While many investors have taken advantage of the six-year rally in U.S. stocks, they may have overlooked attractive opportunities overseas. Despite the recent struggles of some international markets, there are powerful reasons to look outside the U.S. for equity exposure.
Yet, many investor portfolios remain underexposed to international stocks, often due to misperceptions about the asset class. According to an article released by Fidelity Investments Leadership Series, here are five common “myths” investors have about investing in international stocks.
MYTH 1: International investing is too risky.
Reality: International stocks can actually lower risk in an equity portfolio. Over the past 65 years, a globally balanced hypothetical portfolio of 70% U.S./30% international equities has produced better risk-adjusted returns and lower volatility than an all-U.S. portfolio.
*Hypothetical “globally balanced portfolio” is rebalanced annually in 70% U.S. and 30% foreign stocks. U.S. equities: S&P 500 Total Return Index; International equities: GFD World x-US Return Index (1950-70), MSCI EAFE (1970-87), and MSCI ACWI ex-US Index (1987-present). Source: Bloomberg Finance L.P., Fidelity Investments (AART), as of December 31, 2015. Past performance is no guarantee of future results.
MYTH 2: U.S. stocks usually outperform foreign stocks.
Reality: Historically, the performance of international and U.S. stocks is cyclical: One typically outperforms the other for several years before the cycle rotates. Recent performance has favored U.S. stocks, but given the cyclical nature of these asset classes, foreign stocks could possibly take the lead again.
MYTH 3: U.S. multinationals provide adequate international diversification.
Reality: Over the years, many large U.S. companies with operations overseas have experienced periods when their stock prices have been highly correlated to the performance of the S&P 500. High correlations indicate that investment returns are moving in tandem and typically signal lower diversification.
MYTH 4: Investors should hedge their currency exposure.
Reality: Currency hedging is intended to prevent currency fluctuations from hurting the stock price. While it sounds good in theory, the effort and expense involved might not be worth it. Timing currency calls is very difficult, even for professional investors.
MYTH 5: Index funds beat active funds in international.
Reality: Active managers backed by skilled research analysts have the ability to select (or avoid) specific companies they believe will beat (or lag) the index average.
The main risks of international investing are currency fluctuations, differences in accounting methods; foreign taxation; economic, political or financial instability; lack of timely or reliable information; or unfavorable political or legal developments. An actively managed investment fund is a fund in which a manager or management team makes decisions about how to invest the fund’s money. Such decisions are made in an attempt to do better than the market and involve actively choosing which investments to purchase, hold, and sell for the fund. The fund manager performs an analysis using in-depth techniques and methods that may involve numerous investment options. The goal of an actively managed fund is to perform better than the specific market index with which the fund is being compared.” The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. MSCI Europe, Australasia, Far East Index (EAFE) is a market-capitalization-weighted index that is designed to measure the investable equity market performance for global investors in developed markets, excluding the U.S. and Canada. MSCI All Country World Index (ACWI) is a market-capitalization-weighted index that is designed to measure the investable equity market performance for global investors of developed and emerging markets. All indices are unmanaged and investors cannot actually invest directly into an index. Investments are subject to risk, including loss of principal. Past performance does not guarantee future results.”