How do you feel about investing beyond our borders? In today’s global interconnected economy it is almost impossible to avoid international exposure. Now more than half of the worlds’ market capitalization lies outside of the United States, investing globally offers the opportunity for improved portfolio diversification and long-term growth. Financial professionals Joe Anderson and Alan Clopine discuss the pros and cons of investing beyond our borders and highlight the various avenues for investing around the world.
(0:00) – Intro Beyond Borders
(1:50) – Investing Globally
(3:18) – Pros – Investing Globally
(3:53) – Pros – Diversification
(6:04) – Pros – Reduces Volatility
(9:41) – Pros – Historical Performance
(13:43) – Cons – Investing Globally
(14:33) – Global Markets – Developed
(15:13) – Global Markets – Emerging
(17:44) – Ways to Invest Globally
(19:27) – Invest Globally – Mutual Funds
(21:29) – Ask the Experts
Joe: How do you feel about international investing? Most of us have a very home bias when it comes to investing in our overall portfolio because we don’t understand it’s so darn foreign. Welcome, everyone, show’s called Your Money, Your Wealth®, Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors. And of course, the show wouldn’t be a show without the big man Alan Clopine.
Al: Hey, buddy. Ready for another great show.
Joe: Foreign stocks. Investing globally. It’s interesting because if you look at the global universe of stocks, 57% are in the US. But if I were to look at most of your portfolios. 75% or up to 100% is all US, you have very little international or global exposure because maybe you just don’t understand we are going to help you understand global investing today. That’s today’s financial focus.
Look in your cupboards, look in your garage. I’m sure you have some international products. Nestlé, I mean most people think that that’s probably a US company. Nestlé right? Toyota, BMW. Louis Vuitton. I think you got some nice stuff here. But these are all international companies. A lot of you are afraid to invest internationally because maybe you don’t understand. Right? But you’re using the products every single day. Let’s break things down a little bit more. Let’s bring in Big Al Clopine.
Al: So investing globally, what do you need to know about it? It’s not that complicated, we’re going to kind of break it down today. First of all, we’re going to talk about pros and cons. Spoiler alert there’s more pros than cons, and so we’ll get into that. Secondly, the types of markets, right? You know, there’s different kinds of international markets what you should you’d be investing in or what you should know about each of those types of markets. And then finally, how to do it right, how to go about it. There’s different ways to do that. We’re going to give you some tips on the best ways, the most cost-effective ways to do this, Joe. And I think this is a very important topic because I do believe most people have a home bias and they invest mostly in the US, which isn’t necessarily bad. But there are some real advantages of international stocks as well.
Joe: Well sure, if you listen to the radio, you watch TV, I mean, all you’re hearing about is U.S. companies like the S&P 500, the Dow Jones Industrial, and it’s like, well, I don’t want to invest foreign. I don’t even know how to do it. It is complicated, but it is very, very simple. In you have really good pros, if you taking a look at a globally diversified portfolio, let’s just kind of break things down here. First things first, of course, diversification. It’s adding additional diversification to your overall portfolio. It may reduce the volatility. We want high growth, but all of us want less volatility. This may help with that. Also, let’s take a look at this historical performance, right? The proof is always in the pudding. You’d be surprised on how often if you look at the global universe of countries where the US stacks up in regards to that. So, we’ll kind of break things down here. But Al, let’s dive into diversification.
Al: All right. So right off the bat Joe, you can take a look at this so you could invest in the S&P 500, for example, which is the height the largest US companies, the top 500 companies. So that’s one way to be diversified, and that’s a good start. But what about globally diversified funds that may be in as many as 46 different countries? Right? 8,000 plus stocks. So that’s much more diversified, and you may not realize this, but different companies in different countries, they tend to zig and zag at different times, meaning that sometimes the US outperforms sometimes international outperforms as a whole. And Joe, when you think about a country by country, stock, by stock, it’s variable all over the place.
Joe: Absolutely. You know, this is more concentrated, but even though you’ve diversified, you have 500 different companies here versus 8,000 in some of the 8,000 stocks. It’s crazy. Maybe that’s over diversification. Have you ever heard of that? Sure. This is a very interesting chart when you look at the S&P 500. OK. And we’re looking at concentration of the S&P 500. So, if I’m going out to 2020, 24% of the S&P, 500 is made up of 5 stocks. OK, 5. So, there’s 500 companies in the S&P 500. 5 stocks make up 24% of that. The big boys Apple, Microsoft, Alphabet, right? Facebook. If I’m looking at concentration risk in international stocks, 7% of the index is made up of the top 5. So, there’s pros and cons to this, because if I add the S&P 500, I significantly outperformed international stocks over the last several years because these big boys did very, very well. But what happens when they don’t do well, right? It’s going to go down and this is going to shift. OK, so just understanding the risks that you take is absolutely key because this could be a good thing or it could be a bad thing.
Al: Yeah. And recently it’s been a great thing, but it’s not necessarily always that way. And take a look at this next graph that we want to show you, which is simply this international versus domestic US. They zig and zag at different points, and you can see this is all the way back to 1970 to current day. And you can see on the on the left-hand side international outperforms and sometimes in big ways for long periods of time. And then it flips, and then domestic outperforms. You can see what’s happened in the last 10-11 years. Domestic has outperformed. What does that mean? Is it going to zig the other way? Probably. At some point no one knows when, but this is how this has been going for the last 50 years plus. They zig and zag at different times. It helps the volatility helps smooth out your portfolio returns.
Joe: Yeah, I mean, if you if you’re looking at the global market capitalization of the world, right, the U.S. is less than half. So you’re leaving out over half of the market capitalization. You know that you have opportunity. To invest in, and this is just a really good example, too, right, because as the US continues to really outperform, you’re going to see international leg a little bit, but it always kind of reverts to the mean. So, when we’re looking at reduces volatility and diversification. This is a real key component. Hey, go to our website, Your Money, Your Wealth® We have a global investing guide. If you’re not investing globally and you want to go to our website right now, download our guide for free, yourmoneyyourwealth.com. Click on the special offer. It’s our global investing guide. We’ve got to take a break when we get back. The proof is in the pudding, folks. We’ll have a little contest to see how well you think the US has performed over the last 20 years against all other countries. We’ll be right back.
Joe: Hey, welcome back to the show, show’s called Your Money, Your Wealth®, Joe Anderson and Alan Clopine, we’re talking about globally investing. Looking at your portfolio, how much exposure do you have to international stocks, are you overweighted or underweighted? Are you totally confused? Go to our website, yourmoneyyourwealth.com. Click on that special offer. We got our global investing guide. Before we get into the good stuff, let’s see how you did on the true/false question.
Al: When you buy international stocks directly, you can pay 2-4% in currency conversion and transfer charges. Mr. Anderson, would you say that’s true or false?
Joe: I have no idea. No part in the international stock directly. I’m assuming it’s true, but that’s a problem, right? Because there’s a lot of unknowns when someone reads that, they’re like, Yeah, that’s why we don’t invest internationally. I guarantee it’s true. Yeah, because I mean, you have if I’m going to directly to a foreign exchange and investing that way through a broker, I would imagine it.
Al: I think that’s right. If you go to a full-service broker on a foreign exchange and with the currency conversion, it could be that much. But there are a lot cheaper ways to do it, which we’ll get into.
Joe: Yeah, I mean, I think you look at the industry has come so far to give the average individual investor all of us real time access to just about any investment that you want to choose at a very low cost that’s more transparent than ever before. So, I wouldn’t necessarily be fearful of investing internationally. You just want to make sure that you’re educated to make sure that you’re doing things appropriately.
Al: So, Joe, you piqued my interest. Which country was the winner in terms of the best performing? Was at US? Was it something else?
Joe: So, so let’s take a look at this, right? This chart is crazy because most of you won’t be able to see it from here, but we’ll zoom in on this.
Al: Can you read that?
Joe: Yeah, I can read this. So here are different countries, right? We got Australia, Austria, Belgium, Canada, Denmark, Finland, France, Ireland, Italy, New Zealand, you name it. We got it in here, right? Here’s the bottom is the US and what these numbers represent is the rate of return of what that overall country has performed in each of these years. These little marks all over that means they were number one. OK. So, if I’m looking down here at us, this is 1997-2018. We wanted to give this a lot of time US loser, loser, loser, loser, loser, loser, loser, loser. Oh, they won one time in 20 years. The US was the top performing country in 20 years, but we’re so jammed up in the US who won? Finland, right? Finland was the top performing asset class, 5 years of the 20. Who would have thought that? Are you investing in Finland companies? You don’t even know where Finland is?
Joe: Scandinavia? Yes, Sulake, I had an uncle that was Finnish.
Al: Oh yeah. So interesting. Well, yeah. And I think they picked the point of that is you never know which country. I mean, it’s all the companies within that country collectively, but which is going to be the winner. And then I guess when you look at it aggregate, you know, you look at a 10-year period right from 2000 to 2010, you look at US companies and on average they went up about 1.4% internationally. They went up 3.5%. So here was a period where international outperformed US, which tends to happen like we talked about. But what about this emerging markets? What the heck is that? Emerging markets went up over 15%. Now this is where you’re investing in companies in emerging countries, right like India and Brazil and very often share emerging markets, is the highest performer because of the risk, although that’s not been true the last decade.
Joe: Interesting enough, if you look here and this is data mining to its best. All right, don’t get me wrong here, but we kind of take a look at the last decade and that was 2000-2010, when the US markets actually underperformed. But like Alan said, emerging markets did phenomenally well.
So, when the S&P 500 was flat or negative, you know, if you were globally diversified, you actually had a pretty positive return over a really bad 10-year stretch.
Al: Yeah. And remember, you know, the last decade, which is defined as the beginning of 2000 to the end of 2009. So what happened was the S&P actually went down. It actually went down 0.9% percent almost well, I should say 9%, almost 10%. If you had a million bucks, you had about $900,000 at the end of that decade. What if you had a globally diversified portfolio that included emerging markets? You probably were closer to 5 or 6%. That’s how this works. That’s why it helps. It benefits to invest, at least some, internationally.
Joe: Yeah, but here’s what happens with a lot of investors, is that OK, well, you know what, I’ve I was in US stocks and I’m going to look and say, wow, emerging markets did really well. And so, what do you do? You invest in emerging markets after the fact. Right? It’s like, Well, I don’t know anything about emerging market countries. I don’t like them. But then you see the return and then that’s when we act and we always act basically too late. And then it dips and then, right, you’re kind of doing the same cycle over and over again. So, the cons of investing internationally, I think a lot of you are this is like, well, you know, there’s could be political or corporate instability. You look at currency fluctuations. Right. So, if I’m buying something or if I hold something in a different country, right, that is not in the US dollar. How does that work? And when do I sell and buy? And then you look at regulatory changes. So, in the grand scheme of things, I think in the past Al these were legitimate concerns. I’m not saying they’re illegitimate today, but I think the concerns should be probably a little bit less.
Al: Yeah. And so let’s talk about the two kinds of major markets. So, one would be developed countries. And one would be emerging countries. So developed countries would be North America, including Canada and US. Western Europe would be another, Australia would be another. These are countries that have well-established exchanges. Great regulations. Right? High market liquidity. So, there’s a lot of safety, just like US, similar type markets in Europe. And so, it’s kind of like US, they tend to zig and zag at different times. Right. But it’s kind of like US in terms of similar safeguards to where you, you know, you’ve got your you can be pretty assured that things will be probably OK.
Joe: Sure. Yeah. Well, I mean, you know, North America, that’s where most of us are investing here than Western Europe, you know, London Exchange or Australia right in. As Al said, there’s established governments there. But then you get emerging markets. What the heck is an emerging market? Well, that an example there’s Brazil or India, Russia, China. Even though China has almost the same market capitalization as the U.S., it’s still in emerging market. And the reason for that is, you know, you have a little bit of political issues there.
Al: Well you can, however, with more risk tends to have more return. It’s not guaranteed, certainly, right. But over the long term, you tend that when you have more risk, you tend to have more return, which is why emerging markets can do well over time.
Joe: Hey. Go to our website, Your Money, Your Wealth®. Click on our special offer. It’s our global investing guide this week. If you want to invest globally, we want to get a little bit more educated, yourmoneyyourwealth.com. Click on the special offer. Global Investing Guide Got to take another break? We’ll be back in just a second. Show’s called Your Money, Your Wealth®.
Joe: Hey, welcome back to the show, show’s called Your Money, Your Wealth® Joe Anderson, big Al Clopine, we’re talking about global investing today. Are you investing globally? You want help investing globally, go to our website, yourmoneyyourwealth.com, click on the guide. Let’s see how you did on the true false question.
Al: Investors should hedge their currency exposure? Interestingly enough, if you look at maybe the last 50 years on funds that have been hedged versus non-hedged, the non-hedged ones do a little bit better. Why? Just because they don’t have that cost involved, because about half the time you do well, half the time you don’t, if you have a short-term need, you might want to hedge. But longer term, probably not.
Joe: I know that there’s a lot of individuals that, you know, trade currencies and they do quite well, and some of them lose everything. So, it’s risky. So, but if I have, let’s say I’m moving from Australia and I’m moving into the US and I have assets in Australia, and I want to move those assets from Australia into the US, right? Then you might want to take a look at a hedge there, depending on what the dollar’s doing and the Australian dollar. So, every situation is unique, and I would talk to a financial professional before you start hedging currencies.
Al: Yeah, I think that’s good advice, so let’s talk about ways to invest internationally. So, here’s some different vehicles. One would be like a global mutual fund. I think we all know what mutual funds are. This is typically an investment that will hold 300 companies, 200 companies, 500, 1,000 companies, right? So, you’ve got one investment that holds all these companies well. You can do this globally as well. You can do it with international funds or international companies, as well as domestic. Another one would be exchange traded funds. It’s kind of the same idea. It’s just a little bit different vehicle. It’s a newer approach than mutual funds, but the concept is the same. It’s a single investment. You’ll have many companies, many investments within that one investment, or you could go direct. You could go right direct to a foreign exchange if you want to just pick a company or maybe a couple of companies, whatever it may be, you can do it that way. Joe, I think for pay for most investors, it’s way simpler to do mutual funds and ETFs.
Joe: Yeah, but when you look at global mutual funds, let’s say so. Let’s look at the mutual fund environment of how you can have access to these markets is that a global mutual fund is going to have US exposure in it. So, if you’re looking at your portfolio and you’re saying, Hey, you know, let’s have some international exposure and you buy a global fund, well, you’re buying everything in the globe and the US, of course, is part of the globe. So just understand the subtle difference there. If you want to wacked access internationally, then go internationally and as we talked about these developed countries. Right? And then there’s emerging markets. So, the developed countries is, you know, Australia, Britain, things like that. The emerging markets is, you know, China, Brazil, India. So, you want to look at, alright, well, what areas internationally do I want to take exposure of so you can get fairly granular in mutual funds or in exchange traded funds, really, depending on what you’re trying to accomplish?
Al: Well, I think you can. And these are the choices you just went over. And I think maybe a way to think of this is for the average investor. Maybe, maybe you just stick with global or international understanding. The difference global includes some US favors. International includes US, international is just strictly international. And then, of course, international, like we talked about, there’s developed and there’s emerging, right? So, you kind of want to have exposure to both. Emerging is more risky. So, we would tend to recommend that if you can do emerging markets, which is a good asset class, do you a little bit don’t do too much because it tends to be a rollercoaster ride and not something you necessarily want in your portfolio with a lot of your assets?
Joe: Yeah, I mean, it really depends on the circumstance, what you’re trying to do and accomplish. But what our job is just really trying to educate you. But I know as much education that a lot of people have. We still have home biases. I mean, it gets so granular if you talk to people, let’s say, in Atlanta, Georgia, if I go to Atlanta, Georgia, what do you think most people hold in their portfolio? If you look at an individual stock, what are people like in Atlanta?
Al: What’s Atlanta, Coca-Cola?
Joe: Coca-Cola! Yeah. And I would if I went to St. Louis, Missouri.
Al: Let’s see. Anheuser-Busch.
Joe: Anheuser-Busch. Let’s just drink some beers, right? What do you like? We’re here in San Diego. What do you think everyone loves here in San Diego?
Al: Right, Qualcomm
Joe: Qualcomm! Yeah, right. Of course, it’s so I mean, every single city, every single country, even every town. But we have our favorites because it’s known. We are fearful of the unknown. And it’s like, Oh my gosh, I don’t want to invest over there because I don’t know anything about that. But I do know what’s going on in my backyard, and I feel a lot more comfortable. Just understand by having that mentality is totally fine. But you could be missing out on some opportunity. Let’s go to ask the expert.
Al: My broker purchase ETFs that contain some international stocks. How can I make sure I’m diversified with the ETFs if I’m not sure which specific stocks are or what each one includes? Philip from Ocean Side.
Joe: One of the biggest pros about an exchange traded fund is the transparency of the exchange traded fund, so you can click on, you know, the ticker symbol through Google, and then they’re going to show you basically the top holdings within the overall ETF. Is it market cap weighted? How is it weighted in regards to percentages of how they’re looking at constructing the overall vehicle? So there’s a ton of information out there, but do their due diligence prior to investing? Right? So if you’re already purchasing and then you’re thinking, man, I should think about what companies I have and you’re doing it backwards. Make sure that you get educated upfront, do your due diligence, get the information that you need, then that’s when you place your dollars to get them to work. If you want our guide. Go to Your Money, Your Wealth®. It’s our global investing guide. This week, yourmoneyyourwealth.com. Click on the special offer. Global Investing Guide. What have we learned? Beyond Borders Investing. You know you’ve got to evaluate the pros and cons. There’s always pros and cons to every single investment out there. Then you have to take a look at the risk. How much risk do I want to take? And then you can assess the type of investment that you’re going to go into and then decide for yourself, Do I want to go direct? Do I want to have a mutual fund? Do I want to have an exchange traded fund? You know, there’s multiple ways that you can have access to multiple markets, really, depending on what your comfort level is and depending on your sophistication. So that’s it. Big Al, are you ready to invest globally?
Al: Let’s do it.
Joe: Let’s do it together. Go to our website if you need some more information, yourmoneyyourwealth.com. Click on that special offer. It’s our global investing guide this week, yourmoneyyourwealth.com. Click on the special offer global investing guide. Thanks for watching again this week for Big Clopine, I’m Joe Anderson and I’ll see you next time here on Your Money, Your Wealth®.
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