Looking at my 401k account (standard 2055 target retirement fund) and realizing that international funds have dragged down my rate of return compared to the S&P 500. Should I switch to all domestic?

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Yes. You should look at which markets/etfs/stocks performed the best last quarter/yesterday/earlier today and keep moving all your money where you see the biggest jumps.

likefunnysmart

I did that two years ago and the dynamic switched in the next year.

The purpose of the account is long term earnings, and you should be cautious in trying to predict short term volatility. I’d stay the course and the portfolio should balance over time.

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M1 is being a good troll but the real answer is that chasing returns rarely works out. Some diversity in your portfolio is good and, in the long run, will 1. smooth out returns (as international and domestic stocks are not completely correlated) and 2. probably exceed the returns of any individual asset class (if you rebalance once a year or so, or use a target retirement fund, as money will automatically move from an overheated asset class to undervalued asset classes).

TLDR: stick it out and don’t check your balance that often. When domestics fall and foreign markets hold their value, you’ll be mad

likehelpful

Especially considering that domestic index funds have outperformed international indexes in both the short and long term? Looks like standard aggressive portfolios have international/emerging markets at about 30% of their holdings.

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I just did the exact same and am moving to all domestic for the exact reason you state. Maybe we will regret it but the foreign stocks have underperformed for 5+ years

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Right, I think emerging markets have actually had the highest annual returns historically. Either way, I don’t think having an all domestic portfolio is necessarily a problem, my point was more that investor behavior has a far greater impact on long-term outcomes than allocation (ie switching up your long-term strategy too often based on recent outcomes typically doesn’t work out)

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Legit sources D1- I'm sure this is an investment strategy a lot of investors have no clue about. You should become an evangelist for this

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@SC1 is spot on.

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I would be more confident in the diversification reasoning if domestic and international indexes have more or less the same rate of return in the long run. Even though there are cycles of outperformance of international over domestic, domestic indexes have outperformed by about 2% annually over a 50 year horizon. Is it not irrational to conclude that will continue? Warren Buffet and others advocate for an all-US portfolio.

M1 thinks he’s trolling but what he/she described is actually a legitimate trading strategy that arguably has some of the best risk adjusted returns I’ve researched. If your interested in learning more I’d encourage you to look into momentum based strategies for both indexes and stocks as well as the general principle of tactical asset allocation.

Actually asia markets have significantly outperformed US markets in the last few years. Based on your logic, you should move all your money to China.

Nope. Not the suggestion. There is a very large body of research on absolute and relative momentum based trading strategies which can be applied to certain market indexes that meet a set amount of requirements (e.g. minimum levels of liquidity, reporting and accounting standards, appropriate period of historical data for statistical measures). It’s not as simple as pick the best performing ETF last month and go with it.

Right, right, I didn’t intend to mischaracterize the strategy, the point is that OP shouldn’t invest in momentum ETFs or really any strategy he’s not willing to stick out through relative down times vs other options. Personally, given my understanding and risk tolerance, I see value in including global equities and other assets in my portfolio, and regardless of asset classes I think “set it and forget it” is the way to go for the vast majority of investors

https://www.barrons.com/articles/momentum-investing-big-risk-rare-reward-1409652939

D1 - yes. Completely agree. Investors with basic knowledge of the stock market should only go with momentum based strategies.

My point is not based on whether this strategy is useful for novices. Understanding the underlying theory behind momentum based strategies would require a moderate to high level of financial education and knowledge but implementing it is relatively easy. There are a number of different momentum strategies out there and they all can’t be lumped under one umbrella. I posted a few links for you to read for some of the ones I implement.

Okay

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