One of the core concepts in investing is diversification: You need to own stocks in an array of industries so that if one part of the economy tanks, it won't take your whole portfolio down with it. But you can also diversify right out of your country's stock market -- there's a whole world of investments to choose from.
So how much of your money should you put into those international stocks? That's the question posed by Rule Breaker Investing listener John Felipe. For him, the question takes on added complexity because he lives in Canada, where the stock market is dominated by giants in a handful of industries. In this segment of the mailbag podcast, host and Motley Fool co-founder David Gardner, Motley Fool Chief Investment Officer Andy Cross, and senior analyst Jim Mueller discuss how best to get that foreign market exposure -- and the degree to which that should be a priority in the first place.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on July 31, 2019.
David Gardner: Speaking of learning, let's learn a little bit with John Felipe Levesque. John Felipe writes in, "Hi, David. I've been listening to the RBI podcast for the last year and I love it." Well, thank you, John Felipe! "I'm on my way to listening to all available podcasts." Now, I think he means all available Motley Fool podcasts, but he might mean all.
Andy Cross: Oh, that is an undertaking.
Jim Mueller: That's Mount Everest.
Cross: That's a graduate degree in itself.
Gardner: So, John Felipe, we may be misunderstanding. If you are, in fact, purposing to listen to all available podcasts, write us a year or two from now. I want to share your journey. That's amazing. He goes on to say, slightly more seriously, "I am now a Motley Fool U.S. and Canadian Stock Advisor member. I'm glad to say I'm beating both indices in the last year. Here's a question. I live in Quebec, Canada." I spent a little time in Quebec City within the last year and it's so beautiful, that historic part of your hometown, John Felipe. Thank you very much! "Typical recommendation for a stock portfolio is roughly one-third Canadian, one-third U.S., and one-third international to minimize foreign exchange risk and tax treatment of foreign investment. However, the Canadian market is less than 4% of the world market, and mostly made up of energy, finance, and materials. These are not my favorite investment sectors. At least we have Shopify! Also, a lot of U.S. companies or U.S.-listed companies -- like, for example, MercadoLibre -- are international. Do you care," gentlemen, Fools all, "about geographical diversification in our portfolios?" For his individual stocks portfolio, he's two-thirds U.S., he says, and one-third Canadian.
Mueller: There is a behavioral bias that's involved in his question, too. So many people invest much more -- maybe not John Felipe -- in their home country than in external countries. I'm one of them. I think every company I own is listed on a U.S. exchange.
Cross: It's actually called the home country bias.
Mueller: Exactly. That's not that damaging if the home country's exchange offers a wide range of selections.
Gardner: That is true.
Mueller: But France, for instance, is similarly a very small portion. Australia, very small portion of the world market. So, that can hurt you. It can get you into too narrow a range. So, with you, diversifying yourself outside like that, U.S. gives you a lot of variety, international gives you more variety -- I think you're doing all right here.
Cross: John Felipe said he's a member of Stock Advisor Canada, in which we offer a U.S.-listed and Canadian-listed recommendations every month. So I think Jim is right. While we do have a home country bias, the Canadian market is so small and tends to be very focused in those markets, as John Felipe mentioned, which in our minds are not the most exciting, greatest wealth-creating opportunities for any person in the world. Over the last 10, 20 years, those have really been focused in the U.S. markets. That's why we tend to concentrate mostly in there, besides the fact that most of us live here. But we have a lot of global members who invest -- and you can now invest much easier in the U.S. markets than it used to be. So, I would say in general, the U.S. market continues to be one of the most exciting places to invest because it has the best companies, and I think that's not going to change, in my mind, anytime soon.
Gardner: So, having just got back from China myself, I recognize the importance of that economy, the No. 2 GDP economy in the world. There are some great Chinese companies as well. And we've had them in our services. I think in particular of Baidu, which has been a wonderful long-term performer, even though more recently it hasn't been great. Or, think about Tencent or Alibaba, these are really big, world-shaping companies as well.
Is it fair to say, as we conclude this one, gentlemen, that we tend to be go-anywhere investors here at The Motley Fool? Show me the best company I can buy, and I'm going to buy it?
Cross: I think so, Jim. I would say that. We are looking for excellence wherever we go and wherever we can find that. MercadoLibre is another one that is not located here in the U.S. has been an exceptional recommendation of ours. That is not focused primarily here in the U.S. We're looking for excellence, and we will go where we can find that. That's been predominantly in the U.S. over the last 20 years.
Mueller: That's a fair point. Also, there's been a shift in companies themselves over the last 15, 20 years that might not have been taken into account by this kind of question, in that in your own country, the idea was, the company gets most of its revenue from that country. Now, with companies like Alphabet, Netflix, Amazon, GM, Toyota, all those --
Mueller: Uber and so forth, their revenue is a much more international, so they're not exposed as much to the risk of a recession in their own country.
Gardner: Really true. So, if you're really looking to diversify geographically, which I don't think we three purpose as a primary goal as investors, but if you are, maybe take a look at where their revenues are coming from, not just the market cap of where that company's based. All right, thank you!
Jim Mueller, thank you for joining us this week on Rule Breaker Investing!
Mueller: My pleasure!
Gardner: I really appreciate your insights!