rossington wrote: ↑
Fri Jul 26, 2019 4:20 am
Given the lackluster performance of VTIAX do you still feel it should still be a component of the 3 fund portfolio?
In the decade prior to the Great Recession, I believe that International stocks actually outperformed U.S. stocks. While the U.S. markets have outperformed since 2009, largely due to the rise of a new generation of technology giants, there is never any guarantee that a trend like this will continue.
I believe that inclusion of International assets also provides a hedge against any future currency problems with the U.S. Dollar.
In situations where:
1. USD inflation is severe
, Vanguard's International index funds, which are currency un-hedged, will provide some shelter. International bond funds will also provide some shelter, even if they are hedged, because the currency Forward Exchange contracts used by such funds operate on a short 1-3 month horizon, and are dependent on interest rate differentials between countries. Inflation would have to unexpectedly and noticeably outpace the predicted interest rate differentials to damage hedged bond holdings.
2. USD inflation is moderate
, both U.S. stocks and International stocks have room to grow.
3. USD is experiencing deflation
, both US and International bonds should provide good returns to counterbalance lower earnings (and probable resulting lower share prices) in equities.
4. the US Federal Reserve rate hikes
, International bonds may provide some counterbalance against U.S. bonds that lose value due to rising interest rates. Central banks in different areas (like ECB, England, and Japan) rarely raise and lower rates in lockstep.
International assets are insurance against problems with local currency. That's why I maintain a 3-Fund portfolio. I might even go Core-4 with International bonds in the future, but I currently do not have this option in my retirement plan.
Some people advocating using gold as a hedge against currency problems, particularly inflation, but gold's record on this is not very good: https://www.inflationdata.com/inflation ... lation.asp
. Gold is a hedge against widespread societal disruption or collapse. I don't advocate using it in a growth-oriented investment portfolio. However, I think it could be a complement to one's emergency fund as a last-ditch asset in a SHTF scenario, such as escape from a war zone like Syria, where use of currency and other paper/data-based assets becomes difficult or impossible.
First Principles: (1) Diversify (2) Low Cost (3) Stay the Course | 3-Fund Index Portfolio