The Argument for International Equities
Why now may be the best time to diversify your stock portfolio by investing globally.
If you’re not utilizing the power of international equities in your portfolio, you could be missing out on a good thing over the next few years.
Past performance is not always indicative of future performance, but there are subtle indicators that now point to the benefits of diversifying your portfolio with international stocks.
While there are many arguments to keep money in U.S. stocks, there are ample reasons why investing abroad is a great option to maximize future returns. Even many of the arguments against international equities may not hold as much weight as you think.
Myth #1: International Stocks Do Not Perform as Well as U.S. Stocks
According to the last few years, the argument wins. But, so far in 2017, international stocks are outperforming those in the United States by a healthy margin.
Historically, underperformance is followed by outperformance. Since 2008, the U.S. markets have outperformed international markets – a good eight-year run. Many investors and financial experts now believe that could reverse itself soon. A combination of rising interest rates, overvaluation and slow growth may reduce the return on investments for United States-based stocks – by historical standards, valuation is currently at a high level in the U.S. Overseas, especially in Europe, the rates and valuations are historically low. The current average P/E ratio for U.S. stock is approximately 17-18 times earnings, which is at the high end. Foreign markets, on the other hand, are on average 12-13 times earnings.
Myth #2: Too Much Volatility
Terrorism in Europe. Venezuela taking over GM facilities. Concern over North Korea. Uncertainty with Russia.
There is way too much risk in investing overseas!
But the international market doesn’t consist of investing in the world as a whole. When it comes to investing outside the U.S., the world is divided into two categories – developed markets and emerging markets.
Developed markets are the larger, more stable markets, such as France, Germany, Japan, England and Switzerland.
Emerging markets are those that are still developing and subject to greater volatility such as Brazil, India, Russia and China.
While investing in emerging markets can be riskier, it is similar to making the decision to invest more aggressively in the United States. There is more volatility and risk, but the reward can be higher as well. Investors can get in while valuations are lower and enjoy the growth as emerging markets stabilize and their economies grow.
If you’re worried about currency fluctuations, those concerns can be eliminated through funds that hedge currency risk.
Myth #3: My Portfolio Is Doing Just Fine So I Don’t Need to Change It
Why fix what’s not broken? Remember the disclaimer that follows every piece of advice regarding the stock market: Past performance is not a guarantee of future results. Well, just because the strategy is working now doesn’t mean it will stay like this forever.
For the conservative investor, there is ample opportunity to keep accumulating wealth by going where the money is cheaper. Investment dollars can go further and the return can be greater outside of your current portfolio strategy without taking on more risk.
The United States encompasses nearly 50% of the world’s stock markets. That leaves nearly half of the world’s stock off the table if you stick solely with investing in the United States – you risk losing out on half the possibilities.
Finally, there are global funds that you can invest in that put money in a combination of U.S. stocks and international equities. These global funds offer the best of both worlds – exposure to the U.S. and international markets, both developed and emerging.
When considering changing your portfolio strategy, consult your financial adviser. At Telemus, we take a holistic approach to wealth accumulation and look at the big picture, an investor’s short-term and long-term goals, as well as the actions of the markets. Your trusted financial adviser will be able to guide you to the right international equity portfolio for you in order to maximize growth and gains while meeting your overall investment goals.
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. This market commentary is a matter of opinion and is for informational purposes only. It is not intended as investment advice and does not address or account for individual investor circumstances. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. The statements contained herein are based solely upon the opinions of Telemus Capital, LLC. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Information was obtained from third-party sources, which we believe to be reliable, but not guaranteed.
About the Author
A founding Partner of Telemus, Gary Ran serves as the firm's chairman. In this role, he is responsible for the overall strategic direction of Telemus in addition to managing key member relationships and serving on the firm's investment committee. Prior to forming Telemus in 2005, Ran served as a first vice president of investments at Merrill Lynch and as senior vice president of investments at UBS Financial Services. During his career of more than 20 years as a retail stockbroker, he built one of the largest brokerage practices in the industry. He has been repeatedly selected as one of "America's Top 100 Advisors" and "America's Top Independent Advisors" by Barron's magazine and is frequently quoted in numerous industry publications.