Should you buy international stocks?
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After years of underperformance, international stocks started strong in 2023. While historical performances never guarantee what may occur in the future, being aware of the current international investing environment in light of past outcomes provides good input for your investing decisions. Here are three reasons you should consider investing in international stocks.
Reason #1: Ripe for Outperformance
International stocks have struggled compared to US stocks for a long time, but that could change. As of May 3rd, the 10-year return on the S&P 500 has been 11.8% per year, while the Morningstar Global Ex-US Stock Index has been 4.1%. US stocks have nearly tripled International stocks over that period. However, in 2022, we began to see a shift in performance where the S&P 500 ended the year down -18.1% while international stocks ended down -15.3%. Over the past one-year period, the S&P 500 is down -0.35%, while international stocks have been positive, up 3.31%.
While this is a short period of outperformance, it might be noteworthy because, historically, international stocks have performed similarly to US stocks. If that holds, it seems to suggest that international stocks have a lot of ground to make up to get back to even with US stocks.
Reason #2: Diversification
Can you guess the number of times in the past 50 years international stocks have outperformed US stocks? If you guessed half, then you were nearly correct.
International stocks have outperformed in 23 of those 50 years based on the performances of the S&P 500 and the MSCI EAFE International Stock Index. As noted above, recently, US stocks have faired much better, outperforming in 11 out of the past 15 years.
Of the 23 times international stocks have outperformed, 8 of those times, the difference was at least double digits!
Further, in 16 of the 23 periods, the outperformance was greater than 5 percent. So having exposure to an area that can provide outperformance of that magnitude is helpful for an overall portfolio.
Reason #3: Currency Hedge
As we have witnessed over the past decade, the US Dollar has strengthened against most other currencies worldwide.
Without getting into too much detail, a strengthening US dollar can make it difficult for non-US stocks, which is a drag on their performance. Likewise, a weakening US dollar can be a tailwind for the performance of non-US stocks.
Over the past six months, we have seen the US dollar weaken against other currencies. Currency fluctuations aren’t a reason to invest, but they can inform you whether you are fighting a headwind or potentially riding a tailwind as you rebalance your portfolio.
Summary
Now is a good time to review your international exposure in your stock portfolio. You may find that your allocation is out of balance due to the recent dominating performance of US stocks. If you have none, take time to rebalance. Addng international exposure may put your portfolio in a better position to realize long-term stable returns.
Ryan Collier, CIMA, is the Director of Investment Management at Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Ryan at rcollier@bedelfinancial.com.