﻿Having international funds in your portfolio is a highly debated topic. Some say it’s really
not necessary. Others say you are missing out on some great exposure by not including them
in your portfolio. So in this video we are going to get to the bottom of this debate. One, do you
really need international funds in your portfolio? We'll hear both sides of the argument. Two, if you
decide that international funds are something you want, how much is appropriate? And finally,
what is the best international fund to hold? If you want to save some time from watching the rest
of the video, let me give you the 5-second take away. Yes. I believe it is a good idea to hold
some international funds in your portfolio. But no more than 20%. And when it comes to a specific
fund, buy VTIAX - Vanguard’s Total International Stock Index Fund Admiral Shares. Alright. If you
are still with me, thank you for sticking around. But if you are new to the channel,
my name is Tae from Financial Tortoise. In this channel, I discuss personal finance, investing
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So the first question we want to ask ourselves is, why even invest internationally? Many of us are
probably not as familiar with names of companies outside the United States. Yes, we’ve all heard of
Apple, Google and Tesla. But how many of us can honestly say we know much about companies like
Taiwan Semiconductor Manufacturing Company, aka TSMC. Tencent Holdings or ASML Holding?
But would you be surprised to know that some of these companies rival the size of many major
US based corporations in market capitalization? TSMC is a Taiwanese multinational semiconductor
contract manufacturing and design company and is considered the world's most valuable semiconductor
company. Tencent is a Chinese multinational technology and entertainment company and is
considered the largest company in the world in the video and game industry. And ASML is a Dutch
multinational corporation specializing in the development and manufacturing of photolithography
systems - I honestly don’t know what that means, but it sounds pretty fancy to me. So at the end
of the day, when we are only investing in US based companies by holding only US based stocks,
we are potentially missing out on the portfolio growth that these international companies can
provide. In addition, markets outside the United States may not always rise and fall
at the same time as the domestic market, so owning pieces of both international and
domestic securities can level out some of the volatility in our portfolios.
But as with anything in life, there isn’t just one viewpoint. I do want to share with you some
strong arguments that argue against international funds in your portfolio that you want to consider
in your decision making. JL Collins, one of my favorite authors who wrote the “Simple Path to
Wealth” actually argues in his book that you don’t necessarily need international funds in
your portfolio. One pretty good argument that I actually agree with is due to accounting risk.
Accounting is not a sexy topic, but you have to give it to America’s accounting
standards. Compared to many other countries in the world, especially emerging countries,
America’s accounting practices are top notch. When companies produce their quarterly and
annual financial reports, they need to adhere to strict accounting policies. I worked with many
accountants in my former life and trust me, they may not be the funnest bunch, but they
take their accounting policies seriously. Many other countries do not have the same level of
transparent and strict accounting standards that’s required here in the US. So what this
means is that when we review Apple’s latest annual financial report, we can have a strong confidence
that what they report is actually accurate and honest. Vetted by top notch accounting
firms. But when it comes to financial reports from other countries, it’s a risk to apply the
same level of confidence. Another key reason JL Collins cites for not needing international
funds in your portfolio is that the world economy is a lot more integrated today than ever before.
Many of the major US based companies today aren’t just domestic companies, but they are actually
international corporations. They generate a good percentage of their sales and profit overseas.
For example, just look at Apple. The biggest US company based on market capitalization.
As of the second quarter of fiscal year 2021, 67% of Apple’s total revenue was generated
from outside the United States. At one point, there were more Chinese people purchasing Apple
products than Americans. So the argument here is that when you hold US based company stocks,
you already have access to the growth of the world market and are able to gain the benefit of
that growth. But again, we live in a complex world and this is one viewpoint. Your viewpoint could be
different and some argue that having international exposure can actually be quite worthwhile.
The Bogleheads, famous for their intense devotion to Jack Bogle and his index fund advice,
have a slightly different perspective when it comes to international funds. Of all the stocks
in the world, the US stocks represent about half of the world's stocks. $33 trillion of the world’s
$68 trillion total stock market value, or about 49%. In one of their books, "The Bogleheads'
Guide to Investing," they argue for international stocks by referencing the Japanese Stock market.
At the end of 1989, the Japanese stock market’s capitalized value was considered the largest in
the world. The Nikkei 225 Index, the index of 225 largest publicly owned companies in Japan,
reached an all-time high of close to 40,000. Sadly 22 years later, the Nikkei was under 8,500 and to
this day has yet to reach its all time high again. But sadder is the Japanese investor who failed to
invest in international stocks outside Japan. The US based companies are currently the world
leaders in market capitalization and revenue, but who can confidently say it will stay like that in
the future? It would be unfortunate, but the same thing could happen to the US stock investors.
I personally still have strong confidence in the US economy and US based companies as a whole,
but I also have to continuously check my assumptions. Financial writer Larry Swedroe
had a saying. “Never treat the highly likely as certain and the highly unlikely as impossible.”
The bottom line on holding international funds in your portfolio is this.
It depends - I know, it’s unsatisfying. I hate it when people say this to me, but in this case it
is true. So much of it is based on your appetite for risk and your worldview. And the world outside
the United States is a big and complex place. And there are quite a few things you want to consider
when thinking about the international market. One of them being that when we are talking about the
international market, there are actually several types of international markets. To simplify,
international markets are generally divided into 2 categories - developed markets and emerging
markets. Developed markets, as the title suggests are in countries that have established industries,
strong infrastructure and in general, relatively high cost of living. Think
countries like the United Kingdom, Japan and Canada. Emerging markets, as the title suggests,
are in countries that have less stable economies and still developing capital markets. But many
of these countries are on the pathway to becoming a developed market so they have faster growth and
thus potential for higher returns. Examples of emerging markets include countries like India,
China and Mexico. So when looking at international funds, we want to check to see what percentage of
the allocation is weighted towards developed markets vs. emerging markets because this will
affect risk and return. We don’t want to be weighted so heavily towards emerging markets
given the volatility in these regions. And visa versa, we don’t want to be only weighted towards
developed markets given we are missing out on potential returns. Location is another factor
you want to consider when thinking about investing internationally. Though we are living at a time
when more countries, regardless of location, are more tightly integrated than ever before, regional
events still have an impact on their specific region. A Europe based crisis will have a strong
impact on European countries. And similarly, a Latin based event will impact countries in Latin
America. So when assessing an international fund, you want to be wary of its allocation to different
international regions. You don’t want a fund that has 90% of its allocation to Antarctica. Unless
you strongly believe Whaling is going to make a comeback. And to add another complexity to your
international fund decision making, there are many different types of international funds as well.
There are International funds that invest only in foreign markets, excluding the United States.
There are Global or world funds that invest in essentially everything. Both foreign and
US markets. Regional funds invest primarily in specific regions of the world that we discussed
earlier - like Europe or Latin America. Developed market funds invest only in
developed foreign countries. And Emerging market funds invest only in emerging foregn countries.
Alright, now that I’ve done enough to confuse you about the world,
let me give you my simple recommendation and what I personally do when it comes to investing
internationally. If you still have the desire to invest in international companies after all that I
talked about in this video, buy VTIAX. Vanguard’s Total International Stock Index Fund. It’s my
goto fund that represents close to 8,000 non-US based companies. All international companies we
may have heard of such as Samsung, Shell and Alibaba are in it. And thousands of others
we may have never heard of. VTIAX has an expense ratio of 0.11% and like many other Vanguard funds,
has a minimum investment requirement of $3,000. It also has an ETF equivalent which is Vanguard
Total International Stock ETF (VXUS). And in order to mitigate the risk of different
markets and regions in the world, it has a good balance of emerging vs. developed market holdings,
spread all around the world. And I don’t know about you, but it feels pretty cool to say that
I own a piece of oversea companies like HSBC and Unilever. Now when it comes to how much to hold,
the generally agreed upon number is approximately 20%. Jack Bogle recommended no more than 20%
and Vanguard recommends at least 20%. So as a compromise, I think 20% is a good place to start.
It’s meaningful enough to make a difference to your portfolio, but not too much to hurt
if foreign markets start to fall out of favor. And you always have the ability to increase or
decrease your exposure based on your comfort level with international stocks. There you have it guys.
If you’ve debated having international funds in your portfolio, have no more.
If you like the idea of having some international exposure, buy VTIAX and hold up to 20% of your
portfolio. But if you don’t feel comfortable holding international funds, no worries either. JL
Collins would give you his approval as long as you are holding a well diversified total stock market
index as your core holding. Thank you guys for watching and until next time, all the best.