Limiting your equity investments to U.S. stocks only made sense for a long time. All things considered, the average return of a diverse portfolio of stocks from American companies beat that of a similarly varied portfolio of stocks from foreign companies.
The reverse has been true throughout the last 12 months. Additionally, a number of investment specialists from large financial institutions think that American investors ought to include exchange-traded funds and mutual funds with diversified portfolios from foreign companies. According to these experts, foreign stocks will beat U.S. stocks.
Reporter Andrew Welsch recently published a thorough piece in Barron’s that backed up the idea that American investors ought to think about diversifying their holdings by including foreign stocks. The piece was based on interviews with top investment specialists from a number of prestigious financial institutions, including Morningstar.
I have personally done so, and I plan to employ dollar-cost averaging to raise the proportion of foreign stocks in my stock portfolio.
Over the next ten years, Vanguard’s asset managers forecast that U.S. equities would return 4.3% to 6.3% yearly, while developed markets outside of the United States will return 6.6% to 8.6%. According to Welsch, some equity strategists anticipate that U.S. stocks will yield lesser returns in the upcoming years.
As of July 3, for instance, the Vanguard FTSE All-World ex-US ETF (ticker symbol VEA), an exchange-traded index fund that invests in international stocks outside of the United States, was up 18.3% year-to-date, while the S&P 500 index was up 6.9%.
As Welsch said, American Funds EUPAC R5 (RERFX), Natixis Oakmark International A (NOIAX) fund, and Dodge and Cox International Stock Fund Class I (DOXFX) are among Morningstar’s suggested foreign stock funds.The yearly expense cost of investing in foreign mutual funds and exchange-traded funds (ETFs) should be taken into account because it is typically higher than that of investing in an S&P index mutual fund or ETF.
Welsch cites credible sources in his piece, including Dynasty Financial Partners’ Bob Shea. Alan Bazaar, the CEO and co-chief investment officer of Hollow Brook Wealth Management, was another source. When it comes to investment selection, Mr. Bazaar’s company places a strong emphasis on active management.
The portfolios of the aforementioned funds are diverse and come from various nations. Certain funds and exchange-traded funds (ETFs) are restricted to a certain nation, such Japan and Germany. Naturally, a portfolio that is limited to a single nation would have a higher level of risk.
There have been times when this hasn’t been the case, despite the fact that U.S. equities investments have generally beaten diversified portfolios outside of the country for many years. According to T. Rowe Price’s study, for instance, foreign stocks performed better than U.S. assets between 2006 and 2013.
What percentage makes sense if you do choose to invest in foreign stocks? Roger Aliago-Diaz, chief economist and global head of portfolio construction at Vanguard, says it’s important to stay away from extremes. According to him, you want to think about expanding your portfolio to include foreign stocks if your proportion of U.S. stocks is greater than 70%.
Conclusion: Although many financial experts think that international equities will likely outperform U.S. stocks in any given year, there is no certainty that this will happen. Even if the non-U.S. investment eventually rises to 10% to 20% of your portfolio, I advise you to think about include a diversified fund or exchange-traded fund (ETF) if you have almost no investment in foreign assets. To attain the percentage that makes sense for you, think about dollar-cost averaging instead of making a big one-time investment to avoid buying at a high point. Choose an ETF or fund with a track record of outperforming the market. You should be able to find similar alternatives on Morningstar.
You can contact Elliot Raphaelson at [email protected] with any questions or comments.
