I feel the S&P 500 index is enough International exposure for me, since many US companies are diverse as much as 50% international. And yes, I go with Bogle and Buffett, however Buffett has a significant investment in Japan as of late. At 77 years old I put my money on US.
I have been working on this question for the past 5 months since my sudden (read that as let go after 20 years) retirement. I have settled on an allocation of 70/30 with the equity portion 60% SPY and 10% VEU. The remaining 30% is 25% Bonds and 5% Cash (drawing 4.73% currently). Will see how that looks in 6 months and then adjust if needed. Really am trying not to overthink this.
I am sticking with Bogle and Buffet, and will get my international market exposure via US multinational companies. It has served me well for nearly five decades and eliminates forex concerns.
“Thus, if you have chosen a 60/40 overall stock/bond split, your mix—a balanced portfolio—looks like this: 42% total US stock market 18% total foreign stock market 40% total fixed income market
That’s it. Done. Does this portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it.”
I assume that’s a quote from Bill’s book and relates to your comment just below. That 18% foreign stock out of the total portfolio works out to 30% of the stock portion. Vanguard Total World Stock Index Fund — my largest single fund holding — is currently at 41% international. That doesn’t strike me as a huge difference.
In “The Investor’s Manifesto”, Bernstein advocates for an 18% allocation to foreign equities, much less than the percentage you favor. Care to comment?
I don’t have Bill’s book at hand. Is that 18% of a person’s stock portfolio — or 18% of a model portfolio that also includes other asset classes? And is the 18% a minimum suggested allocation?
Historically international diversification hasn’t done much and of course in recent decades it’s been a major drag on returns.
What HAS made a difference is including small-cap stocks, as this comparison of U.S./International vs. U.S. Total Stock Market/U.S. Small Cap Value mades abundantly clear:
There’s also a good article on the always-helpful Portfolio Charts site that looks into the the characteristics of the most efficient portfolios. It shows that while there are a number of assets that really do help with diversification, international equities do not.
I’m not crazy about how the question includes the word “should.” However, last check, stocks abroad are 26% of my portfolio, which means it’s about half of what I have in domestic stocks.
Many large U.S. corporations have a global presence. Because of various idiosyncrasies (e.g.; valuations, economic conditions, market sector weights), investing in foreign-domiciled companies increases diversification. I believe allocating 20% – 40% of equity holdings to international stocks makes sense for many U.S. based investors.
As a novice, I’m still a bit hazy as to the right allocation of international stocks for me. I currently hold 55% domestic equities and 10% international.
15 years of 30% in International has not proven to be a great strategy. However, I do believe in being diverse and sooner or later (probably later) it will pay off.
There should not be a separate percentage. As John Bogle pointed out the main companies in the US stock market already have exposure to international investments. This means your investment in US based stock already is exposing you to international markets.
The global market weight +/- adjustments (for US investors).
US retirees will earn and consume in US dollars, and their economic fate is tied significantly to that of the US. Overweighting US markets helps ensure that their accumulated savings act largely in concert with US trends (Consider the extreme case of a US retiree in 1990 with 100% in Japanese equities. Their fortunes diverged considerably for the worse compared to the US Market in the following decade.) This is a good reason to hold anywhere from 0 to 30% in International.
At the same time, valuations matter (usually!) On that basis, many people (including me) think this is a good time to overweight international and emerging markets stocks. Be aware, however, that this is a widespread market opinion, which should make one immediately skeptical. This is a good reason to hold 50-70% in International.
Considering both of these factors puts me right near market weight (which % varies by source, but seems to be between 42% & 52% which I’ll average to 46% and I don’t believe greater precision carries much value). I’m about 44% International.
My base case is the global equity market portfolio market cap weights, but I have more weighted to ex-US just based on valuations and my personal expected returns over the next 5-10yrs. I also have a tilt to value and small caps. Right now, the latest JPM Guide to the Markets shows 58% USA, 42% ex-US (13% of which is Emerging Markets).
+1 I think your reasoning is sound. I’m not a value investor per se, so I have odd tilts to value and growth depending on a variety of considerations. The closer I get to retirement, the less I tilt to anything.
If your stock portfolio is held in a qualified plan is there a tax cost associated with the foreign withholding tax on dividends for most international stocks?
I may be the odd ball here, but I say stay domestic. I know more about our countries industries and stock market than any other country. If I’m investing for the long term, I believe my returns will be at least as good or better with this approach. I also note that many domestic companies are global so I am getting some international exposure.
I suspect you have a lot of company in your camp, Carl – I, for one. The 10-year AAR for the Vanguard Total Stock Market Index (VTSAX) was 12.51% as of 6/30/2022. The 10-year AAR of the Vanguard Total International Index (VTIAX) was 5.17%. I have no desire to take a 7-point annual hit to my returns for the sake of diversifying into countries whose market and economic characteristics I do not know enought about.
I have invested internationally for 30 years, but have found that I was constantly tax loss harvesting my international index fund for the last 6-7 years. I have enough capital losses logged thanks to the international funds so I have decided to stick with a 2 fund portfolio of US total market and US total bond. I have been retired for 4 years and feel that the diversity of International is better left to those with decades to reap the benefits. This will be my first full year without an International index fund.
Although your viewpoint is not popular among readers of this site, at least you have good company: famously, both Warren Buffet and John Bogle dismissed international diversification.
Maybe not providing the full diversification benefits, but my international exposure is through companies with a global footprint, but US- or UK-based.
According to an analysis by Vanguard, investors reap the maximum diversification benefit when international stocks account for around 40-50%. You can find the study at https://personal.vanguard.com/pdf/ISGGEB.pdf.
As Figure 3 in that paper suggests, the bulk of the volatility reduction benefit can be reached with as little as a 20% international allocation for US-based investors. And as shown in Figure 4, the correlation between US and international equities has increased over time, reducing the global diversification benefit.
My takeaway is that it’s beneficial to have a fairly sizable international allocation, but the cost of a home bias for US investors probably isn’t huge. That’s assuming there isn’t a black swan event that causes extended US underperformance. Because of that risk, a higher international allocation is probably warranted.
While the correlation between U.S. and foreign stocks has increased over time, that correlation doesn’t tell you about magnitude. In other words, U.S. and foreign stocks may move in the same direction in any given year, but the size of their gain or loss may be vastly different — and thus the case for diversifying globally isn’t fully captured by correlation coefficients.
I’m at around 34% and have been at that percentage for some time. My foreign exposure is mainly via Vanguard Total International Stock, which isn’t currency-hedged, while their Total International Bond is. The explanation Vanguard gave me is that they want the benefit (and will accept the risks) of currency swings in their international stock offering, but they want more stability in the bond fund in keeping with its role as ballast in a portfolio.
I agree that the Japan example is an important lesson in diversifying away from your home country, especially when there may be a financial bubble. But in my amateur opinion, I’m not so sure that lower valuations compensate for weaker accounting standards and potential government interference in all overseas markets, particularly China. So I’m uncomfortable investing as much there as world market cap would indicate. I have about 37% of my stock portfolio overseas.
I think this is a highly valid consideration as well. I don’t make an adjustment for it, but I have considered doing so. It may also make an extreme economic shock worse, as I think you imply. A counterpoint on China, for example, might be that the government interference amounts to propping up important companies, and so the weaker controls may yield a better result over the long term, and who cares if they cheated to get there? Shrug, these considerations can go down the rabbit hole, and I’m not going to say either case is true, but I like your thinking process.
I personally think that at least a third of the stock holdings should be in international. My own allocation is 60:40, though I don’t mind going even higher and resemble the Global stock allocation (through a single global fund like VT). I think some overweight to emerging market can be a good bet, especially compared to their valuation to the US counterpart. I have emerging market passive fund (IEMG) and Templeton Dragon CEF to bump my EM allocation.
I own some IEMG also, mostly a basic low expense ratio institutional fund, & some DFA EM Value… I am curious about the Templeton Dragon – looks like it’s done extremely well, which it would have to do to offset the expense ratio. May I ask what initially piqued your interest in that fund?
My stock portfolio looks roughly like the global stock market, with half in U.S. shares and half abroad. I realize that’s far more overseas than most U.S. investors are comfortable with. But I’d argue my strategy is the lower-risk one. Yes, I’m more exposed to currency swings, but that should help as often as it hurts. Yes, property rights and accounting standards are less robust abroad, but my assumption is that risk gets reflected in lower valuations and hence I have a buffer against misfortune. So why do I think my strategy is less risky? In a word: Japan. I’d argue that its three-decade-long bear market offers the most important investment lesson of my adult life—and that lesson is the danger of investing too much in any one country’s stock market.
The Japanese market (stocks and real estate) bubble and subsequent bear markets might also point to a problem with index funds. Japan was a significant portion of the international index in 1989 and so index investors were hurt disportionately. Also, since Japan is an international market, it seems like your argument is somewhat deflated. Should one invest outside the USA because this one international market was in an extended bear market. It could just as well suggest that international markets are much riskier than they appear.
A minor quibble: In 1989, I don’t believe there were any international index funds. A major quibble: If it was obvious that Japan was in a bubble in 1989, why didn’t more investors sell, driving down stock and real estate prices? Ditto for U.S. tech stocks in early 2000, U.S. real estate in 2006 and U.S. financial stocks in 2008. I do believe that bubbles form in financial and real estate markets. But that doesn’t mean they’re easy to spot or it’s easy to know how to react, in part because apparently overvalued markets often continue rising for many years.
Well said! As I read everyone’s inputs I feel like Chris Stevens from Northern Exposure, cheering on everyone’s point of view. There are a lot of thoughtful posts here. I think this Voices page was a great idea.
I feel the S&P 500 index is enough International exposure for me, since many US companies are diverse as much as 50% international. And yes, I go with Bogle and Buffett, however Buffett has a significant investment in Japan as of late. At 77 years old I put my money on US.
I have been working on this question for the past 5 months since my sudden (read that as let go after 20 years) retirement. I have settled on an allocation of 70/30 with the equity portion 60% SPY and 10% VEU. The remaining 30% is 25% Bonds and 5% Cash (drawing 4.73% currently). Will see how that looks in 6 months and then adjust if needed. Really am trying not to overthink this.
I am sticking with Bogle and Buffet, and will get my international market exposure via US multinational companies. It has served me well for nearly five decades and eliminates forex concerns.
“Thus, if you have chosen a 60/40 overall stock/bond split, your mix—a balanced portfolio—looks like this:
42% total US stock market
18% total foreign stock market
40% total fixed income market
That’s it. Done. Does this portfolio seem overly simplistic, even amateurish? Get over it. Over the next few decades, the overwhelming majority of all professional investors will not be able to beat it.”
I assume that’s a quote from Bill’s book and relates to your comment just below. That 18% foreign stock out of the total portfolio works out to 30% of the stock portion. Vanguard Total World Stock Index Fund — my largest single fund holding — is currently at 41% international. That doesn’t strike me as a huge difference.
Thank you so much for your reply, Jonathan. I respect your thoughts highly and appreciate all of your help.
In “The Investor’s Manifesto”, Bernstein advocates for an 18% allocation to foreign equities, much less than the percentage you favor. Care to comment?
I don’t have Bill’s book at hand. Is that 18% of a person’s stock portfolio — or 18% of a model portfolio that also includes other asset classes? And is the 18% a minimum suggested allocation?
More than you are currently invested in foreign stocks.
Historically international diversification hasn’t done much and of course in recent decades it’s been a major drag on returns.
What HAS made a difference is including small-cap stocks, as this comparison of U.S./International vs. U.S. Total Stock Market/U.S. Small Cap Value mades abundantly clear:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2023&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&asset1=TotalStockMarket&allocation1_1=60&allocation1_2=60&asset2=IntlStockMarket&allocation2_1=40&asset3=SmallCapValue&allocation3_2=40
There’s also a good article on the always-helpful Portfolio Charts site that looks into the the characteristics of the most efficient portfolios. It shows that while there are a number of assets that really do help with diversification, international equities do not.
https://portfoliocharts.com/2021/12/16/three-secret-ingredients-of-the-most-efficient-portfolios/
I’m not crazy about how the question includes the word “should.” However, last check, stocks abroad are 26% of my portfolio, which means it’s about half of what I have in domestic stocks.
I don’t think it’s necessary for any to be invested abroad. US companies get a lot of international exposure.
Many large U.S. corporations have a global presence.
Because of various idiosyncrasies (e.g.; valuations, economic conditions, market sector weights), investing in foreign-domiciled companies increases diversification.
I believe allocating 20% – 40% of equity holdings to international stocks makes sense for many U.S. based investors.
As a novice, I’m still a bit hazy as to the right allocation of international stocks for me. I currently hold 55% domestic equities and 10% international.
15 years of 30% in International has not proven to be a great strategy. However, I do believe in being diverse and sooner or later (probably later) it will pay off.
There should not be a separate percentage. As John Bogle pointed out the main companies in the US stock market already have exposure to international investments. This means your investment in US based stock already is exposing you to international markets.
The global market weight +/- adjustments (for US investors).
US retirees will earn and consume in US dollars, and their economic fate is tied significantly to that of the US. Overweighting US markets helps ensure that their accumulated savings act largely in concert with US trends (Consider the extreme case of a US retiree in 1990 with 100% in Japanese equities. Their fortunes diverged considerably for the worse compared to the US Market in the following decade.) This is a good reason to hold anywhere from 0 to 30% in International.
At the same time, valuations matter (usually!) On that basis, many people (including me) think this is a good time to overweight international and emerging markets stocks. Be aware, however, that this is a widespread market opinion, which should make one immediately skeptical. This is a good reason to hold 50-70% in International.
Considering both of these factors puts me right near market weight (which % varies by source, but seems to be between 42% & 52% which I’ll average to 46% and I don’t believe greater precision carries much value). I’m about 44% International.
At least 30%, preferably 50%.
My base case is the global equity market portfolio market cap weights, but I have more weighted to ex-US just based on valuations and my personal expected returns over the next 5-10yrs. I also have a tilt to value and small caps. Right now, the latest JPM Guide to the Markets shows 58% USA, 42% ex-US (13% of which is Emerging Markets).
+1 I think your reasoning is sound. I’m not a value investor per se, so I have odd tilts to value and growth depending on a variety of considerations. The closer I get to retirement, the less I tilt to anything.
If your stock portfolio is held in a qualified plan is there a tax cost associated with the foreign withholding tax on dividends for most international stocks?
Yes, there is a tax cost — you can’t take the credit or deduction for foreign taxes withheld:
https://www.morningstar.com/articles/914550/should-you-keep-foreign-stocks-out-of-your-ira
I may be the odd ball here, but I say stay domestic. I know more about our countries industries and stock market than any other country. If I’m investing for the long term, I believe my returns will be at least as good or better with this approach. I also note that many domestic companies are global so I am getting some international exposure.
I suspect you have a lot of company in your camp, Carl – I, for one. The 10-year AAR for the Vanguard Total Stock Market Index (VTSAX) was 12.51% as of 6/30/2022. The 10-year AAR of the Vanguard Total International Index (VTIAX) was 5.17%. I have no desire to take a 7-point annual hit to my returns for the sake of diversifying into countries whose market and economic characteristics I do not know enought about.
I think the odds are high that this approach will yield ‘very good’ results, even if it fails to meet your expections relative to International.
I have invested internationally for 30 years, but have found that I was constantly tax loss harvesting my international index fund for the last 6-7 years. I have enough capital losses logged thanks to the international funds so I have decided to stick with a 2 fund portfolio of US total market and US total bond. I have been retired for 4 years and feel that the diversity of International is better left to those with decades to reap the benefits. This will be my first full year without an International index fund.
I think there is wisdom in a simpler and more focused retirement portfolio.
That reasoning appears very sound to me, even though I follow a different approach.
According to Portfolio Visualizer, an international index fund (VXUS) experienced a CAGR of 5.45% with dividend reinvestment from Jan 2014 to March 2021. Those aren’t whopping returns, but they aren’t abysmal either. At the end of the day, though, what’s most important is that you feel comfortable with your investments.
Although your viewpoint is not popular among readers of this site, at least you have good company: famously, both Warren Buffet and John Bogle dismissed international diversification.
I agree that my current international allocation of 27% needs to be raised to a minimum of 30%.
Maybe not providing the full diversification benefits, but my international exposure is through companies with a global footprint, but US- or UK-based.
According to an analysis by Vanguard, investors reap the maximum diversification benefit when international stocks account for around 40-50%. You can find the study at https://personal.vanguard.com/pdf/ISGGEB.pdf.
True, but a few caveats:
As Figure 3 in that paper suggests, the bulk of the volatility reduction benefit can be reached with as little as a 20% international allocation for US-based investors. And as shown in Figure 4, the correlation between US and international equities has increased over time, reducing the global diversification benefit.
My takeaway is that it’s beneficial to have a fairly sizable international allocation, but the cost of a home bias for US investors probably isn’t huge. That’s assuming there isn’t a black swan event that causes extended US underperformance. Because of that risk, a higher international allocation is probably warranted.
While the correlation between U.S. and foreign stocks has increased over time, that correlation doesn’t tell you about magnitude. In other words, U.S. and foreign stocks may move in the same direction in any given year, but the size of their gain or loss may be vastly different — and thus the case for diversifying globally isn’t fully captured by correlation coefficients.
Ah, good point!
I’m at around 34% and have been at that percentage for some time. My foreign exposure is mainly via Vanguard Total International Stock, which isn’t currency-hedged, while their Total International Bond is. The explanation Vanguard gave me is that they want the benefit (and will accept the risks) of currency swings in their international stock offering, but they want more stability in the bond fund in keeping with its role as ballast in a portfolio.
I agree that the Japan example is an important lesson in diversifying away from your home country, especially when there may be a financial bubble. But in my amateur opinion, I’m not so sure that lower valuations compensate for weaker accounting standards and potential government interference in all overseas markets, particularly China. So I’m uncomfortable investing as much there as world market cap would indicate. I have about 37% of my stock portfolio overseas.
I think this is a highly valid consideration as well. I don’t make an adjustment for it, but I have considered doing so. It may also make an extreme economic shock worse, as I think you imply. A counterpoint on China, for example, might be that the government interference amounts to propping up important companies, and so the weaker controls may yield a better result over the long term, and who cares if they cheated to get there? Shrug, these considerations can go down the rabbit hole, and I’m not going to say either case is true, but I like your thinking process.
I personally think that at least a third of the stock holdings should be in international. My own allocation is 60:40, though I don’t mind going even higher and resemble the Global stock allocation (through a single global fund like VT). I think some overweight to emerging market can be a good bet, especially compared to their valuation to the US counterpart. I have emerging market passive fund (IEMG) and Templeton Dragon CEF to bump my EM allocation.
I own some IEMG also, mostly a basic low expense ratio institutional fund, & some DFA EM Value… I am curious about the Templeton Dragon – looks like it’s done extremely well, which it would have to do to offset the expense ratio. May I ask what initially piqued your interest in that fund?
My stock portfolio looks roughly like the global stock market, with half in U.S. shares and half abroad. I realize that’s far more overseas than most U.S. investors are comfortable with. But I’d argue my strategy is the lower-risk one. Yes, I’m more exposed to currency swings, but that should help as often as it hurts. Yes, property rights and accounting standards are less robust abroad, but my assumption is that risk gets reflected in lower valuations and hence I have a buffer against misfortune. So why do I think my strategy is less risky? In a word: Japan. I’d argue that its three-decade-long bear market offers the most important investment lesson of my adult life—and that lesson is the danger of investing too much in any one country’s stock market.
The Japanese market (stocks and real estate) bubble and subsequent bear markets might also point to a problem with index funds. Japan was a significant portion of the international index in 1989 and so index investors were hurt disportionately. Also, since Japan is an international market, it seems like your argument is somewhat deflated. Should one invest outside the USA because this one international market was in an extended bear market. It could just as well suggest that international markets are much riskier than they appear.
A minor quibble: In 1989, I don’t believe there were any international index funds. A major quibble: If it was obvious that Japan was in a bubble in 1989, why didn’t more investors sell, driving down stock and real estate prices? Ditto for U.S. tech stocks in early 2000, U.S. real estate in 2006 and U.S. financial stocks in 2008. I do believe that bubbles form in financial and real estate markets. But that doesn’t mean they’re easy to spot or it’s easy to know how to react, in part because apparently overvalued markets often continue rising for many years.
Well said! As I read everyone’s inputs I feel like Chris Stevens from Northern Exposure, cheering on everyone’s point of view. There are a lot of thoughtful posts here. I think this Voices page was a great idea.