Over the past year, international stocks have crumbled: Vanguard’s benchmark ETF for foreign developed markets (Ticker: VEA), is down 11%. Even worse, Vanguard’s benchmark ETF for emerging markets (Ticker: VWO) has lost 30% of its value.
Since international equities are nearly the cheapest they’ve been in three years, is this not the right time to buy? After all, doesn’t the old adage say that great investors “buy low and sell high”?
If you don’t currently have any international equities (I like VWO, VEA, and VXUS), there is probably no harm in picking up a few of these offerings to help diversify your portfolio. If you do currently own index funds that track foreign markets, my suggestion would be to limit total foreign holdings to a maximum of 20-30% of your portfolio.
Here is why I hesitate to load up on foreign equities—even if they are absurdly cheap and have high growth potential. Better yet, here is why I continue to prefer US equities:
1. The US legal requirements on financial disclosures are arguably the most stringent in the world, and there are strong protections in place for shareholders and investors. Thanks to these rules and regulations that govern public companies, I believe that US-based equities are the least likely to be cooking their books or committing fraud.
2. Foreign investing involves both currency risk and market risk. The US government is widely viewed as highly stable (low market risk), which has helped to make the US Dollar the most traded currency in the world. While there are many outstanding companies based internationally, the fact that these companies trade in currencies other than the US Dollar means that there is inherent currency risk. For example, a great investment in a company based in Russia, may actually perform poorly if the Ruble (which is the currency that the Russian company trades on) loses value relative to the US Dollar.
3. Most US-based firms have an international presence anyway. Therefore, even when investing exclusively in equities listed on the NYSE, you're gaining international exposure by virtue of their foreign subsidiaries. Yes, people drink Coca-Cola all over the world; and yes, people use Facebook all over the world, too. (Both are US equities).
4. America will continue to be the leader in technological innovation, and the US-equity market will capture that added value. I don’t know about you, but I want to invest in the next Uber, the next Apple, or the next blockbuster drug company. Odds are that a US-based company will do just that.
Bottom line: Limit holdings of foreign-based assets to 20-30% of your portfolio.