Why bother with international investing?

Mar 10, 2021
  • Dennis Lee, Market Insights Lead

Since we’re asking a question in the headline, why not ask some more?

Why do you believe investing will succeed over the long-term? Why are you optimistic overall?

Isn’t this a strangely confrontational way to start an article?

As investors, we believe markets will trend upwards because historically, a portfolio that is diversified across different sectors, asset classes, and regions, has seen improvements on the whole. Put another way, while the conversation continues around persistent inequality in the world, the average person today compared to a hundred years ago has more opportunity at their disposal, more technology to benefit from, and more commerce bustling around them.

As analysts like to say, the world experiences economic growth.

Do U.S. investors like U.S. stocks too much?

Here’s another question. Where are you invested? At a very simplified level, stocks are in your portfolio for growth, bonds are in your portfolio for diversification and income, and alternatives are in your portfolio to seek outsized or uncorrelated returns. We learned previously that bond yields are close to a 40-year low, leaving little room for bond prices to rise.

So stocks, or equities, are an incredibly important part of your portfolio for helping achieve the returns you might be looking for.

And very likely, that slice of your portfolio is going to look U.S.-centric.

Home country bias

Chart: Home country bias

Source: Morningstar, BlackRock as of 12/31/20. Illustrative purposes only.

On average, the stock portion of U.S. portfolios are 75% U.S. stocks.

And why wouldn’t you favor U.S. stocks? You live in the U.S. You know U.S. companies. You like this country’s prospects. And perhaps more importantly, U.S. stocks have done remarkably well. Facebook, Apple, Alphabet, Netflix, Google, Microsoft, Tesla are some of the best performing stocks in recent years, and they are all U.S.-based companies. U.S.A.! U.S.A.! U.S.A.!

Expanding the universe of returns

We might as well keep the questions coming. Are you sure this trend will continue for the next 10 years?

Would you have guessed that between the years 2000 to 2018, that U.S. stock performance ranked 27 out of 45 countries in the All Country World Index*? Much of that can be explained by the tech bubble and the financial crisis, in what many call “The Lost Decade,” during which country equity indexes from Brazil to Bangladesh experienced over 300% returns.

The point here is not that the U.S. is poised to do badly, or that other countries necessarily will “do better.” The point here is that investing is complicated and unpredictable. The U.S has done very well in the last 10 years, perhaps better than most expected.

But let’s go back to our first question: Why do we believe investing over the long-term will be successful? The answer was that we believe on average, that across sectors, industries, and yes – regions, the world will continue to grow, innovate, and change.

Why bother with international investing? Because it makes sense to expand your universe of investment returns.

Would you bet it all on your local team to win the championship every year, or invest in the growth of the entire league?

Isn’t investing globally more risky?

So glad you asked. The main case for increasing exposure to international stocks is not necessarily a market call or prediction. It’s a case for increasing the likelihood that your portfolio will benefit from global growth.

A common misconception is that international developed stocks and emerging market stocks would make a portfolio riskier. But because international and emerging market stocks are not always correlated to U.S. stocks, you might expect to see less volatility over the long-term.

Chart: The impact to your portfolio

Source: BlackRock, Aladdin as of 12/31/2020. Typical advisor equity allocation represented by an index-based portfolio with allocations that match the average geographic allocation of the equity sleeves of 17,795 portfolios collected in the trailing 12 months. It is 75.40% S&P Total US Stock Market Index, 17.10% MSCI International Developed Markets Index and 7.50% MSCI Emerging Markets Index. The “…minus emerging markets portfolio” consists of 81.50% S&P Total US Stock Market Index and 19.57% MSCI International Developed Markets Index. Risk figures are factor-based estimates of annualized standard deviation from the risk model in Aladdin.

One additional point in favor of venturing beyond our borders: U.S. stocks are capturing less from global growth than they used to. In 2010, on average, the companies in the S&P 500 enjoyed revenue growth of 14% from international markets. In 2020, that figure is down to 2%.

U.S. equities are no longer capturing rising consumption and global innovation as well as they used to – a trend that has been further exacerbated by the pandemic.

The bottom line

The same thesis that compels investors to invest at all, applies to global stocks. We suggest you consider expanding the universe of returns through international developed and emerging market stocks, especially in an environment where the U.S. may not see the same kind of returns as the last 10 years.

You can still be bullish on the U.S.A. Just turn the dial up on the world.