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Are International Stocks Worth the Bother?

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Summary

This article looks at the case for investing in international stocks, exploring short- and long-term trends in correlations, returns, and risk. It notes that while U.S. stocks have outperformed non-U.S. stocks over the past few decades, non-U.S. stocks held up better than U.S. stocks in 2022. The article also looks at the 3-year correlation matrix for international stocks and finds that developed markets European and U.K. equities have had the tightest correlation with U.S. equities while emerging-markets stocks have had lower correlations. It also looks at longer-term trends and finds that while correlations between U.S. and international markets have been higher in recent years, they have been lower in some previous periods. The article concludes that while diversifying into non-U.S. stocks may modestly reduce volatility, investors seeking diversification should make sure their foreign-stock allocation includes at least some exposure to less-developed markets.

Q&As

What did Vanguard founder Jack Bogle argue about international stocks?
Jack Bogle argued that international stocks didn't merit inclusion in investors' portfolios because U.S. companies derive plenty of their revenue from selling goods and services overseas.

How have non-U.S. stocks performed relative to U.S. stocks in the past few decades?
U.S. stocks have handily outperformed non-U.S. stocks in the past few decades.

Is there evidence that international stocks can improve a portfolio's risk-adjusted performance?
Yes, there is evidence that international stocks can improve a portfolio's risk-adjusted performance.

How have correlations between U.S. and international markets varied over time?
Correlations between U.S. and international markets have been lower in some previous periods, such as from 2004 through 2008, when the U.S. dollar was generally on the decline.

What portfolio implications can investors consider when deciding to diversify into non-U.S. stocks?
Investors considering diversifying into non-U.S. stocks should make sure their foreign-stock allocation includes at least some exposure to less-developed markets, and should shy away from investment vehicles that focus solely on a particular geographic region.

AI Comments

👍 This article provides an insightful and comprehensive overview of the current trends in international stock markets and how they may be beneficial to investors.

👎 The article fails to provide detailed information on which specific investments would be best for investors to include in their portfolios.

AI Discussion

Me: It's about whether international stocks are worth investing in and how they can help diversify a portfolio. It looks at short- and long-term trends in correlations, returns, and risk, and how U.S. stocks have outperformed non-U.S. stocks. It also talks about the potential benefits of diversifying with international stocks, like a higher exposure to value sectors and lower correlations with the U.S. market.

Friend: That's interesting. What are the implications of the article?

Me: Well, the article suggests that although international stocks may not have been a great investment in the past, they could be beneficial in certain environments, such as when the dollar declines versus other currencies. It also suggests that investors should diversify their portfolios with some exposure to emerging markets, as they can offer lower correlations with the U.S. market. Ultimately, the article suggests that diversifying with international stocks could help investors reduce the risk in their portfolios while potentially gaining a better return.

Action items

Research the correlation between U.S. and international stocks over the past several decades.
Consider diversifying your portfolio with non-U.S. stocks, especially those from emerging markets.
Monitor the performance of different international markets and sectors to determine which ones may offer the best diversification benefits.

Technical terms

Portfolios: A portfolio is a collection of investments, such as stocks, bonds, mutual funds, and other financial instruments.
Correlations: Correlation is a statistical measure of how two variables are related. It is a measure of the degree to which two variables move in the same direction.
Returns: Return is the amount of money earned or lost on an investment over a period of time.
Diversification: Diversification is a risk management strategy that involves spreading investments across different asset classes and sectors in order to reduce the risk of loss.
Standard Deviation: Standard deviation is a measure of the spread of a set of data points from its mean. It is a measure of the variability of a data set.
Bear Market: A bear market is a period of time in which stock prices are falling and investors are pessimistic about the future.
Risk-Off Environment: A risk-off environment is a market condition in which investors are more risk-averse and are more likely to invest in safe-haven assets such as cash and bonds.
Technology Stocks: Technology stocks are stocks of companies that are involved in the development, production, and distribution of technology products and services.
Value Sectors: Value sectors are sectors of the economy that are characterized by low prices and high dividend yields. Examples of value sectors include utilities, financials, and consumer staples.
Emerging Markets: Emerging markets are countries that are in the process of developing their economies and are characterized by low per-capita incomes and high growth potential.