The Money Meets Medicine Podcast

Should I Invest in International Stocks?

By Jimmy Turner, MD
Host of Money Meets Medicine

Warren Buffett and Jack Bogle, two of the most famous investors, have cast long shadows of doubt on the need for international stocks in your portfolio. In fact, in 2013 while speaking about the assets that his wife would receive upon his death, he said “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

You’ll note what is left out here – international stocks. Is Buffet right? Should international stocks be as absent in your investing portfolio as ESG investing?

To understand, we will cover a lot of ground. You’ll learn about the roller coaster journey of Japan’s Nikkei index, compare US market dominance against its global counterparts, and explore how diversification can shield you from volatility. We’ll also touch on liquidity considerations crucial for navigating international waters smoothly and peek inside target date funds to see how pros balance their global exposure.

Table of Contents:

The Case Against International Stocks

Buffett and Bogle’s Perspective

Warren Buffett and Jack Bogle, two titans of the investment world, have raised eyebrows with their skepticism towards international stocks. Buffett and Bogle contend that the robust showing of America’s stock market negates the need for global investments.

From 2009 to 2024, the US stock market indeed outperformed its international counterparts by a significant margin. During this era, tech behemoths such as Apple and Amazon experienced explosive expansion, playing a crucial role in American indices while being notably missing from overseas exchanges. The triumphs of these corporations significantly uplifted the American stock market’s achievements.

The argument from Buffett and Bogle hinges on simplicity: why venture into less familiar territories when you’ve got a goldmine at home? Particularly, in a world where all of the markets are connected. Shouldn’t the American markets be exposed internationally in and of themselves? Yet, as any seasoned investor knows, past performance is not indicative of future results.

Is this pattern of success in the American market going to hold up, or are we on the brink of seeing the winds shift? No one can know, but we know we can look to history for other examples of substantial success that later floundered – like the Japanese Nikeii index.

Understanding Market Performance Disparities

The Japanese Market’s Long Road to Recovery

Japan’s Nikkei index was knocked out in the 90s faster than Little Mac in Punch Out. After its collapse in 1990, it took a staggering three decades for it to claw back to its previous highs. The drawn-out resurgence of Japan’s market offers invaluable insights for those considering foreign investments.

Namely, this story warns against the risk of concentrating investments in a single area and illustrates the wisdom of broadening your financial horizons worldwide, even when faced with periodic hurdles. Anyone who was someone in the late 1980s invested heavily in the Japanese market. Look where that got them.

US vs. International Markets

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Sometimes, looking at just US stocks feels like watching only blockbuster movies – you might miss out on some incredible indie films from around the world. Since 2008, US stock markets have significantly outperformed their international counterparts, tempting many investors to focus solely on domestic options.

Yet, diving into this comparison unveils more than just numbers; it’s about grasping the distinct forces of growth, divergent economic strategies, and the dynamic nature of markets that render each one uniquely fascinating.

In essence, while US markets have had an impressive run lately—thanks largely to tech giants—the bigger picture suggests that diversification across borders can help manage risks better over time by exposing portfolios to various economies’ ups and downs.

Maybe you aren’t sold on the need for diversification into international stocks.

Diversification and Portfolio Construction

The Role of Diversification

Just like in football, you don’t want all your players to be star quarterbacks. You need diversity—some defense, some offense—to win the game. That’s what diversifying across regions and asset classes does for your investments; it spreads out risk while potentially enhancing returns.

When one part of your portfolio zigs, another part ought to zag. And we don’t know which segment in the market is going to zig versus zag. Here is an example of that through the “periodic table of investing” which shows the best performing segments over recent years:

You’ll note that the patchwork pattern in this table shows how hard it is to predict which markets will do best each year, including foreign and emerging markets.

This approach is crucial because markets are unpredictable. Allocating your funds into various global equities, bonds, properties, and beyond can cushion the impact when a specific market stumbles. Remember that diversification is recommended for constructing resilient portfolios because it taps into opportunities worldwide while mitigating risks.

Mean Reversion in Investing

Mean reversion suggests that high-flying stocks or sectors eventually cool off and return to their long-term average performance levels—and vice versa for underperformers. Putting this in context, the U.S. market has been on quite the run for over a decade now. When will it revert to the 10% annual return mean it has experienced over long time horizons?

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According to Blackrock research, despite their recent lag, between 1971 and 2021, the international stock market outperformed the U.S. stock market 100% of the time when U.S returns were less than 4%. When U.S. returns were less than 6%, international stocks outperformed U.S. stocks 94% of the time.

This underscores why having international exposure matters in investing; not all markets peak or valley at the same time.

Incorporating assets with differing cycles—like international stocks—into your portfolio helps ensure that when some parts are down, others could be up or recovering towards their mean. It’s this balancing act facilitated by mean reversion that makes diversified portfolios stand strong over time.

Target Date Funds’ Approach to International Stocks

Vanguard and Dimensional Funds, two heavyweight champions in the investment world, have a pretty clear stance when it comes to mixing international stocks into their target date funds. They allocate a significant chunk—30-40% of the portfolio—to these global assets.

So, while Jack Bogle – the founder of Vanguard – has stated that he thinks international stocks are unnecessary, his own company dedicates a significant portion of its asset allocation internationally to its target date funds.

By spreading your assets among different nations, you’re essentially cushioning the blow in erratic financial climates. This approach also taps into growth opportunities outside the US that you might miss otherwise.

The strategy isn’t just throwing darts at a map either. These investment strategists meticulously study various markets to identify areas ripe for growth or where assets are undervalued, a process far more nuanced than randomly selecting locations. In their quest to boost gains while vigilantly managing risks, these stewards of capital perform a balancing act reminiscent of an adept tightrope walker.

The Future Outlook for International Stocks

Thinking about the future of international stocks can feel like trying to predict the weather in a month. But, there are solid reasons to keep an eye on global markets. For one, diversification isn’t just a fancy word; it’s your portfolio’s best friend against volatility.

Diversifying across countries and regions lets you ride out storms that might hit one market but not another. This is because when U.S. stocks zig, sometimes international ones zag, giving your investments balance and reducing risk over time.

Moreover, some international markets offer growth opportunities that mature U.S. companies might not. Emerging markets come with their own set of risks but also the potential for higher returns as they grow and develop economically.

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Liquidity considerations should never be ignored though. Not all international stocks offer the same ease of buying and selling as their U.S counterparts do—something vital during turbulent times or if you need quick access to cash.

Last but certainly not least: currency fluctuations add another layer of complexity—and opportunity—to investing abroad. Grasping the impact of currency variances on your profits can empower you to choose wisely the timing and locations for your global investments.

Conclusion

Embarking on the journey of international stock investment unveils a plethora of possibilities. It’s clear that while legends like Buffett and Bogle have their doubts, the global market cannot be ignored.

Exploring beyond your backyard brings lessons in diversification, revealing how it can protect against volatility. Reflecting on the journey of Japan’s Nikkei index, we’re reminded that stories of bouncing back and enduring challenges offer valuable lessons in perseverance.

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