Should You Invest Outside the US?

Well, welcome, everybody, to "The Informed Investor." I'm Mark Gochnour, I'll be joined today by Jake DeKinder and Dr. Wes Crill. Gentlemen, the topic of the day is, "Why should I diversify in stocks outside the US?" So let's read a couple headlines, then we'll get into it here. The first headline, this headline came out last November, and it goes, "Wall Street sees no alternative to US stocks in 2025." Now, here's a more recent headline. "Foreign stocks are beating US equities. "It isn't too late to catch the wave." Wes, I'm gonna start with you. Let's go back to the first headline, as we rounded out last year, US Stock Market had done so well for several years. We're getting a lot of questions about, "Why would I invest in stocks outside the US?" Take us back to that time period, some of the returns we are seeing at that time in the US. Those headlines make me chuckle because it's almost a kind of thing you wanna keep receipts on, because some of these predictions might not end up being very right in the end. But you know, the S&P 500 has had a wonderful few years, I mean just over the past year, five years, averaging 14.5% per year. That's substantially above its long-run average. We go all the way back to 1926, and, you know, when you see a return that is much higher than the long-run historical average probably implies that things went well or at least better than the market had expected. Well, a lot of those were the MAG 7, they were driving that incredible performance we saw here in the US. You talk about unexpectedly good returns. And I even go back to the late 90s, that time period, 1995 through 1999, I think that annualized return in the S&P was about 28.6%. So, phenomenal returns. As an investor, I love those returns. Who doesn't want those good returns when they're on the unexpectedly good side of that. But Jake, there's time periods where it goes the other way as well. I like what you said there, though. I mean, you think about a lot of people that are probably listening into this, they may have a decent allocation to US stocks, and to your point, they should be pumping their fist. I captured some amazing returns, but to your point, I mean, listen, with investing we should expect the unexpected. And we've seen it on the positive side, the unexpected. We've also seen it on the negative side. You know, you go back to the 2000 time period, some people know that referred to as the Lost Decade here in the US, where you invested in the S&P for 10 years and you get a negative return. Go back to the late 60s into the 70s, I think '65 through '81, you get 17 years where stocks lose to treasury bills. And if you go back at the start of '65, I don't think there were a lot of people that were saying, "Hey, I expect, over the next 17 years, T-bills," quote unquote "The risk-free rate." I expect 'em to outperform stocks. And this is something you just have to be prepared for as an investor and accept, hey, when it's on, the negative unexpected side, you gotta stick to your plan. And when it's on the positive one, you probably wanna stick to your plan as well. I like how you said that, expect the unexpected. Because if you look at the range of outcomes, the calendar year returns of the S&P 500, almost rarely is it ever kind of right there in that long-run average. That's a great point. Average of about 10% or so, you know? It's always kind of out here on the high returns on the high side or perhaps on the low side. And on the low side, we saw that tough time period too. The Lost Decade, 2000 through 2009, I think the S&P was about minus 0.9% over 10 years on an annualized return. So it does come in both ways there Completely. Now let's shift a little bit and talk about that second headline about how returns have been very good recently, when you look at the stocks outside the US compared to what's been going on in the US. Yeah, I mean in the US, contrary to what that headline might have had you believe, non-US stocks have been outperforming, non-US developed stocks have been in the double digits for returns so far this year. And emerging market stocks are pretty substantially as well. So I think it's a good reminder that we don't know where returns are going to come from. I was thinking back, you guys mentioned the Lost Decade in the 2000s for the US under performance. It was really easy when I started Dimensional in 2010 to encourage this idea of global diversification because we were coming out of that stretch of time. I think as the years, as we get further and further removed from the Lost Decade, some of those lessons have waned where people say, "Well, that had to have been an aberration. "I'm not falling for this boogeyman "of the US underperforming over a long stretch." That one's really not unprecedented when we look at other markets. In fact, when you look at the worst 10 year-period across, you know, 40 some odd countries, all but seven of them have actually seen a negative return from their country's equity market over a 10-year stretch. So if it's happened before in the US, you mentioned the 60s as well, if it's happened in many cases across different countries, it could happen again. Well, it brings up the point, though, about the thousands of companies that are out there outside the US. And Jake, when we are talking about doing this session, you made the comment that as an investor, you're investing in companies, not the countries that are out there. I think with the argument around global diversification, that gets lost a little bit. You know, we cite all these things, "Well, the US has done this "and other countries have done this "and international developed and emerging markets." I mean, let's remember you aren't investing in the countries, you're investing in companies. And just take a step back and think about that. You know, ask yourself, do you think that there are hardworking people in other countries working for other companies that are located there? I think the answer is probably yes, right? I think so. Do they have good ideas? Are they using technology, are they using natural resources? They're trying to drive a profit. And I don't think that you can make the argument that somehow that is a US phenomenon. And remember that's what you are investing in. And I do like the example again about the Lost Decade because we're talking about headlines, that's almost a misleading headline, 'cause go look at the returns for international developed and emerging markets during that Lost Decade. To Wes' point, back in 2010, people were literally making the exact same argument that they're making today, which is, "Oh, I want more of what just did better." It just to be something different back then. But the company point is a great example. I think the other thing on the companies that might surprise people is if you really push yourself to say, "Here's a lot of companies or brands "or products that I interact with." Are they a US company or are they a non-US company? And when you go down that path, it surprises a lot of people. Well, I think a lot of people tend to see, I'm just gonna go buy these big US brands. So for example, I'm gonna go buy Budweiser, I'm gonna go buy Trader Joe's. Well, those companies are actually owned by companies outside the US. So to that point, you're not even sure anymore whether it is a US-owned company or, you know, a brand owned by somebody outside the US as well. The other thing I was thinking about, that is, as you guys were talking, is there's a tendency to chase the performance, you talked about that, where we just look at what just did well recently, and that's what we wanna load up on. And I think that's the point where we're making here is just because something did well recently, we're not saying abandon the US, and we're not saying give up on stocks outside the US, just sort of keep to your plan because you wanna own all these companies all around the world. And I think about it too, that as a consumer, it's almost like we're a natural, diversifier as a consumer. And we kind of talked about that, point about, you know, if you walk through your pantry, you walk around your kitchen or living room, just look at the stuff that you probably bought that's been manufactured outside the US or owned by companies outside the US. I was thinking about, you know, our dinner last night, olive oil, for example, had a nice little Italian glass of wine. Oh, that sounds good, it was dinner, was it good? It was very good. I didn't have the scotch, but that is something nice outside the US. Cars, a lot of us drive cars made outside the US there. So it's kind of interesting how we're very comfortable, I'll say, as diversifying our purchases in our preferences to US companies as well as non-US companies. And in a way I just think about it can be similar about the way we wanna own companies all around the world in our stock portfolio. I think the other piece of that too, and we get this question a lot is is that, "Well, wait, wait, wait, all of these," and let's just take, so these big US companies are now multinational companies, and they're generating all of these cash flows from around the world. Do I still need to diversify globally when I think about investing. When you get that question, how do you approach it? I mean this is testable to an extent. In the data we can look at, you know, whether companies are getting the revenues in the US versus non-US countries. And then you can look at the performance of those, you know, so-called multinational firms who are sourcing the revenue from other countries. So I guess the pretext here is that these companies would provide international diversification. Well, when you look at periods where the US market is down and the non-US developed indices are up, you tend to see that these US-based companies with non-US revenues are behaving like the home US stock market. We tend to see that securities behave like their home markets rather than where the revenues are being sourced, so. Another one that's testable in the data does not hold up. Well, there's also the other side of it too, which is just like the US has large multinationals, so do other countries, again, we're investing in the companies, right? But remember these companies that are outside of the US are also generating revenues from a lot of other locations as well. So the other side of the argument was like, "Well, wouldn't you just go invest in all of those?" It's a little bit of a flawed argument. Well, let's go back in time too and look at some other time periods where a country's done really well and then had some challenging returns in their market subsequently. And Jake, you always give a really good example about Japan, kind of back in the 80s. So walk us through that one. I think the Japanese data is really interesting. You know, if you look at where the US is currently, this is the end of 2024, it's mid 60s, right around like 65% or so of the global market cap. I mean if I took the whole world and carved it up, about 60% of that money is located here in the US from a investment standpoint. You know, if you go back to January of 1990, you had the US that was all the way down around 32% and Japan was at 41%. Now, fast forward to today, Japan's at 5%. So you've gone from 41% Japan to 5%. And with US you've gone from 32 to 65. And just imagine going to Tokyo back in January of 1990 and you try to make a global diversification argument, and what would you have seen? They would've said, "Well, Japanese stocks have done really well recently. "We're incredibly strong on the global economic stage. "A lot of the best products in the world "are coming out of companies, "a lot of the innovations coming out," right? And this goes back to, with investing, expect the unexpected. I don't think there's a lot of people in Tokyo in 1990 who would've said, "Yeah, I think Japanese stocks are gonna be roughly flat "for the next three decades or so," right? But that again is the way that investing works. You just don't know what's gonna happen. You know what segment of the Japanese market did not struggle over that three-decade stretch, small-cap value stocks. And I think that's, you know, when we look at the performance of the premiums this year, that's another reason why you wanna be globally diversified if you are emphasizing stocks with higher expected returns, like small-cap, like value stocks, being diversified globally can increase the reliability of outcomes that when small value is down in a given market in a period of time, like it is this year so far in the US, non-US small-cap value stocks could help right the ship. And you can see that over extended periods too. Didn't we just look at some data looking at international developed and emerging markets small-caps over a longer period. And you see a pretty healthy small cap premium there. Yeah, I mean people have been fretting by the size and value premiums in some cases because they're looking at US stock data only. Well, if you look outside the US non-US developed stocks, emerging market stocks, size and value have been positive over the 20-year period ending in 2024. Yeah, and also, if you took all the numbers off the table, right? And you just said, "I'm gonna think about investing "from an intuitive standpoint." And you did a great job citing the pantry example too. But if you said, "Look, I've got this massive opportunity set "with all of these interesting companies, "hardworking people, natural resources, "technology all around the world," that's one option. Or I'm simply just gonna concentrate in one country, you'd probably say, "Well, I'm gonna start "with my complete opportunity set," right? But then even take it further, say, "I'm not just gonna concentrate in one country, "I'm just gonna invest in the best performing stocks "within that country." You get down to a very, very small number of names inside of your portfolio. Well, and if you knew which ones, those would be into the future, you do that all day long. You do that all day long. Right. But the absence of that then, you know? "What gives you the best chance of success?" And it's just sticking to your plan, staying diversified globally, and make sure you capture those returns of the markets when they present themselves. Listen, do you think there were people at the end of that run from '65 to '81 who were like, "Wow, that was unexpected. "I didn't expect stocks to lose." But they probably didn't completely bail on stocks, by the way, stocks went on a pretty, US stocks especially went on a crazy run after that really, really strong. And you see another period, you know, you've got an extended period in that 2000 to 2010 period, where you get stocks that underperform a bond index. Do you think people are just bailing on stocks at that point? No, I think a lot of people probably said, saw that it was unexpected, but likely going to maybe stick to my plan. Great comments there. Another area we get a lot of questions about, as we think into the future, is on a lot of economic signals out there, different metrics out there, that says, "Is there anything I can understand "from an economic perspective "that tells me what stocks are gonna do into the future?" And so that is going to be our next topic on "The Informed Investor." Thanks for joining us today, and have a great rest of the day.