You raise a good question. For some data on the topic, you could take a look at the returns earned by Vanguard’s Total International Stock Fund and compare them to an S&P 500 fund.

The answer, to save you the time, is that you’re right. The correlation is pretty darned high.

The difference in expense ratios is 0.16%. Personally, I’m willing to pay that price for the (admittedly potential) benefits of further diversification.

However there are certainly many well-informed investors–John Bogle comes to mind–who’ve opted to keep international exposure to a minimum for precisely the reasons you mentioned (as well as a concern about the additional level of risk from fluctuations in exchange rates).

Amen.

I am not dogmatic about avoiding non-index funds. But style drift is a serious problem. The benefit of long-term investing is that you are giving your strategies time to work out. If the fund manager is changing his strategy, he is also changing your strategy (possibly without you even knowing about it). So the benefit of long-term investing is lost to you.

Unless you are willing to take the time to follow your fund closely enough to be sure that there is no style drift going on, I think you are better off in index funds. I view the transparency of index funds as a big argument in their favor. I don’t want people playing games with my funds and index funds are simple enough that gamesmanship is not possible.

Rob

While I certainly wouldn’t want my investments changing without my knowledge- I wonder how much of a difference diversifying between different stock categories really makes? Have you seen any data that even gives a rough estimate?

I expect most of the world’s economic growth to happen outside the USA but the S&P500 are really global companies. Do we really get that much more diversification with an international fund? If we do, is it worth the extra cost of an international fund?

-Rick Francis