Note: This video is part two of nine of an interview between Morningstar's Christine Benz and Jack Bogle, founder of Vanguard, at the 2018 Bogleheads conference. Watch the other segments here.
Christine Benz: Let's talk about international, and you and I always talk about this. You're kind of a contrarian even within your firm in terms of thinking that investors don't necessarily need international stocks to have a globally diversified portfolio. But yesterday at the conference, you talked about Jason Zweig's good piece on the perhaps relative undervaluation of foreign stocks. Do you think investors ought to look at that, be thinking about the fact that we have not seen foreign stocks perform as well as U.S.?
John C. Bogle: I guess the answer to that is yes and no. Number one, the fact that they're undervalued may mean that they're undervalued because they're riskier, which I think is at least importantly the case, maybe not the entire case. Second, I'm just a great believer in a U.S. portfolio because we're the most entrepreneurial nation, we've got the soundest institutions, financial and otherwise, or have had in the past, governance is pretty solid, in the past at least, and a well-diversified economy.
For U.S. corporations, about half of their revenues and half of their earnings come from abroad anyway. It's not as if we're America first or America only. The entire world economy is integrated around many, many countries trading with many, many other countries. I do not think you need to add international.
People have been doing it a long time. The cash flows in the fund business have been much stronger in non-U.S.-
Benz: In international, yeah.
Bogle: -than in the U.S. despite the inferior performance. I don't quite understand where this thing is that you must have a global portfolio. Maybe it's right. Of course, maybe anything is right, but I think the argument favors the domestic U.S. portfolio, and they have to worry about whether the dollar is strong or weak. One more risk.
Many of these foreign nations, particularly emerging markets nations--which are, I think, around 20% of the non-U.S. index--are very risky, very interest-rate sensitive, governmentally not as strong or maybe capable of tipping over rather easily. I do tell people, feel free to disagree with me because I'm not always right, but I have 0% in non-U.S. I say you don't need to have non-U.S., but if you do, limit it to 20%. A lot of portfolios now have 25%, 35%, 45% in non-U.S. securities, and I think that's just too much.