3 Reasons Investing In Foreign Stocks is a Smart Move

3 Reasons Investing In Foreign Stocks is a Smart Move

August 4, 2023

3 Reasons Investing In Foreign Stocks is a Smart Move

3 Reasons Investing In Foreign Stocks is a Smart Move

August 4, 2023

US stocks have done far better than non-US stocks for the last quarter century. It’s not even close. And over the past decade, the out-performance has been particularly stark. US stocks have done 2.5 times better.

Not surprisingly, many clients ask: why bother to own non-US stocks? It seems the rest of the world can’t keep up with the US – at least regarding stocks.

The rationale to keep a portion of your investments outside the US is simple: the future will be different than the past. Of course, you knew that. Here’s why you should be particularly reluctant to own only US stocks.

 

Reason 1

Compared to non-US stocks, US stocks are far more expensive. Analysts often compare stock prices to earnings (P/E ratios) or accounting value (price/book ratios). US stocks are about twice as expensive as stocks outside the US. Another way to compare is dividend yields. US stocks yield less than half of non-US stocks.


Reason 2

The US stock market has become far less diversified than it was. Today, the market is 30% technology companies – a far higher percentage than a decade ago. These companies are certainly making the world better in myriad ways. But isn’t the world more than a handful of companies like Apple, Microsoft, Amazon, Google, and Facebook? Five technology companies represent 20% of the US stock market today. That’s a lot of risk.


Reason 3

Without non-US stocks, you are missing out on a lot. A broad non-US stock fund owns 8,000+ companies. Ignoring that opportunity set is a risk.

 

This is not an argument about whether the US economy, or US companies, are better, stronger, more profitable, or faster-growing than non-US stocks. That is not the critical point. Every stock has a price. An investor should care about whether – based on today’s stock prices – they will build wealth by only owning US stocks. As the Economist pointed out in a thoughtful column recently, you ignore foreign markets at your peril.

Our recommendation: diversify, diversify, diversify.

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This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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