Venturing Abroad

Rick Moberg

STOCKS WORLDWIDE have a total market value of some $85 trillion, with the U.S. accounting for 54%, developed foreign markets 35% and emerging markets 11%. Should your stock portfolio have similar weightings, as some experts suggest?

Tomorrow, I’ll look at the argument for keeping your stock market money close to home. But today’s article presents the case for venturing abroad—by focusing on three key arguments:

No. 1: A global stock portfolio is less risky than a U.S.-only portfolio.

Proponents contend that U.S. stock investors should hedge their bets by diversifying worldwide. That broader diversification lowers risk in three ways. First, you spread risk over more countries. Second, foreign stocks give U.S. investors exposure to industries that are underrepresented in the U.S stock market, as well as to great companies such as Bayer, Daimler, Nestle, Samsung, SAP, Siemens and Toyota.

Third, foreign stocks reduce home country risk—the danger that your domestic stock market experiences a large and prolonged decline. Japan is the classic example. Japan’s stock market peaked in 1989, declined precipitously in 1990 and still hasn’t recovered. The U.S. is not immune to that sort of protracted bear market.

The U.S. has enjoyed more than 200 years of prosperity, growth and good fortune. One day, its fortuitous streak will likely end, just as it ended for the British, Dutch, Spanish and Roman empires, among others. It’s impossible to know when that might happen, so now’s a good time to hedge against that risk.

Proponents also note that foreign stocks reduce portfolio volatility. Foreign stocks aren’t perfectly correlated with U.S. stocks, so they sometimes zig when the U.S. zags. That said, this argument isn’t as strong as it once was, because global stock markets have become more highly correlated over the past few decades.

No. 2: Foreign markets are poised to outperform U.S. stocks.

Proponents argue foreign stocks are likely to deliver higher returns in coming decades. There are three reasons:

  • Valuations. U.S stocks have outperformed foreign stocks over the past decade. That has left U.S. stocks with significantly higher price-earnings multiples.
  • Reversion to the mean. Since 1970, U.S. and foreign stocks have seesawed back and forth, with each delivering better returns for a decade or longer. Foreign stocks beat U.S. stocks in the 1970s, 1980s and 2000s. U.S. stocks won out in the 1990s and 2010s. Given the great run that U.S. stocks have had of late, foreign stocks may be primed to outperform.
  • Emerging market growth. That faster economic growth among developing countries could translate into superior stock returns in countries such as China, India and Taiwan.

No. 3. Experts recommend stashing 20% to 50% of a stock portfolio abroad.

The institutions making this recommendation include Charles Schwab, Fidelity Investments and Vanguard Group. The people include Bill Bernstein, Ben Carlson, Charles Ellis, Rick Ferri, Morgan Housel and Burton Malkiel. This is an impressive crowd of thoughtful, intelligent, respected and trusted people. Their collective opinion is quite an endorsement.

A final thought: Whatever you decide is the right amount of foreign stock exposure, you need to be committed to it. Flip flopping back and forth is a bad idea—and will likely hurt your long-run returns.

Rick Moberg is the retired chief financial officer of a publicly traded software company. He has an MBA in finance, is a CPA and has a passion for personal finance. Rick lives outside of Boston with his wife. His previous articles were Six TipsGive Me Five and To Roth or Not.

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