One of the blog’s key themes is that you can get rich through disciplined investing in stocks and learning how to avoid the infinite short-term traps that keep us from realizing our fair share of market returns. Owning stocks is theoretically the easiest way to build wealth – buy a diversified portfolio of ETF’s or mutual funds, turn off CNBC, don’t check your balances, and add money to your portfolio whenever you have extra long-term cash.
Because markets are volatile, money matters are emotional, and we’re not hardwired to handle financial stress, sticking to the basics becomes difficult. One short-term trap is recency bias, and while we’re seeing it play out right now in many ways with many investments, the decision by some investors to ignore international stocks is a timely example.
Recency bias in investing occurs when investors place a heavy emphasis on things that just happened and ignore the longer history. Expecting Tesla stock to keep going up forever because it’s been on a tear, or that a market that’s underperforming will continue to do so are two examples. The latter one takes us to international stocks.
In the decade that just ended (2010 – 2019), U.S. Stocks (represented by the S%P 500) returned 256.7%, and international stocks (represented by the MSCI ACWI) returned only 69.96%. Investors have taken notice and questioned the need for international stocks in their portfolios.
However, the decade prior (2000 – 2009) was a different story as you can see in this chart. U.S. stocks were negative during the lost decade and you made money internationally.
Chasing performance and shifting investments because of recent events and returns can get you in trouble. Diversify and hold because by design diversification creates winners and losers in your portfolio simultaneously.
An allocation to international stocks makes sense for other reasons now as well. The team at Vanguard recently put together a white paper addressing this. Check it out for the full read. (I’ve also written recently about emerging markets stocks here.) Their main points are:
International stocks are cheaper than U.S. stocks after the stronger run for U.S. stocks. As such, they expect higher returns going forward for them.
Adding international stocks reduces portfolio volatility, and they identify a sweet spot at about 35%.
International investing allows you to own some great companies like Toyota, Novartis, Alibaba, etc.
International dividend yields are higher.