If your country is roughly 50% of total worldwide market like the USA, then there is a serious question, do you need to invest internationally?
I'm going to try and answer that here. If you don't live in the USA, then the answer is 99% of the time: YES, you must invest internationally.
The USA is a unique place for an investor and one can arguably get away without investing internationally. Let us explore why that is, so you can make an informed decision.
Americans overwhelmingly spend their money with US companies. The Federal Reserve estimates about 11% of domestic money is spent outside the US. This has been true for the past 15 years. So we are mostly self-sufficient in regards to things Americans spend their money on. That puts us in a very unique position globally. The BLS Agrees with the Federal Reserve.
Also of note, the Working Age Population in the USA is still growing. We can be confident for about 20 years out(as the workers 20 years in the future are being born today).
"The total U.S. population is projected to increase by 98.1 million between 2014 and 2060. As shown in Figure 1, the population is expected to increase from just under 319 million in 2014 to just under 417 million in 2060. This corresponds to an average increase of 2.1 million people per year."
We know the birth rates, and we know despite all the political insanity around immigration, we still import about 1 million people a year per the DHS. These numbers haven't significantly changed in decades.
Population growth is shrinking, so in 40 years the facts might change, but so far we are on pace to continue to have a larger working population than a retired population through 2060. In fact the # of people over 65 in 2060 will be less than the number of people over 65 in Italy in 2020.
These facts:
- Rougly Half of the worlds publicly investable dollars happen here in the USA.
- Americans overwhelmingly spend most of their money locally in the USA.
- Americans Working Age Population is not slated to change much over the next 20-40 years.
- The US Dollar is overwhelmingly the US reserve currency, both legally and practically, with no end in sight.
Means that it's very likely that US performance vs International is going to continue to be fine.
There are some things to note however, if something drastic happens to the US that alters the investment landscape and you are 100% invested in the USA, it could cause you lots of grief. But it should be noted, if half of the worlds invested money suddenly had a terrible time, then chances are even if you as an american citizen were invested 100% ex-US, it probably wouldn't help you much. You might not get demolished as much as 100% US investors, but the sorts of things that would cause American investments to collapse would absolutely have global consequence, and be terrible for everyone. The 2008 "global financial crisis" taught us that much.
But there are some things going for Investing Internationally. So it's not all bad news.
- ex-US has more "commodities", things like oil, etc.
- Dividends of ex-US index funds pay more than US index funds (about 1% difference) i.e. US TSM pays about 2%, ex-US TSM pays about 3% in yearly dividend. So if you have a safe withdrawal rate of 3%, you could in theory buy just international and never sell a share. (if you were to do this, a fund like Vanguard's VT would be the best way probably, i.e. a total world fund)
- There is a tax credit on your US taxes if your ex-US investments pay taxes outside the US(and they all do). The credit isn't all that fabulous, but it does currently exist, so might as well take advantage.
- There is usually a country or two that outperform the US on any given year. The problem is, we never know which country, and for a US investor, it's expensive to invest in only a single country, it's way cheaper to just invest in everything outside of the US in aggregate(i.e. an ex-US TSM fund) So ex-US as a whole usually does OK, it rarely beats the US in aggregate, even though a single country or three might.
Japan is often brought up as a reason to diversify outside of the US. If you aren't aware for the past many decades, Japan's stock market has been miserable. Like totally beyond terrible, so bad that the Japanese government is propping up the stock market at unprecedented levels and still has made zero dent in returns, even over decades and with no end in sight.
If something like that happened to the US economy, it would be terrible for our investments and retirement plans. This is probably the biggest reason to seriously consider investing in ex-US investments today.
The bottom line is, there is no good concrete answer. Experts fight over this all the time, which pretty much tells you, nobody knows. For the next 20 years at least, investing 100% US is probably totally fine. After that, the facts are fuzzy.
My recommendation, make a decision on if you want to invest in ex-US or not. If you don't want to hold ex-US right now, then every decade or so, (say the year after the US census releases their latest report) verify the above facts are still true, or likely to be true and re-evaluate your perspective on holding ex-US. There will likely come a time when the US isn't half the world's money. The UK once held a similar position back when it was the dominant super-power on earth. It's undoubtedly true that the US will eventually lose out to some other country/region, though who and when that might happen are not remotely clear at the moment and may not even happen in either of our lifetimes.
We however are prudent investors and want to be ready if that does become likely in our lifetimes, we should get plenty of warning, if we are paying attention.
If you are going to hold ex-US, you have many options, but in my mind there are really only 3 useful options:
- Hold at Market weight (so the lazy of us just buy VT for all equity holdings)
- Hold 20% of your equities in ex-US, so if "Japan happens" to the US, you are not totally demolished in equities or that's the theory anyway.
- Gamble and hold some portion of developed ex-US and emerging market ex-US equities.
Personally if you are going to invest globally, then I'd recommend holding market weight and if you do taxable investing then hold as much VXUS in taxable as possible, you might as well get some foreign tax credits for the taxes in other countries you will pay. and don't be lazy and buy VT, just re-balance to market weight once a year or so. (as when US performs better and more then 50% of the money is in the US, VT won't qualify for the Foreign Tax Credit) Vanguard and Fidelity recommend holding market weight as well.
About taxable VXUS: This only makes sense depending on your tax rate, both federal and state. If you have no state tax, and have a 12% or maybe 22% tax bracket, than VXUS in taxable makes sense. If your tax bracket is higher, then it probably doesn't make sense. If you have state income tax, then some math is required, and your state may or may not offer a foreign tax credit (most do not, it seems). More information about this is available here
I think that's all I want to say about international investing. The tldr; If you live outside the USA, the answer is YES. If you live in the USA, it probably doesn't matter what you do over the next 20 year investment timeline.