It's Hard To Make A Case For International Investing Right Now (But I Will)

Returns on publicly traded companies based in developed, non-US countries have lagged US investments for several years. Investors who own globally diversified portfolios may be disappointed with the often touted benefits of diversification, especially when they assess returns on their international holdings. The chart below shows the historical returns of US and International stocks (through 4/1/16)*.

Despite recent international disappointment, there are a few reasons why investors shouldn't give up on such a potentially diverse asset class.

International Stocks Have Outperformed US Stocks,

Depending On When You Look

From 1/1/00 through 11/1/07, International stocks rewarded investors with a 6.00% run*. During the same time period, US stocks only managed 2.26%*. Investors saw a similar international ride the decade ending 12/31/94, where International stocks beat US stocks by 4.01%*. These are long periods of time where globally diverse investors were rewarded above and beyond a US stock based investor.

The Past Doesn't Equal The Future

Many institutional managers share the belief that non US countries are recovering slower than the US has since the Great Recession (2007-2009). The US was quick to combat the recession with interest rate cuts and increased money circulation. Propping up the economy lead to enhanced corporate earnings, which allowed for the wicked comeback that has defined this 8-year bull run.

International regions like Europe haven't seen the same appreciation as the US, so the argument is that there is more room for growth overseas. Even if this turns out to only be somewhat true, investors may see their international investments outpace their US investments over the next several years. Although this outcome makes a lot of sense, it remains a speculative viewpoint.

International Stocks Avoid The "Home Bias"

Approximately 70% of all stocks are domiciled outside US borders. From a market capitalization (total dollar amount of all outstanding shares), the US represents only half of the world's stocks**.

International stocks are not perfectly correlated with US stocks. While it's true that non-US stocks can rise and fall simultaneous with US stocks (however, usually not at the same rates), this hasn't always been the case. Historically, there have been periods when returns on International stocks diverged noticeably from those of US stocks.

International Stocks = Diversification

When different types of stocks behave differently over various time periods, investors achieve diversification benefits. By diversifying, investors may achieve returns similar, and many times better, than portfolios dominated by domestic stocks. Usually, this is accomplished with less risk than a home biased portfolio. Less risk helps mitigate investor "freak out", so they're more likely to stick with their long term investment strategy.

How Much Should I Invest Internationally?

There is no perfect Asset Allocation. Therefore, there is no perfect answer to this question. Within the custom portfolios I build for my clients, I generally use more international investments in the growth oriented portfolios, and I usually employ a smaller relative percentage of International stocks for the conservative folks.

Some of my colleagues advocate splitting US and International stocks equally (based on that market capitalization chart above), but many place a small emphasis on US stocks based on their superior long term risk adjusted returns (more return per unit of risk taken on). A typical stock allocation might include 60% US stocks / 40% International stocks, which is about what I normally target.

Many investors probably don't know how much they're investing outside US borders, so please write in to us for a free summary, no strings attached. Use the Shoot Us An Email function below so we can chat about how you could potentially improve your International allocation.

* All return metrics generated using Returns Web, courtesy Dimensional Fund Advisors. Indices used for comparison include MSCI EAFE Index (gross dividends) and CRSP Deciles 1-10 Index (broad-based US stocks). Investors cannot directly purchase an index.

** Slide courtesy Dimensional Fund Advisors. Market cap data is free-float adjusted from Bloomberg securities data. Many nations not displayed. Total may not equal 100% due to rounding. For educational purposes; should not be used as investment advice. China market capitalization excludes A-shares, which are generally only available to mainland China investors.