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The Independent Adviser for Vanguard Investors
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November 2015
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800-211-7641
I think Vanguard may finally have it
right here, but that doesn’t mean I’m
going to switch allegiances. Stick with
International Growth.
Pacific Index
Hold.
Like European Index, Pacific
Index got a new bogey, the FTSE
Developed Asia Pacific All Cap Index
beginning in October, bulking out the
portfolio with many small-cap stocks
that it’s never held before. Japan
remains a huge component of this
fund’s bogey, with close to two-thirds
of its holdings there. Australia is the
next biggest source of stocks, and then
Korea, Hong Kong, Singapore and a
smattering of Kiwi issues make up the
remainder.
As I noted earlier, I’ve never been
a big fan of Vanguard’s sector foreign
funds, because, well, active managers
have shown they can outrun the indexes
pretty darned consistently. What do you
know about Japan and the Pacific Rim
that they don’t? I’d rather let the man-
agers decide how much to invest and in
which countries.
This fund has ETF shares (VPL), but
why bother?
Total International Stock Index
Hold.
Anyone who chooses an index
fund over a managed fund in foreign
markets is simply not using their head.
Either that or they just haven’t looked
at the numbers, which show that most
of Vanguard’s actively managed funds
have outperformed this index fund
since inception.
Formerly an EAFE plus emerging
markets index fund, in the fall of 2010
Vanguard switched the fund’s bogey
to the MSCI All Country World ex-
USA Investable Market Index. The big
change was that the fund suddenly had
portfolio exposure to Canada—making
it nearly indistinguishable from World
ex-U.S. Index. The move to the FTSE
Global All Cap ex-U.S. Index in 2013
was, by comparison, a non-event.
If you are looking to separate out
your U.S. and foreign index holdings,
this is my preferred foreign-only index,
as it now includes emerging markets
and Canada, and is cheaper than World
ex-U.S. Index (0.22% vs. 0.29%). ETF
shares trade as VXUS. That said, I’m
a bigger fan of the managed options,
particularly International Growth.
Total World Stock Index
Hold.
For a while this fund was
giving Global Equity a run for its
shareholders’ money, as noted earlier.
Today, I’d opt for the managed fund
if I wanted an all-encompassing port-
folio.
This fund and its ETF shares (VT)
provide Vanguard with its only global
equities index option, which fills out
the company’s product line. Though
the Investor shares no longer charge
front- or back-end fees, almost two-
QUOTABLE
Asset Allocation and Questionnaires
IN A COUPLE OF RECENT BLOG POSTS, Vanguard planner Chuck Riley made a good point
about the typical risk questionnaires and robo-based asset allocation tools that firms including
Vanguard offer their clients and prospective clients. But he also makes a really bad point about
optimal allocations.
Let’s start with the good. “It’s possible to ‘cheat’ on the risk quiz,” he writes. “Quizzes like
Vanguard’s investor questionnaire…are just a starting point.”
And how. Now, I may not be the typical Vanguard investor, but I took the risk quiz and was
surprised that it (a) consisted of just 12 questions, if you count plugging in your current alloca-
tions between stocks, bonds and cash, and (b) suggested that I hold no cash, but rather put all
my cash—as well as some of the money I have allocated to stocks—into bonds.
This points to one of the great problems with computer-based asset allocation and advice
schemes: They simply can’t know all the factors that go into your thinking about how to allo-
cate your assets. In my case, I must pay quarterly estimated taxes on my earnings from writing
this newsletter. And, as I have often advised when someone has a short-term liability looming,
I keep cash in cash, i.e., a money market fund. Recommending that I take all my cash and put it
into bonds is simply bad advice. It’s not wrong-headed, it’s just bad.
For the moment, my recommendation is to simply avoid using these electronic tools and ser-
vices that purport to make investing easier and simpler. They don’t.
As Riley says, “Ultimately, the foundation for an asset allocation decision should come down
to just one thing: You.”
I couldn’t agree more, and no computer is going to substitute for a thorough analysis of who
you are, and what your needs are and will be.
Now, here’s where Riley really falls down. In a blog post from October 6, he recounts the
story of a client of his who is scared to death of investing in foreign stocks. He goes ahead
and recommends, though, that she put a good slug of her money in foreign markets. He further
explains that he and his colleagues at Vanguard regularly recommend investors stash any-
where from 30% to 50% of their stock holdings in foreign shares, and between 20% and 40%
in foreign bonds. He admits that some investors are “shocked” by these allocations. And yet,
this is the advice he gives.
Here’s the problem. No matter what the data shows and no matter how many mathemati-
cal arguments you can make supporting the argument that one should have, say, 40% of your
stock allocations in foreign markets, the investor who isn’t comfortable doing that is going to
be ill-served by such advice.
Why? Because, as Jeff keeps reminding me, just because theory says you should, doesn’t
mean you should. On many levels, the investor needs to be comfortable with his or her port-
folio if they are going to hold through the ups-and-downs of the markets. Yes, we all need to
take some risks. And yes, we all should own some foreign stocks in our portfolios. But pushing
people to put as much as half of their portfolio in foreign stocks when that makes them uncom-
fortable is only setting them up to exhibit poor behavior—buying high when things look good,
but selling low when they get uncomfortable. To our way of thinking, that’s a far more costly
error than holding a bit less in foreign stocks than theory might say you should.
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