Photo by Timo Stern on Unsplash.
Most investors have a serious case of home country bias. That means that, all things being equal, they prefer to invest in companies based in their own backyard and tend to underweight companies based overseas. That’s true of America investors as well as those in other countries. Everyone likes rooting for the home team.
If you take a quick look at your portfolio, you may note that you’re underweight when it comes to foreign investments. U.S. based companies now represent about 58% of the world’s investable stock market capitalization (that’s roughly the amount you would need to buy up each country’s available shares). Other developed world companies – like those based in Germany, Singapore, or Australia – make up another 30% of world market cap, while those based in emerging economies constitute the final 12%.
How does that translate to portfolio weightings? In a typical 60% stock-40% bond portfolio, just under 35% of the total portfolio should be invested in U.S. stocks if the intent is to reflect world market weights. Another 18% of the total should be devoted to developed world companies, and another 7% or so should be directed to emerging market stocks. (The remaining 40% would be in bonds or similar lower-risk investments).
In all fairness, U.S. stocks have been tough to beat for the past few years, so betting on the home team may have worked in your favor.
But here are 3 reasons to consider bulking up your international investments now, to help give foreign companies the portfolio representation they deserve.
Reason #1. Investing in foreign stocks opens up new opportunities. Many foreign-based companies – whether domiciled in Europe, Asia, or Latin America – have something that U.S. investors want and need, and that’s the secret to growing revenues and winning over millions of emerging middle class consumers in developing countries. Their economies and populations are growing faster than ours, and they represent an untapped market for everything from cell phone and car sales, to banking and health care services. Investing more in international companies gets you more ‘up close and personal’ exposure to those promising and innovative markets.
Reason #2. Foreign stocks give you more bang for your buck. No doubt about it. Valuations are more attractive overseas. Stocks in the S&P 500 are currently trading at a historically steep price/earnings ratio of just over 20. International stocks are trading at a price/earnings ratio of 14.3. That makes international stocks almost 30% cheaper than their U.S. counterparts, and suggests higher returns ahead as European and other global economies bounce back from COVID. Successful investing is all about ‘buy low, sell high.’ Investing overseas lets you buy in at a lower price point.
Reason #3. Foreign stocks can help you solve the income problem. On average, companies in the S&P 500 index are paying a skimpy 1.4% dividend, far under historic dividend levels. International equities now pay twice that amount, which can add a needed boost to investors looking for steady retirement income. That income flow also helps to reduce risk and provide some shelter from inflation.
The Takeaway: A well-diversified portfolio helps achieve more consistent returns and reduces risk. Now is a good time to make sure your portfolio has adequate international exposure. That can open the door to new and rewarding opportunities in some of today’s fastest growing markets, lock in better values, and increase your monthly income.
All investing involves risk, including the possible loss of principal. Diversification does not ensure a profit or guarantee against loss. Company dividends are not guaranteed and are subject to change or elimination. Foreign investing involves special risks due to factors such as increased volatility, currency fluctuation and political uncertainties. Investing in emerging markets can be riskier than investing in well-established foreign markets.
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