International Stock Allocation (MUST WATCH For 2021!)
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Now may be the best time to add to your international stock allocation. Even beyond current market conditions, this video will break down why you need foreign stocks inside any long-term portfolio!
00:00 – Intro
0:56 – Should You Hold ONLY U.S. Stocks?
4:27 – Advantages of International Stocks
6:30 – Disadvantages of International Stocks
9:06 – Why You Need Foreign Stocks (Summary)
9:17 – Best International Stock Allocation
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The decision whether or not to hold stocks outside of the U.S. market is often debated. After my research, I’m pretty confident taking the side of having some foreign stocks in a portfolio. But this goes directly against the beliefs of two of the most renowned investors of our time – Warren Buffett and John Bogle.
Interestingly, as it turns out, they don’t have any real data to back this up, and it’s simply “personal preference”. So why are they comfortable taking this stand? I think it comes down to three things:
1. A home market bias. Investors are naturally biased towards stocks in their own country, for better or for worse. This affects investors around the world – so it’s important to be aware of it.
2. Simplicity. Passive investors don’t want the added homework of exploring international investments. For most investors, a simple portfolio tracking the S&P500 is perfectly fine – and that means there won’t be any foreign stocks included.
3. U.S. stocks are already exposed to foreign markets. Many of our country’s largest businesses operate internationally, which means there is some foreign exposure baked into the stock.
But let’s consider the benefits of international stocks:
1. Greater diversification. Sticking to U.S. markets exclusively means higher risk and less diversification. Adding international stocks will obviously reduce risk and could provide better returns over time.
2. Higher returns. The U.S. market has delivered great results historically – but it’s rarely the best performing market of the year. International stocks can help you earn returns with the U.S. is lagging behind.
3. Better valuations. The U.S. market is incredibly overvalued right now, especially in comparison to international stocks. It may be a good time to buy the better deals – and that means looking at foreign stocks.
Of course, there are disadvantages to foreign stocks. These include:
1. Costs. International funds typically have higher expense ratios and fees associated with them. This means your added diversification will come at a price.
2. Taxes. Foreign stocks are not eligible for the qualified dividend tax rate. You’ll be paying income tax on these dividends. But, the U.S. does offer a foreign tax credit to help cushion this cost quite a bit.
3. Liquidity. Some foreign stocks lack the trading volume and liquidity that U.S. stocks have.
4. Currency risk. Changes in currency rates, such as one currency growing or decreasing in value, can impact the value of your foreign investment.
I don’t mind these disadvantages too much, especially given the impressive advantages that international stocks can offer. So what is the best international stock allocation?
Bogle, surprisingly, recommends a maximum of 20%, which is in line with what most other experts say. Others recommend a market-cap weighted approach, which means keeping U.S. holdings around 50% and leaving the other 50% for international stocks.
Historical returns show that either a 60/40 blend of US/International stocks or a 50/50 blend provided the best returns and tolerable risk over time. Combining these ideas with current market conditions, I believe the best international stock allocation is closer to that 50% figure.
Personally, I’ll be moving at least 1/3 of my portfolio into international holdings. What’s your international allocation? Let me know in the comments!
#InternationalStocks
#ForeignStocks
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DISCLAIMER: NOT FINANCIAL ADVICE.
The content in this video should not be used as the basis for any investment decision, as it is for entertainment purposes only. Additionally, some of the links contained in this description are affiliate links. I may earn a commission via Amazon, M1 Finance or Robinhood should you choose to purchase or sign up at the links provided.
Do I Need International Stocks in My Portfolio, International Stock Allocation (MUST WATCH For 2021!).
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