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International Stocks: Are You Crazy to Buy Now?

You probably have them in your retirement account, and that's probably not making you happy

spinner image International Roth stocks fluctuating on a blue screen
Torsten Asmus/Getty Images

It’s been a bad year for investing in just about all assets — stocksbonds, gold and cryptocurrencies. The greed that I saw in January when stocks hit an all-time high has turned to fear, perhaps nowhere more so than in international stocks. A total international stock index fund is down 26.4 percent through Sept. 29, lagging the performance of a total U.S. stock index fund by 2.6 percentage points.

The international news is especially horrible at the moment. Russia has annexed part of Ukraine and is threatening to use nuclear weapons, and Europe is facing surging heating prices this winter. China’s growth has stumbled amid fierce tensions with the U.S. over Taiwan and trade. The dollar is surging relative to major currencies like the euro, the British pound, the Japanese yen and the Chinese yuan.

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Yet it’s not just one year of bad performance for international stocks. Over the last decade, foreign stocks have badly lagged the U.S. For the 10 years ending Sept. 29, the total international stock index fund gained only 3.38 percent annually, compared with 11.49 percent for a total U.S. stock index fund. I’ve made the case for owning international stocks before and been dead wrong. In fact, it was the late Vanguard founder John Bogle who argued to avoid international stocks or keep to no more than 20 percent.  

Is investing in international stocks worth it?

Everything above may seem like I’m making the case to avoid international stocks, but I’m not. I’m a big believer in Warren Buffet’s advice to “be fearful when others are greedy, and greedy when others are fearful.” Being greedy and buying stocks in March 2020 worked well because fear of COVID-19 drove stocks down in a swift bear market. Similarly, being fearful and selling stocks at the end of last year worked well when others were greedy. The same has been true for all of the bears and bulls so far this century.  

Keeping a target allocation means buying stocks when they are down and selling when they are up. It turns out that buying low and selling high works better than the reverse, although research from Morningstar, the Chicago investment trackers, indicates that people do the opposite overall. Economic news tends to be the worst at the bottom and best at the top of the stock market. 

The international news is bleaker than a Siberian winter now. But that news is already priced into the market. Perhaps that’s why the U.S. stock market is trading at 16.5 times earnings while the international stock market is cheaper at only 11.3 times earnings. And while total return matters far more, international stocks yielded 4.12 percent over the past year while U.S. stocks paid only 1.72 percent. That is not to say foreign stocks can’t go down further, but I’m betting capitalism will survive, at least in most of the larger and strongest economies. Any company can go bankrupt, and even a country’s stock market can go under, but not the whole rest of the world.

Though Bogle wasn’t keen on international stocks, Vanguard itself has 40 percent of the stock portion of its target date retirement funds allocated to international stocks. Fidelity’s target date index funds have about 40 percent international as well.

My argument is simply that I wouldn’t only buy stocks in Colorado (my home state), and you shouldn’t only buy in your home state. Same goes for our home countries.

The basics of buying international stocks

Don’t buy international stocks if you are looking for a quick recovery. Buy only if you are investing for the long run and have the ability to handle the pain of possible continued losses and underperformance versus the U.S. Assuming you live in the U.S., international stocks should be a smaller portion of your stock portfolio. 

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Which countries would be best? My answer is all of them. You can own thousands of companies in dozens of countries by owning one simple, low-cost, total international stock index fund. Examples include:

  • Fidelity Total International Index Mutual Fund (FTIHX) 0.06% annual expense ratio
  • iShares Core MSCI Total International Stock Index ETF (IXUS) 0.07% annual expense ratio
  • Vanguard Total International Stock Index Fund ETF (VXUS) 0.07% annual expense ratio

While there is no assurance that international stocks will bounce back, I would advise embracing Buffett’s statement I quoted above. Times are scary, particularly overseas, so try being greedy while others are fearful. Buying (or even continuing to hold) international stocks now isn’t for the faint of heart.

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