The international markets lagged the US market by a significant margin in 2014. In fact, they have lagged in recent years. Nevertheless, Nobel Prize-winning economist Robert Shiller told CNBC last month that he’s thinking about shifting his personal money into international stocks. Shiller believes the stunningly low long-term interest rates are pushing U.S. stocks higher and said “Europe is so much cheaper. What I have done is I’ve invested in Italy indexes, Spain index.”
Wall Street Journal reporter Jonathan Clements is on the same page. He recently wrote an article for the Wall Street Journal detailing four reasons he’s inclined to up his allocation to both emerging markets and developed foreign markets. His first sentence summarizes his reasoning in a nutshell, “What goes down might come up.” The four reasons he listed were:
- U.S. stocks have outperformed foreign shares
- U.S. stocks now account for more than half of global stock-market capitalization
- The dollar has soared in the currency markets
- Many foreign stocks are cheaper than U.S. stocks
You have to look no further than the Callan Periodic Table of Investment Returns for proof of that statement. And don’t worry about straining your eyes to see what asset class was the top performer in each year. Rather, if you take a quick look at this patchwork quilt of investment performance, the message is as crystal clear as any investment advice will ever be: There is no pattern to investment performance.
If you accept that we cannot predict which asset classes will outperform each year, the only logical approach is to construct and stick with a diversified portfolio with exposure to all asset classes. If that’s the case, even if you figure this is the year international markets will come roaring back or that the strong dollar or high valuations in the US make it a good time to invest internationally, you shouldn’t have to make portfolio reallocations.
Ideally, the percentage of international stocks has been set in your portfolio according to your risk tolerance, goals, and investment timeline. Therefore, you should not increase or decrease exposure to international stocks or any other asset class based on what anyone says – even if they have won a Nobel Prize! If you stick with your properly diversified portfolio and rebalance regularly, you’ll reap the benefits these market experts discuss without taking more risk or risk being wrong. After all, there will always be an expert saying now is the time to get in or out of a particular asset class or investment. It’s safest to view this advice as entertainment and remain disciplined in your properly diversified and allocated portfolio.