Do You Need International Stock Funds? Bogle Doesn't Think So

Bogle Doesn't Think You Need International Funds

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Conventional wisdom says to allocate a portion of an investment portfolio to international stocks. But is this advice really wise? John C. "Jack" Bogle, the founder of the Vanguard Group, Inc, doesn't think so.

Bogle may be best known for his relentless teaching and preaching on the virtues of index investing. But he's not been one to sing the praises of international investing. Why?

Why Bogle Doesn't Like International Stocks

Bogle's investing philosophy led him to create the first index fund available to the general public, Vanguard 500 Index (VFINX) in 1976.

To this day, the fund is one of the best S&P 500 Index funds and Vanguard investments are among the best and favorite of mutual funds for the do-it-yourself crowd. 

While there are plenty of good foreign stock funds at Vanguard, it is no surprise that VFINX invests solely in large U.S. companies. Why doesn't Bogle like international investing?

Here are excerpts from a recent interview Bogle had with Morningstar:

I don't do international. And emerging markets is a little separate part of so-called 'international.' We're wonderful in America--we call non-U.S. funds international. Where's the U.S.? (Laughs.) They are really non-U.S. funds--non-U.S. portfolios. I probably talked about this a year ago. I say, 'What are you buying?' There is such a thing as oversimplifying--this coming, of course, from the great simplifier. People say, 'Buy the EAFE Index or the FTSE International Index.' So, [I tell people to drill down into that index]. What are you buying? Look behind the curtain. Your largest investment is Britain. Your second-largest investment is Japan. Your third-largest investment is France.

What... is the possibility that those three nations are going to outpace the U.S. in terms of investment return in the next 10 years? I just don't think it's possible. And those countries may be the better ones. Each one has its own set of troubles. We've got plenty of troubles over here in the U.S. But at least we know that we have the most innovative economy, the most productive economy, the most technologically advanced economy, the most diverse economy in the world.

Building a Portfolio Without Foreign Stocks

Bogle's subtle joke about how we in the U.S. think "international" means "foreign." This is a common mistake in the investment community. Any mutual fund that invests in more than one country, including the U.S., can be considered international. But foreign stock funds typically allocate more than 80% of their holdings to countries outside of the U.S.

And Bogle suggests, that if an investor wants to invest in foreign stocks, they may do so by purchasing an index fund that invests in the MSCI EAFE index.

Int is also important to understand that large-cap stock funds will hold stocks of companies that often have an international presence, which is to say that they do business and/or have locations all around the world and are thus affected by global economies. Therefore investing in a large-cap stock fund or an index fund like VFINX will have an international element to it.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.