My December article for Physician’s Money Digest was titled “Don’t Give Up On International Stocks.” I wrote in response to a trend I’ve been seeing lately with new asset allocations/portfolios where the percentage allocated to international stocks seems to keep getting lower and lower. It really smacks of performance chasing. Here’s an excerpt:
As of December 22, 2016, the US Stock Market is up 13.6% year-to-date while the International Stock Market is only up 3.9%. In fact, that has been the case for the last four years, as described below:
- 2013: 16.4% vs. 15.1%
- 2014: 12.6% vs. -4.2%
- 2015: 0.4% vs. -4.3%
- 2016: 13.6% vs. 3.9%
Therefore, it is no surprise, to me, to see more and more investors, particularly new investors designing their portfolio for the first time, decreasing or even eliminating international stock holdings in their portfolios. While my crystal ball is just as cloudy as everyone else’s, this is likely to be a mistake. To understand why, let’s first take a look at the historical record….
The record for the last 20 years is probably best displayed with the Callan Periodic Table of Investment Returns….As you will notice, US Stocks have outperformed Developed Market Stocks in 11 of the last 20 years, including five of the last six, (six of the last seven if you include 2016). US Stocks have outperformed Emerging Market Stocks in nine of the last 20 years, including the last three years (last four if you include 2016). It is also notable that when it comes to comparing returns, Emerging Market Stocks are frequently either the best or the worst (eight out of 20 the best, and seven out of 20 the worst)….
So what is an investor to do? Just two things.
First, recognize that international stocks are solid investments worthy of her investing dollars, despite the fact that many US companies receive significant revenue from other countries. Allocating a reasonable portion of a public equity portfolio to international stocks adds valuable diversification. Most experts agree that a reasonable portion is somewhere between 20% and 50% of stocks. Ignoring half of the publicly traded companies in the world when designing your portfolio is likely an error.
Second, STICK WITH YOUR PERCENTAGE. It turns out it doesn’t matter all that much in the long run whether you allocate 20% or 50% or anything in between. Each asset class will have its day in the sun. When US stocks do well, you will regret whatever percentage you have put into international stocks. When international stocks outperform, you will wish you had allocated more into that asset class.
Read the rest of the article here, the come back and let me know what you thought.
Do you invest in international stocks? Why or why not? What percentage of your portfolio is allocated to them? Has that changed in the last 10 years? Why or why not? Comment below!