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International Equities


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We had this discussion in another thread, about whether it's worthwhile to have international exposure (ex-US, developed markets, not necessarily emerging markets). I had said that on my advisor-only calls with the big brokerages, they had all advocated for this. They expressed justification including, but not limited to, US stocks being very overvalued, and developed international not so much. Other countries doing better in terms of covid mitigation, etc.

Here's a recent Morningstar article on the topic.

"In the end, having a diversified portfolio of assets with low correlations means that some portions of a portfolio will necessarily underperform others. And so, while clients (and their advisors) might be frustrated by the recent underperformance (and higher correlations) of international markets compared to the U.S. in recent years, a return to lower correlations between the asset classes could increase the value of international stocks as a portfolio diversifier!"

So yes, I don't do this for any kind of "inverse correlation" or buffer effect. I do it for more diversification. I want to own a piece of those great companies that aren't US, as well as all of our great US-based companies. And yes, those brokerage house analyst statements were made before the Russia invasion of Ukraine (although it was on the radar as a possibility). However, again, these were *ten* year forecasts. There's the sentiment that the rebuilding of Ukraine will spark European economies even more.

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I read the Morningstar article when it first came out and reread it now. My initial response was "Huh???" The author spends most of the article describing how and why US stocks are now much more correlated with non-emerging foreign stock markets: Because correlations between the U.S. and other developed markets around the world have been so high in recent years, international diversification hasn’t improved portfolio performance. Adding international stocks to a portfolio of U.S. stocks has reduced risk slightly (as measured by standard deviation) but has also detracted from returns. The net result has been lower risk-adjusted returns, which might call into question whether international diversification is fundamentally broken. Then goes onto say: In addition, correlations were much lower in earlier decades. For example, correlations between U.S. and non-U.S. stocks were as low as 0.12 during the 1970s, 0.29 in the 1980s, and 0.54 in the 1990s, making them much more effective for portfolio diversification during those periods. But because international correlations have increased by such a significant amount since then, it’s not clear whether they’ll ever return to their previously low levels. And then say: ...the steady increase in international correlations might raise questions about whether international diversification is still worthwhile. In an increasingly global economy, geographic boundaries aren’t as clear-cut as they used to be. Most larger companies earn at least a portion of their revenue from non-U.S. markets, and the fact that investors can easily find stock and fund opportunities across borders makes the U.S./non-U.S. distinction less important than it used to be. Even after providing all this information, their recommendation, amazingly, is to invest in international stocks, and then go on to qualify their recommendation: And even with higher correlation levels, international stocks still provide some diversification benefits, particularly as it relates to currency exposure. In a period of U.S. dollar weakness, international diversification could become increasingly important. The most recent forecast for the US dollar is positive: . I think the bottom line is long term returns vs risk. If you want to reduce risk, a little, invest in international stocks. But if you are nearing retirement or early into your retirement you have time to overcome any US stock investing risk and be handsomely rewarded with larger gains over time. Over just about any 5 year time period, US stocks have outperformed international stocks, more money in your pocket.