Think Global

Other than improving my golf handicap, a Sisyphus struggle if there ever was one, traveling overseas again is what I yearn to do most. But until the pandemic ebbs enough so there’s some level of certainty in hopping an international flight, I’m staying right here. I have no interest in arriving in Amsterdam only to find the Netherlands has had to change their rules, leaving us watching Dutch TV in our hotel room rather than touring the Van Gogh Museum. I do enjoy, however, thinking about countries other than the U.S. The Cellist, the most recent Daniel Silva novel, was a good way to tour London, Zurich and Tel Aviv vicariously, for instance. More important, I believe investing in companies based outside the U.S. is a wise way to diversify a portfolio. Here are some reasons why:

• International companies make up almost half of the global market for stocks. Ignoring that sector is ignoring much innovation, company earnings and growth opportunities.
• According to Morningstar, the correlation between the U.S. S&P 500 index of stocks and the EAFE index (Europe, Australasia, Far East), was just .26 from the 1970’s through 2019. Without dusting off your old statistics textbook, if these two indexes moved together exactly, the correlation would be 1. So, .26 is really low.
• Why is this important? Because having a portion of your portfolio invested in an international mutual fund can reduce the volatility of your portfolio. When U.S. stocks zigged over those decades, international stocks mostly zagged.
• Since 1970, the returns of the EAFE Index have trailed U.S. stocks significantly. In fact, if you invested $10,000 in the Dow Jones Industrial Average then it would be worth $432,840 now, compared with only $233,100 for the EAFE. Why is that potentially good? It means overseas companies’ stock prices are less expensive right now.
• The Price to Earnings ratio of the S&P 500 is currently almost 21 based on estimates of future earnings. Translation: One must pay $21 to receive $1 of earnings. That same ratio for the EAFE Index is currently only 15. It’s only possible to buy low and sell high if you first buy low.

If investing history is any guide, the portion of our portfolios invested in the U.S. stock market will drive most of our gains over our lifetimes. U.S. stocks generally outgain other asset classes such as bonds and international funds. But, if those other types of investments can gain, or not lose as much, when U.S. stocks decline, it can help smooth out the investment ride and aid overall portfolio performance. How much depends on each individual’s circumstances but a toe dipped into international waters comes recommended.

Steve Byars, CFP®