The 12 month period ending 6/30/2017 marked the first time in about five years that non-US stocks performed better than US stocks on a trailing 12 month basis. Regardless of recent performance, investing in companies based overseas is a crucial component of a diversified portfolio. Below are some of the reasons we invest abroad:
- Investing overseas provides a hedge against a weakening dollar. In times of a weakening US dollar, foreign stocks get a boost. Therefore, we don’t necessarily need to engage in sophisticated currency trading to protect ourselves from a declining dollar – simply allocating a portion of our portfolio to non-US stocks can provide the same kind of benefit over time at a lower cost.
- Investing abroad can reduce the volatility of your portfolio. While there is some evidence that correlations between US and non-US stocks are converging, they don’t move 100% in tandem. Therefore, including non-US stocks is likely to reduce the long-term volatility of a portfolio. This is especially critical in retirement when lower volatility can improve the longevity of a portfolio.
- Investing overseas helps when US stocks underperform. It’s inevitable that at times, US stocks will perform poorly relative to markets abroad, and even extended periods of underperformance are possible. At those times, investors who have some allocation to non-US stocks will benefit. Consider the example of the Japanese stock market, which still hasn’t recovered from its peak in 1989.
- Investing overseas diversifies political risk. One risk involved when it comes to investing is political risk. One way to protect against political risk in the US or in any single country is to diversify globally across many countries.
As investors, we don’t know the future, so diversify we must. Investing abroad is just one piece of the diversification puzzle, but it remains a crucial one.