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Why so much international?

April 18th, 2008 at 01:55 pm

Broken Arrow expressed some concern about my 44% international exposure:

Yikes... perhaps you have higher tolerance than I have, but I feel like the international is actually... too high!

Everybody is going international... and well, yes, that's understandable.... However, what exactly is international anyway? Is fund diversification really going to spread out the risk enough for us to simply invest in it and feel safe?


I currently use a full-service broker and the vast majority of my money is in American Funds. I was a bit concerned the first time I saw how high the international was, but my broker explained that with Amerian, most of the "international" companies are really big multi-nationals, which includes companies that were founded in the US, but register overseas. If you look at the breakdown by nation the majority is in US, Europe, or Japan. He felt that the international component was about right.

I wouldn't say that I'm a savvy investor. I've got a big portfolio because I stashed 10-15% in my 401k the first 12 years that I worked as a software engineer, and because I made a $150k profit on a townhouse I bought, and decided to invest it instead of rolling it into our second house. I've basically followed the advice of my broker, and the townhouse profit has almost doubled in 6 years time, so he's done pretty well by me so far.

I had a big wake-up call when I read The Complete Idiot's Guide to Getting Rich, and realized that I'm entering a growth phase where how I manage my investments is becoming more important than how much I contribute each year. For instance, last year my dividends and capital gains were about $30k, where maxing out 401k and ROTH would only be about $23k.

So I'm trying to get to the point where I actually understand what is going on rather than passively following the broker's advice. At the same time, I'm reluctant to change anything (and potentially screw it up) before I feel I have a deeper understanding.

My dad, who was an investment broker for many years, believes that American is one of the best at protecting your money -- losing less in the down years than the other families. I'm in no position to judge.

6 Responses to “Why so much international?”

  1. Broken Arrow Says:

    Heheh, wow, I got my own blog entry response. Big Grin

    The explanation is reasonable. It seems like you have a fund manager who knows what he or she is doing. My international fund is also primarily large caps and in developed countries. It is because of that that I felt comfortable enough to allocate 30% to it.

    So, even though I may not be as high, I am still up there somewhere. But yeah, I echo your sentiment the desire to learn more about investing in general, at the very least for the comfort level of knowing what I am putting my money into.

  2. jc3900 Says:

    The international question is a very tough one. At one glance, the United States is the most free and stable political country in the world. At another glance, you see that it is drawing bigger and bigger deficits yearly, and future entitlement that are forecasted to completely bankrupt us. You would expect that the citizens of this country would be alarmed by such facts, however it is apperent by their appetite for new entitlements such as universal healthcare that our spending habbits will most likely not change. You can't spend more than you take in forever. Eventually, it all has to come to a crashing halt. Right now our national debt is 9.3 trillion dollars in debt. That is over 3 times annual revenues. Sorry, but there will be a crash in this country in the next 30 years.

    In the last crash, it took the dow over 20 years to hit its previous high. Since the crash is inevitable, you might as well invest the majority of your money in countries that our currently lending nations and somewhat fiscally responsible. I mean china pays less taxes than us for goodness sake!

  3. Nika Says:

    I am *oh horror* 75% international

    2 reasons:

    1) I am young
    2) I plan to retire outside US and the weakening dollar and astranomical debt and the government that does not see these issues as a priority... these things are freaking me out

  4. Broken Arrow Says:

    No offense, but 75% is way too high, and dare I say... reckless.

    I don't really understand this appeal of overloading on international funds....

    Because this actually defeats the purpose of proper asset allocation.

    Without in-depth due diligence, your investing risk is roughly that of groping in the dark. In order to protect your assets in light of that (haha, get it? nevermind), you want to spread out your risk.... Diversification does that, but in order to achieve proper diversification... you don't want to put more than... say 20% of funds into any particular asset class.

    It's true that internationals are all over the world, so who knows, maybe you can up that to 30% like I have. However, more than that, and I have to seriously question diversification.

    There's something else to consider:

    The US market is underperforming right now, but I don't think it'll be like that forever. That means that, right now, it's the perfect time to pick up even US funds and ETFs for CHEAP. Contrast that with international funds, which even though it may be performing well in the short term, are also costing a premium to buy.

    Finally, because the Dollar is weak right now, it will cost even more for you to invest in foreign assets. So, in other words, you are losing money just on buys alone, and it's up to the fund performance to make up that difference....

    While it may seem like a good idea at first to overload on internationals, the truth is... it isn't. I hope you don't get offended, and please feel free to disagree (because I recognize that I could also be wrong) but....

    In my opinion, unless you know what you're getting into, it's best to follow proper asset allocation and diversification.

  5. jc3900 Says:

    You know Broken Arrow, when you say that 75% international is way too much, what you are saying is that you are very confident that the United States will outperform the rest of the world for the next 40 years. But yet you say nothing to back these figures up. I think what you need to address is one of the posters main reasons for going so much international.

    I plan to retire outside US and the weakening dollar and astranomical debt and the government that does not see these issues as a priority... these things are freaking me out

  6. Broken Arrow Says:

    Um... but I did point out the reasons in my earlier post. I'm not sure why that isn't enough.

    I should also clarify that I did not say that one market will out-perform another market. The truth is, I'm not sure what exactly will happen, especially over the course of such a long horizon.

    But that's exactly my point. If one is not certain, I advocate broad diversification.... And 75% to me is not broad diversification. That's basically a hunch that internationals will out-perform domestic. Where's the data to back that up?

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