Although U.S. stocks represent almost two-thirds of global stock market value, the U.S. economy accounts for only about 15% of global economic output. That suggests significant growth opportunities outside the U.S. for American investors.
SMI's Mark Biller discussed international investing with host Rob West on Moody Radio's Faith & Finance Live last week. Mark and Rob also answered listener questions.
Click the play button below to listen. Scroll down to see the transcript.
Faith & Finance Live airs weekday afternoons on Moody. A different version airs weekday mornings on American Family Radio.
(More radio appearances by members of the SMI team can be found on our Resources page.)
Transcript
Rob West:
Over the past decade, U.S. stocks have been the center of the investing universe, but does wise diversification mean looking beyond our own borders?
Hi, I'm Rob West! How should investors think about international opportunities without taking on unnecessary risk? Mark Biller joins us today to help us think more globally about investing — and then it's on to your calls at 800-525-7000.
This is Faith & Finance Live — biblical wisdom for your financial decisions. (opening music ends)
Well, it's always a pleasure to welcome my friend Mark Biller back to the program. Mark is executive editor and senior portfolio manager at Sound Mind Investing, a faithful underwriter of Faith & Finance and that's been true for a long time.
Mark, great to have you back!
Mark Biller:
Thanks, Rob. Always good to be with you.
Rob West:
Mark, in your latest newsletter, you wrote an article titled Diversifying Abroad: A Primer on International Investing. And I want to start with a basic question today: Why should investors consider looking beyond the U.S. market?
Mark Biller:
Yeah, well, there are a few reasons, Rob. The traditional reason to include international stocks in a portfolio was always diversification. Foreign markets used to move a lot more independently of the U.S. market. So when older guys like me were starting out in the investing business 30 years ago, there was a really strong diversification case that you wanted to own some foreign stocks so that when the U.S. market was zigging, hopefully those foreign stocks might be zagging.
Now, over the last 30-plus years, we've had this great burst of globalization, and as that has advanced over these past few decades, a lot of that diversification benefit has gone away. So these days, the U.S. market and foreign markets tend to move in the same general direction most of the time. But with that globalization, we've got a second big reason to include international stocks in a portfolio now — and that is that there are a lot of great companies outside U.S. borders, and we don't want to miss out on those growth opportunities abroad.
A third reason to consider foreign stocks, Rob, is really more opportunistic, and we focus a little more on this in the article. U.S. and foreign stocks tend to trade leadership back and forth. So what you see in history is that one or the other will be really strong for a decade and then those roles will kind of reverse for a decade or so. And what we've had the last 15 years or so is U.S. stocks have been really, really strong for 15 years. And so it seems at some point we're likely to get that "reversion to the mean" where that leadership flips back towards foreign stocks. And so just on that opportunistic basis, it seems like, relatively speaking, foreign stocks look pretty attractive relative to U.S. stocks.
And then the last piece, I guess, is really the more obvious one, which is that while the U.S. is still the center of the investing universe, we're all watching in real time as these really big changes are unfolding in the international order right now.
And so that makes it an open question whether those changes to the geopolitical scene will cause foreign investors to invest a little bit less here in the U.S. and a little bit more in their home countries going forward.
Rob West:
Mark, if the U.S. market has been so dominant for so long, what makes you think that could begin to shift?
Mark Biller:
Well, one of the points that we hit in the article is that U.S. financial assets have been punching way above their weight for a long time now. And what I mean by that is that the U.S. share of global financial assets is way bigger than our share of global economic production.
We'll get into some numbers that I think will really clarify this point, but it's important because normally when you think about an investment, you think about a stock price being related to the economic activity of the company of the stock that you're buying. So there's this relationship between how the company is actually doing and the stock price, at least that's the theory of it.
So now, as we go a step higher and talk about countries and their stock markets, the cleanest way to think of this, Rob, is that U.S. stocks currently represent about 64% of the total global equity. So the total global stock markets, U.S. stocks are almost two-thirds of that. Now that's way larger than the U.S. share of global economic production, where we're closer to 15% of that. Now again, there's nothing that says a country's share of financial markets has to exactly equal its share of economic production, but anybody can see there's a really big difference between the U.S. being 15% of the global economy, but having 64% of the global stock price.
So when you look at it that way, you can see there's this big gulf, and a lot of that is because for the last 15 years, U.S. stocks have just gone up and up and up and up, whereas foreign stocks haven't done as well.
And so that's also partly why I say, Rob, that there's an opportunistic angle to this trade between foreign and the U.S. Not that you'd want to go "all in" on foreign stocks and exclude U.S. stocks, but it's kind of like somebody who — if you like chicken and hamburger equally well and you usually get some of each when you go to the supermarket, well, if the price of one of those two goes straight up for 15 years and the other one stays kind of stable, you're probably going to buy more of the cheaper one.
And that's really all we're talking about here between foreign stocks looking like they're a relative bargain relative to fairly expensive U.S. stocks.
Rob West:
Let's turn that around. If U.S. market dominance may not continue at the same level, how should investors then think about that in their portfolios?
Mark Biller:
Yeah. Well, today the primary benefit of owning foreign stocks in your portfolio is they offer broader growth opportunities than if you invest exclusively in U.S. companies. And so with such a large portion of global economic activity happening outside the U.S. now, it's important for us as investors to be aware of those opportunities.
"Emerging markets" in particular represent a growing share of that global economic output, and a lot of investors are very under-exposed to those countries, those regions, because of their U.S. stock home bias. U.S. stocks have been much better performers for most of the last 15 years. A lot of U.S. investors have quit paying attention to foreign markets.
Rob West:
The case for international investing is made in this article we're talking about today. It's called Diversifying Abroad: A Primer on International Investing — from Soundmind Investing. You can find it — it's available free — at soundmindinvesting.org.
We're taking your questions today for Mark Biller at 800-525-7000.
Mark, as we've been talking about international investing, I know one of the things you point out in the article is the role of the dollar in all of this. So how does currency valuations factor into international investing?
Mark Biller:
Yeah. Currency fluctuations have a really significant impact on foreign stock returns. And this is an area that a lot of Americans really don't think much about, and that's because for most of us, all of our earning and our spending happens in dollars. So if the U.S. dollar gets stronger or weaker against, say, the Euro, most of us Americans really only notice that if we happen to be taking a trip to Europe or buying a European car —something really specific like that, which most of us aren't doing regularly.
But let's try and break this down for listeners, Rob. So, as investors, this is how this works. If an investor puts money into a foreign market and then that foreign currency strengthens against the dollar, the investor's basically going to get two separate returns. First, they're going to get whatever the return is for that local stock market that they invested in and then, on top of that, they're going to get the return of that foreign currency strengthening against the dollar.
So lately — the last year or two — we've had a weaker dollar. Other foreign currencies have been strengthening against the dollar. And that's bad for us overall in terms of our purchasing power, but it's really good for investors who are investing in foreign investments because they're getting that currency "tailwind" or that extra second return on top of the returns of the foreign markets they're investing in.
Rob West:
And that's especially true in a season when the dollar has been weaker. So for someone who's listening today, Mark, who wants to respond thoughtfully, what are the main ways to add international exposure to their portfolio?
Mark Biller:
Yeah. Well, we're always fans of mutual funds and exchange-traded funds, or ETFs, because you get broad diversification in a single investment. So when you look at foreign ETFs and traditional mutual funds, there are a few different groups. One of those groups is labeled "World Funds." You'll see that label, and when you hear "World Funds," what that really means is it's a fund that can invest anywhere. That's good, but it also means they can invest heavily in the U.S. And so with a World Fund, you could actually be buying a fund that's mostly U.S. stocks, and that's typically not what we're looking for when we're looking specifically for foreign diversification.
Then there's another group that are typically labeled "Foreign Funds," as you might expect, and those are the ones we're really looking at because they invest most of their money outside the U.S. There are also regional and country-specific funds that get much narrower, and they're investing in specific countries or regions.
Those can be good, but they also can be more volatile because there's less diversification — you're more tied to a specific country or region.
So you just want to be clear on what level of diversification and volatility you're getting into. And we talk a little bit more about that in the article.
Rob West:
Yeah, that's helpful. All right, let's head to the phones here. We've got some lines open. We'll get to as many calls as we can for Mark Biller today at 800-525-7000.
Let's go out to Omaha, Nebraska. Bruce, go ahead.
Caller:
Good afternoon, Mark.
Mark Biller:
Hi, Bruce.
Caller:
Yeah, I want to see if you can give me some information. This company's kind of been rattling the cage at Wall Street. It formerly was MicroStrategy. They changed the name to Strategy, and their latest vehicle is STRC, a "perpetual stretch preferred stock" with a high yield right around at 11.5%. And the tax treatment on it is the distributions are classified as "a return of capital," and that means you typically don't owe immediate income on the dividends. Instead, they reduce the cost basis of the shares until the basis hits zero.
Mark Biller:
Yeah. Well, Bruce, it's an interesting company and an interesting setup. And what we need to understand first and foremost about this particular instrument that you're talking about as well as everything associated with formerly MicroStrategy, now just Strategy, is this is all built on Bitcoin — and that can be a scary thing for a lot of people. The founder of that company, Michael Saylor, has been really the foremost Bitcoin evangelist for many years, and he's structured his company around a strategy — thus the name — of accumulating Bitcoin, which for the most part has worked out well because Bitcoin has for the most part gone up over time.
The problem is that as this has gone along, Saylor has piled leverage on top of the idea of simply buying Bitcoin, and so he has created a structure where he's borrowing money in public markets to fund his purchases of Bitcoin — and that works really well as long as the price of Bitcoin continues to go up. But as soon as you introduce these loans that he has to pay back, or roll forward over time, it does introduce more risk because Bitcoin has obviously had some very deep declines.
So this is a risky investment, even though it seems like a high yield and a safer kind of income play. There's a risky underlying foundation, Bruce.
Rob West:
Bruce, really appreciate your call. Mark, great insights there, and I'm confident that was helpful to you. Thanks for being on the program today, sir.
We'll be right back on Faith & Finance Live. Stay with us.
Rob West:
Thanks for joining us today on Faith & Finance Live. With me today, Mark Biller. He's executive editor at SoundMind Investing, a longtime underwriter of this program. If you head over to Soundmindinvesting.org, you can check out the article we've been talking about on international investing.
Just keep in mind, when you become an SMI member, they'll give you mutual fund recommendations for your portfolio, including allocations to international, and then their Private Client group is available for those that want to delegate that responsibility to Mark and his team. You can check all of that out at soundmindinvesting.org.
Let's try to get to as many calls as we can here in this final segment down to Florida.
Adele, how can we help you?
Caller:
Yes, hello. Thank you for taking my call. I am a senior person, and I have a home with some equity in it, but I'm not doing anything, just leaving it there. And then I have a little bit of a savings, and I want to try to invest a little bit of it into something that will grow and bring an increase, but I don't know what that is because I'm just learning about investments.
Rob West:
Yeah. Mark, somebody just starting out. Where would you head?
Mark Biller:
Typically, the "hierarchy" of investments — as you go up in risk, that's typically when you'll also go up in return. So every investor, whether you're a senior or a young person just starting out, has that fundamental question of, "How much risk am I willing to take in order to chase higher returns?"
And so, depending on your situation, normally the historic way to chase higher returns is to expose some of your portfolio to stocks and have some stock allocation. That's been the best way over time, in history, to grow your money at a rate faster than the rate of inflation.
Then the next step down from that would be more to be a lender to invest in bonds and that sort of thing, but lower returns, you're likely not to outpace inflation by a lot, but maybe buy a little with a good bond portfolio.
And then, below that, is cash — and with cash, of course, you're risking that your cash isn't going to even keep up with the rate of inflation over time.
As a senior, Adele, you probably would not want to have a lot of money exposed to stocks, but perhaps a little bit would be appropriate. If you haven't had stock investments before, I would start slowly, maybe even just 10% of that money, or something very small, so that you can get a feel for how that goes up and down. You can definitely lose money in stocks, though, so you have to be willing to accept that risk of loss in pursuing those higher gains.
If that's something that you want to do, there are some very easy ways to do that with just stock market index funds. We have information on that on our website. Those are easily researched on the internet, or by asking someone that you know that is knowledgeable about investing — they could probably help you with some very basic index funds that you could use.
So that would be how I would think about that. Rob, anything else?
Rob West:
Yeah, that's great advice. I couldn't agree more, Adele. So I think that's the key. For that portion, you do want to put at the risk of the market just to get something growing, but recognizing you could lose, an index fund is where you could capture kind of the broad moves of the market without having to try to pick individual stocks, and soundmindinvesting.org would be a great resource for you.
In fact, why don't you hold the line and we'll send you a copy of The Sound Mind Investing Handbook, and that would give you some good reading just to familiarize yourself with the terminology. Thanks for your call today.
Let's finish up today in Florida. Donna, go ahead.
Caller:
Yes. Thank you so much for taking my call, and God bless you both.
My question is this. I heard you many times speak about the biblical concept of diversification and I'm all for that, but I never had stock and I'm afraid of stock because of what family and friends have experienced, but I heard the other day on the news that Mr. Musk, Elon Musk, is going to open up his company and I thought, "Well, I don't know how to go about buying stock." And I thought, "Well, maybe that might be a little safe."
I mean, I know there's risk, but I'm getting to the point I'm retired, and by the grace of God — I give him all the praise. He has me all set up very well. I'm able to freely give, and I just praise him for his mercy and benevolence. But I was wondering, I want to take that leap, but I don't know how, and I'm not a computer person. I don't buy or do social media. So how would I do that if you think it's a good idea?
Rob West:
Well, we have just about a minute left, Mark. SpaceX — what do you think?
Mark Biller:
Donna, I'm afraid to say that I think that this particular stock opportunity is actually quite high risk, and a lot of that has to do with the valuation that's going to go on that. So that would definitely not be the one I would recommend as a first stock market purchase. It will be included in the broader indexes fairly quickly, so that would be a way to get a tiny bit of diversified exposure through an index fund, but I think you have to be thinking very high risk.
This is a speculative technology venture, and those tend to be the very highest risk types of stocks in the market. I hate to give you a discouraging report, but I'd be careful with SpaceX in particular, especially as a brand-new stock investor.
Rob West:
Thanks so much for that call, Donna. We appreciate you being on.
Mark, tie a bow on today's conversation as we come full circle to international investing. How should folks think about this in their portfolio?
Mark Biller:
Yeah, we're talking about adding a diversifying element with a growth opportunity, maybe an opportunistic edge. This is not something to be your whole portfolio, but to bring in as a portion alongside your current existing stock exposure.
Rob West:
We always love Mark when you stop by. Thanks for being here today.
Mark Biller:
Thanks, Rob. Always my pleasure.
Rob West:
That's Mark Biller, executive editor and senior portfolio manager at SoundMind Investing. He's a regular. We love it.
We'll be back tomorrow with another edition of Faith & Finance Live. God bless you! (theme music ends)
