Investors saving for retirement often avoid international stocks because of their perceived risk, but going global could actually reduce your portfolio risk. Why? International stocks may offer better value.
Over the six months ending April 30, the U.S. stock market, as measured by the S&P 500 Index, was up more than 8 percent and had surpassed its pre-recession highs. Overseas, the story is different. Some regions, such as Europe, have recently performed well, but others, such as Japan, have not.
As a result, the Wall Street Journal, using data from FactSet, reports that the U.S. stock market is now among the world’s most expensive. For example, U.S. stocks trade for 16 times their per-share earnings forecasted from May 2014 to May 2015; non-U.S. stocks, 13 times.
Diversify to benefit your portfolio
Another benefit of international investing is the potential it offers for diversification. When some markets are performing poorly, others may be performing well. If you invest in a number of markets, your chances may increase of achieving an overall return you’re comfortable with.
How much to invest in international stocks is a personal choice, but the conventional wisdom may be outdated: It used to be that investors were encouraged to invest 20 percent of their portfolios in international stocks – but this was in the days when the U.S. played a much more significant role in the global economy. Today, the U.S. represents roughly 20 percent of the global economy. It might make more sense to invest more of your portfolio abroad than in the past.
Risk exists
Keep in mind that international investing can add risk. Foreign markets may be less transparent, and if foreign currencies weaken against the U.S. dollar, the value of your investment could fall.
Your advisor can help you decide if adding international stocks to your portfolio is a good idea based on your individual financial circumstances and goals.