I never owned international stocks before I decided on my retirement portfolio in December 2014. I chose to hold 70% US stocks and 30% international stocks for Patti and me. (Our mix is 85% stocks and 15% bonds; see Chapters 8 and 11, Nest Egg Care [NEC]). Returns for International stocks have lagged since then – by nearly six percentage points per year. They’ve lagged US stocks for much longer than that. Do I have too much allocated to International? Should I hold any international stocks? I conclude I’m sticking with my 30% allocation.
== Return rate: less than half US since 2015 ==
Our US Total Stock Market fund is FSKAX and our International Total Stock Market fund (VXUS; this is the EFT of VTIAX). Since the start of 2015, the annual, compound return rate for FSKAX has been for 9.6%. The rate for VXUS has been 3.8%. VXUS has lagged by nearly six percentage points per year.
$10,000 invested FSKAX has more than doubled; VXUS increase by 35%. If we did not invest in VXUS, we’d have +50% more than the portion nvested in VXUS.
It’s a bit worse than the comparison above. In six of eight years, FSKAX has returned more than VXUS. When I rebalance back to 70%-30%, I’ve sold FSKAX buy more VXUS in six years and done the opposite in two. Over the eight years, I’ve definitely sold more FSKAX than VXUS to rebalance. That means the difference in my cumulative returns is worse than portrayed.
== More than just the past eight ==
The data I have for MSCI-EAFE (the index for developed countries in Europe, Asia, and Far East) shows that International kept pace with US stocks 1970 to 1993 and lagged since then. Over +50 years, International has lagged in real – inlfation-adjusted – return rate by 2.5 percentage points per year. Jeremy Siegel in Stocks for the Long Run, Sixth Edition has a table (4-1) that shows EAFE lagged US by 1.5 percentage points per year 1970 through 2021; Burton Malkiel in Random Walk Down Wall Street (page 203) shows EAFE returns were better than US returns 1970-2013. I can’t explain the difference: I think my data for annual returns for International and US are accurate.
== I could make this same argument ==
It looks like 30% International was not a great choice. I could make this same argument for a number of choices. Why didn’t I just buy an S&P 500 index fund? Over the past ten years, the remaining ~3,500 stocks out of the total of about 4,000 US stocks that my Total Stock Market fund holds lagged by three percentage points per year.
Why did I include US value stocks? I could have picked a fund that only focused on growth stocks. Over the past ten years, US Value stocks have lagged Growth stocks by nearly four percentage points per year.
== We can’t predict ==
The simple answer is that we have no logical basis as to what kind of stocks will underperform or outperform in the future. We can’t make judgments based on history. Last week I checked out the sixth edition of Stocks for the Long Run by Jeremy Siegle. In the fifth edition, the one I had when I wrote Nest Egg Care, Siegle made the case that one should overweight a portfolio with small cap stocks and value stocks. That was based mining the historical data; there was nothing about the fundamentals of small cap stocks or value stocks that would suggest they would outperform, and they haven’t for the past decade. It’s been a lot longer than that for small small cap stocks. I conclude the past is a poor predictor of the future, and it’s better not to guess.
== Smoothing effect ==
I would like to be able to show that a mix of US and International stocks smoothed the most harmful sequences of returns for stocks for a retiree. Ideally, we’d see that a mix of US and International stocks is a safer portfolio than just US stocks: we would calculate to more years to depletion for a given spending rate.
The two most harmful sequences of return for US stock returns were the sequences that started in 1969 and in 2000. The 1969 sequence starts with the steepest six-year decline for stocks in history and includes the second worst two-year decline in 1973-74. The 2000 sequence starts with the second steepest three-year decline in history and includes the second steepest one-year decline in 2008.
I can’t test FIRECalc – actually my spreadsheet that duplicates FIRECalc’s result – with a mix of US and International stocks. I don’t have enough data. The index for developed international stocks (MSCI-EAFE) started in 1970. I really want the data starting in 1969, preferably earlier. I’d like to include emerging company stocks, since they are (currently) ~30% of the value of all international stocks, but that index started in 2001, and I can’t find the history of returns for those early years.
My rough attempt, using the pieces of data that I have, does not clearly show an advantage for holding international stocks for those two return sequences. International stocks weren’t headed up when US stocks cratered. They didn’t decline less when when US stocks cratered. This does not mean they won’t be valuable protection for our portfolio in the future.
== Other reasons ==
International stocks are too much of the world’s stocks to ignore. At the end of 2021 International stocks were 40% of the value of world stocks.
Some argue that you get exposure to International by solely holding US stocks. Siegle points out that US companies derived 41% of their revenues from international sales in 2021, and this percentage has been increasing. But the US imports more than it exports and we buy more than 1/3 of goods from international companies.
Fidelity recommends 30% International and Vanguard recommends 40%. I think anything above 20% is fine. I don’t want to vary much from thier mix of the total capitalization of the world’s stocks. I’m sticking with my 30% allocation of International stocks.
Conclusion: I decided on 30% international stocks and 70% US stocks for our (Patti and me) investment portfolio when we started our retirement plan in late 2014. International stocks have underperformed US stocks over the following eight years. And for more years than that. I can’t even make the case that they were helpful in the most harmful sequences of return that we use to derive our Safe Spending Rate (SSR%. See Chapter 2, NEC.) That poor past history does not affect my thinking. There is no logic that says they should permanently underperform in the future. International stocks are about 40% of the capitalization value of all the stocks in the world. That’s too big to ignore. I’m sticking with our 30% mix of international stocks.