In this month’s edition of “Money Matters,” Scott talks about the benefits of investing in international stocks and the importance of diversifying your financial portfolio to include international stocks.

Money Matters: International Investing Transcript

0:00:00.1 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified family financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals, and he's joining us by phone. Scott, you're not a family planner as well, are you?

0:00:28.3 Scott Oeth: Well, I don't know to maybe ask my wife and kids for their opinion on that—it’s still all I'm doing in that area.

0:00:34.2 CJ: Alright, well, hey, you wanted to talk about investing internationally and globally and—to my way of thinking—with so much going on in the world right now that's affecting trade and wars and everything. Boy, this sounds like kind of an important topic to discuss right now.

0:00:55.8 SO: Yes, well, you're not alone CJ, and of course I'd say, upfront that we're talking about investing and people really need to be careful making decisions around their own portfolios and their own money and seek their own expert guidance, which is just general conversation. But what you just said, I've been hearing from many people questioning, do we really want to own or put our money overseas or into investments in other countries? Why not just stick in the U.S.?

0:01:23.9 SO: And the bottom line is because there is and there has been tremendous opportunity for attractive returns in international investing, and it's offered the opportunity to improve the quality of one's portfolio. The statistics are impressive. When you look at them, CJ, you know about 40% of the world's investments, stock investments for your own ownership and company, companies are located outside the United States, and in a very large percentage of the world's gross domestic product is produced outside the United States.

0:01:55.1 SO: But most investors in the United States, we can tell by looking at statistics are what would be considered under weighted in international stocks. They hold them in a much smaller proportion than they're actually representing the world market, and people who study the psychology of investing and behavioral finance called this a home bias. It's something that we wanna be aware of and there might be reasons why it's thought through and it makes sense, but it's something to consider.

0:02:22.6 SO: So, international stocks, the classic textbook reasons are attractive, long-term return and also a diversification effect. You and I have talked about diversification many times. This idea that for a targeted level of return, we want to try and minimize the volatility and that can not just smooth out the ride and make it more comfortable, but can actually help with wealth creation. At this moment, the U.S. stock market is very top heavy in a small cluster of big technology stocks, very heavily weighted in a small company.

0:02:51.3 CJ: The magnificent seven.

0:02:52.5 SO: That's right. Magnificent seven. Yes, we've talked about it before, and the international market is much more spread out and bringing in a different pattern of returns. It doesn't work perfectly. These markets move. There's a fairly high level of correlation that's not exactly the same, and I'll tell you, over the course of my career, there have been many times where U.S. markets were down and some area in the portfolio of international stocks it was up.

0:03:17.6 SO: But it was very nice to be able to have that—especially if someone was retired—to be able to say, ah, here's a pocket of something that's performing well that we could go and draw on to take money out to fund future year spending, that type of thing. So, economists, who are usually not the most exciting likely crowd, I like it, they have a term, they talked about this idea of counteracting patterns of return and the potential benefit from bringing international stocks is the only free lunch to invest in.

0:03:47.1 SO: So, as a friend, there's no such thing as a free lunch. They get, they'll call this, idea that the only free lunch to invest in.

0:03:53.8 CJ: Interesting. All right, so what's been happening recently in the international investment market? Can you sort of give us a quick thumbnail?

0:04:03.9 SO: Yeah, so the high-level thumbnail is there have been some decent returns coming in from around the globe. Always there are some countries that are really at the top of the charts, but broadly there's been decent returns, but they've lagged the United States. The United States has really dominated over the last five plus years, and it's been an unusually long run of U.S. dominance, and it really has been those big technology companies. So, getting a lot of questions from people, why would we even own international investments?

0:04:36.1 SO: What's the point? Isn't the U.S. the strongest economy and, isn't it good enough just to own these big global companies that are based in the United States? And, it's easy to see why folks feel that way with recent market performance, but I think there's some pretty good evidence that it won't always stay that way.

0:04:57.1 CJ: Right. Nothing ever is permanent. Right. Alright, so going forward, what are your thoughts on international investing?

0:05:04.9 SO: Yeah, well, CJ as always, we don't know for sure and even when we can look at some of the metrics and they appear very compelling, the timing doesn't always line up perfectly with what the numbers are saying. Markets are part a weighing machine where they're looking at numbers and financials, and they're part of voting machine that runs on a motion and momentum and long runs and cycles. What we know is historically market leadership between the United States and international stocks has been cyclical.

0:05:35.2 SO: There have been many periods of time where U.S. company stocks have trailed international stocks. Ben Felix, who's an analyst for PWL Capital, has a great piece, and he shows that from 1950 until 1989, the real return, so that means inflation-adjusted return in U.S. dollars of U.S. stocks trailed the real U.S. dollar return of world stocks excluding United States companies by 2.65% per year.

0:06:04.8 SO: That is a huge difference over many decades, and I can tell you, CJ, when I was getting started earlier in my career, I would see charts, long-term charts of investment patterns, and what you would see, what I was used to looking at, almost 30 years ago was international stocks deliver higher long-term returns, and you could see it on these beautiful mountain charts, and so we're dealing with a bit of an endpoint bias here with recent returns.

0:06:29.9 SO: So, there have been many periods of time where international stocks have outperformed the U.S. markets and what we call the—what's been come to call—the lost decade, the 2000s where we had terrible .com rack and corporate scandals and things like that early in the 2000s and the global financial crisis around 2008, international stocks, there again, if you adjust for inflation, perform much better than U.S. company stocks.

0:06:55.8 SO: So, that's what's happened historically. Looking ahead, lots of information out there. David Kelly is chief economist for JP Morgan, and he likes to point out that if we're looking at the price to earnings ratios or what it takes to buy a dollar of earnings per share in international stock markets, it's currently at about a 30% discount to the United States, and those stocks on average are paying a much higher dividend yield that return of extra earnings to shareholders.

0:07:26.9 SO: So, it's just one point, or one economist view, but there's many out there that, things look pretty attractive if you're a bargain hunter. And saying this again, I want to caution, do your own research and don't say, what other than money matters that 2024 international stocks are gonna outperform. I'm not saying that at all. What I'm saying is over a long period of time, it probably makes sense to have a reasonable allocation to a diversified mix in your portfolio. And there will be periods of time, we would expect where they're gonna deliver, handsome returns and help the pattern of returns in your portfolio.

0:08:02.1 CJ: Got it. So, the key is diversify, diversify, diversify.

0:08:06.3 SO: As always. Yep, I think that makes sense.

0:08:08.3 CJ: Alright, well, Scott, thank you so much. We're talking with Scott Oeth, and we talk with him on the first Wednesday of the month on North Shore Morning. Thank you again, Scott, and good luck with that new career and family planning.

0:08:19.9 SO: Yeah, thanks, CJ.

0:08:21.4 CJ: Bye.