Arguments against international stocks, and why I invest in them anyway


ETF investors may have wondered whether they should add international stocks to their portfolio or stick with the S&P500. Proponents of international stocks highlight their lower valuations and potential diversification benefits as reasons to invest in them. However, well-known investors like Warren Buffet and Jack Bogle believes that non-US stocks are unnecessary.

I do tell people, feel free to disagree with me because I'm not always right, but I have 0% in non-U.S. I say you don't need to have non-U.S., but if you do, limit it to 20%. 

-- Jack Bogle, 2018 interview with Morningstar

 
Reasons to stick to US stocks
 
One of the reason why investors favour US over non-US is that the US stock market is considered one of the most efficient in the world, supported by sound financial institutions and governance as well as strong investor protection laws. The US economy is also highly diversified and includes a broad range of industries, making it more resilient against a slowdown in a particular industry. This makes investing in international stocks seem more risky by contrast, especially in some countries with greater political and economic instability.
 
In addition, investing in international stocks may not provide meaningful diversification. In the event of a financial crisis, stocks will likely crash across the world, meaning that international stocks may not provide the protection that investors expect. During the Great Financial Crisis, the US stock market fell by 51% from its 2007 peak, while the international stock market fell 59%. Likewise, during the Dot-com bubble, the US stock market fell 44%, while that for international stock fell 47%.
 
Another reason investors may not see the need to diversify into international stocks is because many US companies are already deriving significant revenue from outside the US. According to some estimates, about 40% of the S&P500 companies' revenue are generated outside of the US. So, is there really a need for more non-US exposure?
 
Why I invest in international stock market anyway

Honestly, those are compelling reasons to stick to the US stock market but I still have some exposure to international stocks through my Dimensional funds, and I continue to DCA into them.

One reason is because international stocks are trading at a steep discount to the US market. While they are cheap for a reason, I find the difference in valuation hard to ignore. For instance, the price to earning (PE) ratio of VOO (S&P500 ETF) today is 17.91, while that for VXUS (international excl. US ETF) is a 31% discount at 12.34.

Another reason is that most of US outperformance was generated from the past decade and this may cause investors to view the US stock market with recency bias. An investor who invested in the 2000s would likely have a very different view on the US stock market which underperformed the international stock market substantially

And as usual, there is no guarantee that historical performance will continue in the future and I do not want to exclude myself completely from the potential outperformance in the international market.

 

The content shared in this post is just my opinion and should not be taken as financial advice. In fact, you should never treat what a random dude shared online as financial advice, no matter how credible they may sound.

Comments

Post a Comment

Popular posts from this blog

Reflecting on 2024

2024 marked a year packed with personal milestones, from moving into my own house, celebrating my wedding, to crossing the coveted $1 million net worth mark. There were also difficult decisions to make, like overhauling my investment portfolio, investing when markets were at all-time highs and grappling with rising insurance premiums. Here's a brief recap that shaped my year: Major Expenses The largest expense this year was the renovation and furnishing of my new home which cost close to $90,000, slightly exceeding my initial budget. Being our first time going through this process, we were keenly aware of the many horror stories about renovation nightmares - be it unreliable contractors, hidden costs, or shoddy workmanship. While we thoroughly researched the contractors and IDs, there was always an element of luck. Fortunately, we managed to engage one that we were quite satisfied with. To manage costs, we opted to work with a main contractor instead of an ID. While this saved up ...
Read more

Networth Update 3Q 2024

Image
It's been a while since I last updated my finances. With the completion of my flat renovation and our wedding banquet successfully hosted, I have put these significant expenses behind me. I can now focus once again on building my wealth. I took this opportunity to consolidate my investments. I liquidated my positions in Stashaway and sold the cash-funded investments in my Endowus account. My funds were redeployed into an All World ETF (ISAC) and a US small-cap value ETF (USSC) through IBKR. This shift not only simplifies my portfolio but also helps reduce recurring fees. Going forward, I plan to DCA based on the following allocation: $3,000 in ISAC, monthly via IBKR $1,000 in CSPX, monthly via IBKR $1,500 in USSC, quarterly via IBKR $1,500 (SRS) in Dimensional US Core, monthly via Endowus $1,000 (CPF) in Amundi World, monthly via Endowus With these, I'm looking at a roughly 80% US 20% international portfolio with a slight tilt towards small-cap and value factors.
Read more

Starting Early and Staying Focused: How I Reached $500,000 at 32

Image
  When I was just 20, I started to educate myself on personal finance and investing. I read books about investing from the national library, keeping myself updated with the latest financial news by reading The Straits Times, and watching videos to learn about the different investment investment instruments and strategies. At 21, I made my first investment in the local stock market by purchasing 4,000 shares of Starhill Global REIT. Despite being an undergraduate with limited funds, it was a crucial step in kickstarting my investing journey. I understood that the earlier I start, the more time I would have to learn and grow my savings . At 25, I started my first job and began saving a significant portion of my monthly income. As I had low material desires, I was able to me live below my means without sacrificing much. I also set long-term saving targets for myself and was determined to achieve Financial Independence (FI) by the age of 45. At the time, this seemed like an ambitious...
Read more