Buying International Stocks Is Essential, But Not Exciting

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Overseas

Unlike international travel, international stocks are not sexy; they do not offer Instagramable photos of the beach or centuries-old cityscapes. Nevertheless, financial advisors often preach utilizing global equities to lower risk and increase returns through portfolio diversification.

But, after decades of underperformance and increasingly interconnected economies, do global equities still offer advantages compared to investing exclusively in their domestic brethren?

The Premise

Industry titans like Fidelity, Vanguard, and the Securities and Exchange Commission tout that global stocks can lower risk and increase returns for your portfolio. However, recent data does not support this theory.

If we look at the past 15, 25, and 35 years, a 30% allocation to international markets decreased portfolio returns while barely changing the portfolio risk profile.

[Domestic Stock = Total US Stock Market, Foreign = Total International Excluding-US Stock Market]

[An allocation of 70/30 domestic/foreign is the ratio Fidelity Investments advocates, while Vanguard preaches 60/40. Schwab, on the other hand, promotes up to a 75/25 domestic to foreign allocation.]

Standard deviation (Stdev) is a measure of portfolio risk. The greater the percentage, the greater the risk of return variability. I.e., the chances your portfolio will go down.
Correlation measures how interconnected asset classes are, with 1 meaning they move in parallel and 0 meaning they have no relation. I.e., if A goes up, does B go up, too?
CAGR is the average compounded annual growth rate. I.e., the average yearly return.

The Findings

All three graphs above clearly show that there has been no advantage to investing abroad in recent times. Interestingly, over the past 15 years, adding international stocks increased risk and lowered returns, while over the past 35 years, it decreased portfolio risk and lowered returns. Thus, on the surface, global equities have failed to provide sufficient benefits to warrant their exposure.

Why Hold International?

So, why should you hold international stocks? Because the past doesn’t reveal the future, just as a wake doesn’t determine where a ship is going.

While the US has been a powerhouse in generating high returns, there is no guarantee this will continue. Had you told British, German, or Russian investors at the end of the 19th century that the United States would surpass their economies in the coming one, they likely would have scoffed at you. But, here we are in an era where the US economy has easily eclipsed all three combined.

While it remains unlikely that the US will lose its global economic prowess anytime soon, there are emerging opportunities abroad. Additionally, while 35 years is a long time, it is less than half a lifetime for those residing in the United States. For perspective, during the last 35 years, over 800 companies have been added/removed from the S&P 500.

Thus, we cannot accept what worked yesterday as a solution for tomorrow.

In Closing

You may not make as much money when you allocate to international stocks, and that is okay. The point of international investing should be to spread out your chances of finding winners, which is why so many are drawn to index investing in the first place. Thus, excluding international exposure would be a rebuff to index investing, so don’t do that!

Do you hold international stocks? If so, what is your reasoning, and how much exposure do you allocate to them? Let me know in the comments below, and as always, have a great day.

A Note On Total Market Funds

In the scenarios above I backtested total stock market funds for the US and International markets. Total US stock funds include exposure to the entire US economy, while total international funds include exposure to small, mid, and large cap stocks that are in both emerging and developed foreign markets.

Examples of such international funds include the Vanguard Total International Stock ETF (VXUS) and Fidelity ZERO International Index Fund (FZILX).