FREE NEWSLETTER
IT’S AN ARGUMENT I’ll never win. But perhaps I can sow a few seeds of doubt.
The anti-foreign-stock drumbeat has grown louder with each additional year that international markets underperform U.S. shares. Indeed, even though foreign stocks beat U.S. shares in the 1970s, 1980s and 2000s, there are folks today who argue there’s no reason to own foreign shares.
Really? Before you throw in the towel, ask yourself six questions:
1. If U.S. stocks had lousy returns for 15 years, would you abandon them? Since year-end 2009, foreign stocks have lagged behind U.S. shares almost every year. If U.S. stocks had served up that sort of mediocre performance, and I declared that it was time to give up on America’s publicly traded companies, readers would eviscerate me for my flip-flopping, failure to appreciate market history, and possible horrible market-timing—and the criticism would be richly deserved.
2. If U.S. multinationals are a good substitute for investing abroad, why don’t they perform like large-cap foreign stocks? Pained by international markets’ lackluster results, it seems many U.S. investors are looking for an excuse not to invest overseas.
One of their favorite contentions: There’s no need to own foreign stocks, because U.S. corporations offer ample international exposure. But if that were truly the case, wouldn’t returns for large-cap stocks in the two markets be similar? Yet, over the 15 years through Oct. 31, MSCI’s Europe, Australasia and Far East index has notched just 5.7% a year, far behind the S&P 500’s 14.2%.
3. Yes, foreign companies offer fewer legal protections and greater business risk. But isn’t this already reflected in share prices? Arguably, investors today are getting paid to take the greater risk associated with international markets.
For instance, the stocks in Vanguard Total Stock Market ETF (symbol: VTI) sport a price-earnings (P/E) ratio of 26, based on the past year’s earnings, versus 15.7 for Vanguard FTSE Developed Markets ETF (VEA) and 15.5 for Vanguard FTSE Emerging Markets ETF (VWO). That huge difference in P/E ratios tells you how much more comfortable investors are owning U.S. companies—and how much more room there is for foreign-stock valuations to rise.
4. If foreign stocks are riskier, shouldn’t they offer higher returns? Many in the anti-foreign-stock camp are trying to have it both ways: They’ll claim that U.S. shares are less risky—and yet they’re also confident that U.S. shares will continue to outperform. What happened to the notion that high risk and potentially high return go hand in hand?
5. If you’re an indexer happy to hold U.S. stocks according to their market value, shouldn’t you also be willing to allocate among countries on the same basis? Many—and perhaps most—HumbleDollar readers are index-fund investors, and most index funds weight stocks based on their stock-market capitalization. Today, for instance, that means having 6% of your U.S. stock market money in Apple and almost nothing in Bath & Body Works.
Yes, some carp that this weighting scheme leads to too much money in tech stocks. Still, despite that, I haven’t heard of many folks giving up on their S&P 500 or U.S. total market index funds. I have, however, heard countless folks say there’s no way they’d put roughly 40% of their stock portfolio in foreign markets, even though that’s what a market capitalization approach would suggest.
In designing my own investment mix, I take my cues from the so-called global market portfolio. Investors worldwide have collectively decided that foreign stocks should account for 40% of the global stock market’s value. Who am I to disagree? That’s why Vanguard Total World Stock Index Fund (VT and VTWAX) is my largest fund holding.
To be sure, that opens me up to the risk of both foreign stock and currency fluctuations. The dollar has strengthened in the foreign-exchange market over the past decade-plus, denting the performance of overseas stocks for U.S. holders.
Will that persist? Nobody knows. In fact, nobody knows what will happen to global stock and currency markets in the short-term—which is why I believe you should keep money you plan to spend soon out of stocks, and especially foreign stocks, and in nothing riskier than high-quality, short-term U.S. bonds.
But that doesn’t preclude owning international markets. Suppose you’re retired and have half your money in U.S. bonds and half in Vanguard Total World Stock. Result? Some 20% of your overall portfolio would be subject to the whims of the foreign-exchange market and foreign stock markets—an acceptable level of risk, I’d argue.
Can’t bring yourself to stash 40% of your stock-market money overseas? I’d strongly favor going for at least 20%. At that level, investors can get much of the reduction in portfolio volatility that comes with owning foreign stocks.
6. What if you’re wrong? Foreign stocks’ diversification benefit isn’t just about tempering a portfolio’s price swings. It’s also insurance against truly terrible results. You might be confident that U.S. stocks will continue to reign supreme, offering a magical combination of high returns and low risk. But what if you’re badly wrong?
I hate to bring up Japan’s 34-year market disaster once again, and yet I consider it the most significant financial event of my lifetime. What if, in 1989, you were a Japanese investor who was so convinced of your home economy’s strength that you had 100% of your retirement money invested in domestic stocks? At the time, the Japanese economy was the envy of the world. Few foresaw the stock-market debacle that was to come.
Could a similar debacle await U.S. stocks? It’s unlikely. But low risk isn’t the same as no risk. Is it wise to bet your stock portfolio solely on the U.S. market? Many investors are doing just that—and it worries me.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
The notion of “American Exceptionalism” is driving lot of investors from around the globe to pile into US stocks. See link below: “U.S. companies now account for 70% of the leading global stock index, up from 30% in the 1980s, while the U.S. economy’s share of global GDP is just 27%”.
This could be creating a bubble.
https://finance.yahoo.com/news/mother-bubbles-us-sucking-money-215345592.html
“Investors worldwide have collectively decided that foreign stocks should account for 40% of the global stock market’s value. “
To be an obnoxious nitpicker, that is probably incorrect. If a stock holder in say Germany has 40% in foreign stocks,
“foreign” includes US stocks.
So they would have 60% in German stocks, and 40% in all other countries,
including the US.
Add up all the 95% non US people in the world, and I doubt if there would be 60% in US stocks. 🙂
A suggestion: When you find yourself starting a sentence, “To be an obnoxious nitpicker,” it’s probably wise to delete what you were writing and move on!
Yes, this site is not the proper forum for ranting , political and angry comments, complete with exclamation points and too many capital letters.
I will continue to invest in the 95 nations that enjoy stock markets. And, I will also continue using short and mid duration
Foreign indexes tend to have a higher dividend yield, also.
And the foreign nations seem to be ok with investing in our nation’s treasuries, also. They own a few trillion worth.
Even though we are only a tiny 4% of the population, our market cap is over 60 percent. But, there is no guarantee of that in the future. I suggest 30 percent in foreign markets.
And , yes, 6 percent in two companies, is much riskier than 40 percent in 20,000 foreign ones.
To quote Yogi Berra, “ The future ain’t what it used to be,”, and , It’ s very hard to make predictions, especially about the future!” “ Sometimes, you can see a lot, just by looking.”
And if I never read the “ word”, “ fanboys”, again, it will be too soon.
The United States business model appears to be working well, thank you. Those whom have been betting against us for a couple of centuries have no doubt been frustrated.,
I hold zero animosity to our country and none to the other nations. I tend to keep my head down and attempt not to lash out , with bitter comments and so forth.
To all the American exceptionalism fanboys, what happens when the US becomes an oligarchy, where a few billionaires run the show, own SCOTUS, POTUS and congress, to THEIR sole benefit? Where does that leave the average investor? Wake up folks.
I agree. Just read the writing on the wall
Wrong forum!
Since I was born over sea, I always hold foreign stocks. I believe that people should have the finances to full fill their dreams and aspiration. When I invest in other countries, I support their goals and values. I had 50% in foreign index funds. Since I rebalanced every 5 years, my foreign index funds have shrunk to 38%. When times to rebalance comes, I will buy low foreign stocks and sell high US stocks.
Very good points, especially the reminder about Japan. Thank you!
Mutual funds are the way to go for foreign stocks as I have learned the hard way. International stocks can fail for reasons we’d never expect of US ones. My biggest lesson involved Gazprom and Norilsk, low PE, high dividend stable Russian stocks. Both cratered when Russia invaded Ukraine, leaving foreign holders high and dry (but not Russians!) Fortunately, those were small plays compared with the approx 10% in Vanguard’s VWILX and TIAA’s QCGLIX, both global funds.
If Bitcoin is truly a “store of value” then that too should be in a portfolio.
I personally won’t touch it but to think that a pizza was bought for 5050 BC in the early days and they are now worth $450,000,000 is enough to drive one crazy.
In addition to currency risk, investing internationally always has a higher associated expense fee. Maybe not as much as in the past due to low cost mutual funds, but for active funds, significantly higher (someone has to pay the MBA’s to fly first class around the world to investigate companies).
I regret listening to an advisor who, using diversification as a rationale, pitched international equites to me in 2006. Unfortunately, this was the apogee for international stocks and it was only a year or two ago when I broke out of red ink on these index funds and they regained their 2006 value. Those of you who have bought into the 40% international diversification idea today, might want to think about where your portfolio might be 18 years from now if the performance of this sector continues as it has for the last 18. At present I keep between 8 and 10% in international. I figure that I can afford to have 8-10% consistently underperform the US.. .….
I would have to agree with Jonathan. Everyone should have some international stock exposure. The take away from all the investment programs and books I’ve watched and read over the years is that on average, US and International stocks trade places, one going flat and the other picking up, about every ten years.
Excellent piece, I like having Intl diversification, but I have to say I’ve lost faith in owning China.
Another insightful and thought provoking article, Jonathan.
I think one of the hardest things about investing is the patience and fortitude that is required, especially when going against the grain. You wrote about US versus international but the same piece could be written about value versus growth.
We may not know whether our decisions, say to diversify internationally today, will have been “right” for another decade. That is an eternity in today’s investing landscape. I believe that the coming decade will see international equities outperform US equities. But even if correct, no one will remember the articles or comments written a decade earlier urging international diversification. I’ve been keeping a financial journal, making quarterly entries. It will be interesting to go back in ten years and review the 40 prior entries to see my “batting average.”
Just curious. You write, “I believe that the coming decade will see international equities outperform US equities.” What are you basing this comment on?
No one knows what the markets are going to do, both domestic and international. There’s too many events that are unknown. Let’s just take the past five years. Did anyone predict a year ahead that COVID, or the Russian invasion would occur?
That’s why when articles start popping up about this time of year prognosticating about how the markets are going to do the following year I don’t even consider reading them.
The best bet is just to diversify as much as you are comfortable with. In my mind that means having some international exposure. The crap shoot is the percentage of that holding.
Sorry. I just fundamentally disagree with your first three points. At bottom, I think the United States is just different.
As to #1, I will abandon some of my US stocks for foreign stocks when the US has a downturn that I decide is going to continue AND the global market is performing noticeably better. There is no need to change until both of those things happen.
As for #2, I expect the non-US segments of US multinational corporations probably do perform more in line with their non-US geographic neighbors where they are in the same businesses in the same geographies. If anything, it seems these multinational arms of the US companies probably are the reason these companies underperform US companies, and have dragged their parent company’s stocks down.
And as for #3, business people are good at estimating business risks where they operate, but they are never going to be as good at estimating business risks where they have a much lower level of familiarity with the specific market. But they should be roughly comparable. Where I differ with you (as a lawyer who is a bit familiar with international business) is with the legal protections. I don’t think it is possible to accurately estimate the impact of poor or absent legal protections in most countries, and I think the variability along that dimension is much higher across the world’s countries. Even in the First World, that is a big risk, IMHO. Both the probability of problems and the relative financial harms that can result from those problems seem higher to me. (For example, take a close look at the EU’s overall legal structure. That is a place with supposedly good legal protections for investors. But you’ll find a hugely Byzantine arrangement, with four different sources of authority at the top, and that is before you get into each country’s individual legal structures. And you also get an opaque administrative state at the top of the EU that coexists uncomfortably with the administrative agencies of each country. And though it never admits it, the EU is hugely protectionist, and bends its rules to prop up its own companies, with only middling results. The resulting mix invites an unpleasant inertia of assuring only that those poorly performing economies and companies will continue to perform poorly for longer than they need to. I’ve seen many radical legal changes emerge through decisions of the European Court of Justice, and the impact was either hidden or poorly understood until the decision was issued. The EU makes the legal structure of the United States look sleek and efficient.)
As for points #4 and #5, I don’t disagree. I don’t necessarily want to hold US stocks according to market value, but that is the best available option for me because the products are the most liquid and rarely suffer huge short-term moves down, so I have time to decide whether I need to look to do something different.
And as for #6, go back to my first sentences. The US is fundamentally different. If the US suffers a financial head cold, the rest of the world will likely suffer something far more harmful.
Nevertheless, I understand your rationales. I wish the rule of large numbers worked better for global investment, and that a billion investors around the world would come up with an equilibrium comparable to the way we get there with US markets. I just don’t believe it works as well elsewhere. As I have said before, given the terrific comparative performance of US stocks versus those of the rest of the world, I feel like I am playing with house money right now. If we enter bad times, it may be that other economies have matured and become more reliable, and the rule of law may be respected more there, too. I’m willing to take the loss if I have to. And at that point, I might move money out of the US.
Gotta agree – I can’t hit the up button enough on this one. The combined business, regulatory, investing and legal environment in the US is the differentiator. If other countries had these same environments I would agree with Jonathan’s view. However, in my experience with European, Asian and Middle Eastern countries that is just not the case.
The US investing environment is far from perfect – but as one economist put it “it’s the best looking horse in the glue factory”
My country count is now at 41. One thing no one mentioned is corruption. Yes, corruption can happen anywhere but companies in the USA have many more guardians watching.
I get foreign investment exposure in my portfolio by owning the Vanguard Total World Stock Index Fund. I own the mutual fund version VTWAX even though it has a fractional expense ratio that is higher than the ETF version. The mutual fund version helps me not worry about the short term price variations during my limited trading days that investments are bought or sold and helps keep me from making stupid trades. For long term purposes I like the VTWAX feature that the percentage of my foreign investments mirrors what is happening in the world so no foreign/US re-balancing is required on my part. Approximately 1/2 of my portfolio equity portion is in VTWAX and that 18.33% overall equity foreign stock equity holding (one half of 36.66% foreign % Morningstar 11/19/24) is a sufficient foreign exposure for me.
When thinking about the percentage of my foreign stocks I consider only the equity portion of my portfolio. I intend my cash and bond holdings to be as risk free as possible so I limit that “bond” portion to TIPS, I-Bonds, T-bills and US money market funds and the like. My overall allocation goal is 70/30 and I consider my current small Heloc mortgage debt that I use to help manage unexpected cash flow needs to be a negative bond in my allocation planning.
The other half of my equities are in the basic S&P 500 index fund VFIAX. I started with VFIAX or VOO decades ago in 401(k) type plans I previously had. I continue to consider the arguments for changing my portfolio away from 1/2 VFIAX as circumstances change but I am currently comfortable with the diversification of the two equity funds I use. Combined, they provide me an automatic reweighing that occurs by the design of the equity indexes.
I annually re-balance my equity portfolio in January when I take my current year RMD and make any prior year contribution to either a Roth or traditional IRA to hit my target tax range for the prior tax year. l am fortunate to still have seasonal W-2 earnings from a part time job I like that allows me to continue IRA contributions when beneficial. For me I find IRA contributions administratively easier than conversions. I have been able to re-balance between my two funds to be approximately 50/50 after my IRA RMDs and contributions.
Tax expense which I try to control is a much bigger drag on my portfolio than my portfolio expenses. We are not currently planning a Roth conversion for 2024 or 2025 due to the current tax cost. I may start conversions to Roth in 2026 if I completely stop working or if tax law changes make doing so beneficial.
My wife and I coordinate our portfolios and her asset allocations are different than mine and her equity allocation is to a single US only broad based index fund. Her focus is having sufficient liquidity. We are both building a rolling TIPS ladder for our bond portion of our portfolios to replace the social security benefit that will end when the first of us dies. We still have a long way to go to hit that goal.
I’m not sure this is the correct article to ask this question but I will.
What effects do HD readers think proposed tariffs will have on US or International markets?
The United States is the only country in the world where you can get away with home country bias because it’s markets account for 55% of the world’s total cap. China’s next at 6%. I live in Canada where it’s minuscule relative to the rest of the world.
And yet, even in these countries with smaller markets, you still find home bias. Something to ponder: If foreign stocks are extra-risky for U.S. investors, are U.S. stocks extra-risky for foreign investors — and are these investors also safer if they keep their money at home?
Excellent point, Jonathan!
On the one hand the writer says risks are priced in and on the other hand he seems to say there are bargains overseas. How does he know which risks are and are not priced in? Also, how many years of underperformance would convince the writer that international diversification was an idea that did not pan out?
Investing is simple but never easy. Part of the explanation is that tech has been hot and US is much more heavily in tech than international. Other events like overseas wars are a factor as well.
Back in 2007, I was recommending a third of equities be in international and the typical response was “why so low – international will do much better.” Today, I’m recommending the same and you can guess what the typical response is.
Great points. So many behavioral factors for your observations, Mr. Roth. Recency bias, performance chasing, and envy to name a few. Reversion to the mean is a powerful force, but what’s difficult is that its timing is impossible to predict. It’s a matter of when, not if.
As a former “IT Data Geek” I know it’s likely to suffer from “paralysis from analysis”.
So I am a very boring investor. I have about 20% in cash and other liquid assets. The other 80% is in a S&P 500 index fund.
Since I started keeping track in January of 1993 that has had an average ROI hovering at 7%.
I’m satisfied and can sleep well at night. Plus it’s very easy to maintain.
Once again … YMMV
80-20, I like it. I have an article coming out next month about the 80-20 portfolio. Stay tuned.
I appreciate the wise reminders Mr. Clements. Recency bias seems to be part of human nature – especially when “recent” spans more than a decade.
For what it’s worth VT is 66% U.S. stocks and has been at that level for some time, reflecting of course the incredible valuations of the so-called Magnificent Seven tech stocks. I believe I read that Nvidea alone is worth more than the entire stock markets of several countries.
Also of interest to me is that U.S. small cap value stocks have been a better diversifier than total international funds like VXUS. But of course championing them is likely to get one an even colder reception than touting the benefits of global diversification. And heck, going international is basically a small (ish) cap play anyway, given that all of the mega cap firms are U.S.-domiciled.
I just stick with VT and am grateful to not be able to meddle with U.S./Int’l. percentages anymore.
I’m seeing VT at just 59.25% U.S. stocks: Vanguard Total World Stock Index Fund;ETF (VT) Stock, Price, News, Quotes, Forecast and Insights | MSN Money (click on “Holdings”). But I could be missing something.
According to the Vanguard site, the U.S. was 63.4% of the fund as of 10/31:
https://investor.vanguard.com/investment-products/etfs/profile/vt#portfolio-composition
The 66.10% figure is from Vanguard’s own website for the ETF:
https://investor.vanguard.com/investment-products/etfs/profile/vt#portfolio-composition
Thanks for the cite and I think I see the discrepancy. The 66.10% appears to be for North America rather than the U.S.
The most recent Semiannual Report (4/30/24) has it as 61.7% for the U.S. and 2.7% for Canada.
extension://mjdgandcagmikhlbjnilkmfnjeamfikk/https://personal1.vanguard.com/funds/reports/q6282.pdf?2210215483 (p.2)
Jonathan, thanks for a thought-provoking article. I still maintain a position in Vanguards Total World Market, but it has probably shrunk to 10% of our portfolio, misty due to inertia as other investments have grown faster, as you point out.
On our recent trip through the Dalmatian coast, we were exposed to 5 beautiful countries, with very different economies. Speaking to locals, there was an awful lot of complaining about their governments and perceived corruption. I have no idea how to factor information like that into an investment decision.
I spent the majority of my career with 2 multi-national behemoths – GE and Lockheed Martin. Believe me, we wanted to sell our products to every country around the world. I had the opportunity to do a few years of international business in Central Europe, and was exposed to many modern and impressive companies. I’m sure there are great investments. To me, the challenge is separating the wheat for the chaff. I’m also sure I suffer from home team bias – I have more experience and greater knowledge of US companies. I somehow can’t believe that what happened in Japan could happen here. But I recall the stories my father told about the lost decade of the 70s. He worked in banking and mortgages – that decade permanently damaged his finances and his health. So you never know.
Largely due to this same advice from you years and years ago, I invested about 30% of my retirement funds in international stocks. Would I have earned more if I invested in U.S stocks alone? Yep? Would I have worried about that a bit every day? Yep.
Japan rings in my head, too, Jonathan. So does $35 trillion in U.S. debt.
A recent analysis completed by the nonpartisan Committee for a Responsible Federal Budget found that the national debt could grow by $3.5 trillion over the next 10 years under Harris.
The Democrat has vowed at campaign rallies that her economic plan, which focuses on the middle class, would be fully offset by her plan to raise the corporate tax rate and her plans for taxing the wealthy, the Associated Press reported.
The same analysis found that the national debt could add another $7.5 trillion onto the national debt should Trump be elected – a number that could grow to $15.2 trillion under some scenarios, the AP reported.
When you diversify, you’re always going to own the market’s laggards. Problem is, absent a crystal ball, you have no idea which investments those will be.
Ah, the old Bogle quote, “Why try to find the needle in the haystack, when you can buy the whole haystack?“
That goes for worrying about not buying the stocks that will be the future winners, AND avoiding the losers!
Just buy a total world fund and let her ride. We are doing this in our Roth accounts which will either be tapped at the end of one of our lives, or inherited by our children, hopefully at least 20, or maybe 30+ years from now.
Yes. As Rob Arnott has said, “Diversification is a regret maximizer.”
Regarding point #2, I’m not sure the performance needs to be similar for these two asset classes. US multinationals can incorporate the benefit of large-cap international and still exceed in performance based on its own unique merits.
Allocating 40% International in one’s stock portfolio is difficult to argue against, because that’s what the world markets tell us is appropriate. Yet, I don’t think it’s wrong to view the US as exceptional and to overweight this to one’s preference.
To point #5, you’re right to call out the irony of our tendency to balk at overweighting certain pockets of the US market (value, small, etc) while behaving similarly by overweighting US over International. Yet, we all have our own quirks to how we tilt certain asset classes. I believe your own portfolio – outside of your world funds – includes tilts to value assets in both domestic and international stocks. Personally, I don’t take issue with tilts so much as I do with massive overweighting or investing solely in certain asset classes (dividends only, value only, etc.).
If we were perfect indexers, what about Alternatives? Some may view Gold and the like as unnecessary, and have a visceral reaction to something like Crypto, despite the crypto market capitalization currently sitting at $3.38T. That’s not the behavior of a “perfect indexer,” but in my opinion, that’s ok.
It just seems a little anti-patriotic to me. I keep reading that the U.S. is still desirable because of our regulations (which are not perfect) and the rule of law. Both of those points can be argued against too.
Warren Buffett has branched outside the U.S. a little. Most recently in Japan and a big buy in Israel a few years ago (Iscar was the company). Still, he leans heavily toward the U.S. I think he even had an investment in Russia at one time and had problems way before the problems of today.
What does patriotism have to do with investing?
All I know is what I read in the Berkshire Hathaway Annual Report:
“I can’t remember a period since March 11, 1942 – the date of my first stock purchase – that I have not had a majority of my net worth in equities, U.S.-based equities. And so far, so good. The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I “pulled the trigger.” I was down about $5 by the time school was out. Soon, things turned around and now that index hovers around 38,000. America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.”
Your quote says majority in US equities. That means up to 1-49% could be international. Does that make Berkshire Hathaway/Warren Buffet unpatriotic, and if so at what percentage?
I am concerned about the new federal gov’t eviscerating regulations and rule of law that are important to the successes we’ve benefited from as regulated capitalists. These regulations, including consumer protections which have made credit card use ubiquitous, are essential for capitalism working across the spectrum of wealth and less wealth. We have no idea what’s coming next.
I’ve been thinking about diversification this week. Does diversification mean that if it’s there I should own it? Or is it [only] a meaningful hedge against undue risk of concentration? In his Yale course on financial markets, Shiller says 20 stocks provide 90% of the value of diversification and 25 provide 95% of the value, yet he also advocates for owning “the whole market.”
I don’t own the whole market, and there is some risk inherent in that choice. 12% of equities are foreign-domiciled large companies, so if that is the measure of diversification, I have something.
Then there’s residential real estate, all in a single region of a single city in the US, now that’s concentration. I justify it as not being done for investment reasons. And they all need new roofs due to hail damage!
There is some debt, again justified as not being done for investment reasons. (But it might count as a kind of diversification, too.)
As I understand it, at 20 stocks, you can have a portfolio that isn’t much more volatile than the total market. But at 20 stocks, you can also have major tracking error — meaning your return each year could be far greater or far less than the broad market. That raises the issue of skewness. Each year, the market averages are driven higher by a minority of stocks with huge gains. If your 20 stocks don’t include some of those big winners, and the odds suggest that’ll be the case, you could have a portfolio that’s no more volatile than the broad market — but which lags behind the market averages by a huge margin.
Also, just having 20 stocks may mean one has similar diversification as the total market, but not just because of hitting that number. It also depends on those stocks being chosen to appropriately represent various parts of the market. It’s not as simple as just buying 20-25 stocks and calling it a day.
I also feel that many, perhaps, younger investors, think the world is far too unstable at present, to invest globally.
The United States has global interests, and clearly unrest around the world affects Americans, dramatically.
I do not think there will ever be a time of perfect stability and no worries, and it it a winning strategy to invest when pessimism it at a maximum.
Last century was a tad unstable. Two world wars, a devastating depression, pandemics, the dot com collapse.
So, invest globally, rebalance, a mix of stock, bonds and cash. Do not buy a boat and/ or loan money to your cousin for his “ cannot fail”, start up.
Avoid any lottery tickets, unless you feel our governments are perfect stewards of our money , and you feel all the taxes and fees are inadequate.
Is it really necessary to have an estate tax? At any level? Please, when a loved one dies, how about not taking any money, a “ death tax”, is not needed. Really.
Our elected officials defend the death tax. The state that it is only paid by a tiny portion of estates and generates very little revenue.
So, if it is so insignificant, make it go the way of the dinosaurs. And the dodo bird.
My father was a veteran of two wars, yet, when he passed, we had to pay Massachusetts $ 67,000 dollars, we had a very low estate tax threshold in 2007. $650,000!
Thankfully , the federal exemption was double, I believe, at the time. And no money owed to the feds.
On the estate tax, an estate’s assets in cash and a primary residence should not be taxed, but there should be capital gains on equities and investment properties. The step up is ridiculous, not fair to living people who want or need to sell their equites or other appreciated investments. But I know this is unrealistic; it would drive wealthier people to put morr assets in trusts and would burden the heirs of smaller investors.
I agree that the step-up makes no sense. I believe Steve Abramowitz would have sold his properties by now if it didn’t exist. More to the point, why should the next generation get a free pass?
Very good points. Persuasive … and reassuring for those of us sticking it out. I have 32% of my stock portfolio overseas. But I tilt toward Japan and away from China. I’m just not convinced that the risks of China’s communist government are priced in.
Thanks, Jonathon. I was on the fence, figuratively, about lowering the foreign allocation. It is at 42% currently. ( If I was “ literally, “ on the fence, there would be a broken fence. No matter how well built it might be. )
I was focused too much on past performance,* and gave little thought to what future returns may bring.
Mr. Buffett also feels no foreign stock is needed, but , at his level, I surmise he will not be ragged and homeless if our stocks fall dramatically. **
I feel that the smaller the portfolio, the more critical diversification is. And, in my case, there cannot be enough diversification.
* According to Einstein, the only way to travel to the past , and then invest based on the known future, is to travel faster than light speed. Alas, at 5’8” tall, and a tremendous 250 lbs. ( even kilograms at 114 is scary) , there is no chance of yours truly moving beyond a snails pace. In lieu of that, I shall henceforth keep the global portfolio. Also, there are many foreign brands that are critical to my survival. Heineken, Nestle, et.al. Need to keep them afloat!
** If his holdings were to tank 99.99 percent, he would be down to 14.7 million. Oh boy.
“Also, there are many foreign brands that are critical to my survival. Heineken, Nestle, et.al. Need to keep them afloat!”
Unless you bought these stocks at the IPO your owning them does not affect their survival at all – the company does not receive a penny of the purchase price. The same is true for all stock purchases that do not come directly from the company. We are not truly investing in the company in the sense we are capitalizing it like venture capitalists, we are simply buying previously issued shares in the hope/belief that the company will increase in value over time.
Thank you for this timely article. Abandoning foreign stocks would indicate I thought there was a fundamental change in the folks that live beyond our borders, that they don’t have the same desire to succeed that we have. And that the basic relationship of risk and reward had ceased to operate. There may be pockets of retreat and stagnation, like Japan, but to think of it on a global scale seems overly pessimistic.
Jonathan, I often hear that the currency risk makes investing in international less advantageous–something along the lines of, “If you plan on spending U.S. dollars, it’s smarter to invest in companies doing business in U.S. dollars”. But I have a hard time estimating the true impact of that. I invest roughly 20% in international, vs. the 40% that VT includes. I’m curious to get your perspective on whether or not the currency issue holds merit, and how much it really matters.
As I mentioned in the article, for someone with a balanced, globally diversified portfolio, currency exposure might be just 20% of the portfolio — hardly an unbearable risk.
I have been invested based on markets do currently.
1995-2000 = Mostly in US LC
2000-2010 = Mostly US LC VALUE+Small cap+international
Since 2010= Mostly US LC tilting growth.
https://fd1000.freeforums.net/thread/58/easy-invest-right-stock-category
In a stable world environment, I agree this is a good strategy. Things to worry about – worldwide turmoil – North Korea threat on Japan/South Korea; China’s threat on Taiwan; China economic growth. Europe innovation is down the tank and the war in Ukraine does not help. France and Germany elections looming. UK is struggling. So, I am not sure now is the time to go global. If I may suggest, pick up mutual funds related to Indian stocks – more stable with significant growth (8+%) – large middle class consumption. Indian currency has been pretty stable. Newly elected government (3rd term) helps continue to drive infrastructure growth in India. BTW, VTWAX seem to have a large service fee when purchasing. US and India should do IMHO.
Interesting rationale and choice. I expect a single country fund, in particular one that’s an emerging market, is riskier than a broad international index fund.
I have followed the teachings of John Bogle for over 25 years. Although I respect Jonathan’s opinion as well, I will stay the course with Bogle’s idea
of reducing currency risk, political risk, and relying on the major U.S. companies that have foreign exposure. I don’t think it is a bad decision
to include foreign equities, but I do believe it is a personal choice.
I agree with Jonathan, as usual. And I live in Italy most of the year, so I want some tilt toward non-US markets. I hold 55% in US stock index, and 45% in Global XUS (no US) stock index. I could use a single global index, but I like to rebalance, taking some profits from the stronger (currently US) and buying more of the weaker (Europe is on sale!). Gives me something to do with my hands that keeps me from doing anything stupid.
Great points Jonathan and I agree. We have had this discussion with our FA and have a bit under 20% of our primary Long term retirement portfolio invested in “World fund ETFs”. We are looking for diversification and balance in our portfolio and exposure to foreign investment (equities) is part of that diversification. We’re comfortable with this allocation as we are with a higher equity weighting overall and a lower fixed investment weighting.
Each investor to their own level of comfort.
Great points. As I recall, the currency exchange rate risk is why Adam Grossman recommends 20%, just enough for the diversification benefit. I’m between the two of you and allocate about 1/3 of our stocks to international. It’s been this way for years, and the fact that international has underperformed the US in no way makes me feel I should change.