Why It’s Time to Send Your Portfolio Overseas

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Americans make up 4.3% of the world population. Yet our economy represents 24% of world GDP.

The U.S. stock market has a total capitalization of approximately $30 trillion. That represents 40% of the world’s total stock market capitalization.

These numbers are impressive. But there is another way of looking at them.

The majority of the world’s economic growth and stock market opportunities are outside the U.S. Indeed, 95.7% of our actual and potential customers and suppliers are non-U.S. citizens.

For investors, it makes sense to capitalize on this.

Studies consistently show that over long periods, a globally diversified portfolio delivers higher returns with less risk, the holy grail of investing.

What invariably happens over the long term, however, doesn’t necessarily happen in the short term.

We just finished a decade of extraordinary outperformance of U.S. stocks relative to international stocks.

Over the past 10 years, European markets have returned 6.8% annually, Asian markets have returned 7.4% annually and emerging markets have returned 7.3% annually, according to The Vanguard Group.

Those returns pale in comparison to the 13.2% annual return of the S&P 500 over the same period.

It’s always easier to invest in the country and companies you know best.

And given recent high returns, most Americans are feeling pretty good about having the vast majority of their money invested in U.S. stocks.

But think globally not locally. And look forward not back.

Forbes reports that U.S. investors hold around 15% of their stock portfolios in foreign companies.

Research suggests that your exposure should be almost double that.

(In fact, our Oxford asset allocation model recommends that you hold precisely 30% of your total portfolio in international equities.)

If you’ve been heavily overweight in domestic stocks, now is an excellent time to make an adjustment.

Not because the U.S. market is about to enter a bear market – nobody knows when that will happen – but because foreign stocks are so darn cheap relative to U.S. stocks.

As of October 31, the prospective price-to-earnings ratio for the S&P 500 was 16.43, compared with 13.39 for the MSCI Europe Index, 12.1 for the MSCI Japan Index and 10.87 for the MSCI Emerging Markets Index, according to Bloomberg.

Dividend yields are higher overseas too.

The S&P 500 currently yields 2% vs. 2.5% in Japan, 3.2% in emerging markets and 4% in Europe.

Yes, Japan’s population is aging, China’s growth is slowing, and there are political and economic tensions in the European Union, not least of all a messy Brexit and Italy’s rising populism.

But these problems are fully reflected in share prices. (And let’s not forget we have our own issues and risks here in the U.S.)

History shows that when you buy stocks when they are fundamentally cheap – as they were in our financial crisis here a decade ago – you tend to get strong outperformance going forward.

No one can tell you whether foreign stocks will beat domestic ones next month or next year. But over the next decade, international equities will almost certainly outperform the U.S. market… and by a substantial margin.

How do you take advantage of it?

If you have the time and skill, it is always preferable to buy individual companies over a broad index.

But for passive investors – or those who need a quick fix – there are several broadly diversified, low-cost and tax-efficient exchange-traded funds (ETFs) that fit the bill, including Vanguard Total International Stock ETF (VXUS) and Vanguard FTSE Emerging Markets ETF (VWO).

These funds give exposure to other economies, currencies and stock markets, and offer higher yields and greater prospective returns.

If your stock portfolio has been almost entirely invested in U.S. shares over the last decade, thank your lucky stars and diversify.

International markets have outperformed our own market by several hundred basis points per year in the past.

And they certainly will again.

Good investing,

Alex

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