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I am looking at Vanguard's Target Retirement Fund VTIVX. This funds' split between US to International stocks is 2:1 (62:27 to be more exact). So for every dollar invested outside US, two dollars are invested within US. I would expect a 1:1 split to be more logical since the US's share of total world stock market is not more than 50% (e.g., reading this link).

Why is the fund biased so heavily towards US?

And this bias is something I have noticed in retirement funds from other provider's also e.g., Blackrock, T. Rowe Price etc.

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Vanguard's target funds pretty much just follow the general guidance I've seen for asset allocation strategies which generally suggest a portfolio with roughly a 75/25 split of domestic/international holdings. The real question is why that advices is so common, not so much about why Vanguard or other funds do it specifically. –  JohnFx Jan 10 '13 at 19:53
    
They aren't weighted that heavily here in Canada. :-) –  DJClayworth Jan 10 '13 at 20:44
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I assume it's for a psychological reason similar to "not invented here". US investors are more comfortable with the US market. There is perhaps a practical reason as well, assuming that the person plans to retire in the US. Though that would require substantiation to prove it a good idea. –  stannius Jan 11 '13 at 0:23
    
Just to give you some perspective, look at the 2015 Target Retirement Fund: quote.morningstar.com/fund/f.aspx?t=VTXVX As you near the target retirement age, you will see the allocation slow change to a less aggressive portfolio. I don't think the funds are favoring US stocks, they are investing based on risk potential of the different markets and allocating percentages based on how close the fund is to retirement age. –  Sun W Kim Jan 15 '13 at 23:14
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2 Answers

up vote 2 down vote accepted

Excellent question, though any why question can be challenging to answer because it depends on the financial products in question. At least, I haven't seen many target date retirement funds that include a high percent of foreign stocks, so below explains the ones I've seen which are primarily US stocks.

  1. The United States (before the last twenty years) has been seen as a country of stability. This is not true anymore, and it's difficult for my generation to understand because we grew up in the U.S.A being challenged (and tend to think that China and India have always been powers), but when we read investors, like Benjamin Graham (who had significant influence with Warren Buffett), we can see this bias - the U.S.A to them is stable, and other countries are "risky." Again, with the national debt and the political game in our current time, it does not feel this way. But that bias is often reflect in financial instruments.

  2. The US Dollar is still the reserve currency, though it's influence is declining and I would expect it to decline. Contrary to my view (because I could be wrong here) is Mish, who argues that no one wants to have the reserve currency because having a reserve currency brings disadvantages (see here: http://globaleconomicanalysis.blogspot.com/2011/04/bogus-threats-to-us-reserve-currency.html; I present this to show that my view could be wrong).

  3. Finally, there tends to be the "go with what you know." Many of these funds are managed by U.S. citizens, so they tend to have a U.S. bias and feel more comfortable investing their money "at home" (in fact a famous mutual fund manager, Peter Lynch, had a similar mentality - buy the company behind the stock and what company do we tend to know best? The ones around us.).

One final note, I'm not saying this mentality is correct, just what the attitude is like. I think you may find that younger mutual fund managers tend to include more foreign stocks, as they've seen that different world.

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Another reason is that foreign investments trigger a significant tax hit, so a US stock X with 5% ROI is better than foreign stock Y with 7%, because of the tax "punishment" the US Congress enacts on investments in foreign lands. –  littleadv Jan 14 '13 at 1:04
    
Yeah and it makes me wonder if they'll continue trying to find ways to profit off foreign investments in the future by raising this punishment. –  YaReally Jan 14 '13 at 1:07
    
I really hope they're going to level the field and allow people to invest internationally. I do prefer to invest in China and have money flowing to the US, than the other way around. –  littleadv Jan 14 '13 at 1:17
    
What exactly does the dollar being a reserve currency have to do with American stocks being a more stable choice? –  Zombies Jan 15 '13 at 3:46
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A target date fund is NOT a world market index. There is no requirement that it be weighted based on the weights of the various world stock markets. If anything, historically (since the invention of target date funds), a 2:1 ratio is actually pretty low. 6:1 is, or was, probably more common. Just a token amount to non-US investments.

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Also, very good point. –  YaReally Jan 14 '13 at 1:04
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