Month: June 2018

You can probably achieve your financial goals while sticking to US stocks, but exposure to international stocks might be desirable as well, depending on your individual financial circumstances. Here are three reasons why.

Diversification: First, academic research shows that investors have better outcomes over the long term when they spread their money around-among asset classes, market capitalizations, and even countries. Indeed, some academics believe you should have no more than half of your equity portfolio in stocks from any one country. That may not be right for everyone, but it’s a viewpoint worth considering.

Performance: In addition, the United States has a strong economy and stock market, but history tells many stories of strong stock markets that encountered problems. And there have been long periods in which international stocks have outperformed US stocks. From 2000 through 2009, for example, the S&P 500 Index lost 0.9%. International stocks generally performed much better, from 1.2% to 12.8%, according to MarketWatch.

Opportunity: Finally, more than half of the world’s market capitalization is outside the United States, and many international markets are growing rapidly. China and India are just two examples. There were 4.7 million science, technology, engineering, and mathematics (STEM) graduates in China in 2016, and 2.6 million in India, according to McKinsey Global Institute. There were just 568,000 in the United States. And ample venture-capital funding is available to innovative Chinese companies. So there is good reason to believe that, over the long term, international stocks have significant potential.

Of course, international equities have risks that US stocks don’t, including lessened trading transparency and heightened volatility, so it is important to consider your risk tolerance when investing in them. Your financial advisor can help you decide if they are right for you, and, if so, what role they should play in your portfolio.

In 2018, American investors said goodbye to a key retirement-saving strategy: the ability to “recharacterize” Roth IRA conversions.

That’s a mouthful, so let’s start with the basics by reviewing the two types of IRAs. Traditional IRA contributions are tax-deductible (in the year in which you make the contribution), but any withdrawals you make in retirement are taxed at your ordinary income-tax rate.

The Roth IRA, meanwhile, does not provide any tax breaks for contributions; however, earnings on the account and withdrawals are generally tax-free.

There are pros and cons for each type of IRA, and sometimes people change their minds about which is best. In the past, you’ve been able to convert funds in a pre-tax IRA to a post-tax Roth IRA simply by paying tax on the converted money. Your money then grows and is not taxed at withdrawal.

Sometimes, however, people change their minds about that conversion, and the old US tax law allowed them to undo that transaction anytime up until Oct. 15 of the year following the conversion. This is called a “recharacterization.” But under current tax rules, recharacterization is not allowed.

This may make Roth conversions less attractive for many individuals. If there’s no possibility of undoing a conversion, some people may hesitate to convert.

If you are thinking of converting a traditional IRA to a Roth IRA, you may want to speak with a financial professional to determine that the conversion is right for you (or come up with another plan if it is not).