Foreign stocks (AKA international stocks) are widely considered a part of a well-diversified portfolio. An international stock index fund can be found in just about any target date retirement fund. I don’t like foreign stocks, and I will explain why.
“I don’t think it’s a good idea to buy foreign stocks… I think it’s a good idea to buy American stocks.”
Warren Buffett
“I don’t quite understand this thing that you must have a global portfolio…I think the argument favors the domestic U.S. portfolio.”
John Bogle
First, let’s look at history. As the famous financial services disclaimer reads, “Past performance is no guarantee of future results.” That’s true, but history is one of the data points we do have for analysis (we basically have three broad categories of data to use for security analysis: history, current fundamentals, and forecasts). Historically, there have been cycles of outperformance by U.S. and international stocks, with the average cycle being eight years, according to Hartford Funds. That said, going back to 1996, the annualized return was 9.36% for U.S. stocks and 4.17% for international stocks. During this same period, the annualized standard deviation was 16.08% for U.S. stocks and 16.97% for international stocks. In short, while outperformance has been cyclical, over the last 28 years, U.S. stocks have had significantly higher annual returns with slightly less volatility. (Note: the arbitrary year of 1996 was not cherry-picked to fit my view; it’s all the price data I have on international stock index funds.)
“America has been a terrific country for investors. All they have needed to do is sit quietly, listening to no one.”
Warren Buffett
Let’s move from the past to the future and let me take a look into my crystal ball. Which will do better over the next 30 years—American or international stock markets? Obviously, I have no way of knowing. All I can do is make an educated guess and put my money on it. A cursory glance leads me to believe American stocks will continue doing better over the long term, assuming we maintain our capitalist economy. I don’t see any other country as having the right combination of resources, capitalism, and freedom to compete.
“American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead.”
Warren Buffett
Also, going back to 1996, the correlation between U.S. stocks and international stocks is .86. Perfect correlation is 1. While anything less than perfect correlation adds some diversification benefit, the two equity classes are so highly correlated that there isn’t much to be gained by adding international stocks to a portfolio. High correlation leads me to a point made by many great investing minds, including Warren Buffett, John Bogle and Burton Malkiel. A large percentage of revenue received by the big U.S. companies comes from overseas. Therefore, by owning the large U.S. stocks, you already have exposure to international markets.
“U.S. companies, especially U.S. large caps, derive plenty of their revenue from selling goods and services overseas. So, if non-U.S. economies thrive, investors in U.S. companies should, too.”
John Bogle
There are additional risks associated with international investing as well. Currency risk is one of those. Foreign stocks are typically traded in their local currency. This means that U.S. dollars have to be converted to the foreign currency to invest, then back to dollars. As exchange rates fluctuate, this impacts the return. Fluctuations in exchange rates can impact your returns positively (if the foreign currency appreciates relative to the dollar) or negatively (if the foreign currency depreciates relative to the dollar).
Political instability is another risk. Despite all the divisiveness in American politics, we are still far more politically stable than the majority of other nations—especially emerging markets. If a nation’s government is not built on a firm foundation, you cannot trust that the business you are investing in is safe and won’t be extorted or have assets expropriated. Civil unrest may disrupt business operations significantly. Lack of a strong national defense leaves the country (and therefore the businesses) vulnerable to external threats.
Poor regulation and oversight is another problem with foreign securities. While too much regulation can kill a business, insufficient regulation can lead to fraud. Inaccurate financial reporting can lead investors performing fundamental analyses to value stocks incorrectly and create massive mispricings. The U.S. has higher standards and a better system of ensuring accurate reporting by public companies when compared to many foreign nations.
Last but certainly not least, when you own stocks, you should view yourself as a business owner. Many people see stocks as nothing more than bits of data with a fluctuating price. But the reality is that stocks represent real businesses and when you buy a stock you are a business owner. If I were opening my own business, I would never even consider opening it in a foreign country. Therefore, I have no interest in buying ownership of businesses outside of America. This view comes partially from the reasons mentioned above, as well as a patriotic disposition.
I have no beef with people who choose to own foreign stocks. There’s a valid diversification argument for owning foreign stocks. I just prefer a 100% American stock portfolio. Maybe one day my views will change, but for now, that’s where I stand, and those are my reasons.
Bryant Quick 