Is the Vanguard Total International Stock Index Fund a Good Investment for You?

Investment decisions are highly personal and depend on your individual risk tolerance and financial goals. The Vanguard Total International Stock Index Fund (VGTSX) is a popular choice among investors, but is it a good fit for you? Let's break down the risks and rewards to help you make an informed decision.

Understanding Risks and Rewards

When evaluating any investment, it's crucial to consider both risks and potential returns. In the case of the Vanguard Total International Stock Index Fund, the maximum drawdown (the peak to trough decline in value) is -60, with a current year-to-date (YTD) drawdown of -6.7. Over the past 26 years, the average annual return has been approximately 2%, which provides a baseline for comparison.

These figures highlight the significant variability in performance. For instance, while the annual returns have been positive over the long term, the potential for substantial losses cannot be overlooked. In particular, the -60 maximum drawdown recorded in the past indicates a high risk of significant declines in value.

Comparison with a More Active Strategy

A more active investment approach, such as weekly trading the best 6 long and 6 short positions of the Nasdaq100 Index, can yield higher returns but also comes with higher risk. Using a discount broker, one can achieve an expected annual return of about 42%, with a maximum drawdown of -37, or 6.4%. This approach contrasts starkly with the less aggressive and more diversified international stock fund, highlighting the potential for much higher returns but also significantly higher risk.

Personal Risk and Reward Tolerance

Ultimately, whether the Vanguard Total International Stock Index Fund is a good investment depends on your personal risk and reward tolerance. For many investors, the goal is to achieve a balanced portfolio where risks and rewards align. The MAR (Maximum Annual Return over Drawdown) ratio, which measures the annual returns relative to the maximum drawdown, is a useful metric. When this ratio approaches 1, it suggests a balance between gains and losses, indicating a well-diversified investment.

The MAR ratios for both the Vanguard Total International Stock Index Fund and the SP 500 (excluding dividends) have not reached this balanced value in recent years. The Vanguard fund's MAR ratio has been lower, reflecting its higher risk profile compared to the SP 500.

Role in a Three-Fund Portfolio

For retail investors like myself, the Vanguard Total International Stock Index Fund often plays a crucial role in a diversified portfolio. Over the past decade, this fund has delivered an average annual return of about 9.6%, with a strong start to the year at 10%. During the March 2020 dip, its maximum drawdown was -25%. In comparison, the SP 500 has had a better annual return, around 11.6%, but with a higher maximum drawdown of -32%.

Conclusion

There is no single "good" or "bad" investment; everything depends on your specific financial goals and risk tolerance. The Vanguard Total International Stock Index Fund is a valuable tool for achieving international diversification, but it should be part of a larger, well-diversified portfolio. Always consult with a financial advisor to ensure your investments align with your personal financial objectives.