In Defense of an International Equity Allocation

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4 Responses

  1. Arrgo says:

    Thanks for the great review and analysis. Also remember that many “US” companies now have a lot of international exposure. I’ve been thinking about adding more to international and emerging markets as I think my overall allocation could be a bit higher. I’ll probably do about 15 – 20% once I regroup on what percentages I actually have. (Most of my holdings(US) I’ve had for years basically on auto-pilot. Can’t complain with the results though!) Regarding taxes, do you think it would be a big concern holding these in a taxable account? My overall income is low and the total amount I’d invest probably wouldnt be enough to have a significant impact regarding dividends etc.

    • Joe Freedom says:

      You’re absolutely right about US multi-national exposure to foreign markets. That is in fact the logic behind Bogle’s recommendation of foregoing international–you get plenty through the US market. But the reason that I wrote this post was to remind myself of why I thought (and continue to think) that the US exposure to the foreign markets isn’t enough for my taste. Interestingly (and very timely) Jason Zweig wrote a piece in the WSJ today that explains that when you invest in a company based in a certain country, you may or may not be gaining the level of exposure to that home-country economy that you presume. The example was Samsung–a Korean based conglomerate that earns something like 25% of their profit in the US! So ironically, if one has the objective of owning 100% of the US market, you’d need to buy the foreign multi-nationals with significant US exposure. Ha! But I digest this data as further support for my view: I don’t care to take the time to figure out who owns what share of the US mobile phone market (as an example) and then go chase down their stock. I’m buying the world of corporate entities; if I own it all surely I can’t miss anything. Here’s a link to the Zweig article today:

      Regarding the tax issue: No, I don’t think it’s a big issue to hold the international allocation in a taxable account. I believe that the tax differential is mostly muted if you are buying in ETF form (as opposed to mutual fund form, where you could get greater capital gain allocations). But there are a lot of moving parts in the tax-delta calculation, and it is probably worth running some scenarios in tax software (I still use TurboTax) to see what works best for your particular situation. Remember that holding the international equities in a tax-advantaged account will effectively forego any foreign tax credit that you would otherwise be entitled to (credit against US tax for tax withheld by foreign governments on dividends), but it may also be the case that you give some or all of that FTC up even if you hold in a taxable account (depending upon how much of the foreign dividend is subject to US tax and therefore included in foreign source income). So the answer will be different for everyone (take a look at the link to the bogleheads discussion page that I included above–it will give you some sense of the calculation issues involved). But if you are investing in ETFs and in modest amounts I would not spend too much time wringing my hands over the tax issue. And consider too (in relation to timing) that people are starting to chase the money in international/EM funds; the Zweig article says that so far in 2017 there have been net inflows of $75 billion into foreign-equity ETFs as compared to $2 billion net outflows from US equity ETFs. I wouldn’t wait around too much longer.

      • Arrgo says:

        Thanks for the detailed response. I agree that even though many US companies have foreign exposure, it’s still a good strategy to have a percentage of your investments directly in international/ emerging markets funds. I have had the Trowe International Discovery fund for many years and it has done pretty well although I cringe a bit looking at the expense ratio. Im considering funds like the Vanguard Developed markets fund and Emerging Markets Index. The US has been on a tear the last few years so I think its good to diversify with other markets. Over long periods of time, they will likely have their day eventually.

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