Bloomberg’s John Authers wrote “There are three powerful forces in the world of investment that you never want to bet against: Momentum, Mean Reversion, and U.S. Exceptionalism. Heading into 2025, however, at least one will have to give. As the season for publishing annual outlooks continues, it’s grown clearer that a big majority believes there will be no reverting to the mean this time, and that the impressive momentum behind US dominance can go on and on.”
Authers’ article gave some other details. For instance, since the 2008-2009 Global Financial Crisis, U.S. stocks have far outperformed international stocks. The only blip occurred in 2017, the first year of Donald Trump's first term.
The writer's final data point really put the U.S. outperformance into perspective. Over the last decade, the U.S. stock market capitalization has moved from 52% to a whopping 67% of the total global market capitalization. Keep in mind that the U.S. gross domestic product (GDP) is only about 26% of global GDP. So a lot of positives going forward are already built into the U.S. stock market’s current capitalization.
As a contrarian investor, I always find it a bit scary when everyone piles into one side of a “boat.” That is how vessels capsize.
Along those lines, when I was a financial advisor, I found it unnerving as to why my colleagues were always recommending the traditional 60/40 portfolio, with 60% stocks (almost 100% in the U.S.) and 40% bonds.
Ditch Bonds for Overseas Stocks?
With fixed income suffering subpar returns the past few years, a few voices in the investment wilderness like myself have argued that traditional investing advice (60/40 strategy) needs a rethink and a reboot.
About a year ago, Bloomberg cited a paper titled “Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice.” It blew away the conventional wisdom.
The study, which looked at three dozen countries over 130 years, found that a mix of half domestic and half international equities actually beat blended portfolios (stocks and bonds) in both the amount of money made and the capital preserved.
In the Bloomberg article, Scott Cederburg of the University of Arizona, who co-authored the paper with Aizhan Anarkulova from Emory University and Michael O’Doherty of the University of Missouri, said:
“As long as stock investors are able to stick it out, they end up being better off with very high probability than somebody who’s trying to smooth out those short-term movements by diversifying into bonds.”
Bloomberg related how the researchers ran a million simulations for U.S. investor households, and found that splitting money between domestic and international equities built just over $1 million of wealth on average by retirement. This easily beat the $760,000 for the traditional 60/40 mix.
The reason is pretty straightforward and obvious to anyone that has followed markets the past several years. Quite often, U.S. stocks and bonds move in the same direction.
The study also found that the maximum drawdown for the all-stock approach was unsurprisingly deeper. But here’s the key point - the drawdown wasn’t bad enough to ruin the portfolio performance over the long haul.
I quite often found that people really don’t understand drawdowns. Let’s say you have $100,000. A bear market hits and you lose 20% - you now have only $80,000. That means you would need a gain of 25% just to get back to breakeven!
I don’t know if I would completely ditch bonds, but my ideal diversified portfolio would be 20% bonds, 10% gold, 25% foreign stocks, and 45% U.S. stocks.
How to Buy Foreign Stocks
If you are interested in adding foreign stocks to your portfolio, here are the ways to do it. They are ranked in my order of preference, from best to worst.
1. American Depositary Receipts (ADRs)
The Securities and Exchange Commission says that “The stocks of most foreign companies that trade in the U.S. markets are traded as American Depositary Receipts (ADRs). U.S. depositary banks issue these stocks. Each ADR represents one or more shares of foreign stock or a fraction of a share. If you own an ADR, you have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR. The price of an ADR corresponds to the price of the foreign stock in its home market, adjusted to the ratio of the ADRs to foreign company shares.”
Many of these ADRs are traded in the over-the-counter market, although some trade on the major exchanges. Companies whose shares that trade as ADRs on a U.S. exchange must meet SEC rules on information disclosure and financial reporting, thus providing more transparency than is sometimes available with overseas stocks.
One great source for information on companies that trade as ADRs is ADR.com from JPMorgan Chase. Keep in mind though that many foreign stocks are unavailable as ADRs. And some ADRs have low liquidity with wide bid/ask spreads that could erode your profits.
2. Foreign Ordinary Shares
Some foreign stocks that are unavailable as ADRs are available to trade on the over-the-counter market and are known as foreign ordinary shares. In simple terms, these are the actual overseas stocks, but ones popular enough with U.S. investors that U.S. market makers will actually create a market for them. As with ADRs, foreign ordinaries are traded in U.S. dollars. And once again, foreign ordinaries in the over-the-counter market may have low liquidity, with a wide bid/ask spread.
3. Direct Foreign Stock Investments
Many foreign company stocks, however, do not trade in the U.S. That means you have to trade the stock on the local exchange and in the local currency. This can be done through a specialized global account, which most brokerage firms now offer. In addition, as with U.S. stocks, many of these trades can be placed online. The application process is the same as for a regular brokerage account.
A global trading account is for those investors who want access to international stock markets (like myself) and desire access to a full menu of stocks around the world. It only requires a bit more research than for a U.S. stock.
4. ETFs and Mutual FundsPerhaps the easiest way - but my least favorite way - to invest in companies outside the United States is through an exchange-traded fund (ETF) or a mutual fund. Funds that track a foreign market index typically are the lowest-cost funds, but are my least favorite option.
Actively managed funds are a better option, especially when investing in emerging markets. That’s because index funds leave out a large number of companies (75%+) in emerging markets, often the fastest-growing ones.
I believe everyone should have some exposure to overseas stocks. If you do your homework, it can be quite rewarding. Here are just two examples this year. Germany’s Siemens Energy (SMNEY) is involved with the global electrification trend. Its ADR is up a whopping 317% in 2024, making Nvidia (NVDA) look like a laggard. And Japan’s Fujikura (FKURF) makes wire cabling for data centers. Its ordinary shares, which began trading in the U.S. on Feb. 7, are up an astounding 435% in 2024.
The conclusion is that there is gold to be found in global markets, just like in the U.S.
