A proposed mix of ETFs for my PP

[Greg]

Yes, I think a US PP investor should use only total US stock market index funds.

The PP book allows for 5%-10% in a broad foreign index fund as part of the stock portion of the PP.  I'm perfectly comfortable with 5% in a foreign broad index fund as a small hedge, but many others may not be.  I think each investor has to weigh their own tolerance for small modifications like this.  AFAIK there's a fairly tight correlation between US and foreign broad index funds anyway, so it might not make much of a difference in the long run.  It's more of a psychological Band-Aid for me than anything.

A single total market fund works fine and is the easiest/simplest option, but the only way you can really go wrong with the stock portion is to buy a small number of individual stocks.  HB initially recommended picking out 20 volatile stocks, but then switched to recommending stock indexes when these became more commonly available.  Several people here keep 20% of the stock allocation in an international index.  I did that after I realized that foreign investors have a large impact on the US Treasury bond market, so the international holding helps even out the ride (my impression only, haven't tested this). 

The only "rule" is to avoid buying assets with currency that is not the one you buy groceries with.  That adds currency risk which the PP is not designed to handle.

That's an interesting tidbit if owning foreign stocks acts as a bit of a hedge against US Treasury Bonds. I was wondering if you'd care to expand upon your logic here for the group.

[sophie]

OK here goes...

Think of the PP as a large pigpen with 4 feeding troughs.  When the pigs run from one trough (e.g. stocks), they run toward another trough (e.g. bonds).  By owning all 4 "troughs", you don't care which one the pigs are feeding from at any given moment, but it's always going to be a subset of them. That's because US Treasuries, gold, and cash are the primary safe haven assets that people buy when they want to pull out of equities.  This is true worldwide, not just in the U.S.

After watching the 3 volatile assets bounce up and down for a while, I noticed that the movements in bonds and gold at times reflected movements in the EFA index, not the US stock market.  Depending on which way the correlation went, this would translate to either a relatively large dip or increase in the PP's total value.  By adding a portion of international stocks, I could capture some of these movements and even out these transitions.

Like I said, I haven't put this to any kind of backtest, it's intuition & observation.  But yes, I got the international stocks not as a hedge against US equities, but to harden the PP's use of gold & bonds for a US investor.

[rocketdog]

Another consideration that's been pointed out before is that most of the larger US companies also have a large foreign presence as well.  So a broad US index fund should also give you a certain level of exposure to foreign markets, albeit in an indirect manner.  In other words, if the economy is flat in the U.S. but booming overseas, then a broad US index fund should benefit from the positive financial activity in foreign markets to the same degree that the US companies in the fund are exposed to those foreign markets.