Traveling First Class in Vanguard’s International Stock Index Fund

Need a vacation from our turbulent market? Go first-class with Vanguard’s Total International Stock Index Fund. Why do I need foreign stocks? After all, they’ve drastically underperformed the S&P in the last few years—and let’s face it folks—the world is in turmoil.

The whole idea of plunking some money down on foreign stocks gives many investors the heebie-jeebies. You’re not a victim of home country bias, you’re just being prudent, right? Aren’t almost all foreign economies—especially government-heavy and  bureaucratic Europe—weaker than ours and so grow more slowly? And what about political upheaval? Those are valid concerns, but in fact over time and across many different periods of international unrest, foreign stocks have fared almost as well as our own.

So what would I gain? Two big advantages. You’ll have less bouncing around in your portfolio. Although international and domestic stocks are highly correlated, sometimes our market zigs when the rest of the world’s markets zag.

You also benefit from increased diversification. Don’t be a wise guy. I know many highly regarded investment advisory services maintain you can achieve the same desired result by simply investing in large-cap U.S. stocks that derive substantial revenue from overseas operations. I protest that’s just not so. For one thing, exporters’ products may not be affected by local developments in quite the same way as their international counterparts. Another twist is that small companies don’t conduct as much business on foreign soil as large ones, so the stay-at-home investor steeped in small caps does not partake in as much of the benefits (and risks) of a global reach.

But if I deploy new cash or shift some money from U.S. funds into international ones, aren’t I just trading? Not necessarily, though I know many readers will disagree here. I’d call it repositioning for the long-term. Several reputable market observers advocate as much as a 40% allocation to foreign companies. To be sure, Vanguard’s popular Total World Stock Index Fund (VTWAX) holds a 40% international weighting, which accurately reflects the current relative value of U.S. and foreign markets. That level may be too high for you, but maybe you’d feel comfortable with a 20% allotment to the Vanguard Total International Stock Index Fund (VTIAX)

Let’s say you’re curious. How to proceed. Take a look at VTIAX. Besides the trademark low Vanguard fee, it gives you representation in the Far East as well as Europe and has two additional perks. Unlike many international funds it has a notable weighting in small and midcap stocks and also a reasonable stake in emerging markets.

Despite a strong showing out of the gate this year, foreign stocks may still be undervalued when compared with our own. It could be an opportune time to start or add to a long-term position. But remember, if you prefer a convenient and comprehensive one-stop vehicle for a global commitment, check out the total world fund mentioned earlier.

Bon voyage.