Summary of Do I need International Funds?

Overview of Do I need International Funds? (DIY Money)

This episode answers a listener question about whether investors should include international equity funds (e.g., VXUS) in their portfolios versus sticking to U.S. broad-market funds (e.g., VTI, VOO). Hosts discuss the rationale for and against international exposure, common behavioral biases, how they evaluate allocations (value vs. diversification), and practical guidance for DIY investors.

Main question addressed

• Listener Lance: He mostly holds broad U.S. index funds (VTI/VOO). Online advice often suggests a U.S./international split (e.g., 70/30). Given the U.S. has outperformed in the past decade and many U.S. companies earn significant revenue overseas, is international exposure necessary?

Key takeaways

• There is no one-size-fits-all answer: U.S.-only is a defensible choice for many DIY investors if that matches their comfort and process.
• The traditional reason to hold international funds is diversification — different asset classes/regions cycle differently, which can smooth portfolio returns over time.
• A stronger, more actionable rationale is relative value: include asset classes when they are attractively priced versus alternatives (e.g., lower P/E overseas vs. high P/E U.S.).
• Behavioral biases matter: home bias (buy what you know) and recency bias (assuming recent outperformance continues) often drive allocations.
• Foreign equities often trade at a discount for reasons (transparency, accounting differences), but discounts may reflect real risks—so evaluate carefully.

Arguments for international exposure

• Diversification: different regions and market caps can outperform at different times; blended portfolios may avoid extreme highs/lows.
• Value opportunities: when international markets trade at lower valuations (e.g., lower P/E) relative to U.S. markets, they can offer better expected returns.
• Historical variability: over multi-decade charts (e.g., Ibbotson asset-class rankings), non-U.S. asset classes sometimes top the returns; U.S. dominance is not guaranteed.

Arguments for U.S.-only (or high U.S. weight)

• Strong recent performance: the U.S. market has significantly outperformed many international markets over the last 10–15 years.
• U.S. funds include many multinationals that earn substantial revenue abroad (hosts cited ~55–60% of S&P 500 revenue from overseas), so U.S. exposure already gives some international business exposure.
• Simplicity: fewer funds is easier to manage for long-term investors who prefer "set-and-forget" strategies.
• If you don’t have a clear reason to add international exposure, diversification for its own sake isn’t convincing.

How the hosts decide (practical philosophy)

• Quint (investment-oriented): He weighs relative valuation first — if international equities are materially cheaper versus U.S. equities, that creates an active rationale to overweight them. He uses metrics like price-to-earnings (P/E) and historical averages and favors asset classes that show value or diversification benefits.
• Allie (behavioral/simpler approach): She highlights home bias and recency bias and emphasizes that the objective of diversification is risk reduction, not necessarily chasing returns. If international exposure doesn’t reduce risk or improve expected returns, it may not be necessary.

Practical recommendations (for DIY investors)

• You can be 100% U.S. if that fits your goals and you understand the trade-offs. Many long-term investors keep it simple with broad U.S. funds.
• If adding international, have a clear rationale: either to lower portfolio risk (diversification) or because international valuations look attractive relative to U.S. stocks.
• Use relative valuation metrics (e.g., country/region P/E vs. historical averages and vs. U.S. P/E) to inform tilts.
• Beware discounts: foreign stocks often trade cheaper partly due to genuine risks (transparency, accounting standards), not just opportunity.
• Consider small/mid-cap and emerging markets as separate decisions; they can provide return/risk diversification but also have unique risks.
• Rebalance and document your reasons so allocations aren’t changed based on short-term market headlines.

Useful resources & metrics mentioned

• Ibbotson asset-class performance chart (shows annual rankings by asset class over time) — useful to see how different classes cycle.
• Price-to-earnings (P/E) ratios and historical averages to compare relative valuation between U.S. and international markets.
• Example funds referred to: VTI, VOO (U.S. broad market), VXUS (international/total ex-U.S.).

Action checklist (if you’re unsure)

• Decide your objective for international exposure: diversification, value tilt, or none.
• Check current valuations: international P/E vs. U.S. P/E and vs. long-term averages.
• Consider whether you want passive broad international exposure (e.g., VXUS) or targeted tilts (emerging markets, small caps).
• Factor in tax, currency, and reporting differences (some foreign holdings carry extra complexity).
• Document your allocation rationale and rebalance on a schedule or when your thesis changes.

Notable quotes

• “Diversification for the sake of diversification never made sense to me.”
• “The point of diversification is not chasing returns… The point is to minimize risk.”
• “Live on less than you make, invest the rest, and do so for a very long time.” (show sign-off advice)

Closing thought

• Both approaches (U.S.-heavy or internationally diversified) can be reasonable. The important part is having a deliberate, evidence-based reason for the allocation you choose and sticking to a plan that aligns with your goals, risk tolerance, and willingness to research or trust an advisor.