Looking at investing oversees makes sense for a number of reasons, the most important of which is broader diversification. By going international, the potential gains for your portfolio and your retirement are no longer tied exclusively to the performance of the U.S. economy and financial markets.
And since markets in different countries don’t always move in lockstep with each other, one part of your portfolio may still be able to see sizable gains while another part slows. As a result, a portfolio that includes both domestic and foreign shares should be able to earn long-term returns comparable to those of an all-USA portfolio but with less risk, or volatility.
But you should realize that this extra layer of diversification doesn’t protect you from major shocks like the recent financial crisis. This smoothing effect on returns is something that happens over the long term.
The second thing to understand about diversifying internationally is that it shouldn’t be carried out as a short-term guessing game, jumping out of foreign stocks because of recent turmoil in Europe or into them because some economic observers believe the continent’s outlook is now rosier than that of the U.S. International investing works best when it’s done in a disciplined and systematic way.
So what is the difference between a total world stock index fund and a total international stock index fund. Both types of funds will give you foreign exposure. But there’s a key difference between the two. A total international stock index fund spreads its money among the stocks of a broad array of foreign countries, but excludes U.S. shares. It’s designed to track only non-U.S. markets.
A total world stock index fund, on the other hand, invests in both foreign and U.S. shares. It takes a global approach, which is to say it tracks the world’s stock markets overall.
Now, you might figure that you can get everything you need — U.S. and foreign shares – all in one place by just investing in a total world stock index fund. And that’s true. But since a total world stock index fund’s asset weights are based on stock market values for each country – and since the U.S. stock market accounts for less than half of the world’s total stock market value – you may end up with a lot more of your money in foreign stocks than you expect, or want, if you go the total world index fund route.
As of the end of June, for example, Vanguard’s Total World Stock Index Fund (VTWSX) had roughly 42% of its assets invested in U.S. shares. The remaining 58% was spread among shares of 42 foreign countries, although Japan and Europe accounted for the bulk of it. So if you had a $100,000 retirement portfolio and invested it in this fund, about $58,000, or well over half of your portfolio, would be in foreign shares.
When it comes to investing internationally, simpler is better. And the simplest way for most investors to add foreign exposure is through a fund that invests in a broad range of foreign shares, and only (or very nearly only) foreign shares. A total international stock index fund is an excellent way to do that, although you can also opt for an actively managed foreign (as opposed to global) stock fund if you’re convinced a manager can add value beyond the extra cost.
Related Information in Prosperity News
- International Investing Lessons
- A Global Investment Portfolio Without an International Stock Fund
- Invest Internationally For Diversification and Growth
- Money and Wealth: Investing Strategies You Need Now
- Frontier Markets: Lower Price/Earnings Ratio than Emerging Markets
- How to Invest for Growth – Use Your Timeframe – Emerging Markets, International, Growth
- Cut Your Investing Costs – Four Ideas to Cut Your Costs Right Now
- Where the Professionals Think You Need to Invest in the 2010’s
