Langsung ke konten utama

Good Reasons to Invest in Foreign Stocks Right Now


They’re cheap, rallying and provide diversification.

After badly trailing U.S. stocks for most of the past decade, foreign stocks are suddenly on fire. Is now the time to load up on them, or is it already too late? And what portion of your stock money should you invest overseas?

Consider recent returns. Since the start of the year, the MSCI EAFE index of stocks in foreign developed markets rose 13.3%, and the MSCI Emerging Markets index soared 17.7%. Standard & Poor’s 500-stock index, though it had a not-too-shabby return of 9.5%, is running far behind. (All returns in this article are through July 7.)

But foreign stocks’ recent performance follows a truly abysmal decade, when they returned virtually nothing. Over the past 10 years, the MSCI developed market index returned an annualized 0.8%, and the emerging-markets index returned an annualized 1.4%—even with the recent rally. Many foreign bourses have yet to climb above their 2007 pre-bear-market highs. Over the same 10 years, the S&P 500 returned an annualized 7%.

Vanguard founder Jack Bogle is one of many observers who see little or no benefit to investing in foreign stocks. Roughly 45% of the revenues from stocks in the S&P are earned overseas. Why take the currency and political risks of investing in foreign countries? And in emerging markets, particularly, companies must deal with far more government meddling and corruption than in the U.S.

But over longer stretches, foreign stocks have provided close to the same results as U.S. stocks. Plus, foreign stocks and U.S. stocks don’t move in lock step. Says Ben Johnson, a Morningstar analyst: “If diversification is the only free lunch in investing, investors are leaving a lot on the lunch table.”

From the start of 1970 through June 30, 2017, the S&P returned an annualized 11.0% while foreign developed stocks returned an annualized 9.2%. The performance gap can be almost entirely explained by foreign stocks’ recent slump. From 1970 through 2010, foreign developed stocks trailed the S&P by an average of just one-half of one percentage point per year.

Even more intriguing: Since 1970, foreign stocks and U.S. stocks have taken turns leading each other for multiyear periods. I had Morningstar look at rolling five-year returns over the years since 1970. By this I mean Morningstar computed returns from the beginning of 1970 through 1974, from 1971 through 1975 and so on.

U.S. stocks led foreign stocks over trailing five-year periods from 2011 through the present, from 1991 through 2003 and from 1983 through 1985. Foreign stocks were the winners from 2004 through 2010, from 1986 through 1990 and from 1978 through 1982.

Next, consider valuations. Partly because foreign stocks have been such abysmal performers of late, they’re cheaper on virtually every measure of value you can find—price-earnings ratio, price-to-sales ratio, price-to-book-value ratio, dividend yield and so on.

The S&P currently trades at a lofty 18 times estimated earnings for the coming 12 months. But foreign developed stocks trade, on average, at 15 times earnings, which is right in line with long-term averages. And emerging-markets stocks change hands at a mere 12 times earnings.

I don’t expect stocks in foreign developed countries, emerging markets and the U.S. to trade at the same price-earnings ratios anytime soon. Europe and Asia both face more headwinds than the U.S. Nor do I think foreign stocks will hold up as well as U.S. stocks in the next bear market.

But I do expect that valuations will grow closer to one another over time. Why? Consider some of the largest holdings in the foreign developed stock index: Nestle, Novartis, Roche, Toyota, BP and British American Tobacco. These are not so much foreign stocks as they are global multinationals. Ditto for some of the largest holdings in the S&P: Apple, ExxonMobil, Facebook, Johnson & Johnson and General Electric.

How much should you invest in foreign stocks? About 47% of global stock market capitalization is outside the U.S. Vanguard’s target retirement funds allocate almost 40% of their stock investments to foreign stocks. In a letter to shareholders, Vanguard Chairman William McNabb criticized “home bias,” the tendency of investors worldwide, not just in the U.S., to overweight their own country’s shares. “In their aversion to the unknown, investors can end up increasing, rather than lessening, their risks,” he wrote. “That’s because they’re sacrificing broad global diversification—one of the best ways I know of to help control risk.”

In my view, 40% in foreign stocks is too much. After all, U.S. investors, for the most part, spend dollars, not euros or yen. I recommend that investors put 25% to 35% of their stock money in foreign stocks in the current climate—with younger and more risk-tolerant investors skewing more toward the higher number.

What’s emotionally difficult about owning foreign stocks is that it guarantees you’ll be out of sync with the U.S. market for lengthy periods. And most of the day-to-day investing news we digest is about the U.S. market. The combination would have made it easy to throw in the towel on foreign stocks at the end of last year—which would have been precisely the wrong time.

Postingan populer dari blog ini

5 Quick Steps to Improve Your Finances in 2018

Losing weight and improving one’s finances are almost always at the top of most people’s lists of New Year’s resolutions. It makes sense to look out for your physical and financial health so you can enjoy life to the fullest. Following through on your resolutions is usually the tough part — it takes changes in certain behaviors, discipline and time to experience and maintain the results. This is as true for financial planning as it is for losing weight.
If improving your finances is one of your New Year’s resolutions, here are five steps you can take starting Jan. 1:
Immediately Pay Down Holiday Bills and Credit Cards.
Many people splurge on holiday gifts, parties and travel in December, but the bills will come due in January. Resolve to pay down those debts quickly to avoid large interest charges on your credit cards.
Set a goal to pay off the total amount on one card within a few months, if not sooner. If you or your spouse expects a bonus check from your employer in early 2018, use…

13 Useful Retirement Planning Tips for Entrepreneurs

While retirement may not be on your mind currently as an entrepreneur, the sooner you start planning for this milestone, the better. Before anything else, you need to consider the ways that you will be able to save for your retirement while also keeping your business running today. So, what tips or tricks can you employ to ensure that you will be financially able to retire when ready?
A. Set Up a Roth IRA
You may not have a company 401(k), but you should take advantage of the long-term benefits of a Roth IRA, which will grow and compound over time (tax free) and be removed (again, tax free) when you are at retirement age. - Jeff Epstein, Ambassador
A. Opt for a Solo 401(k)
If you are a business with no full-time employees (other than you and your spouse), you are eligible for a Solo 401(k), also known as the self-employed 401(k). The benefit to this is that you can contribute up to $50,000 of business income pre-tax ($100,000 if you set up a plan for yourself and your spouse). In 2016,…

Money saving tips - Expert says THIS is the worst way to pay for Christmas

CHRISTMAS is approaching fast and the all too familiar feeling of pressure on our wallets is coming around quick.
The last thing you want at Christmas is the burden of how you’re going to pay for your loved ones Christmas presents or how you’ll afford the turkey.
There are certain things you ought to try to avoid when you pay for Christmas to make sure you don’t start a new year with bad debt hanging over you.
It sounds obvious but before you start spending, if you’re going to have to borrow make a conscious effort to spend less.
This doesn’t mean people will think you’re Scrooge; you just need to be savvy.
By making tweaks to how you pay for things, you’ll save yourself money and avoid the 2018 Christmas hangover.
Hannah Maundrell, Editor in Chief of money.co.uk revealed the best and worst ways to pay for Christmas.
Avoid:
Store cards: Not to be confused with loyalty cards, store cards are often flogged at the till with the promise of 10% off your next shop and the chance to pay later…