It’s time to take your portfolio global

http://www.marketwatch.com/story/now-is-the-time-to-add-non-us-stocks-to-your-portfolio-2015-10-20

Europe is a mess. China’s growth figures, if can be believed, are dropping quickly. Why on earth should investors invest in international stocks? In fact, when I mention to new clients that I believe that they need to have 30%-40% exposure to non-US markets, I usually get a worried look, followed by an “I don’t think that is a good idea.”

Apparently I am not alone in having clients that come to me with little or no international exposure. Chuck Riley of Vanguard writes, “Many investors seem to feel the same way — and did so even before the recent stock volatility associated with global economies. For instance, in a poll of approximately 5,000 Vanguard webcast viewers on international investing held back in May, 63% said they had less than 25% of their portfolio in global investments.”

Historically non-U.S. exposure has been an excellent way to both diversify and lower risk of a portfolio. I want to emphasize the word “historically” as this risk reduction works over the long-term. Certainly over a year or two these markets, like any investment, can under perform. Riley continues, “World events have made international investing a tough sell these past few years. But for long-term investors, the diversification benefits of holding meaningful allocations to broad U.S and international stock and bond markets remain unchanged — even if returns are hard to look at in the short-term.”
Timing the market

Readers of this column know that I am not a big fan of trying to time the market. I believe that a well-diversified portfolio is the key to long-term wealth building. While I always believe that investors should have significant non-U.S. exposure, for those who don’t, current market conditions provide an intriguing entry point. You don’t need to time the market, but if circumstances are working in your favor, and you really should have a certain asset anyway, then there is no better time than the present, to re-align your allocation.

International markets have underperformed vis-a-vis the U.S. over the last few years. Based on pure valuation, they are cheap relative to the US. In addition, in order to spur growth, Europe has dropped interest rates and in the past, that has been a positive for stocks. As a result of the lower rates the U.S. dollar has strengthened against the euro, yen and most currencies, which should help the international companies ‘export more, thus increasing their profitability.

Far East

Then there is Asia. True that China has a slowing economy, and that could have some short-term impact on Asian economies, but investors need to remain focused on long-term economic trends. As I write in my book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing(McGraw-Hill) “The OECD reports that over the next 20 years the middle-class in the North America is set to drop by both numbers of people and as a percent of the global middle class. The situation in Europe is much worse; its share of global middle class is expected to drop from 36% in 2009 to just 14% in 2030. Contrast that to Asia and the rest of the world where you see explosive growth in the middle class, and you can clearly see that most of us will be living part of our retirement years during a major economic leadership change.”

According to JP Morgan Asset Management, “Looking at history as a guide, evidence is compelling that an investment into Asia Pacific at current valuations is merited. Asia’s valuations are at a significant discount relative to the developed world and relative to history.”

Retirement income

If you are a retiree looking for income, global markets can be a good solution. Stocks in these markets provide significantly higher dividends on average than U.S. stocks. Even when comparing small-cap stocks (not usually associated with high dividends) U.S. small caps have about a 1% yield and international small caps sport a more attractive near 4% yield.

There is certainly risk with investing in international markets over the short-term, but for investors with a long-term horizon global investing can help lower risk and add to returns. Speak with your financial professional to investigate whether you need to increase your international exposure.