Don't leave yourself under-exposed to international stocks
Right before the emerging markets boom of the mid 90's, I stressed to my parents to diversify their portfolio into at least 60% international and international royalty businesses. If only they had listened.
My mother is listening now. She has only 50% US allocation and the remaining broken up between Asian, Russian, Canadian and Indian sectors. We did this about two years ago and she has been enjoying an 84% gain since doing so.
If there is one issue facing retirement investors — aside from not saving enough — is that their portfolios may be just a tad bit too U.S.-centric.
The average investor in or near retirement has more than 72% of their portfolio tied to U.S. stocks. One-third of them are significantly overexposed to the U.S. — with absolutely zero exposure to international stocks. Market pundits have dubbed this propensity to favor U.S. equities over international stocks as “hometown bias.”
And the phenomenon could be costing you some serious money over the long term. That’s because as we’ve become more of a global and interconnected economy, the U.S. has seen its leadership position slip. When looking at the world’s stock market capitalization, back in 1985, the U.S. was the leader and made up around 50% of the total. By 2012, that amount had dwindled to just 35%.
Meanwhile, international companies are quickly becoming the global leaders across various sectors. Think about it. You’re just a likely to see a Toyota (TM) on the road as you are a Ford (F) these days. By being so U.S.-focused, retirement investors are missing out on the vast bulk of the world’s opportunities.
Adding a dose of international stocks these days is critical for retirement investors. Luckily, it’s pretty easy to add that dose. Here’s one stock, one exchange-traded fund (ETF) and one mutual fund to get you started.
That edge gives DEO some pretty decent pricing power. It also provides some pretty hefty cash flows and earnings. While full-year 2014 earnings ended up dropping versus 2013, the DEO has really rewarded shareholders over the long haul. Over the past 15 consecutive years, Diageo has managed to hike its dividend payment and currently yields 3.5%. Meanwhile, over the past decade, DEO stock has had averaged annual gains of about 11.5%.
Global reach, steady cash flows and a recession resistant product are exactly what retirement investors should be looking for in international stocks.
Vanguard Total International Stock ETF (VXUS) How would you like to buy the whole world outside the United States with just one ticker?
Well, that’s just what the Vanguard Total International Stock ETF (VXUS) does. The ETF tracks the FTSE Global All Cap ex US Index, which covers 98% of the world’s non-U.S. markets.
As for returns, the fund’s benchmark has managed to return a decent 6.89% annual return over the last ten years.
All in all, VXUS makes adding international stocks and boosting your weighting a piece of cake. And since it’s from Vanguard, you know that the ETF’s expenses are going to be cheap. VXUS only charges 0.14% — or $14 per $10,000 invested — to own. That’s significantly less than the 1.36% than the average charge from funds focused on international stocks. Not to mention that VXUS yields a U.S.-beating 2.83%.
and what he calls the three B’s — brands, barriers to entry and best-in-class management teams. He then screens for fundamentals and selects 30 to 50 stocks to buy.
So far, that strategy has worked well. FIVFX has managed to outperform its benchmark throughout the life of the mutual fund — including down periods. All in all, FIVFX has managed to turn $10,000 invested in 2004 into nearly $18,000 today.
Expenses for this mutual fund of international stocks are more than a passive option at 1.12%, but they are still below the Lipper average cost for similar mutual funds. And considering how well Simnegar has done, paying that fee may be worth it. The minimum investment for FIVFX is $3,000.