Debunkery: Learn It, Do It, and Profit From It—Seeing Through Wall Street's Money-Killing Myths

BUNK 43

FOREIGN STOCKS JUST FEEL SO . . . FOREIGN

Does even the phrase “foreign investing” give you shivers? Do foreign stocks just seem so . . . foreign? You’re not alone. Far too many US investors wholly ignore the non-US world. Or they may consider foreign an inherently “riskier” asset class, holding just 10 percent or 20 percent. Too little!

I’ve heard even established professionals claim foreign is “riskier.” Riskier than what, they don’t say. This is easily disproved with free public data and a bit of history. Truth is: Non-US equity and bond investing shouldn’t be any more or less risky than US investing. A good, well-diversified equity portfolio will benefit from being fully half in non-US stocks.

Fifty percent foreign? Seem outrageous? It’s not. The US is still the largest single nation in terms of total market capitalization—but it’s just about 49 percent of the developed world equity markets. ¹ Considering the whole world—undeveloped markets too—it’s about 43 percent.² If you’re US only, you miss more than half a world of opportunity plus extra diversification benefits.

Once upon a time, maybe it made some sense for US individual investors to ignore the non-US world. Sometimes, transaction costs for foreign stocks on foreign exchanges were excessive—eating into potential benefit. And we couldn’t always count on complete transparency from non-US firms. But in recent decades, as exchanges went electronic, trading globally is now quick and easy—you can buy lots of Chilean ...