How Much International Stocks In Your Portfolio? 2017 Outlook

globeHere are some updated thoughts on holding stocks based outside the US in your portfolio.

There is no “ideal” amount of international stocks that experts agree upon. You have numbers ranging from 0% (US only) to 50% (market-cap weighting). For a good summary of this situation, check out these two recent articles from Christine Benz and John Rekenthaler of Morningstar.

The world continues to change, and the market weights will change with it. Here’s an interesting infographic by Jeff Desjardins at VisualCapitalist about world GDP breakdown for the last 2,000 years. The time axis is kind of wonky from 1-1900, so I’d focus on just 1900-now. GDP is not the same as market value, but the point is that the world will not look the same in 30 years.

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Right now, in terms of valuation, US stocks are relatively expensive and International stocks are relatively cheap. Via this ETFTrends article by Chris Konstantinos at RiverFront Investment Group, via TRB:

Looking a 12-month forward P/E ratio at the MSCI All-Country World Ex-US index, we are currently at the largest valuation gap between US and non-US markets in the 15+ years of data to which we have access.

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My take: Pick a split and stick with it. I don’t feel too strongly about this topic. If a Belgian company buys Budweiser, does that change how the business works fundamentally? If you go with 100% US stock and wait 30 years, you’ll probably be just fine. If you go with 50% US and 50% International and wait 30 years, you’ll probably be just fine. One choice will do better than the other, but nobody knows which one. These days I’ll be happy if we manage to avoid nuclear war.

I personally like buying a bigger haystack with all the needles and thus I like 50/50. If you want to hedge somewhere in between, consider that Vanguard Target and Lifecycle All-In-One funds are 60/40 now but they used to be 80/20 and then 70/30. It’s more important that you pick something and stick with it, as opposed to bailing out when one does a lot better than the other.

In terms of psychology, you can always twist the situation as needed. If you are 100% US, you could be happy with US outperformance over the last decade. If you are 50/50, you can take solace in the valuation gap and that any mean reversion from this point onwards will lead to future international outperformance.

Comments

  1. Very nice article.. I especially liked the following passages:

    “It’s more important that you pick something and stick with it, as opposed to bailing out when one does a lot better than the other.”

    “If you go with 100% US stock and wait 30 years, you’ll probably be just fine. If you go with 50% US and 50% International and wait 30 years, you’ll probably be just fine. One choice will do better than the other, but nobody knows which one. These days I’ll be happy if we manage to avoid nuclear war.”

    Have a plan, stick to it, ignore the noise… Luckily, you have plenty of diapers to change, so you can ignore that noise 😉

  2. Good post Jonathan. I’m at 70% domestic / 30% international now, and I completely agree with your assessment. It’s all a crapshoot. But so long as allocation to equities is between 0 and 50%, it seems reasonable enough. Thanks again for the great blog.

  3. I’m close to 50/50 international, but that’s due to an “extra money” bet. I made a long-term gamble on China/emerging markets as US stock valuations got high and as foreign stocks lagged.

    All things related to money are faddish and generational. I cannot help but believe that the growing nouveau riche class in techno-China will gravitate toward stocks within 20 years. As I get older–or if valuations get crazy–I’ll rebalance toward domestic stocks and less currency risk.

    I well remember the crazy EM valuations of 10+ years ago; peaking around the 2008 Beijing Olympics. And today, China is killing it on execution and innovative technology products…

    Without this side-bet, I’d be 60/40 domestic versus international.

  4. I’ve had a “tilt” toward global for years. After years of “global” underperformance, I think it’s my time! Fingers crossed. Diversification is, in my humble opinion, the best defense against uncertainty. I’m absolutely uncertain of that fact.

  5. I follow the Charlie Munger advice and invest in US stocks. Too many international stocks are fraudulent or have unreliable earnings. Plus, Domestic companies can also expand overseas and take advantage of foreign markets.

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