Value of International Stock in 401k?

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yawningcrab
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Value of International Stock in 401k?

Post by yawningcrab »

I've just recently learned about the Boglehead philosophy, and I'm still getting my head around the body of knowledge. While reading the wiki, one question that keeps bugging me is how important it is to keep international stocks in my 401k in the short term?

My wife and I are 47, and I have a 401k with few investment options. I'm currently in a target date 2030 fund (JSMIX) with a 0.89% net expense ratio. The 401k's US stock index fund options have around a 0.3% ratio, and international stock funds range from 1.01% to 1.33% ratios. I'd like to replace the target date fund with index funds to reduce the expenses, but maintaining a 60/40% US/international stock mix would push the overall expense ratio to nearly 0.7%.

One strategy is to minimize expenses by shifting the 401k to pure US stocks and bonds, leaving us with 0.3%ish expense ratios but no international stock exposure. We could then start accumulating international stocks in a taxable brokerage account. It would take us years to regain the typical 70/30ish ratio of US to international stocks, but the taxable fund would have a far lower expense ratio (0.06%; SWISX) than what we could get in the 401k.

So should I go for a few years with little-to-no international stocks, or keep internationals with the higher expenses? Or am I just splitting hairs? I'd appreciate any input from the community, to include references to wiki pages and other sources I should read. Thanks so much!
jbolden1517
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Re: Value of International Stock in 401k?

Post by jbolden1517 »

yawningcrab wrote: Sun Aug 13, 2017 9:59 pm My wife and I are 47, and I have a 401k with few investment options. I'm currently in a target date 2030 fund (JSMIX) with a 0.89% net expense ratio. The 401k's US stock index fund options have around a 0.3% ratio, and international stock funds range from 1.01% to 1.33% ratios. I'd like to replace the target date fund with index funds to reduce the expenses, but maintaining a 60/40% US/international stock mix would push the overall expense ratio to nearly 0.7%.
ERs are very bad they come off the top and do a lot of damage. Non-diversification of your portfolio is bad, it creates volatility which massively reduces serial returns. Index funds are cheap to run and administer but that cheapness comes at the expense of putting your in the least expensive stocks for a fund to buy large quantities of, large growth. It de-diversifies your portfolio even further. You can't move money freely between taxable and non-taxable so while to a certain extent you can complement one with another it will be decades till you can really treat this all as one fund.

So my first piece of advice is make the 401k a good portfolio on its own. 100% USA index is going to have rather bad serial returns and you are pick up a tremendous amount of risk. To make the funds cheap (and your indexes are not cheap by 401k standards, you are overpaying there too) I'd put the international in. USA smaller and International smaller together with rebalancing, especially if you add value, will easily overcome an extra 100 basis points. Diversification is more important than holding down the ER.
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yawningcrab
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Re: Value of International Stock in 401k?

Post by yawningcrab »

Thanks for the info, jbolden1517. And yeah, I know the 401k investment options are expensive. I've talked to the HR department about getting a different vendor, but the wheels move slowly.
Lou354
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Re: Value of International Stock in 401k?

Post by Lou354 »

Have you considered contributing to the 401k up to the maximum company match and the rest to IRAs? If that makes good tax sense for you, you could put international stock in the IRAs at a much lower ER.
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Re: Value of International Stock in 401k?

Post by ruralavalon »

yawningcrab wrote: Sun Aug 13, 2017 9:59 pm I've just recently learned about the Boglehead philosophy, and I'm still getting my head around the body of knowledge. While reading the wiki, one question that keeps bugging me is how important it is to keep international stocks in my 401k in the short term?

My wife and I are 47, and I have a 401k with few investment options. I'm currently in a target date 2030 fund (JSMIX) with a 0.89% net expense ratio. The 401k's US stock index fund options have around a 0.3% ratio, and international stock funds range from 1.01% to 1.33% ratios. I'd like to replace the target date fund with index funds to reduce the expenses, but maintaining a 60/40% US/international stock mix would push the overall expense ratio to nearly 0.7%.

One strategy is to minimize expenses by shifting the 401k to pure US stocks and bonds, leaving us with 0.3%ish expense ratios but no international stock exposure. We could then start accumulating international stocks in a taxable brokerage account. It would take us years to regain the typical 70/30ish ratio of US to international stocks, but the taxable fund would have a far lower expense ratio (0.06%; SWISX) than what we could get in the 401k.

So should I go for a few years with little-to-no international stocks, or keep internationals with the higher expenses? Or am I just splitting hairs? I'd appreciate any input from the community, to include references to wiki pages and other sources I should read. Thanks so much!
In your situation I suggest not using any of the international stock funds in your 401k, because they cost 0.98%% more in expense ratio than your domestic stock index fund. That's enough higher that it might destroy the expected diversification advantage from adding international stocks.

In opinion it's a good idea to replace JPMorgan Retirement 2030 (JSMIX) ER 0.89% with the 401k's stock index funds ER 0.03%, and a bond fund. I think it may be better to omit international stocks than pay that much extra (0.98%) in expense ratio every year.

How much are you contributing annually to your 401k? Is there an employer match offered in your 401k? Are you contributing more than enough to get the full employer match each year? Are you making the maximum $18k employee contribution?

Do you have any IRAs? Are you eligible to contribute to an IRA? If you have an IRA or are eligible to contribute to an IRA consider buying an inexpensive international stock index fund in the IRA.

I suggest making the maximum annual contributions to your 401k and any IRAs before contributing to a taxable account.
Last edited by ruralavalon on Mon Aug 14, 2017 10:56 am, edited 2 times in total.
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retiredjg
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Re: Value of International Stock in 401k?

Post by retiredjg »

Yawningcrab, if you have decided you want to hold international stocks and if you have no other accounts (such as an IRA, taxable, spouse's accounts, etc.) available, the individual funds with the average ER of .7% seems like your better choice. But you could reduce the amount of international from 40% of the stock allocation to 30% of the stock allocation. How much would that help?

It seems you are considering not having much international until you can build it up in taxable. If international "takes off" while you don't have any or much, you will not get the full benefit of the "taking off". Unless you are one who just believes international is not important to hold, I' think I'd hold at least some and just pay more.

I see that ruralavalon (with whom I'm usually in agreement) has posted the exact opposite opinion as I've typed. Don't you just hate it when there is no clear answer? :?
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triceratop
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Re: Value of International Stock in 401k?

Post by triceratop »

jbolden1517 wrote: Mon Aug 14, 2017 6:05 am
yawningcrab wrote: Sun Aug 13, 2017 9:59 pm My wife and I are 47, and I have a 401k with few investment options. I'm currently in a target date 2030 fund (JSMIX) with a 0.89% net expense ratio. The 401k's US stock index fund options have around a 0.3% ratio, and international stock funds range from 1.01% to 1.33% ratios. I'd like to replace the target date fund with index funds to reduce the expenses, but maintaining a 60/40% US/international stock mix would push the overall expense ratio to nearly 0.7%.
ERs are very bad they come off the top and do a lot of damage. Non-diversification of your portfolio is bad, it creates volatility which massively reduces serial returns. Index funds are cheap to run and administer but that cheapness comes at the expense of putting your in the least expensive stocks for a fund to buy large quantities of, large growth. It de-diversifies your portfolio even further. You can't move money freely between taxable and non-taxable so while to a certain extent you can complement one with another it will be decades till you can really treat this all as one fund.

So my first piece of advice is make the 401k a good portfolio on its own. 100% USA index is going to have rather bad serial returns and you are pick up a tremendous amount of risk. To make the funds cheap (and your indexes are not cheap by 401k standards, you are overpaying there too) I'd put the international in. USA smaller and International smaller together with rebalancing, especially if you add value, will easily overcome an extra 100 basis points. Diversification is more important than holding down the ER.
First, this is simply an opinion. There is no guarantee that a given international small or value fund will outperform by 100 basis points; you don't even know what the factor loadings are and you are recommending the funds. That's dangerous in my opinion; I tilt myself, but it's dangerous to unnecessarily spend money in fees.

Moreover, one can treat the 401k holdings as a unified account with the IRA. One could then hold international stocks in an IRA and save 1-1.2%% in fees. This seems like a no-brainer. Why not just contribute to your 401k at a level to obtain the maximum match, if any, and then prioritize IRA contributions which will have rock-bottom expense ratios?

Holding down the ER should absolutely be done when there are no other disadvantages.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."
jbolden1517
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Re: Value of International Stock in 401k?

Post by jbolden1517 »

triceratop wrote: Mon Aug 14, 2017 10:02 am Moreover, one can treat the 401k holdings as a unified account with the IRA. One could then hold international stocks in an IRA and save 1-1.2%% in fees. This seems like a no-brainer. Why not just contribute to your 401k at a level to obtain the maximum match, if any, and then prioritize IRA contributions which will have rock-bottom expense ratios?
Diversifiers don't work if you can't intermix money between the accounts. Let me give you a simple example. I'll use 2 assets (based on Bill Bernstein's model for stocks)
Coin pays +30% on heads and -10% on tails. Expected return 10%, serial return 8.16%
OpCoin pays +30% on tails and -10% on heads. Expected return 10%, serial return 8.16%

50/50 Coin/OpCoin held separately generate an 8.16% return in each account.
50/50 Coin/OpCoin held together in the same account pay a steady 10% with no risk.
You must rebalance each year to maintain this allocation and get the advantage from diversification. Otherwise you end up taking the penalty for lack of diversification.

The IRS makes things hard.
triceratop wrote: Mon Aug 14, 2017 10:02 am First, this is simply an opinion. There is no guarantee that a given international small or value fund will outperform by 100 basis points;
Of course I have no guarantee. If I can guarantee asset A will always outperform asset B then long A/short B is a 0 cost asset with positive return and allows me to generate infinite return. The criteria is not and should not be a guarantee. It is what is likely. Given what we know, yes I think it is likely. Obviously knowing more about the funds would allow for a more precise answer.
triceratop wrote: Mon Aug 14, 2017 10:02 am you don't even know what the factor loadings are and you are recommending the funds. That's dangerous in my opinion; I tilt myself, but it's dangerous to unnecessarily spend money in fees.
I'm not advising him to unnecessarily spend money in fees. I'm saying all things being equal bad diversification is more damaging than moderate fees.
triceratop wrote: Mon Aug 14, 2017 10:02 am Holding down the ER should absolutely be done when there are no other disadvantages.
No disagreement. Where we are potentially disagreeing is how much the disadvantage is.
Benton Bair
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Re: Value of International Stock in 401k?

Post by Benton Bair »

Foreign tax credit can not be taken in a tax qualified plan.
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Re: Value of International Stock in 401k?

Post by JBTX »

jbolden1517 wrote: Mon Aug 14, 2017 6:18 pm
triceratop wrote: Mon Aug 14, 2017 10:02 am Moreover, one can treat the 401k holdings as a unified account with the IRA. One could then hold international stocks in an IRA and save 1-1.2%% in fees. This seems like a no-brainer. Why not just contribute to your 401k at a level to obtain the maximum match, if any, and then prioritize IRA contributions which will have rock-bottom expense ratios?
Diversifiers don't work if you can't intermix money between the accounts. Let me give you a simple example. I'll use 2 assets (based on Bill Bernstein's model for stocks)
Coin pays +30% on heads and -10% on tails. Expected return 10%, serial return 8.16%
OpCoin pays +30% on tails and -10% on heads. Expected return 10%, serial return 8.16%

50/50 Coin/OpCoin held separately generate an 8.16% return in each account.
50/50 Coin/OpCoin held together in the same account pay a steady 10% with no risk.
You must rebalance each year to maintain this allocation and get the advantage from diversification. Otherwise you end up taking the penalty for lack of diversification.

The IRS makes things hard.
triceratop wrote: Mon Aug 14, 2017 10:02 am First, this is simply an opinion. There is no guarantee that a given international small or value fund will outperform by 100 basis points;
Of course I have no guarantee. If I can guarantee asset A will always outperform asset B then long A/short B is a 0 cost asset with positive return and allows me to generate infinite return. The criteria is not and should not be a guarantee. It is what is likely. Given what we know, yes I think it is likely. Obviously knowing more about the funds would allow for a more precise answer.
triceratop wrote: Mon Aug 14, 2017 10:02 am you don't even know what the factor loadings are and you are recommending the funds. That's dangerous in my opinion; I tilt myself, but it's dangerous to unnecessarily spend money in fees.
I'm not advising him to unnecessarily spend money in fees. I'm saying all things being equal bad diversification is more damaging than moderate fees.
triceratop wrote: Mon Aug 14, 2017 10:02 am Holding down the ER should absolutely be done when there are no other disadvantages.
No disagreement. Where we are potentially disagreeing is how much the disadvantage is.

Not sure I totally get your first point. I look at my portfolio across all accounts combined. I have quite a few different tIRAs Roths and 401ks. Not each account is perfectly balanced but overall it stays close to where I want it. If the balance changes modestly that doesn't mean your diversification benefits go away. Ideally they are frequently rebalanced but modest swings in the percentages aren't going to materially affect returns.
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yawningcrab
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Re: Value of International Stock in 401k?

Post by yawningcrab »

Wow, thanks all for the information! Some replies:

Lou354 & triceratop: Unfortunately there's no company match. After some googling, I think my income is currently too high to use IRAs while there's an employer-offered plan. The situation may change in a couple years, though.

ruralavalon: Much to my sorrow, the 401k's index fund options are 0.30%, not 0.03%! (Love the username, btw.)

retiredjg: If there were clear answers, we wouldn't need a forum! =-)

jbolden1517 & JBTX: I think I see a convergence on cross-account diversification. One option I didn't consider is shifting a $27k Roth IRA from 3FP allocation to 100% international stock index fund at 0.06% ER (SWISX). Then we could hold non-zero but reduced international stocks in the 401k, where ER is higher. But as I mentioned above, Uncle Sam hasn't let us contribute to the Roth for a few years, and may not for a few years more.

One takeaway for me is that it may be helpful to give a more complete picture of our portfolio, beyond just the 401k. I'll study the sticky post on the topic and do so.
jbolden1517
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Re: Value of International Stock in 401k?

Post by jbolden1517 »

JBTX wrote: Mon Aug 14, 2017 6:37 pm
jbolden1517 wrote: Mon Aug 14, 2017 6:18 pm
triceratop wrote: Mon Aug 14, 2017 10:02 am Moreover, one can treat the 401k holdings as a unified account with the IRA. One could then hold international stocks in an IRA and save 1-1.2%% in fees. This seems like a no-brainer. Why not just contribute to your 401k at a level to obtain the maximum match, if any, and then prioritize IRA contributions which will have rock-bottom expense ratios?
Diversifiers don't work if you can't intermix money between the accounts. Let me give you a simple example. I'll use 2 assets (based on Bill Bernstein's model for stocks)
Coin pays +30% on heads and -10% on tails. Expected return 10%, serial return 8.16%
OpCoin pays +30% on tails and -10% on heads. Expected return 10%, serial return 8.16%

50/50 Coin/OpCoin held separately generate an 8.16% return in each account.
50/50 Coin/OpCoin held together in the same account pay a steady 10% with no risk.
You must rebalance each year to maintain this allocation and get the advantage from diversification. Otherwise you end up taking the penalty for lack of diversification.

The IRS makes things hard.
Not sure I totally get your first point. I look at my portfolio across all accounts combined. I have quite a few different tIRAs Roths and 401ks. Not each account is perfectly balanced but overall it stays close to where I want it. If the balance changes modestly that doesn't mean your diversification benefits go away. Ideally they are frequently rebalanced but modest swings in the percentages aren't going to materially affect returns.

To get my first point, consider the example. If it isn't clear ask questions. The diversification benefit does require a flow of money to operate. I look at my portfolio across all accounts combined as well so I'd like to make this simpler but it can't be done.
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triceratop
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Re: Value of International Stock in 401k?

Post by triceratop »

jbolden1517 wrote: Mon Aug 14, 2017 6:18 pm
triceratop wrote: Mon Aug 14, 2017 10:02 am Moreover, one can treat the 401k holdings as a unified account with the IRA. One could then hold international stocks in an IRA and save 1-1.2%% in fees. This seems like a no-brainer. Why not just contribute to your 401k at a level to obtain the maximum match, if any, and then prioritize IRA contributions which will have rock-bottom expense ratios?
Diversifiers don't work if you can't intermix money between the accounts. Let me give you a simple example. I'll use 2 assets (based on Bill Bernstein's model for stocks)
Coin pays +30% on heads and -10% on tails. Expected return 10%, serial return 8.16%
OpCoin pays +30% on tails and -10% on heads. Expected return 10%, serial return 8.16%

50/50 Coin/OpCoin held separately generate an 8.16% return in each account.
50/50 Coin/OpCoin held together in the same account pay a steady 10% with no risk.
You must rebalance each year to maintain this allocation and get the advantage from diversification. Otherwise you end up taking the penalty for lack of diversification.

The IRS makes things hard.
triceratop wrote: Mon Aug 14, 2017 10:02 am First, this is simply an opinion. There is no guarantee that a given international small or value fund will outperform by 100 basis points;
Of course I have no guarantee. If I can guarantee asset A will always outperform asset B then long A/short B is a 0 cost asset with positive return and allows me to generate infinite return. The criteria is not and should not be a guarantee. It is what is likely. Given what we know, yes I think it is likely. Obviously knowing more about the funds would allow for a more precise answer.
triceratop wrote: Mon Aug 14, 2017 10:02 am you don't even know what the factor loadings are and you are recommending the funds. That's dangerous in my opinion; I tilt myself, but it's dangerous to unnecessarily spend money in fees.
I'm not advising him to unnecessarily spend money in fees. I'm saying all things being equal bad diversification is more damaging than moderate fees.
triceratop wrote: Mon Aug 14, 2017 10:02 am Holding down the ER should absolutely be done when there are no other disadvantages.
No disagreement. Where we are potentially disagreeing is how much the disadvantage is.
That is a lot of words. I'm pretty sure I understand how the basic math works, though. Where we differ is the idea that you cannot prioritize IRA investment over 401(k) and rebalance with the IRA to quite a large degree. You didn't mention that at all, so it wasn't clear that this is strictly preferable to spending boatloads of extra dollars in management fees.

I have no idea how you can say that a fund is likely to outperform simply based on the name. That's quite the leap of faith and a dangerous lack of subtlety to give to the OP about how to select investment. It isn't even about having certainty that a given investment like small or value will outperform. I believe they will, too, or I wouldn't tilt. But you don't even know the basic things like the funds' factor loadings, whether it is an active or index fund, etc. Even if the Small or Value Premium were 4% it isn't at all clear that you would even expect the fund to outperform by 1% (a 0.25 loading). It is therefore simply incorrect IMO to advocate for these funds without further information.

We know nothing about these funds other than that the name small or value may appear in the name, and that the fees are 1-1.2% higher than they need be. Prudent thing to do would be to either request additional information and not recommend the funds yet.

OP, please provide more information on the 401(k) fund offerings before you commit to an allocation.
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Re: Value of International Stock in 401k?

Post by triceratop »

Lou354 & triceratop: Unfortunately there's no company match. After some googling, I think my income is currently too high to use IRAs while there's an employer-offered plan. The situation may change in a couple years, though.
If you're MFJ, for 2016 the limit before the phaseout began was $98k of MAGI. See: https://www.irs.gov/retirement-plans/pl ... an-at-work

How much do you plan to save per year? That makes a difference in the efficiency of being able to rebalance outside your 401(k) and avoid high-expense funds.
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Re: Value of International Stock in 401k?

Post by JBTX »

jbolden1517 wrote: Mon Aug 14, 2017 8:23 pm
JBTX wrote: Mon Aug 14, 2017 6:37 pm
jbolden1517 wrote: Mon Aug 14, 2017 6:18 pm
triceratop wrote: Mon Aug 14, 2017 10:02 am Moreover, one can treat the 401k holdings as a unified account with the IRA. One could then hold international stocks in an IRA and save 1-1.2%% in fees. This seems like a no-brainer. Why not just contribute to your 401k at a level to obtain the maximum match, if any, and then prioritize IRA contributions which will have rock-bottom expense ratios?
Diversifiers don't work if you can't intermix money between the accounts. Let me give you a simple example. I'll use 2 assets (based on Bill Bernstein's model for stocks)
Coin pays +30% on heads and -10% on tails. Expected return 10%, serial return 8.16%
OpCoin pays +30% on tails and -10% on heads. Expected return 10%, serial return 8.16%

50/50 Coin/OpCoin held separately generate an 8.16% return in each account.
50/50 Coin/OpCoin held together in the same account pay a steady 10% with no risk.
You must rebalance each year to maintain this allocation and get the advantage from diversification. Otherwise you end up taking the penalty for lack of diversification.

The IRS makes things hard.
Not sure I totally get your first point. I look at my portfolio across all accounts combined. I have quite a few different tIRAs Roths and 401ks. Not each account is perfectly balanced but overall it stays close to where I want it. If the balance changes modestly that doesn't mean your diversification benefits go away. Ideally they are frequently rebalanced but modest swings in the percentages aren't going to materially affect returns.

To get my first point, consider the example. If it isn't clear ask questions. The diversification benefit does require a flow of money to operate. I look at my portfolio across all accounts combined as well so I'd like to make this simpler but it can't be done.
I'd have to play out the math on your example but on the surface it doesnt make sense. You generally don't gain return by diversification. What you do is minimize volatility. Your example implies you can take two investments together that individually make x% and somehow you can get y%.

Perhaps I am missing the point of the example. That's why i asked the question in the first place.
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Re: Value of International Stock in 401k?

Post by jbolden1517 »

JBTX wrote: Mon Aug 14, 2017 8:38 pm I'd have to play out the math on your example but on the surface it doesnt make sense. You generally don't gain return by diversification. What you do is minimize volatility.
You need to play out the math. Gaining return and minimizing volatility are the same thing. That's why we often talk in terms of "risk adjusted return". To make this easier \think in terms of arithmetic and geometric (serial) return. Arithmetic return is unaffected by volatility. Geometric return absolutely is. Arithmetic return is the maximum you can get from perfect diversification. Geometric return is what you get if you don't diversify at all. By diversifying a portfolio you raise its geometric return close to the arithmetic return.

Simple example. Let's hold Coin on 10::1 leverage. Heads you get +300%, Tails you go -100%. Arithmetic return is 100% annually. Geometric return is -100% (you will eventually get tails and you will eventually bust out). Now let's assume you could break this investment into 1000 pieces each which independently flip the coin. Then almost exactly 1/2 would get heads and 1/2 tails so you would get the 100%. Given enough diversification any amount of leverage (any amount of volatility) is safe, but in practice the market doesn't offer that much diversification.
JBTX wrote: Mon Aug 14, 2017 8:38 pm Your example implies you can take two investments together that individually make x% and somehow you can get y%.
Yes that's correct. That is what I'm now saying explicitly.
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Re: Value of International Stock in 401k?

Post by in_reality »

jbolden1517 wrote: Mon Aug 14, 2017 8:23 pm
To get my first point, consider the example. If it isn't clear ask questions. The diversification benefit does require a flow of money to operate. I look at my portfolio across all accounts combined as well so I'd like to make this simpler but it can't be done.
It's not really that true. You can change holdings within accounts without flows between them.

If International outperforms by a sufficiently large margin so that you are overweighted, nothing is stopping you from purchasing domestic stocks in the IRA.

If International underperforms by a sufficiently large margin so that you are underweighted, nothing is stopping you from increasing international in your 401k (granted at a higher ER, but a least it'd only be for a portion of your international) or taxable (if you have money for that). There is also the possibility that in the time it took international to become overweight, that the 401k plan has been changed.

Using the IRA instead of non-matching 401-k contributions seems like a good idea to me.

Anyway, the ER difference of 0.7% (1% international - 0.3% US) should be taking in context of the USD having what appreciated 30% or so in recent years. I think it best to keep your exposure and get your ERs as low as possible by utilizing the IRA.
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Re: Value of International Stock in 401k?

Post by triceratop »

in_reality wrote: Mon Aug 14, 2017 8:51 pm
jbolden1517 wrote: Mon Aug 14, 2017 8:23 pm
To get my first point, consider the example. If it isn't clear ask questions. The diversification benefit does require a flow of money to operate. I look at my portfolio across all accounts combined as well so I'd like to make this simpler but it can't be done.
It's not really that true. You can change holdings within accounts without flows between them.

If International outperforms by a sufficiently large margin so that you are overweighted, nothing is stopping you from purchasing domestic stocks in the IRA.

If International underperforms by a sufficiently large margin so that you are underweighted, nothing is stopping you from increasing international in your 401k (granted at a higher ER, but a least it'd only be for a portion of your international) or taxable (if you have money for that). There is also the possibility that in the time it took international to become overweight, that the 401k plan has been changed.

Using the IRA instead of non-matching 401-k contributions seems like a good idea to me.

Anyway, the ER difference of 0.7% (1% international - 0.3% US) should be taking in context of the USD having what appreciated 30% or so in recent years. I think it best to keep your exposure and get your ERs as low as possible by utilizing the IRA.
Exactly, this.

One thing I'm less clear is how the nondeductibility of the IRA for the OP affects this. I still think that if this can be at all managed, especially by using the existing Roth IRA, it should be done, because the 0.7% is significant.
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Re: Value of International Stock in 401k?

Post by in_reality »

yawningcrab wrote: Sun Aug 13, 2017 9:59 pm One strategy is to minimize expenses by shifting the 401k to pure US stocks and bonds, leaving us with 0.3%ish expense ratios but no international stock exposure. We could then start accumulating international stocks in a taxable brokerage account. It would take us years to regain the typical 70/30ish ratio of US to international stocks, but the taxable fund would have a far lower expense ratio (0.06%; SWISX) than what we could get in the 401k.
If you do end up using taxable, SWISX is not the best fund to use. Either use an ETF (SCHF- International Large Caps, SCHC - International Small Caps, SCHE - Emerging markets) or a Vanguard Mutual fund that has an ETF share class (VTIAX or VXUS).

Mutual funds will generally have yearly capital gain distributions. ETFs or dual share class Vanguard funds won't (except very occasionally for some bond funds).

In any case, I'd try the IRA strategy. If you do need to use taxable, don't forget to claim the foreign tax credit for taxes paid overseas. There is a minimum but I have forgotten what it is.
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Re: Value of International Stock in 401k?

Post by JBTX »

jbolden1517 wrote: Mon Aug 14, 2017 8:47 pm
JBTX wrote: Mon Aug 14, 2017 8:38 pm I'd have to play out the math on your example but on the surface it doesnt make sense. You generally don't gain return by diversification. What you do is minimize volatility.
You need to play out the math. Gaining return and minimizing volatility are the same thing. That's why we often talk in terms of "risk adjusted return". To make this easier \think in terms of arithmetic and geometric (serial) return. Arithmetic return is unaffected by volatility. Geometric return absolutely is. Arithmetic return is the maximum you can get from perfect diversification. Geometric return is what you get if you don't diversify at all. By diversifying a portfolio you raise its geometric return close to the arithmetic return.

Simple example. Let's hold Coin on 10::1 leverage. Heads you get +300%, Tails you go -100%. Arithmetic return is 100% annually. Geometric return is -100% (you will eventually get tails and you will eventually bust out). Now let's assume you could break this investment into 1000 pieces each which independently flip the coin. Then almost exactly 1/2 would get heads and 1/2 tails so you would get the 100%. Given enough diversification any amount of leverage (any amount of volatility) is safe, but in practice the market doesn't offer that much diversification.
JBTX wrote: Mon Aug 14, 2017 8:38 pm Your example implies you can take two investments together that individually make x% and somehow you can get y%.
Yes that's correct. That is what I'm now saying explicitly.
Maybe I'm dense but this makes no sense. You are basically saying 1+1=3

As to your leveraged example, you aren't taking it to its logical end. There is always a chance that you can get all heads and your return will be much greater and average out all the busts. Of course this isn't palatable to most of our individual risk aversion curves but ultimately on average long term you get to the same point.

Diversification doesn't increase long term absolute returns. It does lower risk/volatility for a given levels of return making the returns more attractive to risk averse investors.
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Re: Value of International Stock in 401k?

Post by whodidntante »

My 401k only has one index fund, an S&P 500 index fund. For international I have three choices. Two actively managed ex-US funds, and a DFA emerging market fund. I just put developed in taxable and in my Roth. That's an option for many people.

It's not the end of the world if you end up buying a 1% ER fund to get international exposure, but I agree it's not ideal. I would still fully fund (18k in 2017) the 401k before I put money in taxable.
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Re: Value of International Stock in 401k?

Post by triceratop »

whodidntante wrote: Mon Aug 14, 2017 10:42 pm My 401k only has one index fund, an S&P 500 index fund. For international I have three choices. Two actively managed ex-US funds, and a DFA emerging market fund. I just put developed in taxable and in my Roth. That's an option for many people.

It's not the end of the world if you end up buying a 1% ER fund to get international exposure, but I agree it's not ideal. I would still fully fund (18k in 2017) the 401k before I put money in taxable.
The OP can still contribute to a nondeductible IRA
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Re: Value of International Stock in 401k?

Post by Lou354 »

yawningcrab wrote: Mon Aug 14, 2017 8:15 pm Wow, thanks all for the information! Some replies:

Lou354 & triceratop: Unfortunately there's no company match. After some googling, I think my income is currently too high to use IRAs while there's an employer-offered plan. The situation may change in a couple years, though.

ruralavalon: Much to my sorrow, the 401k's index fund options are 0.30%, not 0.03%! (Love the username, btw.)

retiredjg: If there were clear answers, we wouldn't need a forum! =-)

jbolden1517 & JBTX: I think I see a convergence on cross-account diversification. One option I didn't consider is shifting a $27k Roth IRA from 3FP allocation to 100% international stock index fund at 0.06% ER (SWISX). Then we could hold non-zero but reduced international stocks in the 401k, where ER is higher. But as I mentioned above, Uncle Sam hasn't let us contribute to the Roth for a few years, and may not for a few years more.

One takeaway for me is that it may be helpful to give a more complete picture of our portfolio, beyond just the 401k. I'll study the sticky post on the topic and do so.
It might make sense for you to do a backdoor Roth. I agree a more complete picture could be helpful.
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Re: Value of International Stock in 401k?

Post by jbolden1517 »

JBTX wrote: Mon Aug 14, 2017 8:38 pm As to your leveraged example, you aren't taking it to its logical end. There is always a chance that you can get all heads and your return will be much greater and average out all the busts.
Yes. In N years you have a 2^(-N) chance of having 2^(2N) times your original investment, otherwise you have $0. You average over all the possibilities and you have 2^N of your original investment. The 100% return of the original. You got the same number because what you proposed is just another definition of the arithmetic mean. The more normal definition is simply the case N=1. The problem with that of course is you aren't measuring the central tendency. You have an outlier that is becoming increasingly unlikely throwing out an enormous weight while the central tendency quickly converges on $0 and becomes increasingly likely. In 10 years you have less than .1% chance of not being bust in 20 less than .0001%

Another way of doing this calculation though that turns out to be the right one incorporates your risk aversion comment below. Is that you don't do the above but rather compute the product of all the outcomes and take the Nth root over all outcomes. That would be $0. That's the geometric mean or expected serial return or an investment. https://en.wikipedia.org/wiki/Geometric_mean
JBTX wrote: Mon Aug 14, 2017 8:38 pm Of course this isn't palatable to most of our individual risk aversion curves but ultimately on average long term you get to the same point.
No you don't get to the same point. Over the long term (and not very long) you go to $0 with 100%. Your odds of not having $0 decrease by 50% every year. The reason for that when you talk about risk aversion is that utility is the log of outcomes. The sum of logs is equal to the log of the product. That's the formula for the geometric mean.
Last edited by jbolden1517 on Tue Aug 15, 2017 7:44 am, edited 1 time in total.
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Re: Value of International Stock in 401k?

Post by retiredjg »

yawningcrab [/quote wrote: One option I didn't consider is shifting a $27k Roth IRA from 3FP allocation to 100% international stock index fund at 0.06% ER (SWISX). Then we could hold non-zero but reduced international stocks in the 401k, where ER is higher. But as I mentioned above, Uncle Sam hasn't let us contribute to the Roth for a few years, and may not for a few years more.

One takeaway for me is that it may be helpful to give a more complete picture of our portfolio, beyond just the 401k. I'll study the sticky post on the topic and do so.
Now you are headed in the right direction. :D. I agree with a previous poster that SWISX may not be your best choice since it is not a complete total international fund. But we'll see how the puzzle pieces can be moved around when you post your portfolio.
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Re: Value of International Stock in 401k?

Post by jbolden1517 »

in_reality wrote: Mon Aug 14, 2017 8:51 pm
jbolden1517 wrote: Mon Aug 14, 2017 8:23 pm
To get my first point, consider the example. If it isn't clear ask questions. The diversification benefit does require a flow of money to operate. I look at my portfolio across all accounts combined as well so I'd like to make this simpler but it can't be done.
It's not really that true. You can change holdings within accounts without flows between them.

If International outperforms by a sufficiently large margin so that you are overweighted, nothing is stopping you from purchasing domestic stocks in the IRA.
I think it was domestic in the 401K and international in the IRA. The entire presumption was the investor was unwilling to do this and held the accounts entirely separate. You are now saying if you break the presumption of the question then the answer isn't right. Well yes. You don't have to start by creating synthetic flows between the accounts but you do have to rebalance as if they were one account which means shifting.
in_reality wrote: Mon Aug 14, 2017 8:51 pm If International underperforms by a sufficiently large margin so that you are underweighted, nothing is stopping you from increasing international in your 401k (granted at a higher ER, but a least it'd only be for a portion of your international) or taxable (if you have money for that). There is also the possibility that in the time it took international to become overweight, that the 401k plan has been changed.
Agree with that.
in_reality wrote: Mon Aug 14, 2017 8:51 pm Anyway, the ER difference of 0.7% (1% international - 0.3% US) should be taking in context of the USD having what appreciated 30% or so in recent years. I think it best to keep your exposure and get your ERs as low as possible by utilizing the IRA.
I'd want to see the funds first. But in general I agree ER is very damaging.
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Re: Value of International Stock in 401k?

Post by ruralavalon »

yawningcrab wrote: Mon Aug 14, 2017 8:15 pm Wow, thanks all for the information! Some replies:

Lou354 & triceratop: Unfortunately there's no company match. After some googling, I think my income is currently too high to use IRAs while there's an employer-offered plan. The situation may change in a couple years, though.

ruralavalon: Much to my sorrow, the 401k's index fund options are 0.30%, not 0.03%! (Love the username, btw.)

retiredjg: If there were clear answers, we wouldn't need a forum! =-)

jbolden1517 & JBTX: I think I see a convergence on cross-account diversification. One option I didn't consider is shifting a $27k Roth IRA from 3FP allocation to 100% international stock index fund at 0.06% ER (SWISX). Then we could hold non-zero but reduced international stocks in the 401k, where ER is higher. But as I mentioned above, Uncle Sam hasn't let us contribute to the Roth for a few years, and may not for a few years more.

One takeaway for me is that it may be helpful to give a more complete picture of our portfolio, beyond just the 401k. I'll study the sticky post on the topic and do so.
I think it's a very good idea to do a new post with more details. Please see this for format: "Asking Portfolio Questions". You can simply add this to your original post using the edit button, so that all of your information is in one place. Or you could start a new thread. Either way please give fund names, tickers and expense ratios.

With a complete picture responses can be tailored to your situation, and should be less hypothetical and abstract.

The idea of using the Roth IRA to buy an international stock index fund may be the way to solve the problem of high expense ratios on the international funds in the 401k.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: Value of International Stock in 401k?

Post by JBTX »

jbolden1517 wrote: Tue Aug 15, 2017 7:19 am
JBTX wrote: Mon Aug 14, 2017 8:38 pm As to your leveraged example, you aren't taking it to its logical end. There is always a chance that you can get all heads and your return will be much greater and average out all the busts.
Yes. In N years you have a 2^(-N) chance of having 2^(2N) times your original investment, otherwise you have $0. You average over all the possibilities and you have 2^N of your original investment. The 100% return of the original. You got the same number because what you proposed is just another definition of the arithmetic mean. The more normal definition is simply the case N=1. The problem with that of course is you aren't measuring the central tendency. You have an outlier that is becoming increasingly unlikely throwing out an enormous weight while the central tendency quickly converges on $0 and becomes increasingly likely. In 10 years you have less than .1% chance of not being bust in 20 less than .0001%

Another way of doing this calculation though that turns out to be the right one incorporates your risk aversion comment below. Is that you don't do the above but rather compute the product of all the outcomes and take the Nth root over all outcomes. That would be $0. That's the geometric mean or expected serial return or an investment. https://en.wikipedia.org/wiki/Geometric_mean
JBTX wrote: Mon Aug 14, 2017 8:38 pm Of course this isn't palatable to most of our individual risk aversion curves but ultimately on average long term you get to the same point.
No you don't get to the same point. Over the long term (and not very long) you go to $0 with 100%. Your odds of not having $0 decrease by 50% every year. The reason for that when you talk about risk aversion is that utility is the log of outcomes. The sum of logs is equal to the log of the product. That's the formula for the geometric mean.

I think I am starting to get where you are coming from but I don't necessarily agree with your practical conclusions. It seems like you are using geometric mean to approximate a most likely outcome as opposed to an average outcome. You are essentially partially ignoring outliers.

Ignoring outliers gets you into trouble. AIG ignored them with credit default swaps. I mean investment banks would never go bust right? May as well write credit default swaps on them all day long. FREE MONEY! Until the outlier happens. Some have compared it to picking up nickels in front of a moving steam roller. Also if you used your geometric mean methodology you would never buy life insurance or ever play the lottery.

Whatever the merits, or not, of using geometric mean, getting back to the main point you can diversify across accounts and that will reduce your volatility. It is true that you may not be able to perfectly rebalance easily and may lose a little bit of the benefits of diversification but that impact is relatively small. And your expected return does not diminish.
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Re: Value of International Stock in 401k?

Post by Valuethinker »

yawningcrab wrote: Sun Aug 13, 2017 9:59 pm I've just recently learned about the Boglehead philosophy, and I'm still getting my head around the body of knowledge. While reading the wiki, one question that keeps bugging me is how important it is to keep international stocks in my 401k in the short term?

My wife and I are 47, and I have a 401k with few investment options. I'm currently in a target date 2030 fund (JSMIX) with a 0.89% net expense ratio. The 401k's US stock index fund options have around a 0.3% ratio, and international stock funds range from 1.01% to 1.33% ratios. I'd like to replace the target date fund with index funds to reduce the expenses, but maintaining a 60/40% US/international stock mix would push the overall expense ratio to nearly 0.7%.

One strategy is to minimize expenses by shifting the 401k to pure US stocks and bonds, leaving us with 0.3%ish expense ratios but no international stock exposure. We could then start accumulating international stocks in a taxable brokerage account. It would take us years to regain the typical 70/30ish ratio of US to international stocks, but the taxable fund would have a far lower expense ratio (0.06%; SWISX) than what we could get in the 401k.

So should I go for a few years with little-to-no international stocks, or keep internationals with the higher expenses? Or am I just splitting hairs? I'd appreciate any input from the community, to include references to wiki pages and other sources I should read. Thanks so much!
I believe Americans underinvest in international stocks -- home country bias. The reasons they do so are usually totally spurious-- that they understand something about American companies and American stock markets, that they understand but the market as a whole has not seen, so that US stocks are more attractive than foreign stocks.

In your situation however it's a very real cost to invest internationally. Historically, it has not had a big impact on returns to invest internationally.

I would switch to a pure US stock and bond account in your 401k. Thus saving considerably on management costs.

Over time, I would grow my international stocks in a taxable account *if* I could do so without creating too much immediate tax cost (e.g. on foreign dividends). Fluctuations in the value vs. US account will then determine how fast you get there (30% is probably not a bad target).

The point is you are trading off a very real cost, saved expense ratios, against maybe-gains.

Make sure you maximize your 401k before doing any investment outside of it.
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Re: Value of International Stock in 401k?

Post by triceratop »

jbolden1517 wrote: Tue Aug 15, 2017 7:48 am
in_reality wrote: Mon Aug 14, 2017 8:51 pm
jbolden1517 wrote: Mon Aug 14, 2017 8:23 pm
To get my first point, consider the example. If it isn't clear ask questions. The diversification benefit does require a flow of money to operate. I look at my portfolio across all accounts combined as well so I'd like to make this simpler but it can't be done.
It's not really that true. You can change holdings within accounts without flows between them.

If International outperforms by a sufficiently large margin so that you are overweighted, nothing is stopping you from purchasing domestic stocks in the IRA.
I think it was domestic in the 401K and international in the IRA. The entire presumption was the investor was unwilling to do this and held the accounts entirely separate. You are now saying if you break the presumption of the question then the answer isn't right. Well yes. You don't have to start by creating synthetic flows between the accounts but you do have to rebalance as if they were one account which means shifting.
We don't have to tailor our advice strictly to the constraints suggested by the OP, nor should we consider that as the delimiter of "best" advice. To do so would be to fall victim to the XY Problem
in_reality wrote: Mon Aug 14, 2017 8:51 pm Anyway, the ER difference of 0.7% (1% international - 0.3% US) should be taking in context of the USD having what appreciated 30% or so in recent years. I think it best to keep your exposure and get your ERs as low as possible by utilizing the IRA.
I'd want to see the funds first. But in general I agree ER is very damaging.
But you suggested the more expensive funds without knowing anything about the funds first.
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Re: Value of International Stock in 401k?

Post by jbolden1517 »

triceratop wrote: Tue Aug 15, 2017 11:30 am
jbolden1517 wrote: Tue Aug 15, 2017 7:48 am
in_reality wrote: Mon Aug 14, 2017 8:51 pm
Anyway, the ER difference of 0.7% (1% international - 0.3% US) should be taking in context of the USD having what appreciated 30% or so in recent years. I think it best to keep your exposure and get your ERs as low as possible by utilizing the IRA.
I'd want to see the funds first. But in general I agree ER is very damaging.
But you suggested the more expensive funds without knowing anything about the funds first.
I don't know anything about the domestic funds either. There wasn't a lot to g on. Here is what he said: 401k's US stock index fund options have around a 0.3% ratio, and international stock funds range from 1.01% to 1.33% ratios. Pretty much I read the question as "would you pay an extra 1% for international". And at that level of specification my answer is: yes.

There is a bit more to go on. On average though most US stock index funds are going to be SP500 or something that strongly correlates. That's a big negative (large growth). In the specific who knows what index he's holding. It might be a sector index and by "index fund" he meant a fund that tracks the Nasdaq biotechnology index. We all have to guess.

However the most likely situation is he is paying about a 25 basis points 401k fee wrapped in his funds since they are .3%. The second most likely alternative is he's getting better indexes or something like DFA. If that's the case then the 1-1.3% for international are doing something really good. But assuming they aren't, he's probably looking at pretty good international funds (after all he wasn't getting tooled domestically) that he's overpaying by about 60 basis points for. In the abstract I think international exposure is worth well more than an extra 1%. I was buying international when the spreads were often over 2% to get good international funds.

In the specific no question the funds help. In general I value international a lot.
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yawningcrab
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Re: Value of International Stock in 401k?

Post by yawningcrab »

Thanks again, folks! I hadn't mentioned it before, but one of my goals for this post was to get a feel for how the community works. I had thought asking a supposedly narrow question about a 401k would be an easy way to get experience discuss wider portfolio issues later. I see now that the full portfolio, in addition to more details about the 401k options, are essential for the kind of advice I'm seeking.

Rather than incrementally add information on this thread, I'll retrench and prepare a new post according to the forum guidelines. In the meantime, I'll get smarter about two terms that are new to me: "backdoor Roth" and "nondeductible IRAs".
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Re: Value of International Stock in 401k?

Post by retiredjg »

yawningcrab wrote:Rather than incrementally add information on this thread, I'll retrench and prepare a new post according to the forum guidelines. In the meantime, I'll get smarter about two terms that are new to me: "backdoor Roth" and "nondeductible IRAs".
Good choice. :happy

Here's a start. There is no such thing as a "non-deductible IRA". But there are contributions to IRA that are not deducted, either by choice or because you have no choice.
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