From 50 To Zero: Why Investors Are Shunning International Stocks

Leading into 2008, emerging market stocks and international stocks dominated financial shows. “Talking heads” agreed that investors should allocate as much as 50% overseas for a well-diversified portfolio.

The reasoning? One should be aligned with the world’s stock market pie. After all, half of the world’s market capitalization belonged to U.S. stocks and half belonged to stocks from elsewhere around the globe.

However, the real reason had little to do with market capitalization. In truth, foreign stocks were dramatically outperforming U.S. stocks. You had to be in the “euro-zone.” You had to be in “BRIC” (Brazil, Russia, India, China). In essence, you had to invest more in the winners.

Since 2008, however, allocating abroad has been an exercise in futility. Whereas the U.S. market has experienced admirable total return gains that have largely erased memories of its “lost decade” (2000-2009), non-U.S. equities have netted next to nothing for 11 years.

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What do you hear these days about diversifying with non-U.S. stocks? Maybe you are coming across a 20th century heuristic such as 20%. You certainly don’t hear about placing 50% of your money in foreign equities because half of the world’s market capitalization belongs to non-U.S. public companies.

Ironically enough, there are quite a few advocates for allocating 0% to foreign equities. The rationale? Scores of U.S. corporations derive as much as half of their revenue and/or earnings from overseas operations. According to this shift in thinking, a U.S.-only stock investor has diversified already.

Sounds like yet another effort to back into the recent decade’s winner. 50% in 2008. 0% in 2019.

It is worth noting, of course, that any country/regional diversification since the financial crisis has hurt. What’s more, a fair-minded assessment of stocks as an asset class should account for the adverse effect of non-U.S. equity exposure.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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