What’s Vanguard’s position on how much of your equity portfolio should be in international stocks? For many years, I had consistently seen 40%. But now there is evidence that some Vanguard advisors think it should be far less.
Vanguard’s official position on international is:
In general, Vanguard recommends that at least 20% of your overall portfolio should be invested in international stocks and bonds. However, to get the full diversification benefits, consider investing about 40% of your stock allocation in international stocks and about 30% of your bond allocation in international bonds.
Indeed, Vanguard’s fund of funds, such as target date funds, follow this target. And for years, when I look at portfolios managed by Vanguard’s personal advisory services, I’ve seen this 40% international followed religiously. However, the last two portfolios I’ve reviewed over the past few months had only half that amount, averaging just about 20%.
Two portfolios may not seem like a lot but, if 90% of Vanguard advisors wanted “full diversification benefits,” the odds of finding two out of two different advisors hugging that minimum are only 1%. Many academic studies don’t have a 99% confidence level.
As I see it, there can be three reasons specific to the client that Vanguard advisors would vary from Vanguard’s position. These are:
The client requested a lower allocation.
The client had an overweighting of international stocks in other parts of their portfolio.
The client would have had to pay taxes to sell other positions to reach the 40% international stock allocation.
None of these reasons were present in these two cases. In fact, neither client was even aware of Vanguard’s 40% international stock allocation position. When asked why so light on international stock, the advisor responded that international has lagged the U.S. stock market. Has Vanguard made a shift in its position?
I posed that question to a Vanguard media spokesperson, who replied, “Specifically, our lead recommendation to advised clients is 40% international equity exposure, 60% U.S.” He went on further to state, “We do not advocate attempting to time the market, as our research suggests that it’s extremely difficult to do so successfully,” and concluded. “we believe it is most likely a one-off situation.”
After discovering the second Vanguard PAS client with a different advisor also with a 20% international allocation, I followed up again with Vanguard, asking for data as to how common this was. I assumed they had the ability to quickly aggregate data to see average allocations as well the prevalence of outliers.
I also asked if the client should be told by the advisor that they were varying significantly from Vanguard’s position. The response received was:
Hundreds of thousands of individual investors are benefiting from Vanguard Advice, which is making advice more accessible, affordable, and personal. Advice is not a “one size fits all” proposition; it should be available in a range of options to best meet investors’ unique needs, preferences, and desired value for the cost. Vanguard advisors work with clients to identify their investment goals and develop complete financial plans with ongoing portfolio rebalancing, tax-efficient management and continuous guidance.
Although individual clients and the two advisors were not identified, the spokesperson sent a follow-up email saying the company declined to comment on specific accounts.
My Take
While I may not agree with every investment strategy employed by Vanguard Personal Services Advisors, I do think they are some of the most focused, disciplined advisors around. I love the fact that they build simple, tax-efficient and low-cost portfolios for clients, which is why I continue to recommend Vanguard PAS.
But investing isn’t easy, even for the most focused and disciplined of advisors. Until recently, international has badly lagged the U.S. As of April 21, 2023, the total annualized 10-year return of the Vanguard Total Stocks Index ETF (VTI) was 10.16% versus the Vanguard Total International Stock ETF (VXUS) of only 4.70%. An investment of $10,000 in VTI grew by $16,317 versus only $5,829 for VXUS.
Going forward, Vanguard projects international will outperform the U.S. The numbers below come from the Vanguard economic and market outlook for 2023 and show the value of a $10,000 investment in 10 years. The base case (50%), pessimistic (5%) and optimistic (95%) all show international outperforming the U.S.
5.0% | 25% | 50.0% | 75% | 95.0% | |
Int'l | $12,431 | $17,573 | $22,402 | $28,394 | $40,105 |
US | $8,773 | $13,180 | $17,408 | $22,819 | $33,646 |
Vanguard told me the probability of international outperformance over the next decade was about 75%.
It’s quite possible that getting two out of two Vanguard PAS portfolios at half the international recommended by Vanguard was just bad luck and that the vast majority of Vanguard PAS advisors adhere to the 40% position.
I went to the Bogleheads forum and asked members whether they had seen Vanguard PAS allocations, though Bogleheads are typically do it yourself investors. Vanguard could have provided a clearer picture, but there may be a reason or reasons Vanguard did not respond with specifics.
Lately, international stocks have shown some signs of life. VXUS earned 14.38% in 4Q of 2022 and 8.83% YTD through April 21, 2023. This compares to VTI earning 7.05% and 7.65%, respectively.
I don’t know if international will continue to outperform the U.S or what the appropriate allocation to international should be. The late John Bogle often stated it should be zero percent. I typically recommend a third of one’s equity. But one thing I know is that increasing or decreasing based on recent past performance is systematically buying high and selling low.
As I tell clients, picking an allocation is important, but committing to stick with it is even more important.
Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for Barrons, AARP, Advisor Perspectives and Financial Planning magazine. You can reach him at ar@DareToBeDull.com, or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.
