Print Friendly

Six reasons you should invest internationally

Reprinted courtesy of MarketWatch.com.

To read the original article click here

Most investors can probably achieve their goals without venturing beyond U.S. stocks. Yet in my recommendations I call for having half your equity investments in international funds.

What gives?

This is a valid question, and I’ve heard it lately from a lot of readers since my Performance Series of articles began appearing in February.

I’ve made a detailed analysis of five U.S. equity asset classes: large-cap blend, large-cap value, small-cap blend, small-cap value and REITs.

When you examine the long-term (up to 87 years of data) returns from these asset classes, you may wonder about two things:

  • Do I really need to add international funds?
  • Don’t I get enough international exposure from U.S. multinational companies that do so much business outside the U. S.?

My answer to the first question is that international funds aren’t essential, but they will increase your diversification and quite likely increase your returns as well.

To the second question, my answer is no. U.S. multinationals don’t give you the full meal deal.

Here are six reasons I believe international investing is a boon for investors who are willing to deal with the additional paperwork and periodic rebalancing:

One: Academic research has reached an overwhelming consensus that investors have better long-term outcomes when they diversify widely among asset classes, industries, company sizes, and orientation between value stocks and growth stocks.

Many academics also have concluded that it’s a bad idea to have more than half of your equities in stocks from any one country.

Sure, the U.S. has a terrific economic history and many strong points. But history is full of examples of once-strong stock markets that ran into long-term headwinds. Japan’s stock market over the past few decades is a case in point.

Two: The best international asset classes largely mirror the best U.S. asset classes. (I will be examining each of these international asset classes in upcoming articles.) International funds increase diversification by adding more companies and more markets. In addition, I recommend emerging markets stocks, which don’t have a direct counterpart in the U.S.

Three: Periodically, there are long periods when international stocks outperform U.S. stocks. A recent example is the period from 2000 through 2009. In those 10 years, the Standard & Poor’s 500 Index SPX, +0.23%  had a compound annual loss of 0.9%.

International asset class returns in that period ranged from 1.2% to 12.8%. Those who invested exclusively in large-cap U.S. stocks had reason to be profoundly disappointed; those who added international stocks had reason to be glad they had done so.

Four: Unhedged international funds add currency diversification. Sometimes that helps U.S. investors, and sometimes it hurts them. But in the long run, this reduces expected volatility and thus risk.

Five: Think you will get sufficient international exposure through U.S. multinationals? That could be true if all you look at is large-cap growth stocks in developed countries. But U.S. multinationals don’t give you much exposure to value, small-cap, small-cap value or emerging markets — every one of which can be a powerful return booster.

Six: More than half of the world’s market capitalization lies outside the U.S. As we shall explore in upcoming articles, there are good reasons to believe that, over the long haul, international stocks have at least as much potential, and probably more, as their U.S. counterparts.

Investors who venture beyond the U.S. borders should be aware that an equity portfolio made up of 50% in international stocks will often have returns that are quite different from those of the U.S. markets, particularly the S&P 500.

Sometimes this will seem like a blessing and sometimes like a curse. If you take this route, you should not expect returns that closely follow those of U.S. asset classes.

Ultimately, long-term performance is what retirement investors need. Here are a few numbers to show how international investing contributed to performance over the past 45 years from 1970 through 2014:

  • Invested in the five U.S. asset classes I listed near the start of this article, $100,000 grew to $20,619,192.
  • Invested in the five international asset classes I will examine in the coming weeks (international large, international small, international large-cap value, international small-cap value, and emerging markets), $100,000 would have grown to $23,019,907.
  • Invested in all 10 of these asset classes (half U.S. and half international, in other words) and rebalanced once a year, $100,000 would have grown to $26,358,969.

In summary, international investing offers a whole world of opportunity that’s available at relatively low cost. To the smartest investors I know, that is a great deal.

Note to readers: I will be speaking in Ventura, Calif. for the American Association of Individual Investors on May 7 and again in Portland, Ore. on May 16. Each presentation lasts three hours.

Richard Buck contributed to this article.