Does it make sense to continue to invest in international funds?

10 year returns of VTIAX do not look that impressive

One investment topic that has been hotly debated recently is the need to invest in international stock market funds.  Roughly 30% of our current portfolio is invested in VTIAX, the Vanguard Total International Stock Index fund.  With recent performance of this fund being quite bad (year to date return of -10.63%), a lot of investors in the fund have become very nervous.  People are starting to feel like international stock investing is risky.  Growth in China is slowing down, oil dependent countries like Venezuela are collapsing, Greece and Spain have major debt problems and world governments are in turmoil.

While looking gloomy lately, international stocks currently make up about 55% of the global market.  The US market does not dominate the world.  International markets tend to have more volatility than US markets.  While there is some correlation between the US and international markets, history has shown that non-correlation can help improve performance over the long term. 

Vanguard considers an international allocation of 20 to 40% of total stock investments to be reasonable.  Popular index fund investment advisor Rick Ferri recommends an allocation of 70% to US stocks and 30% to foreign stocks, noting that the diversification of this allocation provides higher risk-adjusted returns than an all US stock portfolio. 

I agree with these recommendations.  We can’t control which world markets do well and which do not.  I feel comfortable diversifying my investments.  The top 10 largest holdings (7.9% total assets) of the Vanguard Total International Stock Index fund include: Nestle, Shell, Roche Holding, Novartis, Toyota, Samsung, HSBC, Unilever, British American Tobacco, and Taiwan Semiconductor Manufacturing Co.  These are big companies that I would be missing out on investing with if I only chose to invest in US stocks.  Stocks go up and they go down.  Right now, international markets have been performing poorly.  As we continue to dollar cost average our investments, we are picking up much more shares of international funds at cheaper prices.  In the future, international markets may outperform US markets.  We are continuing to stay diversified to help us stay the course.

There is a good recent discussion about investing in international stocks on Bogleheads here.