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Wanna know one of the biggest investing myths out there? It’s that U.S. stocks usually outperform international stocks and investing internationally is risky. The truth is for us U.S. investors, there’s a lot more international opportunities to take advantage of than you think.
In today’s post, I want to debunk this myth, and show you the truth about investing internationally.
What Is The Importance Of Investing Internationally?
There are numerous reasons why you should not limit your investments to within the U.S. borders.
The U.S. Will Not Dominate Forever (Featuring A Valuable Lesson From Japan)
Throughout recent years, the United States has been an economic powerhouse. American companies dominate as top companies in the world, and the American dollar has been accepted as the global currency.
As an American, it’s easy for me to assume that the U.S. will continue to be the economic powerhouse it has been. However, we must not take this for granted. In order to be successful at investing, we must refrain from being emotional and think rationally. It’s always a possibility that another country will begin to outpace the U.S., and will dominate globally.
Let’s look at Japan as an example. Back in the 1980s, Japan experienced an economic boom that boosted its economy to second place in the world. The Japanese were enjoying luxurious lifestyles and life was good.
Japanese companies were thriving as they placed high on the charts, outranking the United States.
Below is a chart from CNBC.
Unfortunately, as Japan’s economy was booming, prices started to become inflated. Banks were basically giving out loans to everyone and there was a sharp rise in asset prices. According to Jobs In Japan, stock prices and the cost of real estate went parabolic, almost quadrupling within five years.
Then, the bubble popped. At the turn of the decade in 1990, the Bank of Japan increased interest rates and loans were not given out as much. This was done in hopes to bring prices back down, but it ended up collapsing the economy.
Japan’s story is a story we can all learn from and take into consideration when choosing our investments. As of today, the Japanese stock market is only just now recovering from the plummet that occurred in the 1990s. That means it took more than three decades for the Japanese stock market to recover.
Right now, the economy of the United States is strong. But so was Japan’s. There is no guarantee that the United States will continue to economically dominate the world and we must be prepared for such an event. We cannot predict which economies will prosper and which will go under. That’s why instead of trying to predict, we can simply prepare. Preparation means diversify.
Investing Internationally Provides Diversification
Here at InvestaMind, we like to teach about diversification. The reason is because we cannot predict the future. We don’t know which sectors will prevail, nor do we know which countries will experience the next economic boom. That is why we diversify – it takes the guessing out of investing. As Jack Bogle liked to put it, just buy the haystack. By buying the whole haystack, we will profit no matter which sector or economy grows.
International stocks represent more than half of the value of the global stock markets. Think of all the things we own that are products of international businesses. How many times have you seen a Toyota or Honda on the road? What about a B.M.W.? Do you own or do you know someone that owns a Samsung phone, likes to eat Kit Kat chocolates, or pumped gas at a Shell gas station?
I can go on and on. All these companies are not American and are based out of foreign countries. Can you see all the investment opportunities you’d be missing by only sticking to domestic stocks?
Lastly, if you live in the United States, the majority of your finances are reliant on the U.S. economy. Investing internationally will give your capital some exposure to foreign markets.
What If Investing Internationally Causes My Portfolio To Underperform?
Actually, U.S. stocks and international stocks are cyclical. That means they rotate, taking turns outperforming each other. If U.S. stocks outperform international for a decade, international will lead the next and U.S. will trail behind.
Although recent performance has favored U.S. stocks, it is probable that we will see international take the lead in the foreseeable future. That is why we do not chase recent performance. Past performance does not guarantee future results. This is one of the pillars we teach at InvestaMind.
Take a look at this chart below from Fidelity Investments, illustrating the cyclical nature of U.S. vs. international.
“Equity” means the value of the stock, or the total amount of money invested in the stock.
The image clearly illustrates my point here. International stocks even outperformed U.S. stocks fairly recently, during the housing market crash from 2008 to 2009.
Again, buy the haystack and you will capture the gains from both sides. Timing the cycle is near impossible and I highly advise against it. By the time you realize a certain sector is outperforming, it is too late to buy in and you will miss out.
What Percentage Of My Portfolio Do I Allocate To International Markets?
The short answer is: there is no concrete number for this. Some prefer to tilt more toward U.S. and others prefer more diversification.
But let’s take a look at the portfolio composition Vanguard’s Total World Stock ETF.
This ETF has 60% of its assets allocated to the U.S. market, and 40% to international. This can be great allocation to start off with. You can always make adjustments down the road.
Conclusion
Today’s lesson is simple. Invest some money in international stock markets. Diversification is key because you don’t know which sectors or regions will prevail, and you don’t want to start making predictions. Instead of predicting, you need to prepare.
Are you ready to start investing internationally but don’t know which fund to invest in? We’ve got you covered with this article.
Don’t forget to invest domestically as well. Check out our article on best index funds for domestic equity.
Are you invested in any international stocks? I’m genuinely curious! Let me know in the comments below.