Vanguard Total International Stock Index Fund

[Ramey58]

Just reviewing this fund which is in my retirement portfolio. It seems like the returns over time have not been that great. 4.86% annual returns since 1996. Can someone explain to me why International Funds are so good for a balanced portfolio?

[Rick Ferri]

No one knows whether international stocks will outperform the US or the other way around. They have not recently, but the future may be different.

Rick Ferri

[nisiprius]

I don't know that they are "so good."

Novices sometimes find it hard to believe how incredibly variable and inconsistent performance is. Bursts of outperformance and underperformance can last for five or ten years. The actual results over any particular time period tend to depend on how many of each that particular period included. It's almost impossible to get a time period long enough to average them out, and by the time you do there are serious doubts over whether that whole time period is really "the same thing."

These charts are not intended to show you that international stocks are "so good," but only that you just can't be sure... of much of anything.

Source

Blue is Total International. Orange is VTSMX, the Vanguard Total [US-only] Stock Market Index Fund.

From inception through the end of 2002, US (orange) outperformed.



From 2002 through mid-2008, international outperformed. The result was the investors holding US-only stocks experienced an infamous "lost decade," 2000 through 2009, while investors who included international stocks in their portfolios enjoyed a modest gain.



Mid-2008 through present, the US again outperformed.



So, the time period you looked at had two periods of US outperformance and only one of international outperformance. The two funds leapfrogged each other and the US got in one more leap.

I am not a big enthusiast for international stocks, and I've looked at charts like these before and don't know what to make of them, other than "I don't know." But that in itself is a strong statement. I can't believe either that they do much good or much harm. About 25% of my stock holding is international, for no good reason.

[Rick Ferri]

None of the above charts matter to what will occur in the future. We just don't know. That's why we diversify.

Rick Ferri

[danielc]

None of the above charts matter to what will occur in the future. We just don't know. That's why we diversify.

Rick Ferri

I would argue that those charts show that the future is unpredictable.

[danielc]

Just reviewing this fund which is in my retirement portfolio. It seems like the returns over time have not been that great. 4.86% annual returns since 1996. Can someone explain to me why International Funds are so good for a balanced portfolio?

I don't think anyone has argued that international stocks are "so good". I hold international stocks. Maybe they'll do better in the future, or maybe they won't. In the past they have some times done better than the US, and some times they've done worse. I hold them because I like to hold everything, and I think that they will diversify my portfolio. I also think that most of US and ex-US stocks are large cap companies that are pretty global anyway, so I don't see a powerful reason to discriminate large cap stocks based on domicile.

[Taylor Larimore]

Just reviewing this fund which is in my retirement portfolio. It seems like the returns over time have not been that great. 4.86% annual returns since 1996. Can someone explain to me why International Funds are so good for a balanced portfolio?

Ramey58:

You may find this post helpful:

How Much International Stock? A suggestion.

Best wishes.
Taylor

John Bogle's Words of Wisdom: "I'd approach this relatively new wave of international investing with caution, and stick to my recommendation that international funds -- including BRIC funds -- do not exceed one-fifth of an investor's equity position."

[abuss368]

Just reviewing this fund which is in my retirement portfolio. It seems like the returns over time have not been that great. 4.86% annual returns since 1996. Can someone explain to me why International Funds are so good for a balanced portfolio?

Your right, international stocks have not done well. The problem is no one knows what the future will bring and not chart will ever tell an investor that. I think it is import to simply do what works best for your individual circumstances and allows you to sleep well at night.

[DB2]

I think it is import to simply do what works best for your individual circumstances and allows you to sleep well at night.

Agreed, this is the bottom line.

[Svensk Anga]

Since the financial crisis, corresponding to Nisi’s third chart, the dollar has been appreciating relative to other currencies. This makes the return on foreign stocks lower when measured in dollars. They did about 60% better when measured in their local currencies.

Will the dollar go on appreciating? Who knows? Currencies tend to move in long cycles and at some point this one will reverse. Good luck on timing that.

I’ve been steady at 30% international since the early 90’s. Sure I’ve been disappointed with the last decade, but I suspect now is not the time to lighten up.

[Ramey58]

Thanks for all the replies. I have always just stayed steady on my course and will continue to, but I'm close to retirement so I'm just noticing things more.

[columbia]

If you poke around the site, you’ll see a variety of (strong) preferences and opinions.

I omit international for a variety reasons, but everyone has different takes, preferences and tolerances and needs to take risk. The main thing is - IMO - that there’s no right answer in terms of adding ex-US and to what level. The wiki has a lot unbiased information.

The only strong opinion I have (other than for my own choices) on the matter is to ignore the demagogues.

[Trader Joe]

Just reviewing this fund which is in my retirement portfolio. It seems like the returns over time have not been that great. 4.86% annual returns since 1996. Can someone explain to me why International Funds are so good for a balanced portfolio?

No, I cannot explain. I do not include International stocks/equities in my own portfolio and I my portfolio has performed very well.

[Triple digit golfer]

About half of the world's stock market capitalization is from companies headquartered outside of the U.S. Many of the products that you use every day are produced by these companies. BP, Shell, Nestle, Samsung, Unilever, Toyota, Honda, etc.

That's why international equities are often recommended as part of an equity portfolio.

[PackersFan12]

Just allocate 20% to 33% of your equities to international, and be done with it. I've found that this is not a topic that needs to be overthought.

[columbia]

Just allocate 20% to 33% of your equities to international, and be done with it. I've found that this is not a topic that needs to be overthought.

The easiest way to do this is half in total stock market (or other large cap fund) and half in total world; no spreadsheet calculations required.

[oldzey]

No one knows whether international stocks will outperform the US or the other way around. They have not recently, but the future may be different.

Rick Ferri

+1

The article containing Ben Carlson's 2014 quote: "Diversification is about accepting good enough while missing out on great but avoiding terrible" is worth a read and gives specific examples of the verity that future performance of U.S. or international stocks is unpredictable.

[peterwantstosave]

None of the above charts matter to what will occur in the future. We just don't know. That's why we diversify.

Rick Ferri

+ 1

[Triple digit golfer]

Just allocate 20% to 33% of your equities to international, and be done with it. I've found that this is not a topic that needs to be overthought.

The easiest way to do this is half in total stock market (or other large cap fund) and half in total world; no spreadsheet calculations required.

How is that easier than a 70/30 or whatever split of U.S. and Total International? Still two funds.

It would also allow allocation drift.

[arcticpineapplecorp.]

https://www.bogleheads.org/wiki/Domestic/International

returns by decade (sometimes U.S. wins, other times it's international):

https://www.bogleheads.org/wiki/File:US ... decade.png

returns are not the only thing (and not known ahead of time). Volatility is another. Adding international has provided volatility reduction:

https://www.vanguard.com/pdf/ISGGEB.pdf

not to mention, holding international avoids country risk (but adds currency risk. Though currency fluctuations can not only hurt, but also at times help your investments):



here's a good article:

https://www.fidelity.com/viewpoints/inv ... ail_weekly

by the way, how many times since 1999 was the U.S. the top dog (of developed markets)?
answer: 1

Finland was the top dog 4 times since 1999. (source: http://static.fmgsuite.com/media/docume ... ef3871.pdf)

knowing that, why bother with U.S. and why not put it all in Finland?



There were emerging market countries that did even better:

[whodidntante]

The expected returns of international equities are currently higher. But you can put all your money in the horse that won the last race if you like.

[Fundhunter]

I am in withdrawal stage and do 25% of my equities in international and mostly with that Vanguard index fund. I think it is not impossible that something bad happens to the U S economy/stock market relative to to other economies/markets and this is a hedge against that possibility in my mind.

[abuss368]

I am in withdrawal stage and do 25% of my equities in international and mostly with that Vanguard index fund. I think it is not impossible that something bad happens to the U S economy/stock market relative to to other economies/markets and this is a hedge against that possibility in my mind.

Something "bad" did happen to our economy in 2007 - 2008. International dropped faster and harder than U.S.

[columbia]

I am in withdrawal stage and do 25% of my equities in international and mostly with that Vanguard index fund. I think it is not impossible that something bad happens to the U S economy/stock market relative to to other economies/markets and this is a hedge against that possibility in my mind.

Something "bad" did happen to our economy in 2007 - 2008. International dropped faster and harder than U.S.

That could be different “next time”, of course. That won’t have any effect on me, as it won’t be in my portfolio. Good for those who own it at the time; there’s no indication that it will make a (positive) difference in their long term total reruns, however.

[Fundhunter]

I am in withdrawal stage and do 25% of my equities in international and mostly with that Vanguard index fund. I think it is not impossible that something bad happens to the U S economy/stock market relative to to other economies/markets and this is a hedge against that possibility in my mind.

Something "bad" did happen to our economy in 2007 - 2008. International dropped faster and harder than U.S.

I said "relative to other economies/markets". Do you think that could not happen? I think it could.

[abuss368]

I am in withdrawal stage and do 25% of my equities in international and mostly with that Vanguard index fund. I think it is not impossible that something bad happens to the U S economy/stock market relative to to other economies/markets and this is a hedge against that possibility in my mind.

Something "bad" did happen to our economy in 2007 - 2008. International dropped faster and harder than U.S.

That could be different “next time”, of course. That won’t have any effect on me, as it won’t be in my portfolio. Good for those who own it at the time; there’s no indication that it will make a (positive) difference in their long term total reruns, however.

Hi columbia -

I agree it could be different next time. No one knows in advance what pleasures and pain the stock and bond markets will bring.

[abuss368]

I am in withdrawal stage and do 25% of my equities in international and mostly with that Vanguard index fund. I think it is not impossible that something bad happens to the U S economy/stock market relative to to other economies/markets and this is a hedge against that possibility in my mind.

Something "bad" did happen to our economy in 2007 - 2008. International dropped faster and harder than U.S.

I said "relative to other economies/markets". Do you think that could not happen? I think it could.

I agree as no one knows anything in advance.

[alex123711]

Should non Americans also be overweight US stocks? Or does this only apply to domestic investors? Also how do you adjust allocations say you are 50/50 and U.S has a big year, do you sell some U.S and buy more INT to get back to 50/50?

[watchnerd]

Should non Americans also be overweight US stocks? Or does this only apply to domestic investors? Also how do you adjust allocations say you are 50/50 and U.S has a big year, do you sell some U.S and buy more INT to get back to 50/50?

Rebalancing depends on your rules.

I use bands, i.e. rebalance at 5% overweight of port, or 25% more than original AA.

In your example, if I got to 56% US / 44% ex-US, I'd sell that extra 6% of US and buy 6% ex-US.

[smectym]

None of the above charts matter to what will occur in the future. We just don't know. That's why we diversify.

Rick Ferri

Rick, that’s fair, and as a logical exercise, if one accepts the premise that diversification is the only secret sauce/only free lunch in investing etc., and one further accepts that some huge “x” amount of economic activity is occurring ex-US, it’s easy to conclude, Hey, let’s diversify ex-US!

But those sounding cautionary notes explain that since much of SPX is multinational, and since the US is still, for better or worse, the global monopoly capitalist imperialist big dog, much of the value of that global economic growth is duly extracted by the US multinationals. That could both explain the outperformance of US vs. international, and offer a rationale for investors to shun the excessive volatility and opacity of many international markets, while still reaping most of the profits generated internationally through investing in the less volatile, more transparent U.S. markets.

So I think what’s needed is a persuasive argument debunking that, and showing why investors are not smart to place their chips on U.S. only: and such an argument must go beyond a reductive retreat to the simplistic “diversity is good; international provides additional diversity; so diversifying internationally is good” syllogism. Nor can such an argument complacently ignore the significant underperformance of international vs. U.S. over a protracted period by just shrugging, “well, maybe this year...or maybe next year, we’ll see some mean reversion.” Some color explaining the reasons for the prolonged underperformance of international, and the reasons for expecting future outperformance, would be welcome.

Vanguard has gone out on a limb by oracularly ordaining that investors should put a large slug of their money into international. If you sign up for VPAS you MUST allocate to international, or you’re not welcome. But the case presented so far for such a dogmatic approach seems a little thin. We need a new “white paper” updating the case for international and rebutting its detractors.

[lazyday]

We need a new “white paper”

Global equity investing: The benefits of diversification and sizing your allocation
https://www.vanguard.com/pdf/ISGGEB.pdf
Vanguard Research February 2019 - Brian J. Scott, CFA; Kimberly A. Stockton; Scott J. Donaldson, CFA, CFP

domestic equities tend to be more exposed to the narrower economic and market forces of their home market

In each market we examined [US, UK, AU, CA] our analysis indicated that volatility was reduced most with an allocation to international equities of between 40% and 50%.

[UpperNwGuy]

what’s needed is a persuasive argument {...] showing why investors are not smart to place their chips on U.S. only: and such an argument must go beyond a reductive retreat to the simplistic “diversity is good; international provides additional diversity; so diversifying internationally is good” syllogism. Nor can such an argument complacently ignore the significant underperformance of international vs. U.S. over a protracted period by just shrugging, “well, maybe this year...or maybe next year, we’ll see some mean reversion.” Some color explaining the reasons for the prolonged underperformance of international, and the reasons for expecting future outperformance, would be welcome.

^^^ This.

[lazyday]

You've probably seen charts showing ex-US outperforming for several years, then US, then ex-US.

Recently it's been US.

If you do a backtest when ex-US has outperformed, then ex-US will look good. Today, US looks good in backtests.

[UpperNwGuy]

You've probably seen charts showing ex-US outperforming for several years, then US, then ex-US.

Recently it's been US.

If you do a backtest when ex-US has outperformed, then ex-US will look good. Today, US looks good in backtests.

But this is yet another "reductive retreat." While it is true, it doesn't explain the overall superior performance of US stocks over long time periods.

[lazyday]

doesn't explain the overall superior performance of US stocks over long time periods

Would that help? Most people 100% invested in the US probably have explanations for outperformance.

Imagine trying to convince three investors to diversify: the 100% tech investor in 1999, 40% EM in 2007, and 100% US in 2020.

Among other things, we could tell 1999 that first mover advantages and low marginal costs of adding a customer could bring some companies tremendous profits. We could tell 2007 about favorable demographics and improved financial strength of both companies and countries. We could tell 2020 about the swift response to the financial crisis, and the seemingly more dynamic US economy.

We could also discuss behavioral reasons for outperformance. We put too much faith in the stories above, and drive prices too high.

Smectym suggests also explaining why we should expect outperformance to reverse.

Things change. Economic advantages change, and Shiller's "narratives" change. We could go back and show times where new tech stocks eventually disappointed, such as radio and electronics. Where EM’s future looked bright but problems still persisted, such as 1997. For 100% US, there’s Japan’s rise in the 1980s, and Europe’s in the 2000s.

Here in 2020, we see that the 1999 and 2007 investors should have diversified. I wonder if they learned something, or if they’ve recently sold their international to go 100% US.

[rerod]

Just allocate 20% to 33% of your equities to international, and be done with it. I've found that this is not a topic that needs to be overthought.

Whats interesting is Ive done just that with my taxable (33% international) which is chugging along doing 7% a year..
But my tax deferred doesn't include any international with 35% bonds and did 22% over one year..

Hmm..

[Wanderingwheelz]

The expected returns of international equities are currently higher. But you can put all your money in the horse that won the last race if you like.

You currently expect returns on international stocks to be higher. That doesn’t mean everyone should feel the same way that you do about it.

The truth is nobody knows. Not you, not me, not anybody.

[watchnerd]

The truth is nobody knows. Not you, not me, not anybody.

Which is why I bet on both.

[columbia]

The expected returns of international equities are currently higher. But you can put all your money in the horse that won the last race if you like.

Are you overweighting international based on your reading of expected returns? There is one poster here who is 100% ex-US...

[Wanderingwheelz]

The truth is nobody knows. Not you, not me, not anybody.

Which is why I bet on both.

Technically that’s not a bet at all. You’re internationally not betting, unlike a person who thinks one will do better than the other and acts on his hunch.

[Silence Dogood]

Please see:

Domestic v. International Megathread

[watchnerd]

Technically that’s not a bet at all. You’re internationally not betting, unlike a person who thinks one will do better than the other and acts on his hunch.

I just try to hold the global market weight, or close to it.

It seems intellectually defensible.

[columbia]

Technically that’s not a bet at all. You’re internationally not betting, unlike a person who thinks one will do better than the other and acts on his hunch.

I just try to hold the global market weight, or close to it.

It seems intellectually defensible.

Your signature indicates otherwise.

[watchnerd]

Your signature indicates otherwise.

How so?

I'm 70% stock. That's split 35% US / 35% ex-US.

[columbia]

Your signature indicates otherwise.

How so?

I'm 70% stock. That's split 35% US / 35% ex-US.

“Small factor” indicates a tilt and overweighting some form of small is definitely nowhere near market cap. It’s your portfolio, but it seems like a strange claim to make.

[watchnerd]

“Small factor” indicates a tilt and overweighting some form of small is definitely nowhere near market cap. It’s your portfolio, but it seems like a strange claim to make.

Well, we were talking US vs international.

But that's a 5% tilt. Which is why I said "close to it".

[rascott]

Understand that the underlying tilts of the US market vs the international index are different. International funds are heavily weighted towards things like financials.... while the US is more weighted towards tech.

In many ways it's a growth vs value argument. I've long been very underweight international, and it's worked out so far. I don't find many of the arguments for things like global market weight very persuasive, but that's just a personal decision.

[abuss368]

Understand that the underlying tilts of the US market vs the international index are different. International funds are heavily weighted towards things like financials.... while the US is more weighted towards tech.

In many ways it's a growth vs value argument. I've long been very underweight international, and it's worked out so far. I don't find many of the arguments for things like global market weight very persuasive, but that's just a personal decision.

I would agree. While the future may be different, international has not historically been enticing.

[stan1]

I don't find many of the arguments for things like global market weight very persuasive, but that's just a personal decision.

I don't find the arguments for global weight OR 100% US to be persuasive. Both rely on assumptions about the future that are likely to be flawed. I've settled at 2/3 US and 1/3 ex-US and planning to stay that way. The full set of facts was we know them supports neither global market cap nor 100% US. Agree in the end it does come down to some personal decisions.

[lazyday]

International funds are heavily weighted towards things like financials.... while the US is more weighted towards tech.

Note that if you reweight the US to the sector weights of EAFE, valuations only move a little towards those of EAFE: viewtopic.php?t=231996 (2017)