While “home-country bias”—a common financial mistake—has actually paid off in the last 15 years, diversifying into foreign markets is still the smarter play in the long-term, contends an article in The Wall Street Journal. Investors who put their money solely into U.S. stocks were rewarded with 6 times their investments, as opposed to diversifying into developed nations or emerging markets, which returned 155% and 143%, respectively. But with low foreign stock valuations, including low-cost ETFs, now is the ideal time to diversify overseas.
There are relatively few disadvantages to diversifying overseas. Foreign dividends may not garner the same grace in a taxable account as domestic dividends, and there is always the potential of foreign currency risk. However, major companies like Apple, Tesla, and other U.S. multinationals face the same risk, and many foreign companies, like Nestle or Toyota, do much of their business in the U.S. Some commodity producers even sell their products in dollars, such as Shell or the Australian-based mining corporation BHP Group. In fact, because the U.S. market is so huge, American investors hurt themselves much more by not investing abroad than foreign investors who stick close to home, the article maintains.
Among the countries where the dollar will go farthest are Japan, where U.S. stocks trade at 17.8 times expected earnings. The U.K. and Germany are both trading at 10 times forward earnings while Italy and Spain trade at 7.5 and 9.4 times, respectively. Meanwhile, emerging markets such as Israel and Brazil are trading at 8.3 and 7.3 times respectively, along with Turkey and Pakistan at 5.3 and 5 times, respectively.
But while some American investors may be reluctant to invest overseas simply because it’s unfamiliar territory to them, they should avoid relying on an active manager to do the picking for them, according to the article. Investors should instead focus on picking quality stocks. A basket of international stocks that have a high return on equity with low earnings variability outperformed their lesser-quality counterparts by an impressive 98.8% of the time from July 1990 through April 2023, according to BlackRock calculations that are cited in the article. Investors can choose from several index ETFs that are concentrated on U.S. or foreign quality stocks. With all the possibilities, it’s time for U.S.-biased investors to take advantage of the opportunities overseas.
