In this episode of “Investment Management Foundations,” Wealth Enhancement Senior Portfolio Manager Ayako Yoshioka discusses the differences between investing in U.S. and international stocks, highlighting periods of outperformance and why international stocks can be helpful when diversifying your portfolio.
VIDEO TRANSCRIPT BELOW
Hello, and welcome to another segment of “Investment Management Foundations.” My name is Aya Yoshioka, and I am a Senior Portfolio Manager here at Wealth Enhancement Group. I'm here today to talk about international equities. When investors think about stocks, most of us here in the U.S. gravitate towards Large Cap domestic stocks: Household names such as Microsoft, Pepsi, Proctor and Gamble, Walmart, Boeing, and Eli Lilly. You might feel that you aren't as familiar with companies outside the United States, but I'm sure you have heard of companies such as Adidas, Nestle, Toyota, Sony, or L'Oreal, and one of the benefits of investing in companies or funds that hold international stocks is that you can increase your portfolio's diversification.
Markets outside the U.S. don't always move in the same direction or by the same magnitude as the U.S. markets. So, owning pieces of both international and U.S. stocks can spread the volatility and risks across more securities. But spreading out the volatility sometimes comes at a cost, especially when the U.S. equities have been outperforming for quite some time. You can see on this chart that U.S. stocks have performed well relative to international stocks since 2011. However, if we go back further in time, there are periods when international stocks outperform U.S. stocks. In fact, since 1975, the U.S. outperformance over international stocks typically lasts around eight years, and we are currently at 13.3 years in the current cycle of U.S. outperformance, based on a five-year monthly rolling return, as seen on this chart.
Another great statistic to think about is that since 1988, the U.S. equity market has only been the top performer across all markets over a calendar year four times. So, that is the same as Switzerland and less than Austria, which has the designation of being the best performer five times in a calendar year, and after long periods of outperformance by U.S. stocks. Another thing to consider is that international stocks currently have more attractive valuations, and getting exposure while valuations are below long-term averages can lead to above average returns over long market cycles.
Investing outside the United States does bring additional risks, such as geopolitical risks, interest rate risks, and liquidity risks, and one of the bigger risks is currency risk, and this is why there's a line that shows the U.S. Dollar Index alongside the monthly rolling returns. As we mentioned in our segment on the U.S. dollar, when the U.S. dollar is weaker, international stocks tend to outperform, but timing exposure to international stocks based on your outlook for the U.S. dollar is not the goal. However, investors should consider international investments hedged in U.S. dollars to dampen some of that impact of currency fluctuations. Thank you again for joining me today, and please tune in for the next episode of “Investment Management Foundations.”
This information is not intended as a recommendation. The opinions are subject to change at any time and no forecasts can be guaranteed. Investment decisions should always be made based on an investor's specific circumstances. Investing involves risk, including possible loss of principal.
There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss. Investing involves risk, including possible loss of principal.
2024-5023
