I’ve always been attracted to the allure of international stocks and bonds. They get a bad rap these days, and for good reason if we look back over the past decade and compare them to the S&P 500. What draws me towards international markets is as easy as one word: diversification. Boiled down, proper investing is all about solid diversification. Why not invest in economies of other countries that are on their way up or matured with lower valuations? Why have all my eggs in one basket? Sure, VTSAX is super diversified in US stocks, but can a portfolio truly be called diversified if the only stocks in it are from a single country? Is solely chasing last decade’s winners a recipe for success? All these questions swirl around in my head, thus in 2023 I plan to start diversifying with international stocks…again.

2022 was the first year since I started heavily investing in index funds that I didn’t buy any shares of my old tortoise VFWAX. By the frothy end of the bull market in early 2022, my once 20% international allotment fizzled down to a meek 5% of my portfolio. This was due of course to the crazy last dance stocks had in 2021. But in 2022, a year where US Stock finished down 19.4%, I happened to slightly better that by half a percent (I finished down 18%). I can thank my good ol’ VFWAX for that, though a good note is that VFWAX has also held me back some as markets soared in 2021. Which is how diversification is supposed to work, it’s a ballast to keep things smooth.

VFWAX or VTIAX?

There’s a few Vanguard international ETF’s and index funds to choose from, and since I use Vanguard that’s where I’ll focus. There are two broad Vanguard international index funds that pretty freakin’ similar, so similar that it might be confusing as to why there are even two in the first place.

I’ll summarize the differences.

Option #1. VTIAX or Vanguard Total International Stock Index Fund.

Option #2. VFWAX or Vanguard FTSE All-World ex-US Index Fund.

First I’ll talk what’s similar.

Both funds have a .11% expense ratio, need a minimum investment of $3000, and have equities and bonds exclusively outside the United States.

Okay now the differences.

	VTIAX	VFWAX
Number of Stocks	7955 (as of 11/30/22)	3714 (as of 11/30/22)
Total Assets of Fund	$360.1 billion	$49.7 billion
Top Holdings
1.	Taiwan Semi Conductor	Taiwan Semi Conductor
2.	Nestle SA	Nestle SA
3.	Samsung Electronics Co	Samsung Electronics Co
4.	ASML Holding NV	ASML Holding NV
5.	Roche Holding AG	Roche Holding AG
6.	Tencent Holdings LTD	Tencent Holdings LTD
7.	Shell	Shell
8.	AstraZeneca	AstraZeneca
9.	Novo Nordisk A/S	Novo Nordisk A/S
10.	LVMH Moet Hennessy Louis Vuitton	LVMH Moet Hennessy Louis Vuitton
Top 5 Countries
1.	Japan 15.2%	Japan 15.4%
2.	UK 10.2%	UK 10.10%
3.	China 8.1%	China 8.5%
4.	Canada 7.6%	France 6.9%
5.	France 6.5%	Canada 6.7 %

See not much difference. VTIAX, because it owns more stocks, has more small cap exposure, and leans towards the Pacific. While on the other hand, VFWAX has larger cap stocks and leans towards Europe.

I invest in VFWAX only because it has a bias towards larger cap stocks. And I’ll be honest, the two funds are so similar that, for me, it doesn’t make much difference so long as I’m diversifying in international stocks.

Returns Over the Next Decade?

There’s plenty financial oracles out there calling what will happen to our markets in the next decade or so. I have a list here from 2020 where I compiled a bunch of “professional” outlooks for the 2020’s. If there’s any firm that I will take seriously in the prediction department, it will be Vanguard’s outlook. They’ve been the closest so far this century on market returns. In their 2013 outlook, they made the bold (at the time) call for stocks to gain 6%-9% percent and won the chicken dinner. They successfully predicted the bond yield over the last decade, with returns falling within their range.

They knocked another one out of the park in 2010. See below chart from their June 2010 report:

Not only that. But as we know Vanguard focuses almost exclusively on index funds and ETF’s. They aren’t a bank, they don’t come from a background of housing brokers charging fees and commissions on products, they don’t go searching for “alpha”. Vanguard focuses mainly returns from buying large swaths of the markets through index funds. I have to say, the Boglehead philosophy tugs at my heartstrings more than any other philosophy. If it weren’t for FIRE, I’d be wholly onboard with their classic 3 fund strategy if 62 were the retirement age for me.

Here’s what they are saying, I highly recommend reading the December 2022 report if you haven’t done so already. The below table is where Vanguard thinks we are heading this decade. Look at how horrible US growth stocks look. Last decade’s winner does not translate over to the coming decade’s winners. They’ve been waving the flag and making the case for diversifying in international stocks for some time now.

We can see how Vanguard views growth stocks in relation to small cap and international…valuation wise.

Vanguard Isn’t Perfect…But Diversifying With International Stocks Can’t Hurt

But Vanguard isn’t always right. In their June 2010 Vanguard Economic and Capital Markets Outlook forecast they missed the mark quite drastically on international. They stated that there would be an “insignificant” difference in the returns of US Equity and non-US equity over the succeeding ten years. But from 2011 to 2021 VTSAX returned 14.82% and VTIAX returned 5.4%. Pretty fucking significant difference if you ask me. But to be fair, Vanguard has owned up to falling flat on their face in this department. In fact, as we head deeper into the 20’s, they are doubling down on international again.

The point of me highlighting Vanguard’s misses is to say that even the absolute best forecasters get it wrong. I do not think it would be wise to use this December 2022 Vanguard report to all of a sudden change strategy on the next trading day.

What can’t be overlooked is ensuring diversification during this changing of the guard of market fundamentals. Things are much different than the post Great Recession teens. Rates aren’t going back to zero anytime soon. Inflation seems to like our post-pandemic world. The United States and Europe seem to be reorganizing for a new Cold War. The way we use energy is changing. The Federal Reserve is showing an early eighties like stubbornness (and power trip) to tell the markets it’s not gonna helicopter parent investors anymore.

Things are just different now. Retail investing like we did for the last ten years might not yield the same results. Diversification covers all bases. I won’t lie and say I haven’t been mulling over buying bonds as of the last few weeks…though that’s not in the cards for me yet. Not this year at least. No, this year it’s diversifying with international stocks.

Portfolio Allotment

I’m aiming to make VFWAX 20% of my portfolio with the remaining 80% being either VTSAX or an S&P fund. I do continually invest a small bit into VSGAX, a small cap index fund, in my taxable. Roughly 20% of my post tax investing went to small caps in 2022. That’ll change in 2023 as I shift over to VFWAX so that I’ll be diversifying in international stocks over the year to get my allocation percentage in order. I really don’t want to sell VTSAX and face capital gains tax to rebalance at the moment. Though I will likely sell some duds to tax loss harvest (which I’ll go over in another post).

Here’s how Vanguard sees playing the 2020’s with the classic 60/40 portfolio.

Now I don’t necessarily agree with them on this portfolio layout, solely because of the amount of fixed income they have allotted. But I do plan on going 70/30 (70% stock and 30% bonds) when I initially FIRE. This is based on sequence of return risk and wanting a bond tent to carry me through the first five years of retirement. Though after I retire, I will begin to sway back towards a 90%+ stock allocation to carry me through to the mists of Avalon.

I’m a few years away from retiring, so I’ll make the final chess piece moves the year before and after I retire, with capital gains tax implications in mind.

Below will be my portfolio when I FIRE in a few years. With the exception that I’ll have a 20% international stock allocation and my fixed might not be entirely government bonds.

Yes, I flirt with the Boglehead strategy, as you can tell. I do dabble in individual stocks and I’m not the biggest bond fan at my age, so I’m not an out and out Boglehead. Plus, I hate to lump myself into an investing category, other than being a FIRE guy of course.

Another Chess Piece Has Moved

2023 is about turning another gear in my FIRE machine. This year’s theme is inviting VFWAX to the party again.

My weekly post-tax dollar cost averaging will look like this for me:

(20% VFWAX/VTIAX) – (5% VSGAX) – (75% VTSAX)

Q2 or Q3 2024 will see the Happily Disengaged house start purchasing bonds.

2025 will see a more cash heavy strategy.

All this is dependent on Mr. Market.

Time is running short for my proposed mid-2025 FIRE date. Which I was trying to time with the school year ending for my children, since full time travel is the plan. With markets still acting funny, this could move out another year to 2026. Either way, we are more than halfway to our FI range. Diversifying in international stocks is a strategic element of mitigating sequence of return risks in retirement.

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What do you think? Do you invest in global equities? How do you stay diversified? Or is diversification not part of your strategy?

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