It’s hard to love international stocks lately. Their performance has been a drag on portfolios, leading some investors to ask whether it would be better to focus on U.S. stocks only and leave foreign stocks out of the mix.
The short answer is that investing in foreign equities is still important for a healthy, diversified portfolio – one that will deliver the best returns with the lowest risk over the long-term.
“History shows that investing both here and abroad offers greater returns than sticking with a domestic-only portfolio,” explains Consumer Reports Money Adviser, writing for the mainstream U.S. investor.
Not convinced? Take a look at the companies managing target-date funds for the largest 401(k) plans in the U.S.. Those funds, which are meant to be one-stop solutions for pre-retirement investors, allocate significant (and growing) portions of their stock holdings to international equities.
According to data we pulled from Morningstar, Vanguard earmarks 39 percent of its target-date equities to international stocks, Fidelity targets 32 percent, and T. Rowe Price 35 percent. Applying the math to a portfolio with an overall mix of 60% stocks and 40% bonds, somewhere between 19% and 23% of the total investments would be devoted to international equities. That’s a substantial allocation.
In fact, there are many good reasons to stick with international stocks. Here’s a few:
That’s where the money is. Non-U.S. stocks represent more than one-half of the world’s stock market valuation. If you invest solely within the U.S. stock market, you are automatically excluding over one-half of global investment opportunities.
They help you diversify. Portfolio diversification is all about selecting assets that don’t move in lock-step with each other. That limits the upside, but downside risk as well. Diversification isn’t that complicated. Most people understand the concept of “not putting all their eggs in one basket,” especially if you realize that the basket could drop at any time.
Foreign stocks are a relative bargain. U.S. stock prices are quite a bit higher, compared to earnings, than stocks overseas (especially emerging markets equities). That suggests foreign stocks are the better buy now, as we all recall that “buying low” is a cardinal rule of successful investing.
The U.S. market won’t always be the best. Performance is cyclical. While the U.S. market has been hard to beat for the last few years, that could easily change. Investors have learned the hard way that it’s dangerous to put too much into “hot” performers – just recall what happened with tech stocks or the real estate bubble.
And here’s an interesting nugget. Over the past 30 years, there hasn’t been a single year when the U.S. was the absolute top-performing country stock market, according to MSCI index data. All the more reason to look for greener pastures overseas.