International Funds
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.
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Ann responds:
Posted: May 23rd, 2008 at 6:21 am →
Vered, you are one smart mommyblogger!
I’m a total dope about investing, but improving our financial situation is right up there with cleaning out that horrible basement . . . and I have some learning to do.
Suzie responds:
Posted: May 23rd, 2008 at 6:35 am →
Im just holding onto everything not moving investments right now until things calm down. The world is not a in a good state of affairs financially so I will wait. Thank you so much for your supportive words yesterday they really helped.
ironman responds:
Posted: May 23rd, 2008 at 6:42 am →
I agree with Ann. You are a smart one. But I think I knew that already.
Investing is not my thing, but it probably should be.
Hunter Nuttall responds:
Posted: May 23rd, 2008 at 7:20 am →
I agree that being at least 20-25% in foreign stock is a good idea. In the U.S., most investors are almost entirely in U.S. investments. I was wondering what it’s like in other countries. Where do French and Japanese and Brazilian people invest?
Andre Kibbe responds:
Posted: May 23rd, 2008 at 8:16 am →
I’m still waiting to see an instance of an actively managed fund performing better than an index (except for Lynch, of course), and given my ignorance international stock performance, I’d be reluctant to go with a fund manager. Maybe my bias against fund managers is unduly based their track records in the US. Have you had any experience to the contrary?
And what is the longer-term annualized return of non-U.S. stocks? I’m wondering if the superior international performance has more to do with short-term U.S. incompetence in economic sectors like home loans (and their ripple effects on consumer spending and employment) than with a larger trend.
But I definitely agree with the general principle of diversification, and these funds are terrific starting points for me to research.
Marelisa responds:
Posted: May 23rd, 2008 at 8:20 am →
I completely agree that you should put your money where it has the best potential for growth within the risk parameter that you’re willing to tolerate, and many times that means including foreign investments in your portfolio. To answer Hunter’s question above, I live in Panama and the problem with brokers here is that they do tend to invest their clients’ money almost exclusively in this country.
Chris responds:
Posted: May 23rd, 2008 at 10:04 am →
Vered–I’m so glad I know you. Chaaaaaching! You know what this means, right? I’m going to be e-mailing you when I review my portfolio.
MomGrind responds:
Posted: May 23rd, 2008 at 12:06 pm →
@ Ann and @ ironman: thank you.
I think you should start with http://www.fool.com
@ Suzie: you’re very welcome. You did SO well under some very tough circumstances.
@ Hunter and Marelisa: I grew up in Israel, and I’m pretty sure most Israelis invest in Israeli securities. But since I only started investing after we moved to the U.S., I can’t say for sure.
@ Andre: I have a mix of index-based and actively managed funds. As long as an actively managed fund has a good history and a low expense ratio (below 1%), I’m OK with it. Re: long-term, I usually check 5-year performance. It’s a lot like investing in a sector (health, energy) or even in large/mid/small cap companies – they tend to have a good run and then they lag, but if you have a good mix, your portfolio should be doing well long-term.
@ Chris:
Sure, email me. I’ll be happy to help.
hank responds:
Posted: May 23rd, 2008 at 6:57 pm →
Now THIS is a post I can chime in on! You must be reading up on my site!
I’ve actually got close to 45% international right now. Yea, international is “risky” as they say, but think of it as a bigger bucket – you don’t invest in your own COMPANY stock – well, bump that up to America as a whole! Yea, that may be taking it a bit far, but honestly the international emerging markets are good places to put your money.
Mutual Funds in general are easy to manage because someone is doing that for you. They pick the actual investments (stocks, bonds, cash) that are in the fund and you’ve got some good ones…
DODFX is my moneymaker right now in my 401k holding about 45% of my total 401k bucket. It’s mostly international and has done really well for me this year!
Good post!
Jan responds:
Posted: May 23rd, 2008 at 8:16 pm →
Great advise. I’m just sitting on everything, now. I figure you don’t really lose until you sell.
J.D. Meier responds:
Posted: May 23rd, 2008 at 8:21 pm →
I’m a fan of diversification, whether it’s your portfolio, work, or you life.
Evelyn Lim | Attraction Mind Map responds:
Posted: May 24th, 2008 at 9:20 am →
I’m not from the U.S. and can’t really comment on the full range of funds that you have available for you. However going by recent trends, I would place my bets on funds that invest in agriculture and raw food supply, and on countries that are net exporters of these. I doubt that the situation in food prices is going to reverse anytime soon.
Disclaimer: Like Vered, I am no expert! Do your research first and note the trends, to make your own assessment.
MomGrind responds:
Posted: May 24th, 2008 at 2:52 pm →
@ hank: come on, you can step out of your comfort zone once in a while and comment on stuff other than finance. Will be good for you.
45% international – that’s impressive.
I agree that DODFX is a great fund.
@ Jan: “you don’t really lose until you sell” – absolutely. During the dot com bust, it was really hard not to sell, but I’m so glad I rode it out.
@ J.D. Meier: I have to agree with that! It’s a smart way to live your life.
@ Evelyn: “I would place my bets on funds that invest in agriculture and raw food supply, and on countries that are net exporters of these.” Interesting idea. I am going to look into that!
bonggamom responds:
Posted: May 24th, 2008 at 5:19 pm →
Hi Vered, great post and thanks again for visiting my little corner of the blogosphere! Can’t wait to see you at BlogHer this year so we can catch up on everything!
MomGrind responds:
Posted: May 25th, 2008 at 9:47 am →
@ bonggamom: looking forward too.
MilkYourMoney responds:
Posted: May 28th, 2008 at 6:36 am →
Great article! Hank 45% internationally?! I tend to have much more faith in the U.S. and hold the majority of my money in the S&P index. Great advice on the low cost funds!
MomGrind responds:
Posted: May 28th, 2008 at 9:09 am →
Well, reality is that when the U.S. market is down, it has a global effect, so even with a lot of foreign exposure, you are never fully protected. I agree that the S&P index is a good place to be, long-term. But in my experience, foreign exposure does provide some protection when the U.S. market is heading south.
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Posted: June 13th, 2008 at 3:17 pm →
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Aspiring Geek responds:
Posted: June 15th, 2008 at 8:33 am →
Great post!
I am a patriotic American & a devout capitalist; I’m also a realist. I am pessimistic about short-term prospects for this country. I am withholding judgment on long-term prospects. Yet the apparent political trends do not favor growth. The expansion of the pandering class grows unabated. We’re sending in excess of $500 billion to countries most of whose interests don’t align with ours for energy needs while our own backyards remain untapped. We have the highest personal & corporate tax rates in the industrial world–& countries don’t tax themselves into prosperity. Etc.
Yet international investment opportunities abound!
Andre: Check the S&P’s 8-year return–not good. However, if you’re in it for the genuine long term, you may be OK.
A new ETF was recently created which covers countries not typically available in other funds, e.g., Poland, Vietnam, & Egypt, & Kazakhstan. It’s the Claymore/BNY Mellon Frontier Markets (FRN). It’s new, so you won’t yet find it on a lot of public finance sites.
MomGrind responds:
Posted: June 15th, 2008 at 11:54 am →
@ Aspiring Geek: I thought taxes in most of Europe were higher than in the U.S.?
Thank you for the tip on the fund – I am going to look into it.
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Posted: December 3rd, 2008 at 6:05 pm →
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