You may be neglecting an entire category of stocks.
This is a category my colleague Alexander Green advises you allocate 30% of your portfolio to.
Here is Alex’s well-known Gone Fishin’ Portfolio allocation…
Take a good look at the above pie chart. Is something there missing from your portfolio?
I’m guessing it’s foreign/international stocks.
Most investors I speak to don’t have many non-U.S. stocks in their portfolios. Even if they do, these stocks certainly don’t comprise almost a third of their assets.
And I wouldn’t blame you for doubting the necessity of such a heavy helping of stocks from outside the U.S.
After all, international stocks (excluding U.S. stocks) are down about 22% this year, as measured by the iShares MSCI ACWI ex U.S. ETF (Nasdaq: ACWX). (ACWI stands for All Country World Index.)
Compare that with the S&P 500, which is down about 18% this year (yes, it’s been a tough year for investors everywhere on the planet!).
And according to Morningstar, U.S. stocks have outperformed international stocks in 10 out of the last 12 years.
But ignoring international stocks on that data alone would make us guilty of recency bias, or placing too much emphasis on more recent events.
Consider the fact that international stocks have outperformed U.S. stocks during nearly half of all 10-year rolling periods over the last 50 years, according to Morningstar and BlackRock.
That’s why Alex advocates a healthy allocation to non-U.S. stocks.
He’s looked at the long-term historical timeline and realized these stocks do perform well for significant periods… and he doesn’t want his subscribers and readers to miss out on that growth when it returns, as it eventually will.
The Time to Buy Is Now
And right now is the time to shop for international stocks, as they’re a huge bargain at the moment. For two reasons…
First, their valuations are very attractive.
According to Yardeni Research, the forward price-to-earnings ratio for U.S. stocks is 17.1, while EAFE stocks – which include stocks in Europe, Australia/New Zealand and Japan – are trading at just 12 times forward earnings. Meanwhile, emerging markets (EM) stocks are even cheaper, at 11.2 times forward earnings.
Second, the U.S. dollar is trading at multiyear highs against most other currencies. That means you get more for your dollars when you’re shopping for stocks abroad (just like you get more for your money as a tourist in Paris or Tokyo these days).
But, of course, currency movements are cyclical, and few foreign exchange analysts or economists expect the current level of dollar strength to continue for long.
Thus, if you’re shopping for non-U.S. equities, now is the time. These bargain prices may not last.
Where to Invest Abroad
Of course, international stocks is a huge category, one that contains stocks of incredible diversity.
The current outlook for, say, German stocks is quite different from the outlook for British or Japanese stocks.
And that’s just advanced economies.
EM stocks are an entire other category, one that includes companies from China, South Korea, India, Brazil and many other nations with extremely different outlooks and prospects.
Despite the multitude of middle- and low-income countries to choose from, many EM indexes and exchange-traded funds are heavily weighted toward Chinese stocks.
That’s for good reason, as China (including Hong Kong) is the world’s second-largest economy. It has posted rapid GDP growth in recent decades and spawned world-class companies, like Tencent Holdings (OTC: TCEHY), Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD).
The top 10 holdings in the well-known MSCI Emerging Markets Index, as tracked by the iShares MSCI Emerging Markets ETF (NYSE: EEM), include five Chinese stocks and one Taiwanese stock.
But EM stocks come with an added level of risk. Many of these countries are led by autocratic regimes that run unfree economies. And unfree regimes – like China’s Communist Party – can intervene in markets arbitrarily, sending stocks plummeting. In fact, that’s just what happened in 2021.
If you’d rather stick to advanced economies for your helping of international equities, an alternative is the iShares MSCI EAFE ETF (NYSE: EFA), which tracks the performance of large cap and midcap stocks in developed countries around the world, excluding the U.S. and Canada. The index is made up primarily of stocks from Japan, the United Kingdom, France, Switzerland and Australia.
And if you’re looking for value stocks in this category, try the iShares MSCI EAFE Value ETF (CBOE: EFV), which mirrors the performance of stocks in developed countries (excluding the U.S. and Canada) that are trading at a discount to other stocks in their industries. That ETF has in fact slightly outperformed the S&P 500 this year.
Alex has an emerging markets ETF in his recently debuted Fortress Portfolio. He’s also about to recommend a European pharmaceutical company in the October issue of The Oxford Communiqué.
Both of those are great places to start adding to your international stock portfolio.
So if you, like many investors, have neglected international stocks, now is the ideal time to pick some up on the cheap. The ETFs I mentioned today are a great place to start.