(PUB) Investing 2015

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- >

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

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.

The Independent Adviser for Vanguard Investors • November 2015 • 15

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