VBIAX or VSMGX: Is international still mandatory?

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bigo
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VBIAX or VSMGX: Is international still mandatory?

Post by bigo » Fri Apr 22, 2016 4:05 pm

I am 67, married, retired, with a joint name account with my wife and our two IRA's invested in a 60/40 equity/fixed income split in four Vanguard ETF's at Schwab. For personal reasons, I want to greatly simplify my portfolio to one mutual fund spread among our three accounts and am considering either the Vanguard Balanced Index Fund (Admiral Shares) or the Vanguard LifeStrategy Moderate Growth Fund Investor Shares. I am an experienced investor - retired from Morgan Stanley - so I understand asset allocation and diversification, but am struggling with the possibility that (dare I say it) things have changed. With many if not most US companies now multinational, and markets so linked, I honestly don't know what is to be gained anymore, on either the x or y axis, from adding in foreign securities. When Japan sneezes, the US seems to catch a cold. And by keeping my portfolio local, I don't need to worry about currency fluctuations.

I was taken by Warren Buffett's recommendation to the trustees of his wife's estate that none of her holdings need to be invested overseas, as well as his reasons way. Additionally, I've had several long-term clients who have done just fine with US-based portfolios, despite my gentle coaching over the years. Given the size of my portfolio and the difference in expense ratios, I'll save about $1,500 per year if I go with the Admiral shares vs. the Investor Shares alone. I welcome your thoughts or questions. Thank you.

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stemikger
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Re: VBIAX or VSMGX: Is international still mandatory?

Post by stemikger » Fri Apr 22, 2016 4:43 pm

bigo wrote:I am 67, married, retired, with a joint name account with my wife and our two IRA's invested in a 60/40 equity/fixed income split in four Vanguard ETF's at Schwab. For personal reasons, I want to greatly simplify my portfolio to one mutual fund spread among our three accounts and am considering either the Vanguard Balanced Index Fund (Admiral Shares) or the Vanguard LifeStrategy Moderate Growth Fund Investor Shares. I am an experienced investor - retired from Morgan Stanley - so I understand asset allocation and diversification, but am struggling with the possibility that (dare I say it) things have changed. With many if not most US companies now multinational, and markets so linked, I honestly don't know what is to be gained anymore, on either the x or y axis, from adding in foreign securities. When Japan sneezes, the US seems to catch a cold. And by keeping my portfolio local, I don't need to worry about currency fluctuations.

I was taken by Warren Buffett's recommendation to the trustees of his wife's estate that none of her holdings need to be invested overseas, as well as his reasons way. Additionally, I've had several long-term clients who have done just fine with US-based portfolios, despite my gentle coaching over the years. Given the size of my portfolio and the difference in expense ratios, I'll save about $1,500 per year if I go with the Admiral shares vs. the Investor Shares alone. I welcome your thoughts or questions. Thank you.
Hey Bigo,

Welcome to the Forum.

You seemed to have answered all your own questions. For the record, I'm 52 and for over 20 years I have never invested in international. John Bogle makes the same points as you in Common Sense on Mutual Funds and at 86 he has never invested in international. I also love simplicity (for my wife's sake) and think the Vanguard Balanced Index Fund is a great choice for tax deferred accounts. John Bogle has consistently recommended this fund as a one fund option for many investors. He even saves money for his Grandchildren in this fund.

So I think it is fair to say Warren Buffett does not think it is necessary for his wife and John Bogle does not think it is necessary at all.

I don't think you can get a better stamp of approval elsewhere.

Good Luck!
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!

lack_ey
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Re: VBIAX or VSMGX: Is international still mandatory?

Post by lack_ey » Fri Apr 22, 2016 4:53 pm

Has it ever been mandatory?

A few points to consider, given what you've stated:
  • Diversification benefits may be lower now, but so are costs.
  • Markets tend to link in the short term, especially when it comes to shocks and left-tail risks, but mid-long term performance can diverge. There are papers about this but just a casual glance at the recent past should be illustrative: the last five years, US stocks and international stocks had a daily correlation of 0.89, even though US stocks returned 11.3% and international stocks returned 0.9% annually. The reverse or more can easily occur.
  • When we look back from the future, maybe we'll see what you were wrong about things having changed. Whatever trends we see now or conditions might be transitory.
  • Currently US stocks are more expensive, maybe appropriately so given the risks and future prospects, but maybe that's not correct. Even if something is a good bet, do you place all your money on it?
  • Currently the USD is relatively strong, so if nothing else you get to buy more foreign assets per dollar spent now. This relationship may (or may not) reverse at some later point.
  • There's always the important difference between strategy/process and outcome. What does it show if certain clients did fine with US-based portfolios, and what doesn't it show?
This is one of the most commonly discussed topics in general so you can search for previous discussions in the search box (see upper-right). e.g.
viewtopic.php?t=179502
viewtopic.php?t=187487
viewtopic.php?t=157779
Last edited by lack_ey on Fri Apr 22, 2016 4:58 pm, edited 1 time in total.

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nisiprius
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Re: VBIAX or VSMGX: Is international still mandatory?

Post by nisiprius » Fri Apr 22, 2016 4:57 pm

Note:
VBAIX = Vanguard Balanced Index Fund, Admiral Shares = 60% Total [U.S.] Stock, 40% Total [U.S.] Bond, no international.
VSMGX = Vanguard LifeStrategy Moderate Growth, Investor Shares = 36% Total [U.S.] Stock Index, 24% Total International Stock Index, 28% Total [U.S.] Bond Index, 12% Total International Bond Index Fund.

Exactly whoever said that international stocks were "mandatory?" Very seriously, I'd like you to see if you can dig up what you read, when. Who used that word. Vanguard includes both international stocks and bonds in their "all-in-one" funds and obviously thinks they are a good idea, but Vanguard's very own paper, Considerations for investing in non-U.S. equities doesn't even come close to using the word "mandatory." This is what they actually say (with my boldfacing)
  • Non-U.S. equities should be considered for inclusion in a domestic portfolio.
  • Although there is no right answer for all investors, empirical and practical considerations suggest a reasonable starting allocation to non-U.S. stocks of 20%, with an upper limit based on global market capitalization.
  • The exact allocation to non-U.S. equities will depend on the investor’s view regarding the short- and long-term trade-offs.
As for Warren Buffett, I find his pithy declarations annoying in that they don't even begin to answer some important questions. He isn't clear on why he recommended zero international for his wife's trust--does he really think 100% U.S. is better, or does he just believe in keeping it simple and not fussing? Does he really think the S&P 500 is better than a total stock market index fund, or does he just think small-caps can't be that important and doesn't want to overthink things? Or what?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Dandy
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Re: VBIAX or VSMGX: Is international still mandatory?

Post by Dandy » Fri Apr 22, 2016 5:06 pm

I spent some time with Morgan Stanley but didn't learn about investing so much from that job or any financial services job. Learned more from good reading and this forum. I'm 68 married and recently simplified my TIRA portfolio a bit by eliminating International Index, total bond and total Stock market. REIT Index and Intermediate Investment Grade funds and putting that money in Balanced Index and a smaller allocation to Wellesley Income fund to keep my equity allocation in line. (a 40/60 total portfolio allocation)

So, I basically have those 2 funds and TIPS, short term bond funds and a CD ladder in my TIRA. Simple enough-- for now.

I also reduced my taxable International equity a bit so now my total portfolio allocation to international equities is about 4%. Eventually, I'll increase International on the taxable side a bit to maybe 8%.

I feel I have enough assets and like Dr. Bernstein's idea of having enough safe investments to last 20 years or more to secure my retirement. I don't think I need the risk/reward of a high allocation to international equities at my age. Most don't agree -- I can live with that.

While Mr. Bogle doesn't necessarily believe you need to invest internationally, I wouldn't be guided by Mr. Buffet's wife's allocation.

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Yesterdaysnews
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Re: VBIAX or VSMGX: Is international still mandatory?

Post by Yesterdaysnews » Fri Apr 22, 2016 5:21 pm

Too much simplicity is not necessarily good either. I think a 20 or 25% allocation to international is reasonable and doesn't really complicate things that much. Valuations for international are more reasonable and dollar is strong right now, so while international hasn't done well over the last 10 years compared to US, they certainly seemed currently posed to perform reasonably well going forward. I expect relatively subdued returns from US equities over the next 10-12 years based on current valuations and dollar strength. Good to have a mix.

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JoMoney
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Re: VBIAX or VSMGX: Is international still mandatory?

Post by JoMoney » Fri Apr 22, 2016 5:48 pm

I'm a big fan of Warren Buffett. I'm following the simple portfolio advice he's repeatedly suggested.
Some people get hung up on the 'international', but I seriously doubt that's the allocation decision that will make much difference. It's the fixed income to equities allocation that most people should be looking at. WB has suggested a high equity allocation for the bequest to his wife, but has never really gave hard numbers for most people, suggesting that they should keep enough in cash that they feel comfortable, and the rest in a low cost index fund.
As far as international goes, I would ignore the recent relative returns, it's really really really not predictive of future returns. I would suggest considering what your own opinion is on risks (and expenses) they bring to the portfolio. If you think the additional diversification is important and will help reduce risk with similar expected returns, then do it... but the real risk control will come from your fixed-income/equity allocations not from the mix of equities. Personally, I just don't think international diversification is that important for a broad U.S. investor, and that there may be unnecessary risks and expenses with doing so.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

bigo
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Re: VBIAX or VSMGX: Is international still mandatory?

Post by bigo » Sat Apr 23, 2016 2:02 pm

Thank you to one and all. I have read all of your comments, read all of the links that lack_ey posted, and thoroughly read "Considerations for investing in non-US equities" that nisiprius pointed me to. I appreciate your expertise and willingness to help and have decided to invest with the Admiral shares of the Balanced Index Fund.

Thank you again for your help in clarifying my thoughts.

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