Printer Friendly

Include international stocks for a diverse portfolio: variety makes for a healthy investment mix.

MOST OF MY COLUMNS ABOUT INVESTING HAVE FOCUSED on domestic stocks. As a devoted follower of Warren Buffett, I strive to stay within my "circle of competence." And since Ariel Investments has concentrated heavily on investing in U.S. small- and midcap value stocks, I have weighed in mainly on domestic equities. Yet it should be clear that we all need diversified portfolios--those that include not only U.S. stocks but also bonds, cash, and international equities. Over the last few decades, one shift has been unmistakable: International stocks have become an increasingly important part of an investment portfolio.

The most important reason to invest internationally is diversification. Historically and going forward, the U.S. market will do better in some periods than foreign stocks will; but in other periods, international equities will top domestic fare. For instance, in three out of the last four calendar years, the Standard & Poor's 500 index has topped the chief international benchmark, the MSCI EAFE Index. In total, the S&P has gained 15.9% annually over that four-year period, while the EAFE returned just 8.6% per year. On the other hand, not so long ago, international stocks outperformed. For five straight years, from the beginning of 2002 through the end of 2006, international stocks ruled the roost. During that era, the EAFE smashed the S&P, gaining an annual 15.4%, outdistancing the 6.2% gain of U.S. stocks. Interestingly, over the past 10 years, U.S. and international stocks have been on par, with the S&P 500 gaining 7.7% to the EAFE's 7.4%. There's no telling what will happen in the future, so owning some of each makes sense.

Unfortunately, human beings are not good at accepting that they cannot know the future with certainty. Case in point: emerging market stocks. In 2001, investors started referring to the four biggest emerging economies--Brazil, Russia, India, and China--as the BRIC countries, and there was a prevailing belief that their collective growth would outstrip that of the developed world. This led to a near-craze for emerging market stocks. Between the beginning of 2003 and the end of 2007, the Morningstar diversified emerging markets category gained an annualized 35%. Then between 2008 and 2012 emerging market stocks became volatile, with larger leaps up and more drastic falls than those of developed market stocks. Last year, as the BRICs hit walls of varying descriptions, the category lost a small amount (-0.1%) while the S&P 500 and EAFE gained more than 30% and more than 20% respectively. Those who went "all-in" on "E.M." are likely now regretting it.

If you're going to own both domestic and international stocks, how much should you allocate toward each? The old rules of thumb don't make great sense anymore. First, there's little reason to think U.S. stocks will have meaningfully lower volatility than the equities of other developed markets. Because of improved technology and lower market friction, it has become easier and cheaper to invest abroad. The U.S. gross domestic product is a bit under one-quarter of the world's total. Although U.S. stocks once accounted for about 40% of the world's market capitalization, that share has fallen down toward the GDP level--it was recently around one-third of the world's market capitalization level.

Those statistics are included here simply to help you find your comfort level. If you have no exposure to international stocks, it probably makes sense to gradually invest toward having 20% of equity assets overseas. If you're already at that level and you're really gungho about diversification or international growth, moving toward 50% may make sense.

Mellody Hobson is president of Ariel Investments L.L.C., a Chicago-based money management firm that serves individual investors and retirement plans through its noload mutual funds. For more valuable financial tips, visit or follow @ArielFunds on Twitter.
COPYRIGHT 2014 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2014 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:TOTAL RETURN with Mellody Hobson
Author:Hobson, Mellody
Publication:Black Enterprise
Article Type:Statistical data
Geographic Code:1USA
Date:Jul 1, 2014
Previous Article:3 Reasons to invest in energy.
Next Article:Managing finances after divorce: TIAA-CREF financial planner talks about steps to take after you say "I don't".

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters