About a year ago, I asked Liberty Through Wealth readers if they might be neglecting an entire category of stocks.
I was referring to foreign, or international, stocks. And a year later, I bet many of you reading this column still own too few of these stocks.
In the U.S., we tend to focus inward – within our national borders – when it comes to many things, from culture to sports to investing. And there’s good reason for that. The U.S. has developed fantastic cultures and national pastimes over the past 2.5 centuries, and it has the largest stock market in the world (with 58% of total world equity market value).
Americans enjoy an embarrassment of riches when it comes to domestic companies that they can own a piece of, including enormously successful innovators – like Apple (Nasdaq: AAPL) and Alphabet (Nasdaq: GOOGL) – that are the envy of the world.
But that doesn’t change the fact that the key to any portfolio’s long-term growth, stability and risk mitigation lies in diversification.
Here’s Alexander Green’s well-known Gone Fishin’ Portfolio allocation…
As you can see from the chart, Alex recommends you allocate 30% of your portfolio to foreign stocks. Those could include high-quality stocks from advanced economies like Germany, France and Japan. They may also include stocks from emerging markets, an enormous category that ranges from Latin America to India to Southeast Asia to Africa.
Alex constantly scans the markets for quality companies at attractive prices. And he often turns up gems.
For example, he’s got a Mediterranean-based oil producer in his Oxford Microcap Trader portfolio that is a huge winner this year – it’s up more than 57% since he recommended it in January. (The S&P 500 Index is up about 7% over the same period.)
[Editor’s Note: If you’d like to access the Oxford Microcap Trader portfolio and Alex’s No. 1 microcap for 2023, go here for details.]
It’s Bargain Time
And guess what? If your portfolio allocation to non-U.S. stocks is too small, now is a great time to increase it.
That’s because the U.S. dollar has been on a tear since mid-July. It’s up about 7% since then, which is a huge move for the world’s most important currency. It’s not surprising that the greenback remains the world’s reserve currency, and that status isn’t going to change anytime soon…
When the dollar is strong, it buys you more foreign goods.
That’s true if you’re a tourist in London or Tokyo looking for great meals, tours and hotels. It’s also true if you’re shopping for foreign stocks.
On the flip side, a stronger dollar is bad for many U.S. companies – particularly big multinational firms – because it cuts into profits when they convert their foreign sales back into dollars.
Dollar strength aside, international stocks are also cheap relative to their earnings right now. Consider…
- U.S. stocks are now trading at 18.9 times forward earnings.
- Global stocks (excluding the U.S.) are trading at 12.7 times earnings.
- European stocks are trading at 11.7 times earnings.
- Japanese stocks are trading at 14.9 times earnings.
- Emerging market stocks are trading at 11.8 times earnings.
Alex often tells his readers that international stocks zig when U.S. stocks zag. Put differently, the two groups of stocks don’t move in tandem. And that’s exactly what you want to see in a diversified portfolio.
So take a good look at your portfolio and make sure it’s properly diversified. Not just among a handful of U.S. stocks, but also across asset classes and international borders.