Image Credit: Johannes Vermeer, “The Astronomer” (ca. 1668), The Louvre via Wikimedia Commons
By Jason Zweig | Oct. 1, 2018 11:01 a.m. ET
One of the worst occupational hazards of doing the same thing for a long time is repeating yourself — often without noticing it. My column for The Wall Street Journal this past weekend, I realized after I wrote it, was similar to one I had written 20 years ago. Does that make me an inflexible ideologue whose views have been preserved in amber for decades, oblivious to the changes around me? Or does that make me consistent? I’m not sure myself; all I know is that I start every column with my mind as close to a blank slate as I can get it. I let the data and my reporting take me where they lead. If I come out in the same place I’ve been before, it isn’t for lack of trying not to. Ultimately, you the readers are the best judges, so I will let others decide.
What I wrote two decades ago follows below.
Invest Globally — Still
Sure, the numbers are scary, but staying home is risky too.
Money magazine, December 1998
If you’ve still got any money in mutual funds that invest outside the U.S., you’re probably ready to shoot anyone who says that international investing is a good idea. So shoot me. Sure, you may have lost 25% of your money on a foreign fund in the first nine months of this year. But the only people you should be itching to shoot are those who tell you not to invest overseas.
I know this year’s numbers look bad. So far in 1998, the average emerging markets fund has lost 34.5%, Latin American funds are off 40% on average, and even diversified foreign portfolios like Oakmark International and Warburg Pincus International have lost 12.5% and 4.4%, respectively. Meanwhile, despite a wild ride, U.S. stocks were up 12% through late October.
At first glance, the hostility many Americans have long felt toward investing in other parts of the world seems justified. Who wants to invest where currencies bounce around like Mexican jumping beans, tanks can be as common as taxis on city streets and countries switch governments faster than Madonna changes lingerie? When our own market is so familiar and so lucrative, why bother trying to understand all those places where people talk funny and eat weird food? In August, retail investors yanked a net $4.5 billion out of international funds; in September they withdrew $4 billion more.
But that’s a mistake, and here’s why.
Vive la difference
You’ve probably heard some pundits say that the overseas markets now march in virtual lockstep with Standard & Poor’s 500-stock index. In today’s world of CNN and the Internet, say these experts, money flits in and out of most markets in unison. After all, if investors get jittery in the U.S., which makes up half the total value of all stocks worldwide, it’s only natural for the rest of the planet to panic. So when Wall Street sneezes, Copenhagen, Caracas, Kuala Lumpur and Cairo catch cold.
Sure enough, in the third quarter, when the U.S. fell about 10%, the other 22 countries in the Morgan Stanley Capital International World Index lost an average of 15%; not one major market anywhere in the world rose as ours was falling. That’s roughly what happened in 1987 and 1990, as well as in the bear market of the 1970s. It seems that just when you most need global diversification, it’s most likely to fail.
Nevertheless, the true test of an enduring investment strategy is not whether it works at any given time, but whether it works over time. And international investing does. The fact is, you won’t lower your risks by keeping all of your money in the U.S.; you will raise them.
While foreign stocks may drop in temporary tandem when U.S. equities crash, it’s a different story in the long run. Finance professor Bruno Solnik, who helped pioneer the case for international investing back in 1974, writes in the latest issue of Investment Policy magazine: “Contrary to some media statements, this international correlation has not increased markedly over the past 25 years.”
Over the longer term, the similarity between U.S. and foreign-stock returns has remained relatively stable and surprisingly low. In the past five years, despite the way 1998 has made most markets appear to be joined at the hip, only about 60% of foreign-stock returns have moved in sync with the U.S. market. And since 1974, a mere 45% of the long-term movement of foreign markets has been correlated with our own. That suggests that overseas stocks should smooth the bumps of your portfolio in all but the most turbulent times.
No market is an island
Of the world’s 35,639 regularly traded stocks, only 12,863 are based in the U.S., reckon the investment researchers at Wilshire Associates in Santa Monica, Calif. That means nearly two-thirds of all investment opportunities are based outside our borders.
“Do you really think,” asks Rick Spillane, who oversees international investing for the Fidelity funds, “that there are no good companies worth owning out there?” Let’s say you think cellular telephones have great promise; why limit yourself to Motorola when you could also consider Nokia of Finland or Ericsson of Sweden? Likewise, if you’re excited about enterprise software, should you stick to Oracle when you can also buy SAP of Germany?
And if you simply love cheap stocks, why hunt, perhaps vainly, in our still pricey market when bargains abound elsewhere? Chris Browne, co-manager of Tweedy Browne Global Value Fund, says 15% of the 111 Japanese stocks in his portfolio are trading below the value of their cash on hand. In other words, the money these firms have in the bank is worth more than their stock prices — and you get the businesses for free.
David Fisher, who has been investing in emerging markets since they were called “Third World countries,” oversees $16 billion of emerging-markets stocks for pension funds and other institutional investors at Capital International in Los Angeles.
“A year ago,” says Fisher, “our analysts and portfolio managers were bumping into people from other investment firms everywhere they went. Now most of those folks are gone, and we’re competing with industrialists from Europe and the U.S. who are buying entire companies. That tells me we’ll look back on this period as an absolutely wonderful investment opportunity. I sleep real well at night.”
Although Fisher’s fund (which is down 33.4% this year but up 15.6% a year over the past decade) isn’t open to retail investors, he says that many of his institutional clients are adding money to their accounts, hoping to capitalize on the cheap stocks that he and his colleagues are collecting at “compelling values.” Brazil’s stock market has lost 57% since its peak in mid-1997; Mexico is down 60% since 1994; Thailand has tumbled 91% since 1994; and Indonesia has shrunk by 95% since 1990.
Of course, if you invested in those markets at their peak, I feel your pain. But now is not the time to turn your back on them forever. Instead, harvest a tax benefit by selling before year-end; you can use your fund losses to reduce your taxable income dollar-for-dollar up to $3,000. Then buy right back in at today’s lower prices (if you’re buying back into the same fund, be sure to wait at least 31 days after you sell it or the IRS won’t allow the deduction).
What history really shows
It bears noting that over the past 10 years, the average foreign-stock fund has returned just 7.63% annually, while the average U.S. stock fund has earned 13.78% annually.
But try to imagine that it’s 1988 and you’re Japanese. Your stock market is the most lucrative in the world; your companies are the envy of management gurus everywhere. Buying stocks outside Japan (especially in a then decrepit economy like the U.S.) strikes you as the dumbest idea since sushi vending machines. So you put all your money in Japanese stocks. Now fast-forward to 1998: After Japanese stock prices have skidded for a decade, you’ve lost more than 50% of your stake.
The real lesson to draw from history is not that you should never invest in foreign markets like Japan; it’s that the Japanese should never have kept all their money at home. And neither should you.
Because you can’t possibly know what the future holds here or anywhere else, it’s imperative to spread your bets. With 50% of the planet’s total market value outside the U.S., even if you have 13% of your portfolio overseas — the average for an American fund investor — you’re taking a big gamble that your backyard will continue to be the world’s best place to invest.
If you’re ready to shop elsewhere, here are some tips: Look for foreign funds with annual expenses under 1.5% and portfolio turnover of 75% or less (which will keep the fund’s trading costs low). And don’t buy any fund between now and year-end without asking if it has a taxable capital-gains payout coming; if so, wait till January. A few good choices: Acorn International, Fidelity Diversified International, the brand-new Longleaf Partners International, Scudder International, T. Rowe Price International Stock, Vanguard International Growth and Vanguard Total International Stock Index. If there are specific countries you’d like to target, consider the tax-efficient WEBS, which are index funds for 17 individual countries listed on the American Stock Exchange and available through full-service, discount and Internet brokers.
In any case, this is no time to be a financial xenophobe.
For further reading:
Benjamin Graham, The Intelligent Investor
Jason Zweig, The Devil’s Financial Dictionary
Jason Zweig, Your Money and Your Brain
Jason Zweig, The Little Book of Safe Money
Articles and other research: