Right now, the U.S. stock market accounts for about 40% of the world's stock market cap -- a fairly massive fraction considering that the country has less than 5% of the globe's population. But that still leaves another 60% of public company stock being traded on foreign exchanges, and some of those are in emerging markets, where one might expect faster growth than our mature economy could deliver.
This leads to a natural question -- one that was asked recently by a Motley Fool Answers listener: How much of a well-diversified portfolio should be allocated into international stocks? There's a wide range of thought on the matter, but for this segment, hosts Alison Southwick and Robert Brokamp have special guest Buck Hartzell, director of investor learning and operations at The Motley Fool, to help break down the arguments.
A full transcript follows the video.
This video was recorded on Oct. 30, 2018.
Alison Southwick: The next question comes from... Oh! It's another Allison, but this one has two Ls, and she's in Florida. "How much should I have in international stocks? I think the frequently accepted recommendation is about 30-40% of a portfolio or even up to 50%, but this week there was a long and heated thread on the Bogleheads" -- they're always heated on the Bogleheads Forum, aren't they -- "challenging this. The title of the thread was, 'It's not enough to mumble Stay the Course. Int'l investing has been a disaster!' Would you be able to comment on this?"
Robert Brokamp: First of all let's start, because this was playing off the Bogleheads Forum, with what Jack Bogle says. I just recently heard an interview. The Bogleheads conference happened recently and he made some comments about international investing. He's one of those people that says it's not really necessary. When you look at the long-term returns of U.S. vs. international, there's no evidence that international outperforms U.S. over the long term. Plus the U.S. is a more stable country. We have a pretty good, highly regulated securities market, so you don't have to worry quite so much about fraud. Plus around 40% of the revenues from companies in the S&P 500 come from overseas ventures, so you're still getting some international diversification there.
So if you're going to go with Jack Bogle -- and it's hard to argue too much with Jack Bogle -- just stick with U.S. stocks. That said, when he was running Vanguard and he has since retired, they had international funds and they still have international funds. One of the reasons are there are time periods when international stocks outperform U.S. It happened in the 1980s. It happened in a good part of the 1970s. It happened in the first decade of the 2000s.
Jason Zweig in The Wall Street Journal wrote an article saying, "It's pretty tough, now, from a valuation standpoint, to ignore international stocks. They're about half the valuation of U.S. stocks." Of course, we've been saying this for years and international stocks still, other than in 2017, have underperformed U.S. stocks over the last five years or so.
I would say you have to be comfortable with the volatility of international stocks. I have about 20-25% of my 401(k) in international stocks, but you don't have to have it. One thing I will say is the way that was phrased on the Bogleheads is that international investing has been a disaster. It's not really been a disaster. Over the long term international stocks have underperformed U.S. stocks a little bit, but it really depends on what time period you're looking at.
Buck Hartzell: And I would add if you're buying individual stocks there can be some extra trading costs from some of your brokerages when you buy international companies. I work mostly on Canadian operations, so I have ideas through all our services. I'd say that's an easy market because it's pretty familiar with us. It's right across the border. There's other ones where there's unique things in accounting that are a little bit different and more difficult to comprehend.
So I would say I don't think you need to, but if you have an interest and you want to find great companies, why would you not look everywhere for those? But you don't have to. You can do very well. Berkshire Hathaway and Warren Buffett have very little of their capital [in international stocks and] they're trying to buy more international companies and he's been trying for years. He's done pretty well with mostly sticking to the U.S. market.
Alison Southwick has no position in any of the stocks mentioned. Buck Hartzell owns shares of BRK-A and BRK-B. Robert Brokamp, CFP owns shares of BRK-B. The Motley Fool recommends BRK-B. The Motley Fool has a disclosure policy.