By Danielle Woods
TL;DR A diversified portfolio that includes all facets of the world economy helps us to spread our risk around, and it encourages us to stick to our plan. It also acknowledges that there is no “right” answer. Routine savings and committed investing to a diversified portfolio that takes into consideration the quality of its holdings IS the plan.
As investors, we can be easily overwhelmed by asset options. Propel advisors have spoken on that subject countless times over the years in individual client meetings, in our blogposts, on our webinars, and through our podcast. We keep talking about it because it’s true, and it’s also one of the primary ways an investor makes or loses money.
Many investors hire a firm like Propel to assist them in sifting through the incredible number of options, never ending sales talk, emotionally-driven scare tactics, and inevitable tax considerations in order to make those choices. After all, where does one begin?
Our team at Propel begins by looking at the whole world. While we do consider the vast world of asset options, my focus here is on the entire world market, specifically non-U.S. assets.
International markets get a bit of a bad rap. I am coming up on my 25th anniversary of working with financial advisory clients, and that statement is as true today as it was when I first started. Our clients are Americans; and many Americans fear, loathe, and/or disregard opportunities outside of our own country for a number of reasons.
But did you know that the United States, as large and as powerful a market as we are, has only been between 22 and 30% of the world’s GDP in any given year for the past 50 years? At the end of 2021, that number was 24%. (See US GDP as % of World GDP (ycharts.com).)
Stats vs Quality
Granted, size does not always correlate with quality. We say that all the time when talking about market-weighted index funds like those following the S&P 500 Index (largest 500 companies in the United States). That index may include 500 companies, but the top 10 companies make up nearly 30% of the total these days. We learned during the dot com bubble of the late 90s that a big company does not equate to a healthy one. However, it just might be large enough to bring the whole market down with it.
The point is that we have to look beyond the size of a company to its underlying value: What does the company do? Is it successful? How long has it been in business? Is it poised for growth or has it captured a market share? Are its financials sound? Who is its target consumer? Who runs the company? Does it display flexibility and nimbleness in times of trouble? These questions go beyond data points like size, location of headquarters, and last year’s share price.
Performance Periods are “Lumpy”
My teammate Amanda Vaught shared with me a podcast by a Certified Financial Planner named Taylor Schulte out of San Diego. The podcast is called “The Stay Wealthy Retirement Show” and this particular episode from 6/7/23, was titled “International Stocks: Why Retirement Investors Should Own Them.” You can listen to it for yourself here.
His number one reason to own international stocks was that “investment returns are lumpy.” As soon as he said it, I knew what he meant. In the investment world, any advisor, client, or salesperson can pull a performance number from any period to justify their explanation, complaint or pitch. One could use long periods of time, short periods of time, specific periods between important events, etc. In any case, you can get a wide variety of results just by moving a date.
Our Propel advisors always tell clients that we are investing for the long-term, which is usually true. Retirement is the primary goal for nearly all of our client investment portfolios. That almost always starts with a very long time horizon. Regardless of that reality, investor emotions often become a big part of the picture, and the long time horizon goes to the wayside when negative market behavior shows up in the short-term.
Mr. Schulte pointed out some interesting numbers that I would like to share:
- From 1970-1978, the S&P 500 Index (domestic stocks) enjoyed a total return of 50%. International stocks (the MSCI Global ex US Index) returned a whopping 100%;
- From 1979-1984, the S&P 500 Index returned 135% while international stocks returned only 70%;
- From 1985-1988, US stocks were up only 90% to international stocks’ 300%;
- In the 53 years from 1970-2022, domestic stocks beat international stocks on an annual basis only 28 times.
- From 1970-2010, the S&P 500 returned 9.9% annualized and the MSCI Global ex US Index returned 9.4% annualized. It’s only in the last decade or so that the S&P 500 pulled ahead when looking at the previous 50+ years.
Below is a graph from Morningstar.com comparing the performance of Propel’s core international mutual fund holdings to one another from 9/30/22 through today, 6/26/23. That’s only 9 months’ time and covers the period of a decided upswing after a big drop in the summer of 2022.
You can see that all four mutual funds have made money and are up between 17 and 34%. Below that chart is another that includes Propel’s core domestic funds with returns between 9 and 25%. International appears to be the overall winner in Propel’s portfolios for this period. (Mutual fund Data from Morningstar.com)
Now let’s look at the previous 9 months from January through September of 2022. The first graph includes those same international mutual funds with abysmal returns between negative 21 and 43%. Below that are the same domestic holdings with returns of negative 15 to 33%. I would call this very lumpy.
Now how do you feel? Some of our readers might be much more turned off by the negative numbers than they were inspired by the positive. That is somewhat normal. What if in your frustration you had sold out of your international holdings in October 2022? What if you put more money in internationals instead? What is my point?
The Point: Only Hindsight is 20/20
Keep in mind that we are always looking at performance in hindsight, and there are a never ending number of periods in which to compare assets. If you are looking for disappointment, you will find it.
Regardless of how you feel about non-American companies, please know that international investments are a key component of your portfolio because they are a big part of the world we live in. We buy internationally made products. Domestic companies sell their products overseas. We do, in fact, live in a global economy. Avoiding international investments, simply because they are not American companies, is not a good enough reason.
Schulte pointed out in his podcast that from 1970-2022, small cap international companies returned about 13.5% annually for that period while the S&P 500 U.S. stock Index only returned 10.4%. Sounds pretty close though, right? In terms of dollars, Schulte says that a $10,000 investment in each in 1970 would be worth $8 million in the Small Cap International Index vs only $ 2 million in the S&P 500. But who would be willing to invest their entire life’s savings in Small Cap International stock for 50 years?
A diversified portfolio that includes all facets of the world economy helps us to spread our risk around, and it encourages us to stick to our plan. It also acknowledges that there is no “right” answer. Routine savings and committed investing to a diversified portfolio that takes into consideration the quality of its holdings IS the plan.