Is International Still Relevant?1,2 – theory suggests that diversification increases risk-adjusted returns
Marcus Schafer (00:06)
The question we’re going to try to address today is after 15 years of US stocks being amazing and outperforming most everything else in the marketplace, does international investing still make sense? That’s a question we get often. This is going to be episode 21, if you can believe it, of Green Stream where logic meets life and investing. You are obviously Pat Collins, CEO of Greenspring Advisors. I’m Mark Schafer, the Director of Growth.
So let’s get into it.
Pat Collins (00:36)
Can’t wait. We have a little mini series here that we’re doing. And obviously today we’re going to talk about international investing. Last time we talked about your kind of the perfect asset allocation for you. Next time we’re going to talk about rebalancing, which is another kind of interesting topic to get into some of the research on. But I do want to mention that we’re to have a really special guest coming up after that rebalancing episode.
We’re going talking and we’re going to kind of totally switch it up a bit. Still talking about investing in business and things like that, but it’s going to be the business of sports, specifically baseball. So we’re excited to announce our guest here over the next few weeks, but make sure you stay tuned for that.
Marcus Schafer (01:17)
Yeah, that’s going to be awesome. We’ve already done some of the prep and it will be super, super cool. Let’s focus on international investing. ⁓ That’s the topic of today. Why might you internationally invest? Here’s the thesis. By holding stocks outside of your home country, you can achieve a higher risk adjusted return. Is the thought process kind of goes back to the
foundational theories about diversification, is, if you can hold any asset that either increases expected return or provides diversification benefits, meaning it’s not perfectly correlated, that will help your portfolio overall. And then the juxtaposition to that is we kind of, so the headline numbers show, haven’t seen that over the past decade and a half.
Pat Collins (02:10)
I think this is going to be a good episode to dig into some of the data and the evidence. A lot of times there’s this kind of recency bias I’m sure we’ll talk about when you’re looking at evidence to say, well, the last 10 years have been this. So that must be, that’s the way it is. And 10 years in our business is a very, very short amount of period. You can pick lots of kind of trends and patterns out that aren’t going to be long-term. So I’m excited to get into some of the data, but also maybe trying to
to talk about some of the misconceptions, the things we hear from investors a lot of times about international investing. I think it’ll be good for us to address those, because we get these questions all the time. Hopefully it’ll be helpful for our audience.
Understanding Historical Evidence – the US market has outperformed over the past 100+ years but there are many examples of regime changes
Marcus Schafer (02:51)
Yeah, I pulled some numbers going back to 1900. It looks like US stock markets have outperformed the rest of the world by about 2%. If you go to 1970, which is when we really start to get really good data, especially country specific data, it’s a little bit less than that. US is kind of returning about 11%. Non-US a little bit over 9%. Interesting.
really depends on how you measure that, right? You get a lot of variation for what is the US stock market performance as well. So you have this really long run of US higher returns. And I think that might beg to question like, should we expect the US to have higher returns going forwards or should we expect similar returns? Can we tell?
Pat Collins (03:44)
interesting. I found the same data as well as you did. And when you look at returns that over, say, the last 55 years have been within around one, one and a half percent or so of each other, I’m not sure if that’s enough of a dispersion for us to say with any degree of certainty that, this should continue indefinitely or this should always be the case. I think your question is a really good one, which is what should we expect moving forward, I guess? And
What I would say there is I think there is, and maybe getting right into one of the misconceptions I tend to hear a lot, is people equate investing internationally as investing in countries, not companies. So you’ll hear things like, I don’t want to invest in Europe. It’s a mess over there. Or gosh, South America, they can’t get their, you know, anything in order. And China is not, you know, this or that or whatnot. And so you have all these arguments that tend to be more about the geopolitical
or kind of what’s happening in their economy. And if we were investing in economies, which we can’t do, that would probably be a valid reason. We invest in companies, though. And so companies have a certain price reflected to some fundamental that they have. So because maybe Europe is a mess, let’s just say that everybody believes that thesis. Well, that should be reflected in the price of a company.
if most of their customers are in Europe and they’re selling to them and they think that there’s going to be a slowdown in growth because of that. So price tends to adjust. And we see that now. I just pulled some stats out. You have to pay in the US about 23 times earnings to buy a stock. In Europe, it’s about 15 times earnings. So price matters when you’re buying stocks.
It’s not just what’s going on in that country. It’s what price can I buy it at? And that’s going to have a big determinant on your expected return. If you buy it cheaper, theoretically, it’s better than buying it more expensive, all other things being equal. So I just wanted to mention that, that trying to dispel kind of the myth that ⁓ you can invest in a country or the underlying fundamentals of a country. You invest in companies. Companies have prices that adjust for all the expectations that are now.
Marcus Schafer (06:06)
Yeah, the price adjusts. And I think that we just see these various regimes going back in time. And if you go back to 1900, the US was not the largest country at that point in time. It was countries like the UK were. And obviously, the UK is not one of the largest markets compared to the US today. So therefore, at least over the past 100 years, there must have been
a regime change and I bet you if you go back to the 1900s, the people in the UK did not think that they were going to be exposed to that regime change as well. I, you know, there’s this concept of just being humble as an investor that I think is super, super important in terms of, hey, there’s a lot of unknowns and different companies and different industries are going to develop at different paces and just having this humility sometimes to say, hey, I don’t know.
But generally speaking, I’m not sure there’s enough evidence to really tell to your point if countries have different returns than one another. And even if those are different returns or those are a large enough kind of expected return difference for us to forego benefits of diversification and take on concentration.
Pat Collins (07:28)
Yeah, when you put all of your eggs in one basket, I don’t care what the basket is. There is going to be periods where you are disappointed. And I think the whole point of international investing is to smooth out the ride to some degree. I’m sure we’re going to talk about some periods that you were just, was, were in a much better spot if you had diversified your assets. That’s been the case in the U.S. several times. That’s been the case ⁓ in other countries.
I’m sure we’ll talk about Japan and whatnot, but for most of us, we don’t live in centuries, we live in decades. And the chance that one of these countries, the US or some other, has a pretty bad period for a long stretch, there’s a very high chance of that. I think making sure that you’re diversified, smooth out your ride. One last thing I would just say on US’s outperformance is…
You know, there’s I don’t know how many exactly how many countries are 40 plus countries or so that are in kind of the all country world index that’s investible, I guess. So you would expect that there is going to be a fairly decent sized group that are going to outperform for some period of time. And there’s going to be a group that underperforms. Are they always the same? It’s just like stocks. They’re not always the same. They are going to rotate. We’re going to talk about that. So just because some country.
the stocks or the companies in that country have outperformed from some period of time, it doesn’t mean that’s going to continue forever.
Marcus Schafer (08:55)
Yeah, I got a quiz for you, Pat, that I don’t think you’ve prepped for, so it should be fun. Since 1970, there’s been five countries that have better stock market returns than the US. Any thoughts as to one of them?
Pat Collins (09:11)
Let me go with South Africa.
Marcus Schafer (09:13)
I don’t think we have good data on South Africa going back to 1970. Maybe we’ll talk about the difference between emerging and developed markets here in a little bit, but let me name them. Hong Kong, Sweden, Denmark, the Netherlands, and Switzerland.
Pat Collins (09:32)
interested.
Marcus Schafer (09:33)
Denmark is a super, super interesting one that’s actually over the past 20 years from 2005 to 2024 was even better than the US stock market in terms of just absolute, absolute returns.
Pat Collins (09:50)
So I think it’s fascinating. I did some research as well, maybe just not as lengthy, because I was kind of curious about the last three years, the last 10 years, because that’s really been a dominant period for the US. I think most people would say, what’s been the best performing country? You’d list the US over the best like three, five, 10 years. In fact, the US ranks fourth over the last 10 years.
The top three, this is kind of interesting, Argentina, which has been the news recently, Taiwan and Peru have outperformed over the last three years, which has been again, dominant by the U.S. It’s ranked 16th, which is kind of amazing to me that there’s 15 other countries that have outperformed countries like Poland, Greece, Spain, Italy, China. So again,
The U.S. is rarely won, obviously. It’s been in the top half. But I do think there is ⁓ lots of evidence to suggest that there is a really great case to diversify your assets outside of the U.S.
Diversification Protects3, 4, 5, 6 – against poor results from your own country
Marcus Schafer (11:00)
Yeah. And there’s kind of two cases, right? We’re talking about, hey, there’s potentially higher expected returns outside the US. And here’s how averages work. There’s always potentially lower expected returns. And one of the things you mentioned was one of the big benefits of international diversification is hedging against the risk that your specific country has a terrible outcome.
that might coincide with the time where you really need to draw down on your portfolio or sequence of returns wise just might be really, really impactful for you. And when you look at those worst case scenarios, a lot of times for individual countries, it’s not uncommon to see them stretch into a decade long time period. This is especially true if you look at real returns, right? So not only the effect of stock markets declining in value,
But also a lot of times inflation still kicks along. So that’s another headwind that you might not be thinking about, but makes it even more difficult. So these kind of 10 year occurrences where you might not be rewarded in your individual country for taking on these risks, might still, you’ll be much better off by having global portfolios. And that kind of shrinks that 10 year time horizon closer to something like five to seven years in the worst case scenarios.
So in the worst case scenario, you’re talking three to five years of kind of time to get back to break even. That’s super, super critical.
Pat Collins (12:35)
Yeah, I want to maybe just touch on two of these periods because I think just kind of maybe paint the picture a little bit for people and understanding this idea of sequence of return risk is a really good one. So I think ⁓ many of us have been investing for a while here and we can probably remember what the media calls the lost decade, which is basically the peak of the market in 2000, which was around the dot com boom, basically the advent of the internet and all the companies that came out.
investing in kind of Internet and services and whatnot. And over the next 10 years, if you would put a million dollars in the S &P at the peak in 2000, 10 years later, you would have about seven hundred thousand dollars. You would have experienced this kind of ⁓ bust period after the Internet boom kind of collapsed. Then there was a recovery and then you had another period, which is basically the 2008 financial crisis. And so, again, if you were
unlucky enough to retire in 2000. And you were drawing down your assets during that period because you had to live off them off your portfolio. And on top of that, 10 years go by where you have now, you know, even without the drawdown, you’re at 70000 on a million dollar portfolio. You can start to realize how hard it is to recover from that. And during that same stretch, had you been in a global portfolio, not just US, then
Would you have experienced losses? No, you wouldn’t have losses. Wouldn’t it have been great gain? No, it still would have been pretty lousy, but it would not have been nearly as severe as being U.S. only during that stretch. So that wasn’t that long ago. think people have short memories sometimes when you’ve had good performance. But that’s one. And then the other that most of us probably don’t even realize or remember was Japan in the late 80s. Japan, if anybody remembers that stretch, was really coming out as this dominant
global kind of economic force where they had ⁓ really optimized manufacturing and they were killing us on car sales and whatnot. If you had invested in the Japanese market in 1988 near the peak, it would have taken you more than 25 years to break even. So we had this kind of collapse that happened and it just was this long, slow stretch where there was no growth happening in that Japanese market. So again,
You retired in the late 80s in Japan and you had had your money invested in Japanese stocks. You would really be in a world of hurt because, again, no growth on your money basically for over 25 years. So, again, these are the things we want to avoid in these extremes. And that’s what diversification allows us to do.
Marcus Schafer (15:15)
Yeah. And I think looking at other countries is super helpful because it helps us understand the humility we should take as an investor because we have to take our patriotic hat off and just say, hey, if I only care about future cash flows and the price I pay, let me just think about the type of risk that I’m saying. And if you were a Japanese investor, I think they were 40, 45 % of the world market at that point in time. Hey, there’s a lot.
There’s a lot going for you. You you got, it’s your own country. You know it, you’re familiar with it. So you kind of see that aspect and you might think, no, actually things are going to be okay because everything’s going good from your framework. But outside, if you were to look at it from an American investor’s perspective, holding that much in a single country, that’s not your own. That might be pretty, pretty stressful.
Another example just kind of through this lens of looking through other countries is Australia didn’t have a recession for like 30 years. From the early 90s until COVID happened, they didn’t have a technical recession. And so a lot of Australians, they’re like 2 % of the world marketplace, got very comfortable with their own market and would hold 100 % Australian stocks, 50 %
Australian stocks. They are forgoing a lot of potential growth in the US that obviously we’re here to talk about it because of this, but it’s just you’re super, super concentrated. It’s this familiarity bias that we’ve talked about before.
Behavioral Explanations for a Home Bias7 – familiarity and recency bias
Pat Collins (17:01)
Yeah, I totally agree. ⁓ Maybe we can talk about some of those just biases that we all have or some of the arguments that we’ve heard and maybe starting there with this idea of owning just what you know, kind of thing. And I don’t know if you’ve seen any of the data there, but what are your thoughts on people saying, you know, I know that company, so therefore I’m going to invest in it. I think we start to see it when you measure portfolios around the world.
that people tend to kind of be investing in things they’re familiar with.
Marcus Schafer (17:36)
It seems to be a psychological trait that’s a truism amongst humans and the market clears. What that means is there’s a global stock market. If you yourself own more than the market cap weight of the US, then that must mean that other people from other countries are owning more of their own stuff as well. We see it across the world.
I used to work at a global investment management company. We worked with financial advisors across the world. We saw it in other countries as well. And I would say it might be even more extreme for investors in other countries than it is extreme for somebody in the US because in the US, the US stock market is 60 % of the world already. And we typically see most investors are holding 80%.
probably the upper boundaries of what we would maybe think would be appropriate for sure, but 100%. That’s very different from somebody in Australia who’s 2 % of the world holding all of their portfolio in Australia. ⁓ So yeah, you definitely see that familiarity bias happening. Yeah.
Pat Collins (18:51)
We tend to see that, obviously. ⁓ doesn’t hurt kind of what I would say the next bias is kind of the recency bias. It doesn’t hurt when we encounter U.S. investors that are 100 percent invested in U.S. It doesn’t hurt that the last 10, 15, 20 years have been so good in the U.S. ⁓ I always tend to think that if that hadn’t been the case and emerging markets had been a huge outperformer that we probably wouldn’t see this kind of this bias.
but absolutely, recency bias happens a lot. I found this stat that I was shocked by, honestly. And today, least according to the MSCI, which is kind of an index provider that kind of has the world stock market index, a lot of times you’ll hear the world index, but in the world index, they have 65 % in US as of the end of October. But if you go back to 1987,
It was 33 percent. So the U.S. only was 33 percent of the market back in 1987. Today, it’s 65 percent. So it’s basically doubled during that stretch, which I was kind of shocked by. I would be curious. We don’t have any data that I know of on it to see what investor preferences had been over that time period. Has it shifted much or whatnot? But again, the reason why it’s grown that much is obviously the outperformance of the U.S. market.
And I think that does bring in recency bias where people see that they just think it’s gonna continue forever, but ⁓ clearly it doesn’t. We don’t know when and that’s why we diversify.
Marcus Schafer (20:33)
Recently by is, you know, it is so tough because to your point about the last decade, people coming out of there for the next five years after that, they were talking about, you actually want to be market cat waited from a global perspective. Why? Because the last decade proved that point. And so a lot of this, a lot of these things we talk about kind of are mixing the art and the science of building portfolios, trying to figure out where.
Reasons a Home Bias Makes Sense8 – taxes, fees, market coverage are reasons investors may prefer home stocks, but revenue diversification doesn’t make sense
Hey, if it’s human nature to have a little bit of a home bias, what’s the right balance? Because the worst thing you could do is in 2015, 2014, 2013, say, hey, I’m going to switch my portfolio to being global market cap weighted because it’s worked over the past 15 years. And then the next 15 years, it doesn’t pan out for you. And so you’re kind of timing the market and getting those decisions wrong. It’s better just to find a mix that you’re comfortable with.
And then you could stay with that over time and try to figure out under what circumstances would you change that systematic overweight or underweight.
But yeah, you gotta be careful not to be wrong twice.
Pat Collins (21:47)
Yeah, absolutely. What would you say is the reason you brought up the term home country bias, which obviously means having maybe more in your home country than otherwise you would if you just own the market, the global market. So what are some of the reasons that you see that are valid reasons on why you’d want to own more maybe in the US if you’re a US investor than than what the market would dictate?
Marcus Schafer (22:15)
One reason that the academics think about that I don’t really know any individual that’s really going this deep to think about, maybe us a little bit, touch treatment wise.
There’s a lot of international tax treaties and they will, they depend some more direct negotiations with the U.S. So in some cases, non-U.S. investing is less tax efficient after rebates and tax treaties get incorporated. So therefore it kind of lowers your after-tax return for investing outside the U.S. Anytime you implement a friction in markets, it kind of means, hey, there might be a reason to deviate.
That’s one reason that the academics talk about.
Pat Collins (23:04)
I agree with that. One, it’s fairly complex. I haven’t met an investor yet who said, well, you know, the reason I ever wait the U.S. is because of all these tax treaties that happen. ⁓ but I think it’s valid. It’s a legit reason. There’s a couple other things that I’ll mention, and maybe there’s more that we want to talk about. But one is kind of very practical. And again, I’m not sure if everybody thinks about this, but it’s just that the fees to invest overseas tend to be higher than in the U.S. ⁓ You know, the you know, you may pay
⁓ just a few basis points for a market index in the US. And if you want to start investing in emerging markets and things like that, it might be 10 times as much to invest in. It’s still relatively probably a fairly small number, but it’s something to consider. The other one’s behavioral that I’ve found that there could be a reason for. I think a lot of times investors compare their performance with
The S &P 500, the Dow Jones, the NASDAQ, whatever it is, if you turn on CNBC, I don’t think I’ve ever seen CNBC come up and continually post a global market portfolio return. So as an investor, you know, when you are investing globally and you look like a global market, you’re going to be deviating significantly from the S &P or from a U.S. market. And so obviously, there’s periods like this year where it’s great because international markets are outperforming U.S.
But a lot of times that’s hard for people to see others or the market outperforming their portfolio, what they perceive to be the market, which is like maybe the S &P. So I think that’s something to consider as well is can I handle deviating from the S &P? And if the answer to that is no, I’m really going to be upset if I’m underperforming the S &P. Then one, you may want to kind of really listen to our podcast on the case for diversification and why you want a global market portfolio. But.
I think the bigger thing is you just don’t wanna pick a strategy that you can’t stick with. And if you’re looking at a strategy like, well, if I invest in global stocks and I underperform, I’m gonna make a change, that would be problematic, obviously. So just another reason to consider, do I wanna have a little bit more in home country bias because I compare myself to the S &P and I just don’t want to underperform that.
Again, we would say that’s maybe not the right way to think about it. But if that is the way you’re going to think about it, then you may want to think about, you know, keeping a little bit higher weight in U.S. stocks.
Marcus Schafer (25:34)
Yeah, yeah. I think that’s well said. The decision point I’m always trying to look through from portfolios is if I really unpack them, I am sure I could find stuff I don’t like in them. That doesn’t mean that I should invest differently. That’s just a fact of investing. You were talking about some of those countries earlier that had great performance. If we were going back in time and talking about,
What don’t we like of a portfolio from our non-investor hat? There’s probably different countries, companies, all sorts of different things that we can come up with, even in the S &P 500 that says, hey, we don’t really like this. We don’t think the thesis is there. And the job of an investor is to try to remove those thoughts and just think about it from an expected return standpoint and figure, hey, if I don’t like it, there must be an expected return for it. Because why else?
would people like me hold it, right? It must be a low price because it has future ⁓ expected returns. The other aspect that maybe makes sense for why people wouldn’t have invested outside the US historically is I think fees, especially historically, were much higher. They still are a little bit higher. ⁓ How robust of a portfolio can you get?
If you go back five or 10 years, even the index funds were just really large cap indexes. So in those instances, I think that a lot of people would look at that and say, I don’t know, it’s not really the full exposure. In the U S I could buy every, I could buy 3,500 socks outside the U S you might still only be buying 3,500 socks across the world, but now you’re starting to see the ability of managers and index.
providers and diversified solutions get really the full spectrum, just like we have here in the US. So you can kind of take what you like about your US strategy and replicate it across the globe. So I think that’s maybe was a concern historically that’s just not, it’s not as relevant anymore since we’ve had some, some innovation and product landscape.
Pat Collins (27:48)
It’s a great point. I think our portfolios now are around 13000 equities in them. And of those, it’s less than 3000 are in the US. So 10,000 plus securities outside the US small cap, you know, 40 plus countries and whatnot. So. Really good point. The argument that I’ve heard for why not to go outside the US, I like to hear your take on this, is that.
U.S. companies are now so global that why do we actually need to invest outside the U.S.? If I own Coca-Cola, they’re selling in Africa, in South America, in Europe, in China. And so or if I own McDonald’s, they have, you know, stores all over the world. So if I just invest in U.S., aren’t I already getting international exposure?
⁓ by having a US stock portfolio. So love to hear your thoughts on that.
Marcus Schafer (28:48)
Yeah. Short answer. Yes, you are getting some international exposure. I think the challenge is you can make the reverse argument. Should you not buy European companies that get most of their revenue from the US? In which case, then your thesis would, hey, let me go try and find those companies ⁓ and purchase them. And then there’s also this, are you actually getting the diversification benefits? And I can’t quite explain
exactly why, but companies tend to act like companies of other companies on their same exchanges. like Spotify is a Swedish company on the New York Stock Exchange. It looks like in trades like US stocks, it behaves more like them. It doesn’t behave quite the same way as Swedish stocks.
So you’re just not getting some of the same diversification benefits. Because remember, one of the things we’re trying to hedge against is in this case, what happens if there’s a really bad outcome to US stocks where most of our money is? Well, you want something that’s going to behave a little bit different. And if you’re not getting that, then you’re not getting it.
Pat Collins (30:06)
Totally agree with that. have a couple other thoughts when I hear that argument from folks. So I 100 % agree with the idea that it goes both ways. Does that mean I don’t want to own Toyota because they have most of their revenue coming from the States? Obviously, I’d still want to own Toyota. I want to have as much diversification as I can in my portfolio. But there’s a couple things. One is
Countries oftentimes cluster around industries as well, we find. So the US, if you start to look at the US market cap now, one, it’s very concentrated in a few companies, but those companies tend to be very much in the tech space. And then if you go over to Europe, you’re going to find things like aerospace and luxury brands and things like that that might be over in Europe. And so by having a global portfolio, you’re just getting more exposure to different industries.
just like not wanting to put all of our eggs in one basket in a country or in an individual stock. We also don’t want to be so concentrated in one industry because there’s just a ton of risk with that that can go through ebbs and flows. So I think by having a global portfolio, you’re going to have more exposure to different industries. think that’s important. And then the other part that is maybe a little bit more wonky is currency and meaning that if I am 100 % exposed to the U.S. dollar,
How to Allocate to International Stocks – start with market capitalization and then deviate, with extra care given to emerging market risks
Obviously I spend in dollars. It’s not a bad thing that I have most of my money in dollars, but if the dollar really weakens, there’s some benefit. And we’re seeing that this year to have some of your assets in euros, some of your assets in yen. so just protecting against it. You you hear people talk a lot about the concern of like the weakening dollar and maybe we’re not going to be the global reserve currency in 30 years or whatnot. There’s all sorts of,
theories out there and whatnot. Nobody knows what’s going to happen. But having some exposure to different currencies can help you in the short term, at least with some of the ups and downs that could happen. And God forbid, a really drastic scenario where ⁓ a country’s currency really gets devalued.
Marcus Schafer (32:18)
You know, it’s amazing how many risks, just super diversified portfolios start to hedge against, right? You can kind of throw out all these different ideas. Hey, what about reserve currency risk? What about fiat currency risk? it’s, hey, the best I can do is build a globally diversified portfolio and go live my life. And if those risks do really start to come to fruition, you know, I’m just not sure that’s a
some of the extremes people go to hedge a certain risk. just opens up exposure to so many other risks that, the best starting point is globally diversified portfolio. And then we can think about from there, is there anything special you need to do to try and hedge out some of these risks? But yeah, the currency exposure, you don’t have to go out there and start investing in Turkish Liras because you’re concerned about the US dollar. You could just have a globally diversified portfolio.
Pat Collins (33:17)
Well, so maybe it makes sense to talk about some of the the practical ways. if if if we’ve convinced you that international investing is a part of kind of a good investment portfolio, where do you start? I remember having this conversation when I first got in the industry and I was fascinated by what should the mix between US and international be? And so I started talking to lots of people.
Talked to people that worked on the in the investment industry, managing money directly. Talked to academics. I never got an actual nobody had an answer for that. ⁓ What they said was and I still kind of believe this to this day is there’s no right answer because nobody knows the future. The only thing we know is that you should have some international stocks in your portfolio to create more diversification in the portfolio, to create a lower your risk.
lower some of the things that, you the risks that we’ve been talking about. whether it’s you should have 60 percent in U.S. or 70 percent U.S. or 80 percent U.S., I didn’t hear much of a, you know, kind of an argument that, you know, from from the academics and the evidence based folks that there was really a great answer for that. But how do you answer that? Like, how do you think about how to allocate amongst U.S. and international stocks?
Marcus Schafer (34:40)
Yeah, I mean, it’s a, you probably start with the same foundation. You should start every decision. Let me go to what prices are telling me. So you go to the global market cap and then you say, do I want more of this or do I want less of this? And in this situation, most people, they start with that and they say, Hey, I do want more home exposure, more us exposure. And so like you were saying, Hey, if you’re starting points about 65 % equity,
in US stocks for the global market cap. So maybe I go a little bit beyond that. I think the most important thing is if you do it that way, you have a framework to come back to every single year to really reassess, hey, is there a reason to make a change? And why do I say that? Well, if you pick the static allocation in the late 80s, like you were talking about, US is 35 % of the world and you never have
you never change it, then you come back and wow, it’s really, really, really different. ⁓ So, but it also prevents the situation I was talking about with after the last decade where you don’t want to overreact too much in any direction. So can you find an anchoring point within 10 % of that, something like that, and then go from there.
Pat Collins (36:04)
I think it’s a great point for ⁓ any of our clients who are on the listen to the episode. That’s kind of how we’ve approached it, starting with the global market cap and working our way off that. think that’s it is a framework that you can follow each year. It’s not ⁓ always 100 % static. I would caution people from making changes every single year to say, well, the U.S. is now 67%. So I’m going to move my. But I think every several years coming back to it and looking at the global market cap, how has it changed?
If you own a global index, it’s going to just naturally change with how the market weights change. So if the US becomes less of a overall contributor to the global market cap, then your index is going to show that. If you are buying individual index funds, depending on how you’re rebalancing and whatnot, you might need to be a little bit more cognizant of what’s going on. And you may have to go in and manually make some trades to get you back to where you want to be.
I think there’s one other thing that we haven’t really touched on, and that is inside the international space. And this is kind of more of the practical considerations. We’ve been just talking about international stocks, but we have what most people have categorized as developed versus emerging markets. And do you want to talk a little bit about how is that defined? I guess, first of all, we even know and.
How should we be thinking about them? Should we be avoiding them? Should we still be embracing global diversification with an emerging economy or emerging stock market?
Marcus Schafer (37:34)
Yeah, yeah. The difference in definition between developed and emerging is essentially developed has institutions that look more like the US. The US is a developed, it’s one of the developed ⁓ countries. And if you’re outside the US, a lot of times they don’t have just a US portfolio, right? They have a developed portfolio and the US is part of it. And then emerging, the name kind of, we try to do our best in finance to make things self-explanatory.
They’re on the way to develop, it’s most certainly a spectrum. It’s a continuum, right? Like probably the country that’s most on the border is South Korea. About half the providers call South Korea emerging. It’s the most developed emerging country. And then about half call it a developed country and it’s the most emerging of the developed countries. And so you just have this arbitrary classification.
I would say a few things really for most investors stand out around emerging markets. And that’s really this risk of expropriation. Can you get your money out of the country? And that’s why I think a lot of people define emerging markets separately, because there just tends to be some more capital controls about getting that currency and getting it out. Case in point, China has a lot of these.
controls, they’re getting better, which has enabled a lot of people to hold more in Chinese stocks. The real example is Russia kind of circa a few years ago. Your Russian holdings went to zero. So you just had to be really, really cognizant. And most of the investment managers that we’re looking at, we’re entrusting them and monitoring them to make sure that, hey, are you doing an active process to make sure that
there’s a specific risk here and we want you to be aware of it and monitoring that risk. We’re kind of trusting you to take action if necessary.
Pat Collins (39:37)
Yeah, I think as ⁓ investors, we want to make sure we’re investing in economies and markets that are true markets, meaning that there’s fairness, there is buyers and sellers that are setting prices, there’s not manipulation going on in the market, that there is rule of law, that if there’s disputes, there’s a court system that you can go to, there’s all those types of things. And like you said, the managers that we use would be very cognizant of looking at those types of things. Obviously, that could have massive impact on returns.
So avoiding countries that really aren’t investable is important because yes, maybe things look good now, but all it takes is one regime change or something that happens and it can really blow up in your face. So making sure that there’s a history of open and free markets basically we think is important.
Marcus Schafer (40:24)
Yeah. And then the choice you’re ultimately left with. it’s kind of how much do you want US versus non-US? Second question you have to be asking yourself is how, right? So you can buy a, you can buy a one-fund solution that does US and non-US and makes all those choices for you. It’s the most freeing one to go do what matters to you. We have US, non-US and emerging three independent
portfolios that allows more accuracy in rebalancing some tax loss harvesting opportunities. That’s a nice balance. But if you go more extreme from that, then what are you left with? Single country ETFs? It’s probably a little bit overkill in my opinion.
Conclusion – and preview of the next episode on rebalancing
Pat Collins (41:14)
Totally agree. ⁓ So, you know, maybe just closing for this podcast. Hopefully, I guess my big takeaways are there. ⁓ The way to think about it, there’s a lot of value in investing internationally. I think we’ve talked about the diversification benefits, the risk if you were just an investor that’s saving for the future, that you could have all your money in one area of the market.
and have a prolonged period of downturns at a time when you need to be pulling your money out. That is kind of like one of the worst things that can happen for investors. So international investing helps with that. Global diversification helps with that. And as far as how to do it, you know, I think we kind of went through a few different ways, but probably the best thing is just look at the global market and figure out how much is in U.S. and how much is international. And you want to tweak it a little bit from there. Great. But we just thought we would caution you against the extremes of all or nothing.
Marcus Schafer (42:12)
Yeah, yeah. The opening question I started with is, hey, the US has had a really great run. Does that mean international investing is no longer relevant? And it kind of misses, it hits only one aspect of the question, right? And it’s an expected return question and it’s not a risk adjusted expected return. it’s, hey, if I’m only thinking about future returns, maybe I haven’t solved the full equation because the real question is,
Hey, if there’s a market pullback, how can I best weather that? And one of the things we know in looking back at history is there are market pullbacks. Otherwise, we would not be getting these crazy. We would not be getting a 5 % premium annualized going back a hundred years. We would not be getting 10, 15 % a year returns without some sort of risk.
And if we can’t pinpoint when that risk is, then we have to be diligent all the time to protect against it.
Pat Collins (43:15)
I love the series we’re in because it’s kind of, me, it’s very practical. Last time we talked about setting your asset allocation. This time we talked about how to think about a split between US and international. Next time we’re gonna be talking about rebalancing, which is kind of the active part of managing a portfolio. So hopefully everybody’s been able to take some nuggets out of these and use them with their own portfolios.
Marcus Schafer (43:39)
Wonderful. All right. See you again soon.
Sources:
1 Chambers, David and Dimson, Elroy and Ilmanen, Antti S. and Rintamäki, Paul, Long-Run Asset Returns. Available at SSRN: https://ssrn.com/abstract=5022480
2 UBS Investment Returns Yearbook 2025: https://www.ubs.com/global/en/investment-bank/insights-and-data/2025/global-investment-returns-yearbook-2025.html
3 International Diversification—Still Not Crazy after All These Years. AQR, 2023: https://www.aqr.com/Insights/Research/Journal-Article/International-Diversification-Still-Not-Crazy-after-All-These-Years
4 Japan in the News, But It’s Nothing New. Dimensional, 2024: https://www.dimensional.com/us-en/insights/japan-in-the-news-but-its-nothing-new
5 A Tale of Two Decades: Lessons for Long-Term Investors. Dimensional, 2020: https://www.dimensional.com/us-en/insights/a-tale-of-two-decades
6 Has Australia Really Had a 28-Year Expansion? Federal Reserve Bank of St. Louis, 2019: https://www.stlouisfed.org/on-the-economy/2019/september/australia-28-year-expansion
7 Investor Risk: Behavioral Biases That Cost Investors Returns. Greenspring Advisors, 2025: https://youtu.be/jMxlCOdjkqg?si=CzWk2vQ6QEJUyW3P
8 Global Diversification Still Requires International Securities. Dimensional, 2024: https://www.dimensional.com/us-en/insights/global-diversification-still-requires-international-securities
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