Should You Invest in International Stocks?

Hello everyone Nick, welcome back. Many

invest

ors have been wondering if it makes sense to add non-US

stocks

to my portfolio despite 100 years of outperformance of US

stocks

. Many experienced

invest

ors disagree with the benefits of

international

diversification. In this video I am going to explain. The Most Compelling Reasons to Only Invest in US Stocks After that, I'll share why I still think it's a big mistake. The main argument for investing only in US stocks is performance. People want more money, so let's take a quick look at the portfolio viewer to see. In a couple of performance scenarios, we will use the backtest portfolio asset allocation starting in 2010 with ten thousand dollars, contributing 500 per month adjusted for inflation and rebalanced annually.

The first portfolio will be 100 percent in the US stock market in the second portfolio. 60 percent US, forty percent three percent additional return, had better volatility measures and a better clear-cut ratio. and the sortino index which suggests that it had a better risk-adjusted performance. Now let's take a look if we go back. You know the US obviously did better in the last decade, but International did better between 2000 and 2010. So let's take a quick look. In the same scenario, the US still vastly outperformed the

international

s, with an additional return of one hundred and thirty-five thousand dollars and comparable metrics on risk-adjusted returns.

Now, let's go back to 1986. Let's take a quick look at that. one, so in this scenario, investing in US stocks alone generated over $1 million in additional return if you started investing in 1986 and are now preparing to retire, this would make a huge difference in the quality of your life , being able to spend an extra million dollars and that million dollars could actually generate an additional annual return of forty fifty thousand dollars, which is phenomenal and the people who invested in us alone are in a much better position now, so that is one of the main reasons why people advocate investing in US stocks only, so the next reason is that US companies have everything you need, so if we look at the 20 major companies in the world, 15 of them are based in the US, you can see this here, the country here on the right, almost all of them. they have Apple Microsoft Berkshire Hathaway Tesla so there's only a handful that are outside of the US so that's another very good reason and then there's the sector diversification of all those companies that we just saw in the top 20 They are quite well diversified.

The United States is a pretty strong economy, so next up is the S P 500 which actually has a lot of international exposure as 40 percent of its revenue comes from outside the US, so just investing In American companies you can get great international exposure, another reason why many people use it. Famous investors have suggested that it's fine to simply invest in the U.S. Jack Bogle, the founder of Vanguard, was one of them, as was Warren Buffett, who said his wife's portfolio after the heat passes will be of 90 S P 500 and 10 percent Treasury bonds, the following reason.

It is exceptionalism many people believe that the United States is an exceptional place to invest it is more friendly to companies and to do business now they believe that there are better taxes a better legal system is less corrupt it has the global reserve currency and there are lower fees to invest generally around the world the board believe that it is simply better for companies and that is why another reason why they invest in the US only now let's look at the arguments in favor of global investment, the first is diversification, Most people would not suggest investing in a single company or sector.

The same reason we like to use index funds and let the market price our risks and potential returns for us. Why not do this with global investing? We can diversify between currencies. Political exhibition. Economic risks and all kinds of other risks. The next reason is modern portfolio theory. Nobel Prize-winning research by Markowitz that showed that by diversifying across different asset classes that reduce correlations, you can actually increase returns with less risk. This is pretty fundamental research. I have another video entirely on this topic that goes into a lot of detail as to why. This is the case and that is an asset allocation.

I'll link to it here and below, so one of the next reasons is the cyclical nature that xus has and can outperform for decades. Now let's take a look at some of these charts that show this performance, so the first one is US Stocks versus International Stocks so you can see when it's below zero percent, that means the internationals performed superior when they are above, that means that we have superior performance. Now you don't have a 100-year investment timeline to capture that extra two percent return that the U.S. has generated in the past. 100 years, if that were to continue, you only have a timeline of maybe 50 to 70 years if you're young and you live a long time while you're saving for retirement, it's probably the most impactful and that's usually going to be Now only 30 to 40 years from now, yeah you invested only in US stocks and you were unlucky and you did it in one of the periods when International or xus did better, you could have had the opposite of what we saw earlier in the portfolio viewer, let's just look at a couple.

On other charts, this is a global stock market distribution. The capitalization of the global market. You can see here that the US is actually 65 percent of the global market, it's down to 30 percent and recently it's back up towards 60. Then if we look at the share of global GDP over history in the first thousand years, from the first year to the 18th century. Eastern economies dominated China, India and other economies. It wasn't until around the 19th century that the West began to have more influence on the global economy. Seeing that the trend is actually reversing as well, the United States currently represents only 15 percent of the world's GDP, but in some ways it represents 60 percent of the world's market capitalization and then next up are global reserve currencies in the past, you know, six seven hundred years.

I have seen six different Global Reserve currencies Portugal Spain Netherlands France Great Britain and USA These do not last forever These trends are very cyclical, they do not last forever, they change frequently and you have to make the best decision possible to protect yourself against these different risks of these Trends that change Empires that rise and fall, political systems Wars, etc., and I think this is an asymmetric risk. If you're lucky and pick the right one, you could get over two percent returns for the United States in the past. One hundred years however, if you are unlucky and have an asymmetric risk of a World War, political upheaval or something like what happened in the 80s in Japan, which could be devastating to your portfolio and you might not have enough money To survive in your retirement, let's take a look at what happened in Japan in the 80s, Japan's stock market was completely crushing it, outperforming all other global economies and investors in Japan would probably get very good returns;

However, if they retired around the 1990s and only invested in the Japanese Stock Market that would have had a very negative impact on their retirement, so in summary I think it is an asymmetric risk, it has a bit of upside but many potential disadvantages and risks that may materialize. Another reason for global diversification is exceptionalism. Discounted now, some people argue that America's outperformance might have been because luck didn't have as much of an impact on world wars or other political upheavals, etc., which might have happened in Europe, but if we look at the price-to-price ratio, profit and price The accounting ratios for the US vti are the total Vanguard US Stock Market ETF, price to earnings, this is how much you are paying for the stock price of the company for every dollar of profits they deliver, you are paying 19.1 times on average and The book price, which is the price of the company versus its net worth or book value if it were liquidated, is 3.4 x.

If you look at the Vanguard ETF for the total international stock market, the P/E ratio is significantly lower at 12.2. X and the price to book is significantly lower, 1.6 Americans will probably grow larger and have more favorable outcomes than worth taking, if US outperformance will last forever, how sure are they? Are you willing to bet your financial future on it and why take the risk? I will be humble enough to admit that I don't know the answer to these questions. I'm pretty sure American companies won't deliver higher returns forever, but I have no idea if it will be this year, this decade, or this century.

The United States may continue to outperform global economies, but I simply don't know and I don't know. I don't think it's worth the risk, there's a lot of research supporting diversification, modern portfolio theory, etc., and I'm much more comfortable investing in that globally diversified portfolio, so let's say you've decided you want to diversify. internationally. The next question is how much in xus. I think this

should

depend on your level of conviction in global diversification for people who have a very, very strong conviction that the US is an exceptional place to invest, maybe they

should

be 100 percent in the US. .because that is what they can buy and hold for a long time long term our investment life cycle is 40 70 maybe even more years if you are very young you need to be able to maintain your investment decision.

I think it is one of the most important. The important thing about being a successful investor is choosing a strategy that you have strong conviction in and that you can stick with for the long term, even if it turns out to underperform over 10, 20, 30 years, so I think that should determine how much invest in xus. My opinion, which is not investment advice, is that you should have at least 20 percent in international stocks or xus stocks. However, I prefer the global market capitalization for the same reason I use the total stock index, letting the market assess the risks and outlook. returns of different companies I prefer to let the market decide this for different countries and there is a Vanguard fund called Vanguard Total World stock index ticker VT for the ETF or vtwax for the mutual fund.

I made another video on this fund specifically it is a great fund and could be your one stop fund for global equity exposure this one tracks the ftsc all-world index or the full cap index it is a very well diversified portfolio you can find stats in the ftse website currently you can see the global breakdown here where the US is actually at, let's see, 59 right now, so xus is 41 percent, so these are all the different economies on the way and there are a lot of different stats here. I will put a link to this below so yes be sure to check out my videos on VT and also the best international stock funds some people don't want to use an all in one fun like VT even though it is much simpler and much more easy to do, there may be some minor optimizations for taxes and other reasons using international and separate funds.

US funds or even for international exposure, possibly different developed and emerging market funds, my video covers all of these options and different fund providers in more detail. I hope you found this video useful and it helps you decide whether to invest in xus and, if so, how. how much do you invest in xus this is a highly debated topic in the financial space. I really enjoy talking about it. I have a strong opinion that people should invest globally, but I hope this information helps you. Be sure to comment below and let us know if you think it's a good idea to diversify globally and if so, what percentage do you invest outside of the US?

Additionally, if you wish to support thefree financial education, be sure to hit the like button and subscribe. It really helps me. I'm sure you'll notice. I tried a different video format on this video, very different from the previous ones. I would appreciate some feedback on whether you like this format versus the previous format. I think this format will allow me to create content faster and get back to weekly uploads. I do live broadcasts and different types of content where I share screen. I would really appreciate your feedback, thanks for watching everyone later.