For all that missed it, a couple months ago, /@cbc8171 put up a post about getting some international exposure that wasn't the best received due to the phrasing and tone here:
and I wanted to expand a bit more on it from my personal POV with extra research bits.
Just like ~3 months ago, I am starting to hear more and more chatter about "investing experts" around the office (likely due to the election season) and many people are regurgitating the same fallacy-filled points as I heard then.
Things like “Just put your money in an SP500 index mutual fund/ETF and forget about it”
“Only the C/S funds matter for the TSP”
“International stocks are pointless, most US companies in the SP500 do overseas business anyways”
“The SP500 always outperforms international stocks”
“You don’t need the L fund because of its worthless exposure to international stocks”
It is a lot better in this community, but maybe this can help someone out here as well.
People look back at the last decade and see that, on average, developed markets have not fared as well as the US stocks and further cement that “home country bias” (yes, it’s a real investing term) in their heads. However, that does not mean you should listen to these people! You should DEFINITELY consider investing in international stocks and equities.
To start, let’s put an end to the myth that the US companies do significant enough business overseas to ignore extra diversification. Based on Morningstar data in 2018, the SP500 generated roughly 62% of their revenue in the US and thus 38% overseas. Meanwhile, a broad ETF such as the Vanguard Total International Stock ETF generated 15% of their revenue in the US and a whopping 85% overseas – or a difference of 47%… That is HUGE! Additionally, international stocks represent nearly 44% of the global market, so if you “diversify” entirely in the SP500, that is what you are leaving off the table. After seeing the above, Alex Bryan, a CFA and the director of passive strategies for North America from Morningstar, recommended the following last year (https://www.morningstar.com/articles/937958/should-you-bother-investing-abroad):
“I think a small allocation of about a quarter to a third of your portfolio shouldn’t have a huge impact on the overall portfolio’s volatility because, even though that one piece of your portfolio might be a little bit more volatile, because international stocks aren’t perfectly correlated with U.S. stocks, the diversification benefits help offset that added volatility.”
Additionally, looking back at 2001-2010, check out the chart here:
https://lh3.googleusercontent.com/i...uTOvhlt2zj4aQ9xcZpLBaqZdzuO9vuWztvdHKQOwSnKtQ
As you can tell, developed and especially emerging market stocks absolutely crushed the SP500 index with the former more than doubling your return, while emerging markets multiplied that same return 11.3 times over!
Furthermore, from 2000-2009, US stocks lost 33.75% while emerging markets gained 89.22%.
If 2001-2010 is simply “too long ago” for you to care, consider the following data from 2005 to 2018:
https://lh6.googleusercontent.com/n...aphu0wNPhH9lOh4GcdcaI9EWCoLWX6cJYEEV0aIXG6nuA
The SP500 in the meantime returned the following:
2005 – 4.91%. 2006 – 15.79%. 2007 – 5.49%. 2008 – (-37%). 2009 – 26.46%.
2010 – 15.06%. 2011 – 2.11%. 2012 – 16%. 2013 – 32.39%. 2014 – 13.69%.
2015 – 1.38%. 2016 – 11.96%. 2017 – 19.42%. 2018 – (-4.38%).
Even with the GREAT gains you see above, the SP500 was a loser every time compared to the top international markets of the same year from the link before.
Additionally, you can see that the periods between the US market outperforming international markets are very cyclical even going as far back as 1972-2018 with the current cycle favoring the US for the last decade:
https://lh3.googleusercontent.com/U...KKlNryXaANAn-3t9aoN26ov32rfMVPe4324r2r6HuvEqw
Fidelity (another investing powerhouse) recommends a range of 30-50% of exposure in international markets and finds that going back THIRTY years through 2019, the best stock markets have all been OUTSIDE of the US. They have also mocked up a portfolio going as far back as 1950 through 2019 with their recommended 70 US/30 Intl portfolio, and you can see that the returns are the same as just the SP500 and suggests that international equity exposure may decrease portfolio risk over the long term:
1950 to 2019
US only
International
70/30 mix
Annualized Returns
11.30%
10.30%
11.30%
Standard Deviation
14.30%
15.10%
12.80%
Sharpe Ratio
0.49
0.40
0.55
(Hypothetical “globally balanced portfolio” is rebalanced annually in 70% US and 30% foreign stocks. US equities: S&P 500 Total Return Index; Internationalequities: MSCI ACWI ex-USA Index. Source: Bloomberg Finance L.P., Fidelity Investments (AART), as of April 30, 2019.)
A recent Vanguard piece from June of this year showed their own “in-house” simulation (from data current as of March 2020) that suggests the global non-US annual equity returns will beat out US-only equity returns by roughly 3% for the next 10 years. Of course this is by no means a crystal ball, but Vanguard is yet another heavy hitter in the financial world that encourages international investing. Coincidentally, their research further supports that having a 20-50% international market exposure reduces volatility as well here: https://lh4.googleusercontent.com/l...LR4_ll7qktOK3G8j_i9H2q5ZRIFw7oLe7NsJ3i3xJfYMQ
The same article also references a few of the world’s largest companies that are NOT part of the US, but are likely well known to you regardless. These are companies like Alibaba and Tencent from China, Nestle and HSBC from Europe, as well as Toyota, and a few other international companies that account for the top 50 largest stocks in the world. Lastly, the article compares annual yields between the US and non-US equities which results in a difference of .65%, which should definitely be significant enough for anyone and everyone to consider an international portfolio. As you can see in the graph above, Vanguard also recommends adding an allocation between 20-50% to international equities.
There is a reason why the L fund changed and should be the default recommended portfolio. Please don't allow yourself to be roped into thinking that C/S is the only way to go, and please do not recommend it to others just because YOUR past results were positive.
Just like ~3 months ago, I am starting to hear more and more chatter about "investing experts" around the office (likely due to the election season) and many people are regurgitating the same fallacy-filled points as I heard then.
Things like “Just put your money in an SP500 index mutual fund/ETF and forget about it”
“Only the C/S funds matter for the TSP”
“International stocks are pointless, most US companies in the SP500 do overseas business anyways”
“The SP500 always outperforms international stocks”
“You don’t need the L fund because of its worthless exposure to international stocks”
It is a lot better in this community, but maybe this can help someone out here as well.
People look back at the last decade and see that, on average, developed markets have not fared as well as the US stocks and further cement that “home country bias” (yes, it’s a real investing term) in their heads. However, that does not mean you should listen to these people! You should DEFINITELY consider investing in international stocks and equities.
To start, let’s put an end to the myth that the US companies do significant enough business overseas to ignore extra diversification. Based on Morningstar data in 2018, the SP500 generated roughly 62% of their revenue in the US and thus 38% overseas. Meanwhile, a broad ETF such as the Vanguard Total International Stock ETF generated 15% of their revenue in the US and a whopping 85% overseas – or a difference of 47%… That is HUGE! Additionally, international stocks represent nearly 44% of the global market, so if you “diversify” entirely in the SP500, that is what you are leaving off the table. After seeing the above, Alex Bryan, a CFA and the director of passive strategies for North America from Morningstar, recommended the following last year (https://www.morningstar.com/articles/937958/should-you-bother-investing-abroad):
“I think a small allocation of about a quarter to a third of your portfolio shouldn’t have a huge impact on the overall portfolio’s volatility because, even though that one piece of your portfolio might be a little bit more volatile, because international stocks aren’t perfectly correlated with U.S. stocks, the diversification benefits help offset that added volatility.”
Additionally, looking back at 2001-2010, check out the chart here:
https://lh3.googleusercontent.com/i...uTOvhlt2zj4aQ9xcZpLBaqZdzuO9vuWztvdHKQOwSnKtQ
As you can tell, developed and especially emerging market stocks absolutely crushed the SP500 index with the former more than doubling your return, while emerging markets multiplied that same return 11.3 times over!
Furthermore, from 2000-2009, US stocks lost 33.75% while emerging markets gained 89.22%.
If 2001-2010 is simply “too long ago” for you to care, consider the following data from 2005 to 2018:
https://lh6.googleusercontent.com/n...aphu0wNPhH9lOh4GcdcaI9EWCoLWX6cJYEEV0aIXG6nuA
The SP500 in the meantime returned the following:
2005 – 4.91%. 2006 – 15.79%. 2007 – 5.49%. 2008 – (-37%). 2009 – 26.46%.
2010 – 15.06%. 2011 – 2.11%. 2012 – 16%. 2013 – 32.39%. 2014 – 13.69%.
2015 – 1.38%. 2016 – 11.96%. 2017 – 19.42%. 2018 – (-4.38%).
Even with the GREAT gains you see above, the SP500 was a loser every time compared to the top international markets of the same year from the link before.
Additionally, you can see that the periods between the US market outperforming international markets are very cyclical even going as far back as 1972-2018 with the current cycle favoring the US for the last decade:
https://lh3.googleusercontent.com/U...KKlNryXaANAn-3t9aoN26ov32rfMVPe4324r2r6HuvEqw
Fidelity (another investing powerhouse) recommends a range of 30-50% of exposure in international markets and finds that going back THIRTY years through 2019, the best stock markets have all been OUTSIDE of the US. They have also mocked up a portfolio going as far back as 1950 through 2019 with their recommended 70 US/30 Intl portfolio, and you can see that the returns are the same as just the SP500 and suggests that international equity exposure may decrease portfolio risk over the long term:
1950 to 2019
US only
International
70/30 mix
Annualized Returns
11.30%
10.30%
11.30%
Standard Deviation
14.30%
15.10%
12.80%
Sharpe Ratio
0.49
0.40
0.55
(Hypothetical “globally balanced portfolio” is rebalanced annually in 70% US and 30% foreign stocks. US equities: S&P 500 Total Return Index; Internationalequities: MSCI ACWI ex-USA Index. Source: Bloomberg Finance L.P., Fidelity Investments (AART), as of April 30, 2019.)
A recent Vanguard piece from June of this year showed their own “in-house” simulation (from data current as of March 2020) that suggests the global non-US annual equity returns will beat out US-only equity returns by roughly 3% for the next 10 years. Of course this is by no means a crystal ball, but Vanguard is yet another heavy hitter in the financial world that encourages international investing. Coincidentally, their research further supports that having a 20-50% international market exposure reduces volatility as well here: https://lh4.googleusercontent.com/l...LR4_ll7qktOK3G8j_i9H2q5ZRIFw7oLe7NsJ3i3xJfYMQ
The same article also references a few of the world’s largest companies that are NOT part of the US, but are likely well known to you regardless. These are companies like Alibaba and Tencent from China, Nestle and HSBC from Europe, as well as Toyota, and a few other international companies that account for the top 50 largest stocks in the world. Lastly, the article compares annual yields between the US and non-US equities which results in a difference of .65%, which should definitely be significant enough for anyone and everyone to consider an international portfolio. As you can see in the graph above, Vanguard also recommends adding an allocation between 20-50% to international equities.
There is a reason why the L fund changed and should be the default recommended portfolio. Please don't allow yourself to be roped into thinking that C/S is the only way to go, and please do not recommend it to others just because YOUR past results were positive.