For many people, there’s no place like home. But if that’s how you feel about your money, you’re doomed to a financial life of sub-par returns.
It’s natural to want to invest at home. If you live in Singapore, for example, you see the Straits Times Index quoted every night on the news. You drive by the DBS building every day. If you’re based in Hong Kong, you’re used to watching the Hang Seng Index. And if you’re American, U.S. markets are probably your first investment stop.
But thinking that investing at home is safer is a dangerous investing myth. If you’re only investing at home you’re putting your portfolio at risk… and more often than not, you’re missing out on big gains.
That’s why we believe everyone should have some international exposure in their portfolio. So today, we’re debunking three of the biggest myths about international investing…
Myth #1: “Stocks are too expensive in other markets”
Stock markets around the world have been rising over the last decade…
For example, the MSCI All Country World Index (which reflects the performance of global stock markets) is up 201 percent since global market lows in March 2009. The S&P 500 is up 303 percent over the same timeframe. And now, by many measures, U.S. equities are overvalued.
So you’d be forgiven for thinking that stocks around the world are expensive.
But there are lots of markets that are still cheap…
One of the best ways of measuring market value is to use the cyclically-adjusted price-to-earnings (CAPE) ratio. It’s a longer-term, inflation-adjusted measure that smooths out short-term earnings and cycle volatilities to give a more comprehensive, and accurate, measure of market value.
As you can see in the chart below, it’s true that stocks are expensive in the U.S., Denmark, Ireland and other markets based on CAPE.
But there are plenty of cheap markets too. The below chart shows the 10 cheapest markets by CAPE ratio.
Russia, the Czech Republic, Turkey and Poland are considered the cheapest countries based on CAPE. So there’s still value out there.
Myth #2: “I don’t hold enough shares in my home market”
As I said earlier, people invest mostly in their home market. This is called “home country bias” and it refers to the tendency of investors to have a portfolio weighting bias in favour of their local market. And as we’ve written before, investing in what you know – which is generally what you see around you – is generally smart.
For example, as shown in the graph below, the average American with a stock portfolio has 79 percent of her money in U.S.-listed stocks. Investors in Japan put about 56 percent of their money in Japan-listed stocks. People in Australia have around two-thirds of their portfolio in local shares.
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That might be what they’re comfortable with. But from a portfolio diversification perspective, it’s like juggling live dynamite.
As the graph below shows, American stocks account for only 53 percent of total global market capitalisation (that is, the value of all stock markets in the world). So American investors are a lot more exposed to U.S.-listed companies than – based on a breakdown of the world’s markets – they should be. Japanese investors are even more lopsided in their home preference – Japan accounts for only 8 percent of the world’s stock market, yet they invest 56 percent of their money at “home”. And Australians put 64 percent of their money into their own market – which is just two percent of the world’s markets.
Why is this a problem?
Home country bias can put investors’ portfolios at risk if their local economy suffers a downturn.
If all of your assets are in American stocks, bonds and dollars, what happens if the banking sector goes bust… the dollar massively devalues… the real estate market crashes… or the government starts searching for ways to plug a massive budget deficit, to the detriment of your retirement portfolio? Your U.S. assets are just cherries for the picking.
So one of the best ways to protect yourself against a domestic downturn – or worse – is to have some exposure to foreign stocks.
Myth #3: “Other markets are lousy performers”
Many investors think big, developed markets like the U.S., Europe and Hong Kong tend to perform the best. But if you’re only investing in markets like this, you’re missing out on big gains.
Just take a look at this chart…
As you can see, in 2017, the S&P 500 was up 21.3 percent. The Singapore Straits Times Index returned 31.9 percent. And the MSCI World was up 24.6 percent. But other markets did done a lot better… like the 55.6 percent return from the MSCI China Index or the 43.1 percent return from the MSCI Asia ex Japan Index.
My point is that diversification is critical… you might do well for a while with being overweight in your home market, but over the long term you’ll perform better (and catch the outperformers) by diversifying.
Publisher, Stansberry Churchouse Research