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International Investing

Cullen,

I listened to 3 financial podcasts this weekend featuring guests that I thought had good ideas on portfolio construction etc. One thing was interesting to me though. All 3 said you need international stocks in your portfolio for "diversification" in case of a declining dollar or for value against the high growth US stocks. None of the 3, however, gave any data to back up the claim.

Ever since I have been investing, most commentators have gone with the "you need international stocks for diversification" advice. The actual data, however, shows no such benefit over the last 50 years. Over that time, a portfolio of US only stocks beats the pants off of a US & International Portfolio. As for the diversification claim, most years the markets move in tandem. In that 50 years there were only a couple of years when foreign outpaced US by any significance but yet many years were the US outperformed. So where does this whole mantra of international stocks helping your portfolio come from? I cannot find any evidence that it does at all. Is it just another one of those things that seems to make sense on the surface and therefore people parrot but never actually research?

International stocks are a hedge against US economic dominance.

Hi @jalanlong

There's no doubt that an international portfolio has underperformed a domestic US portfolio for a long time. That's primarily because the USA has a strong tech bias. So, the argument for international investing basically comes down to:

  1. A hedge against US economic dominance.
  2. A hedge against US tech dominance.
  3. A hedge against growth as an alpha factor (international is more value).
  4. A hedge against the currency.

This hasn't worked in recent history, but part of the reason we diversify is because we can't rely on the past to tell us what will happen in the future.

There's quite a lot of other research on this:

https://www.vanguard.com/pdf/ISGGEB.pdf

https://www.aqr.com/Insights/Research/Journal-Article/International-Diversification-Works-Eventually

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3849251