Should you own international investments? According to the experts, yes you should.

by XacTactX

Every day on this sub I see many people asking “Should I just buy VOO/VTSAX?” and far too often someone replies and says yes. I just want to point out that according to your favorite investment firms, you should have international investments, and here is the evidence.

According to Vanguard, international stocks should outperform U.S. stocks by ~3.5% per year in the next 10 years.

Type Return Risk
U.S. Equities 3.9 – 5.9% 17.9%
Global Equities ex-U.S. 7.4 – 9.4% 18.6%

According to BlackRock, international stocks should outperform U.S. stocks by ~1.2% per year in the next 10 years.

Type Return Risk
U.S. Large Cap Equities 5.8% 16.3%
Global ex-U.S. Large Cap 7.0% 16.2%

According to Charles Schwab, international stocks provide a diversification benefit and they lower the volatility of your portfolio.

“If you don’t invest globally, you’re not only narrowing your opportunity set and potentially decreasing your expected return, but ignoring an important tool to help manage volatility. Though not without risk, a global allocation provides diversification benefits and is one of the underpinnings of modern wealth management.”

According to Morningstar, international stocks generate less of their revenue in the U.S., and they have lower correlations to the U.S. market than the S&P 500. (video)

” A lot of times people say, “Well, you know, don’t I get enough international diversification with U.S. stocks?” It is true that a lot of large-cap U.S. stocks are global. Based on Morningstar data, U.S stocks in the S&P 500 generate about 62% of their revenue in the U.S. But international stocks actually still have less exposure to the U.S. market. If you look at the holdings of Vanguard Total International Stock ETF, they only generated about 15% of their revenue in the U.S. over the past year. So, you do get a lot better market diversification in terms of where the underlying stocks do business by diversifying across both U.S. as well as international stocks.”

According to Vanguard, sometimes other countries will outperform the U.S. and if you are diversified you won’t miss out. (PDF)

“Another benefit of global diversification is the opportunity to participate in whichever regional market is outperforming. This is a critical component of diversification that correlation does not effectively capture. For example, while the United States may lead over some periods, another country or region will invariably lead at other points. “

According to Fidelity, the currency exchange risk that comes from international stocks is not a major issue for long-term investors.

“Actually, history shows that hedging currency returns doesn’t improve international stock returns—at least not over the long term. Currency hedging (holding a stock denominated in a foreign currency and an equal but opposite short position in the currency itself) is intended to prevent currency fluctuations from hurting the stock price. While it sounds good in theory, the time and cost it takes to hedge currency has not paid off over time. Since 1973, currency hedging has detracted from returns in 50% of quarters, and contributed to returns in 50% of all quarters (see chart).”

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.