It seems like international investing is all the rage these days. It seems like everywhere I look, someone is recommending investors to add an allocation to foreign stocks. Many “experts” have claimed that individual investors should not be picking individual stocks, but they should be picking separate asset classes instead. In other words, rather than create my own portfolio of 30 – 60 individual dividend paying stocks and some fixed income, I am told that I should pick a portfolio of 10 – 15 separate asset classes, and then pay someone else to hold the stocks for me and charge me annual management fees for this “service”. These experts have cost investors millions of dollars in missed opportunities. Over the past decade that I have been investing, my international stocks have done much worse than my exposure to US securities and US fixed income. I am lucky that my allocation of foreign equities has always been low. This is because I have focused my effort on US multinational companies, which generate a large portion of revenues and profits from abroad.

There is some research, which states that investors are not investing abroad, because of their home bias. I personally believe that the studies on biases are given more credit in the field of investing, than they deserve. This is because studies on biases are always quick to judge and jump to conclusions, without really offering much in terms of improving results. Most studies seem to be too backwards looking, and quick to provide explanations for things, whether this knowledge is useful for decision making or not. I came to the conclusion that biases are useless, after observing experts that shame investors into admitting how biased they are ( and selling them something in the process). However, when real money is on the line, the experts exhibit the same behaviors themselves ( which they shamed investors for in the first place). So if the experts do not use their research when money is on the line, then how good is that research? But this is not the point of this article…

In the case of adding international stocks to US portfolios, we have seen that this has been a bad decision for US investors over the past 20 years. In my personal retirement account, the small exposure to foreign stocks has turned out to be a bad decision over the past decade. In fact, buying Kinder Morgan in 2008 and 2009 has turned out to be a much better decision that buying an international index fund.

International allocation however has been a good decision for investors based in other countries. What makes investing just a fascinating area is that we do not know if the next 20 years will be the same as the preceding 20 years.

It generally makes sense that you want to have a diversified portfolio, which is not overly dependent on one region. If you are based in the US, earn and spend your money there, it may make logical sense to buy some international stocks for diversification. After all, if things don’t go as well as expected domestically, you will be somewhat protected because of your exposure to other assets. The saying is that noone can predict the future, which is why you never know if the tides will be reversed over the next 20 years, and it could very well turn out that our stock market doesn’t do too well. I would not be surprised by that, since many US companies are wasting money on buybacks at inflated prices, and are failing to grow earnings, while at the same time paying miniscule dividends relative to historical standards. Plus, current valuations seem a little overstretched, even for myself. International stocks on the other hand have lower valuations today, and higher dividend yields. If earnings do not grow by much over the next decade, it is quite possible that international equities do better than US equities. If you purchase overvalued equities, you may experience poor initial returns.

For example, an investor that was based in Japan in the 1980s, would have definitely benefited by holding some international stocks. This is because the Japanese stock market was inflated in the 1980s, and had stratospheric P/E ratios and dividend yields of 0.50%. It is no wonder that Japanese stocks have provided terrible returns for the subsequent 25 – 30 years. Foreign equities on the other hand, did really well.

An investor from Russia or China at the beginning of the last century, would have done really well by adding some international stocks or bonds ( assuming that they managed to escape the red army). For an investor based in the US however, investing international has not worked out too well in general.

I am personally all for diversification. However, I do not want to overdiversy, or even worse- diworsify.

There are a few problems that I could think of, when it comes to investing in international stocks. This is in addition to the other issues I had discussed before. ( currency risks, taxation, corporate governance, accounting standards etc)

The first potential issue is that many investing abroad assume that the current system of international globalization and trade would persist throughout their investing timeframe. The world is interconnected today, with capital and ideas moving quickly across the globe. This is good for trade. However, the world was equally interconnected at the beginning of the 20th century. You had government bonds trading around the world, and many companies listing their shares in multiple exchanges. The idea of globally diversified portfolio management was taking shape. In fact, many investors from the Old World invested heavily in railroads, utilities, manufacturing facilities, agricultural and other enterprises around the world. The telegraph connected the world, and financial markets. If you have read books about investing from the end of 19th century and beginning of the 20th century, you can always find examples of investors who used telegraph to take advantage of arbitrage opportunities in stocks listed in the US and in London for example.

Unfortunately, the first worlds war put an end to this globalization. The flow of global capital was halted with capital controls. Certain countries nationalized whole industries, leaving investors with complete losses of capital. Capital controls may make it difficult to take your profits out of the country, to reinvest elsewhere or take out dividends.

The first world war kind of took everything by surprise. The world was never the same after it. Most experts who recommend international investing do so, because they data set they are using starts in 1969. Therefore, they are blind to the risks faced by investors from before 1969.

The second potential issue is that the governments where you are investing will be welcoming after you need to cash out of your investment.

Based on the research I have done, it seems like international investors had provided capital to grow the economies of emerging markets such as Argentina, Russia, China, India at the beginning of the 20th century. The United States and

1, 23  - View Full Page