International Funds Do Not Diversify Portfolio

The graph below illustrates why the Investing For Retirement strategy excludes International funds from consideration.

The blue line represents iShares MSCI ACWI ex U.S. ETF (ACWX),  an index fund  that provides exposure to a broad range on international developed and emerging market companies. ACWX captures all sources of equity returns in 22 developed (excludes US)  and 24 emerging markets.

Note how it exactly mirrors the volatility of the US stock market (VTI – yellow line). The only difference is that it underperforms VTI by about 100%. In fact, since its inception, it has lost nearly 9%.

The fact that it has underperformed the US market for the last 8 years is really immaterial. The important point is that it is highly correlated to the movements of the US market. Thus there is no counter movement to buffer a decline in US stocks.

The stated benefit of diversification is that some equity classes will move in opposite directions to certain stimuli, thereby buffering the impact on the portfolio. It is obvious that International equities do not provide this counter effect.

From this, we can see there is no need to have an International component in our portfolio.