Don’t Forget International Stocks

To be sure, the highest returns possible often come from concentrated, undiversified, investments. However, those returns may come at a cost of higher risk than may be prudent. 

The theoretical language we use (I mean, financial theorists use) is approaching the “efficient frontier” of risk and return, through diversification.

The clearest explanations I’ve ever read of this comes from a 2013 book by Lars Kroijer, Investing Demystified: How To Invest Without Speculation and Sleepless Nights, which carefully threads the needle between plain language and an academic financial nerd festival. Which is to say, I recommend it.

Kroijer offers strong advice that directly addresses my reader’s question about whether to bother with both international and domestic funds. His advice, which I endorse, is that there is no rational reason to have more US stock exposure than the proportion of global stocks that are based in the US. Which, if you’re curious, is about 37 percent right now. I’ve never met an American stock investor who had such a low percentage of stock investments in their portfolio. But I present it as an anchoring idea, in order to be challenging. In my stock mutual fund portfolio, I’m at 60 percent US, 40 percent international. Which, again, I’ll guess is still more international than most.

A historical note. Japanese investors experienced approximately zero price appreciation if they bought only the Nikkei 225 Index 30 years ago, versus a roughly ten-fold appreciation in prices of the US-based S&P 500 Index. Including dividends, the 30-year return on the Nikkei versus the S&P 500 is roughly 50 percent versus 1800 percent, respectively. I’m not adjusting for inflation here.

For Japanese investors, owning only the main stock index of their own country would be a very expensive choice, over this 30 year long run. The point is not that Japanese stocks are bad and US stocks are good. The point is that owning only investment assets from your own country can be an extremely poor decision. Which you only learn in retrospect.

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