International Stocks: Are They Necessary?
As the Olympic Games kicked off this week, athletes from around the world are competing fiercely. The United States is expected to win many medals, but other countries will challenge us. This competition can be compared to global economies. While we often focus on investments in the US, there are many opportunities abroad. However, international stocks come with extra risks that many investors and models overlook. Here's what you should know:
1. **Currency Risk:** The US Dollar impacts global trade and economies. A strong dollar benefits US shoppers but hurts our trading partners. If the dollar weakens, foreign stocks may perform better. However, if the dollar stays strong, foreign investments could struggle.
2. **Geopolitical Risk:** Events like the wars in Ukraine and Gaza, the threat of war in Taiwan, and Brexit affect global economies. For instance, China's actions could hurt Australia's economy, and a US-China tariff war could impact semiconductor stocks. The global pandemic also showed how travel-based economies can weaken.
In addition, the US has strict reporting requirements for companies that many foreign markets lack. While Europe, Canada, Japan, and Korea have strong disclosure rules, they represent only about half of international markets. China, Russia, and other emerging markets often lack transparency.
Retirees usually aim to reduce risk in their portfolios. While some risk is necessary, it should be measured and predictable. In our opinion, International stocks should be an intentional choice for those seeking to outperform, not a default option for all clients, especially conservative ones.
Some firms build portfolios heavily weighted with international stocks, claiming they offset domestic stocks' risks. These models often rely on Modern Portfolio Theory, which I don't support. Instead, I prefer a tailored approach based on risk tolerance, time horizon, and opportunity. Why take additional risks if they don't offer higher returns in the long run?
If you own international stocks without a clear reason, consider reevaluating your portfolio and strategy.
Enjoy the Olympic Games and the beauty of Paris!
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