Disclaimer: This post is my personal opinion. I am not a financial advisor and this post does not constitute as financial advice. Please consult a financial professional before acting on any information.
Should you add international indexes to your investment portfolio? This is the most asked question on online investing communities like Bogleheads and r/investing. Buffett and Bogle have said no (article). Others say yes. What’s the right answer?
There’s no right or wrong answer. You’ll have to decide based on your risk tolerance and investment goals. Here are seven reasons that made me pass on international indexes (for now):
It takes time for the world leader in GDP to change
Take a look at this table that shows the ten largest economies by GDP per five year period. Notice that the primary leaders in GDP have stayed consistent. If you’re looking for consistent, long-term returns it makes sense to stick with them. Sure, an emerging market or underdog will outperform here or there. But good luck finding a consistent performer like the US, China, and Japan. In the event that the tables have turned for good, you’ve got sufficient time (years) to rebalance your portfolio and join the new, consistent leader.
Don’t invest in something you don’t understand
Warren Buffet says “Rule No.1 is never lose money. Rule No.2 is never forget rule number one.” You can only adhere to those rules if you strictly invest in things you understand. I personally don’t keep up with foreign politics, regulations, and market information. Until that changes, I will keep my money and focus on economies I understand.
Accounting practices and regulations; potential shady business?
This technically falls under #2. The US has a track record of requiring strict accounting practices and policing insider trading. There’s also very few state-owned, publicly traded enterprises in the US. I’m not sure the same can be said about some foreign markets that usually get included in international indexes.
Higher expense ratios plus higher risk
It’s a combo I don’t like. Take VTI (Vangard Total US) and VXUS (Vanguard Total International ex-US). Expense ratios are 0.03% and 0.08% respectively. The 0.05% difference will cost you $20,000 over 30 years. This assumes you started with $100k, added $10k every year, and had an average ARR of 7% with both options. I have yet to see an international index consistently return 7% annually.
Large, foreign companies are sometimes listed on NYSE and NASDAQ
I’ll give you two examples. Let’s start with Toyota. The company’s primary exchange is the Tokyo Stock Exchange, but they also trade their ADR (American depositary receipts) on the New York Stock Exchange under TM.
Unilever is another great example. The Anglo-Dutch company has two listed stocks in the US market. UN for the Dutch-listed stock and UL for the UK-listed stock.
I think it’s fair to say that a total US stock market ETF (VTI) or fund (VTSAX) will get you decent exposure to parts of large, foreign companies.
US companies make ~40% of world revenue
Based on 2018 data (see here), US companies account for 40% of revenue generated by the 50 largest revenue generating companies in the world. That’s a considerable amount compared to any other country.
SP500 companies get ~30% of their revenue from foreign markets
Think about iPhone sales outside the US and GM/Ford vehicles in other countries. 30% isn’t optimal, but it’s enough exposure to foreign markets for me. See source.