If you are a U.S. investor, chances are you don’t have enough international funds in your portfolio.
I think you should hold at least 20 to 25 percent of your stock portfolio in international funds. In other words, I completely disagree with anyone who says that “a third of your stock stash seems a bit much. I’d say putting something on the order of 10 to 20 percent of your stock holdings in foreign stocks is enough.”
I hold about 25% of my portfolio in international funds and plan to gradually increase that number to 30%.
The main advantage to holding foreign stock is diversification: In 2007, mutual funds specializing in non-U.S. stocks returned 16%, while funds with diversified holdings in U.S. equities returned just over 6%.
The four basic rules of picking mutual funds:
1. Never buy into a mutual fund that has a front or a back load. Loads hurt a funds’ performance and cut into shareholders’ profits.
2. Always buy low-cost funds. Cheap index funds are a great investment tool, but I do own several actively managed funds. However, I only buy actively managed funds whose expense ratio is well below 1%. Higher expenses must be justified by spectacular performance, which is quite rare. If I hold the fund in a taxable account, I also look for a low turnover – no higher than 50% a year, and preferably closer to 20%.
3. When you buy an actively managed fund, it is a good idea to investigate the fund manager. Past performance generally doesn’t count, but if it is to count at all, it’s only when it belongs to the person who’s in charge now.
4. Full investment policy: look for cash reserves that are as low as possible – ideally, nearly 0%. Cash reserves hurt a fund’s performance.
International funds: my own five winning choices
Since these are all international funds, they obviously do not represent a complete, or a balanced, portfolio. With the exception of the Dodge & Cox fund, they are not core holdings. Some of them are risky and highly volatile. They did give me excellent results over the past few years, but you should keep in mind that I bought most of them during the 2000-2001 bear market, which might explain my good results.
However, I still hold all of them, and plan to keep doing so. I have also had plenty of losers in my portfolio over the years, but since the consensus seems to be that bloggers should post useful stuff, I will concentrate on the winners.
1. International fund: Dodge & Cox International Stock Fund DODFX – This fund has no load; expense ratio is 0.65%; annual turnover is 16%; cash reserves 2.1%; it boasts an impressive 5-year annualized total returns of 26%.
2.Japan Index Fund: iShares MSCI Japan Index EWJ – Expense ratio is 0.52%. 5-year annualized total returns: 16.12%. According to Morningstar, “Investors seeking a straightforward Japan play will find iShares MSCI Japan Index a worthwhile option”. You should keep in mind that this ETF focuses on large cap stocks; that it will overlap with the Japan portions of any other foreign fund that you hold; and that the Japanese market is not always a friendly place to be.
3. China Portfolio: PowerShares Golden Dragon China Portfolio. PGJ – Expense ratio for this ETF is 0.70%; 3-Year Annualized total returns are 29.46%. According to Morningstar, this ETF “warrants great caution”, which I completely agree with.
In fact, Morningstar analysts seem to dislike this ETF very much, despite its dirt-cheap cost compared with other Asia funds. But I like the low cost, the fact that it gives me good exposure to Chinese mid-cap companies, and the fact that it has been tax-efficient: it has not distributed any capital gains since its December 2004 launch. I handle the volatility by trimming it annually and making sure it remains just a small part of my portfolio.
4. European Stock Index: Vanguard European Stock Index VEURX. No Load. Expense ratio 0.22%. Turnover 9%, cash 0, 5-year annualized total returns 21%.
This mutual fund actually doesn’t provide much of a diversification against U.S. stocks, but I do like the companies in its portfolio. Recently, the dollar’s depreciation against European currencies boosted the value of the stocks in this portfolio, which is unhedged.
5. Emerging markets Fund: Vanguad Emerging Markets Vipers VWO. Expense ratio: 0.25%. 3-year annualized total returns: 33%. Annual turnover: 9%. Cash: 0.1%.
Despite the obvious risks, this fund gives me direct emerging-markets exposure at a very reasonable cost. Just like the China fund, I handle the volatility by trimming it annually.
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Common sense caution: past performance really is not a good indicator of future results; I am not a financial adviser; these international funds have worked for me but may not work for you; please do your own research before investing.
Photo credit: thinkpanama
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A homeless man has stationed himself right next to the local Whole Foods store, where I do my weekly grocery shopping. 
When I was growing up, my mom used to tell me countless times, “Regardless of what you do, or what happens to you, I will always love you. There’s nothing you can do to make me stop loving you. Even if you mess up terribly, I will still be there for you.”
I'm Vered DeLeeuw, a blogger for hire and a social media consultant. My social media campaigns increase brand awareness and loyalty, improve search engine rankings and drive targeted traffic to my clients' websites. Momgrind is my personal blog.
