What international stocks can do for your portfolio (And a quick note on "Diversification")
WRITTEN BY: Gideon Drucker, CFP® AIF® ECA
Why do we own international stocks?
It’s a fair question. The US Stock Market has outperformed the International Stock Market consistently over the last decade why do we bother to own international stocks?
Here’s why:
Quite simply, these things go in cycles. As we’ve all experienced, during the 2010’s (2010-2020), the US stock market outperformed international stocks but the previous decade tells a different story: From 2000-2010, international stocks outperformed US stocks.
We can also see, from the chart, that during periods when the stock market underperformed as a whole, international stocks consistently performed better then their US counterparts. This means that during those frustrating times when we all bemoan the stock market’s temporary decline international stocks have historically gone down less and are thus exactly what we want to own at these times!
These ebbs and flows as to WHEN in the cycle each asset class outperforms is….kind of the point.
Now, to be clear, US stocks have outperformed international stocks more often than not throughout history (though not as dramatically as the last 10 years have made it seem), and that’s why the majority of your equity investments are captured in portfolios of broad based, mainstream US equities….we get it. All we’re saying here is that everything has it’s place.
Next, I want to take this whole rant (I think it’s now officially a rant) to strike at the larger conversation around words like “asset allocation” and “diversification” as you might be reading along thinking, “OK Gideon, I get why we want to invest in both US stocks and International stocks but what about diversifying your investments OUTSIDE/AWAY from the stock market….shouldn’t we be diversifying more of our money into other assets?"
Nope, in fact, while we’re in the accumulation stage, I think that would be counterproductive!
Investing in the great businesses of America and the world (stocks) has historically provided a (net of inflation) rate of return of 7%.
Real estate has earned approximately 4%. (see more HERE on why even this is overselling it) Bonds/fixed income, historically, earns 3%. Cash is actually underwater.
And while stock market prices will fluctuate wildly in the short term, “the longest it has ever taken an investor to recover an original investment in the stock market (including reinvested dividends) was the five-year, eight-month period from August 2000 through April 2006” (Jeremy Siegel, Stocks for the long run, 2022 Edition).
In other words, the stock market goes down….but it has never stayed down!
This means that permanent loss when owning a diversified portfolio of stock investments is only something we can bring on ourselves by making rash/emotional decisions. So let’s ask the question again: “Gideon, what about diversifying your investments OUTSIDE/AWAY from the stock market….shouldn’t we be diversifying more of the pot into other assets?”
Well, If our goal as investors is to maximize long term return and gives ourselves the best chance of reaching our financial goals 10, 20 and 30 years from now….than the preponderance of your liquid net worth should be held in mainstream equities.
Investing in the capital (stock) markets has, historically, been the greatest way to compound your wealth & outpace inflation over time.
Read that sentence again. It is both the historical reality and something that NEEDS to be understood to get where we all want to go.
Next time, we'll dive into the mistaken assumption that "asset allocation" and "diversification" are equally important (they are not!)
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