TSP - How to get better international coverage

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WanderingDoc
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TSP - How to get better international coverage

Post by WanderingDoc » Thu Feb 08, 2018 6:45 pm

I wanted to engage in a discussion for the best way to get the necessary international and emerging market exposure for those of us invested in the TSP. It has been mentioned on here in the past that the TSP "I fund" is lacking in certain key markets/sectors. Currently, my index fund portfolio is roughly 15% Vanguard Target 2055 fund in a Roth IRA, 55% VTSAX in taxable, rest in the TSP in a 90/10 allocation, with a 3:1 U.S./International clip. Looking for some suggestions, ie. do I alter the Roth IRA, add a certain fund to taxable acct, etc. Appreciate your thoughts.
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triceratop
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Re: TSP - How to get better international coverage

Post by triceratop » Thu Feb 08, 2018 6:46 pm

WanderingDoc wrote:
Thu Feb 08, 2018 6:45 pm
I wanted to engage in a discussion for the best way to get the necessary international and emerging market exposure for those of us invested in the TSP. It has been mentioned on here in the past that the TSP "I fund" is lacking in certain key markets/sectors. Currently, my index fund portfolio is roughly 15% Vanguard Target 2055 fund in a Roth IRA, 55% VTSAX in taxable, rest in the TSP in a 90/10 allocation, with a 3:1 U.S./International clip. Looking for some suggestions, ie. do I alter the Roth IRA, add a certain fund to taxable acct, etc. Appreciate your thoughts.
I would wait until the TSP I fund contains the coverage you desire. If you do anything you should do it in tax-advantaged where the actions you take are reversible without tax consequences. Are you aware that the index is changing to the MSCI ACWI ex US IMI (source: viewtopic.php?t=233929)?
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WanderingDoc
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Re: TSP - How to get better international coverage

Post by WanderingDoc » Thu Feb 08, 2018 8:57 pm

triceratop wrote:
Thu Feb 08, 2018 6:46 pm
WanderingDoc wrote:
Thu Feb 08, 2018 6:45 pm
I wanted to engage in a discussion for the best way to get the necessary international and emerging market exposure for those of us invested in the TSP. It has been mentioned on here in the past that the TSP "I fund" is lacking in certain key markets/sectors. Currently, my index fund portfolio is roughly 15% Vanguard Target 2055 fund in a Roth IRA, 55% VTSAX in taxable, rest in the TSP in a 90/10 allocation, with a 3:1 U.S./International clip. Looking for some suggestions, ie. do I alter the Roth IRA, add a certain fund to taxable acct, etc. Appreciate your thoughts.
I would wait until the TSP I fund contains the coverage you desire. If you do anything you should do it in tax-advantaged where the actions you take are reversible without tax consequences. Are you aware that the index is changing to the MSCI ACWI ex US IMI (source: viewtopic.php?t=233929)?
That great news! I didn't know. Maybe its best to just wait until it converts, although if it takes 1-2 years it might be a little long 8-)
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retiredjg
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Re: TSP - How to get better international coverage

Post by retiredjg » Thu Feb 08, 2018 9:37 pm

You could add a dollop of Emerging Markets in a roth IRA or whatever, or just wait till the I Fund finishes its transition to a complete international index.

We all want the "complete coverage", but in reality the I Fund, as it is, does get the job done.

rj49
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Re: TSP - How to get better international coverage

Post by rj49 » Fri Feb 09, 2018 1:06 am

Actually if you google interviews and articles with people like Jeremy Grantham and Rob Arnott, they recommend overweighting EM, simply because its valuation hasn't grown as much as US and other international stocks. Following that advice would have gained you 35% over a year, versus 25% for TSM and 27% for developed international.

Personally I'd switch 5% of the 15% in your Roth to EM, especially if it's enough to qualify for Admiral shares. Since a Roth is never taxed, you would benefit from having something with the greatest potential for returns in a Roth, and its higher volatility over other stocks also helps ensure you wouldn't panic sell or worry about its ups and downs. People also tend to have a problem increasing international allocation, so hiding it in a Roth will also help overcome home bias tendencies. If you keep it that way until retirement, it should also make a good balance of EM providing a lot of growth, while the TR fund would provide income you could withdraw for retirement.

A Roth also makes a good 'what if I live to 100' fund, since it doesn't have to be withdrawn through RMDs, as other IRAs do, so you could just let it grow as a backup for emergency medical needs/LTC or an inheritance/bequest fund, and having a strong growth component would probably give you a larger balance late in life than just the TR fund at 70-80% bonds.

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Re: TSP - How to get better international coverage

Post by White Coat Investor » Fri Feb 09, 2018 1:08 am

Just put a little EM and/or IS in the Roth IRA to go with the I fund in the TSP.
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Re: TSP - How to get better international coverage

Post by Engineer250 » Fri Feb 09, 2018 2:38 am

You can wait until 2019 like stated above. If you don't have significant assets in your non-TSP accounts this is probably the way to go.

Otherwise, if you have enough money in a Roth IRA, see the Bogleheads wiki on approximating total international:
https://www.bogleheads.org/wiki/Approxi ... ock_market
For TSP I Fund Investors or any investor with a MSCI EAFE Index fund:
61.12% Vanguard Developed Markets Index Fund (VDVIX) (0.20%)
17.19% Vanguard Emerging Markets Stock Index (VEIEX) (0.33%)
12.54% Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSVX) (0.37%)
6.35% iShares MSCI Canada Index (ETF) (EWC) (0.48%)
2.8% iShares MSCI South Korea Index (ETF) (EWY) (0.62%)
I'm kind of lazy so I just aim for ~18% EM and 12% international small-cap and ignore Canada and South Korea for now. I'm not a current TSP participant but the majority of my retirement funds are there and it's a bit tricky for me to balance out the I Fund in my insufficient Roth IRA and new 401k just due to lack of funds. If I were you, knowing what will happen in 2019, I would not bother to try to balance it out in taxable.

I haven't decided if I'll overweight EM or ex-US small cap after the changeover happens, but regardless it will simplify my life a lot so I'm looking forward to it.
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WanderingDoc
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Re: TSP - How to get better international coverage

Post by WanderingDoc » Sat Feb 24, 2018 3:55 am

rj49 wrote:
Fri Feb 09, 2018 1:06 am
Actually if you google interviews and articles with people like Jeremy Grantham and Rob Arnott, they recommend overweighting EM, simply because its valuation hasn't grown as much as US and other international stocks. Following that advice would have gained you 35% over a year, versus 25% for TSM and 27% for developed international.

Personally I'd switch 5% of the 15% in your Roth to EM, especially if it's enough to qualify for Admiral shares. Since a Roth is never taxed, you would benefit from having something with the greatest potential for returns in a Roth, and its higher volatility over other stocks also helps ensure you wouldn't panic sell or worry about its ups and downs. People also tend to have a problem increasing international allocation, so hiding it in a Roth will also help overcome home bias tendencies. If you keep it that way until retirement, it should also make a good balance of EM providing a lot of growth, while the TR fund would provide income you could withdraw for retirement.

A Roth also makes a good 'what if I live to 100' fund, since it doesn't have to be withdrawn through RMDs, as other IRAs do, so you could just let it grow as a backup for emergency medical needs/LTC or an inheritance/bequest fund, and having a strong growth component would probably give you a larger balance late in life than just the TR fund at 70-80% bonds.
I didn't notice the last 3 replies to my post, whoops! Thanks guys. I will probably allocate 1/3 of my Roth IRA to EM. Would you suggest to rebalance it every year (keep 1/3 of the balance in EM), something else?
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WanderingDoc
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Re: TSP - How to get better international coverage

Post by WanderingDoc » Sat Feb 24, 2018 3:58 am

Engineer250 wrote:
Fri Feb 09, 2018 2:38 am
You can wait until 2019 like stated above. If you don't have significant assets in your non-TSP accounts this is probably the way to go.

Otherwise, if you have enough money in a Roth IRA, see the Bogleheads wiki on approximating total international:
https://www.bogleheads.org/wiki/Approxi ... ock_market
For TSP I Fund Investors or any investor with a MSCI EAFE Index fund:
61.12% Vanguard Developed Markets Index Fund (VDVIX) (0.20%)
17.19% Vanguard Emerging Markets Stock Index (VEIEX) (0.33%)
12.54% Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSVX) (0.37%)
6.35% iShares MSCI Canada Index (ETF) (EWC) (0.48%)
2.8% iShares MSCI South Korea Index (ETF) (EWY) (0.62%)
I'm kind of lazy so I just aim for ~18% EM and 12% international small-cap and ignore Canada and South Korea for now. I'm not a current TSP participant but the majority of my retirement funds are there and it's a bit tricky for me to balance out the I Fund in my insufficient Roth IRA and new 401k just due to lack of funds. If I were you, knowing what will happen in 2019, I would not bother to try to balance it out in taxable.

I haven't decided if I'll overweight EM or ex-US small cap after the changeover happens, but regardless it will simplify my life a lot so I'm looking forward to it.
That is helpful, thank you. Are those the ERs at the end? Seem high! So it looks like the Vanguard EM fund does not include small cap? Bummer. I thought it would be fine but it seems that one would need to add the FTSE All-world ex-US fund which just adds complexity.
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Re: TSP - How to get better international coverage

Post by TwstdSista » Sat Feb 24, 2018 5:33 am

WanderingDoc wrote:
Sat Feb 24, 2018 3:58 am
.... Are those the ERs at the end? Seem high! So it looks like the Vanguard EM fund does not include small cap? Bummer. I thought it would be fine but it seems that one would need to add the FTSE All-world ex-US fund which just adds complexity.
My understanding -- your International allocation could be split up as such (simple version):

TSP:
70% I Fund

Roth:
18% Vanguard Emerging Markets Stock Index (VEIEX) ER 0.33%
12% Vanguard FTSE All-World ex-US Small Cap Index Fund (VFSVX) ER 0.37%

So don't keep 1/3 of your Roth in EM/Int'l SC, but rather 30% of your overall international allocation. It requires some math, but if you create a decent spreadsheet, that will track percentages for you and help you rebalance when needed. Don't worry about those ERs. While anything over 0.20% is considered "high" on this forum, this is a very common exception to the rule, so-to-speak.

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Re: TSP - How to get better international coverage

Post by blaugranamd » Sat Feb 24, 2018 6:30 am

Just also remember that the enemy of a good plan is a great plan. Ensuring you have a portfolio that exactly replicates a TISM fund probably isn't gonna perform significantly different than just holding the I-fund as you international holdings. Currently your TSP is 30% of your portfolio with roughly 1/3 of that in I Fund, so maybe 10% of your entire portfolio is international (+whatever percentage is in your Lifecycle fund). Consider how much additional real return you might expect from adding a few percent EM and small cap (18% and 12% above will amount to only 3% of your entire portfolio) to your portfolio in exchange for the complexity.

On a plus side, I never realized (or maybe just forgot) they we're changing to a more diversified index for I fund, that's great!
-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- | -- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---

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Re: TSP - How to get better international coverage

Post by rkhusky » Sat Feb 24, 2018 8:48 am

WanderingDoc wrote:
Sat Feb 24, 2018 3:58 am
So it looks like the Vanguard EM fund does not include small cap? Bummer. I thought it would be fine but it seems that one would need to add the FTSE All-world ex-US fund which just adds complexity.
Vanguard added small caps to its EM fund within the last few years. Previously it did not have small caps.
See: https://www.vanguard.com/us/insights/ar ... nnel=FUNDS

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Re: TSP - How to get better international coverage

Post by blaugranamd » Sat Feb 24, 2018 9:11 am

Your alternative is to not hold the I fund at all and hold a total international fund that includes EM/Small Caps such as FTIPX or VTIAX. The difference in expense ratios becomes negligible: 0.1% vs 0.033%.

Personally, I already had TISM in my Roth so I kept it along with the I fund in my TSP. I figure it gives me some international EM/SC exposure. I'm not worried about hitting exact ratios. Though, I hold about 30% equity as international so a bit more than yourself. No wrong way to go about this and they'll all probably come out pretty close performance wise.

For historical perspective, compare FTIPX to FSIVX to get an idea of what total market index vs current I fund index, respectively, looks like. Not a runaway difference.
-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- | -- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---

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