Over the years, it has made sense to limit stock investments in US stocks. Overall, the average revenues of a diversified portfolio of US-based stocks outperformed the equally diverse equity portfolios from non-US companies.
The opposite has been the case for the past year. Also, many investment experts at major financial institutions believe that US investors should add mutual funds and exchange trade funds that diversify their portfolios from companies based outside the US.
More recently, reporter Andrew Welsh wrote a comprehensive article based on interviews with leading investment experts from many major financial institutions, including Morningstar.
Personally, I did. I intend to use dollar cost averaging to increase the share of international stocks in my stock portfolio.
Vanguard’s asset managers predict that US stocks will return 4.3% to 6.3% per year over the next decade, while markets not developed in the US will return 6.6% to 8.6%. “Other equity strategists will also project a low return on U.S. stocks over the next few years.” Welsh said.
For example, as of July 3, the S&P 500 index has risen by 6.9%, while 18.3% of Vanguard FTSE All-World Ex-US ETF (Ticker Symbol Vea) is an index fund that trades on exchanges investing in global equities outside the US.
As reported by Welsch, Morningstar’s recommended international equity funds include Dodge and Cox International Stock Fund Class I (DOXFX), Natixis Oakmark International A (NOIAX) fund, and American Funds EUPAC R5 (RERFX).
In his article, Welsch refers to reliable sources such as Bob Shea from Dynasty Financial Partners. Another source was Alan Bazaar, CEO and Co-Investment Director, Hollow Brook Wealth Management. Bazaar’s company emphasizes proactive management of investment choices.
Previous funds mentioned diversify portfolios from different countries. There are certain funds/ETFs limited to certain countries such as Germany and Japan. Naturally, there is more risk associated with portfolios restricted to specific countries.
Over the years, stock investments in the US have on average been better than diversified portfolios outside the US, but there have been periods when it is not. For example, T. Rowe Price Research shows that international stocks have outperformed US investments since 2006-2013.
What percentages make sense if you decide to invest in international stocks? “It’s best to avoid extremes,” according to Vanguard’s global portfolio construction and chief economist Roger Arigodias. He believes that if you are above 70% in US stocks, you should consider adding international stocks to your portfolio.
Conclusion: There is no guarantee that international stocks will average outperform US stocks in a given year, but many investment experts believe this is likely to happen. My recommendation is that if you don’t actually invest in international securities, you should consider adding diversified funds/ETFs to your portfolio, even if you ultimately reach between 10% and 20%. To avoid buying at High Points, consider that the average dollar cost makes sense to you, rather than making a large one-off investment. Select a fund/ETF with a history of above average performance. Morningstar should be able to offer such options.
Elliot Raphaelson welcomes your questions and comments at rapelliot@gmail.com.
