Did you know the US stock market is bigger than all other markets in the world combined? By a comfortable margin, too – almost 60% of the global stock market consists of US companies. In fact, US stocks have generally outperformed foreign ones (collectively) for the last 30 years.
In view of this, it is easy to forget that the rest of the world exists, at least when it comes to investing. But that would be a mistake. The principle of diversification applies to countries just as much as assets; and I can think of three good reasons to invest in foreign markets as well as the US:
- It can reduce your exposure to big risks;
- It can increase your exposure to big opportunities;
- You probably have the tools to do it already!
Let’s look at each of these reasons in a bit more detail.
We all know that the balance of winners and losers is constantly shifting. Still, many investors see the US as an exception to this rule because it has been top dog for the whole duration of their careers. But if anything, that just means it is overdue for an upset!
Although the US economy is still healthy overall, it is sitting on top of the twin fault lines of inflation and debt. And if previous empires like the Dutch and British are any indication, an “earthquake” along one or both of those fault lines can only be delayed, not prevented (click here for more on why that is).
This “quake” could be something sudden and dramatic, like Congress failing to raise the debt ceiling. Or it could be something less obvious, like the dollar gradually losing favor as the world’s reserve currency.
Such scenarios may not be immediately likely. But assuming that they will not happen at all is naïve and dangerous. So if (or when) they do happen, you will be much better off if your eggs are not all in the same American basket.
In addition to being more cautious in our expectations of the future, we may need to reexamine some rosy assumptions about the past and present as well.
Remember, the price people are willing to pay for a company’s stock may have little to do with the amount of real profit that company generates. Similarly, a nation’s stock market is not the most reliable indicator of its overall economic health.
And there is strong evidence that the US stock market has been… a bit overpriced over the past three decades. Its real value is still formidable, of course; but the scales need to be balanced somewhat. This in turn suggests that there are underpriced markets elsewhere, and that means opportunity!
For example, manufacturing is not as sexy an industry as tech or finance, but it still producesa great deal of value – almost by definition. Since it is largely the domain of second-tier economies like China, India and Taiwan, those places may well benefit from any “rebalancing” that happens.
But how do you invest in such places?
How to invest internationally
As I have said elsewhere, the beauty of investing today is how accessible everything is. Thanks to ETFs, fractional shares and a host of other innovations, you can easily find a way to invest in just about anything under the sun – even if only in small amounts.
This is very true of international markets as well. There are tons of mutual funds and ETFs out there that give investors access to all kinds of international portfolios. But instead of using, say, the S&P 500 or NASDAQ as a benchmark, these funds will often use one of the MSCI indexes. For example –
- ACWI (All Country World Index) ex-USA – This index tracks a sampling of stocks from every single stock market except the US.
- EAFE (Europe, Australasia and Far East) – This index tracks markets in “developed” countries, with the exception of the US and Canada. Big players include:
- Emerging Markets –This index tracks markets in “developing” countries like those we mentioned above.
- Frontier Markets –This index tracks markets in countries that, while showing some promise, are more risky than developed or developing economies.
To be clear, I am not suggesting you go all-in on Taiwanese microchips or Nigerian textiles or something. But having some international investment in your portfolio is just good common sense, and simple to boot. And it is overlooked far too often – giving you a bit of an edge!