This is a common frame of mind for most selections we face in life, but is framed most often as an either-or choice in investment selections. Stocks or bonds? Large company or small company stocks? Long term or short term bonds? Gold or silver? Invest or pay off debt? IRA or Roth? The choice pairs could go on and on.
The choice pair focus of this blog: International or U.S investments.
Here’s a nice graph from The Economist that looks at a couple of country specific stock markets at two different points in time … notice the US is not even on this! Thus, there are markets outside the US for investment consideration, not for the urge to make money, but more for the diversification effect on your overall portfolio.
Global diversification: The diversification benefit is probably the most compelling reason to include international investments in a portfolio. The performance of stock markets around the world can differ dramatically. This variability in country market returns provides the risk reducing power of global diversification. Although the economies of various nations are increasingly interconnected, significant differences among governments and economies still remain. Wide differences in returns can be seen as some countries’ economies grow faster than others and political situations vary.
The future of global diversification benefits has been the subject of much debate in recent years because correlations between the U.S. and international markets appear to be increasing. Increased correlations in the late 1990’s/early 2000s is not surprising given the volatile nature of the global markets during that period. Correlations tend to increase during volatile periods, such as the global technology/ telecommunications bubble and subsequent downturn, and the Asian/Russian crisis in 1997. Correlations have actually fluctuated greatly throughout history and global events have caused spikes and subsequent declines in correlations in the past. For example, the correlation between the U.S. and international markets more than doubled from May 1973 to April 1977 (.32 to .70), and then began to decline again soon after. So while recent trends of correlations appear to be increasing, it is not necessarily predictive of what the future holds, just as it was not in April of 1977. This example reinforces the fact that long-term asset allocation decisions should not be based on recent experience.
International Investing notes from the SEC.
Diversification as described by DFA.
The prudent answer to the question either, or? Both!
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