done so with unnecessary complexity.
4. The exception to #3 might be if you have excellent balanced or target fund options for each account. Holding one in each count achieves the highest simplicity even though technically, you've place several (underlying) funds in each account.


Here is an illustration, but it is hypothetical and (not a recommendation) because we don't have all the pieces:

401k
54% Spartan Total Market
15% Spartan US Bond Index

Vanguard Roth IRA
32% Vanguard Total International - Admiral (VTIAX) ER 0.18%

What have I achieved above?
1. 63/37 US vs. Int'l.
2. Now I have all the world's large, mid, small and even micro cap stocks.
3. Now I include developed and emerging markets.
4. 15% bonds gets me closer to the minimum that tends to be recommended around here (20%) without giving up any meaningful equity return.
5. Zero duplication.

My example has it's limitations, but what do you wanna bet we can help you keep a simple portfolio with greater diversification and slightly higher expected long-term return and even with slightly lower long-term risk?

We don't know enough to help beyond the information constraints in this thread. If you'd like more portfolio help, it helps to have less narrative and more information formatted and update in your inicial post (or a new thread) based on the Asking Portfolio Questions link.
I've created a new topic :) thx for the help
http://www.bogleheads.org/forum/viewtop ... 1&t=101746

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Re: How do I select my international AA

Post by LadyGeek » Tue Aug 28, 2012 7:15 pm

To help the OP along, please post responses in: Made a New Thread! Portfolio Review for 25 Year old Boglehead

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