International Stocks and Irrational Exubberance
Whew… after noticing that International Funds have nearly recovered from their big hit a couple of months ago, I knew that it wouldn’t be long before the recommendations started pouring in for large allocations of one’s portfolio to “international funds”.
International Stock Market Like Lots of Slices of Tasty Pie
It’s funny how often investing outside of the US is seen as international investing. As if the US were one market and the “international market” were the other one. Although the US market may contain about 50% of world-wide market capitalization in equities, its not like everywhere else is one large homogeneous pie. It’s like a bunch of little slices of lots of tasty pies =)
Although I wouldn’t count out international investments from continuing to do well in the years ahead, I do know that precisely because they have enjoyed such strong returns over the last several years (relative to the US market) that they are more risky as an investment now, that many overseas markets are currently quite pricey in relation to their historical trends. That is why it is scary to see recommendations for the amount of your portfolio invested in international equities jump from 5 to 10% when they were down and out to 20 to 30% nowadays. I don’t know what these investment advisors and banks are smoking, but I know that saying these investments have done extraordinarily well recently so should invest now is about the worst reason to suddenly shift a whole ot more money into them. Wait for some international markets to have the bottom fall out from under them. It will happen at some point, although it might be in five years instead of one to two. But when they do, this is precisely when you should up your allocation that high, and even higher if they continue to fall. Why do people get excited for all of the wrong reasons?
Hey, I heard that you can buy a $1 worth of assets in Brazil for $3 now, even though it only cost $.25 for the same $1 in assets three to four years ago. Go Brazil!
This is the logic of investment advisers, at least in my mind. From the Wall Street Journal, today:
But the lockstep decline is something of a blip in what has mostly been a period of international dominance, when both managers and investors have warmed to foreign markets. Over the past three years, the average international equity fund is up an annual 22.71%, nearly double the returns of the average domestic equity fund (11.63%), according to investment-research firm Lipper. (The average global equity fund, which invests in a mixture of international and domestic stocks, is up 17.09%.)
“I definitely think there’s more comfort investing overseas,” says Jeff Tjornehoj, Lipper senior research analyst, who recommends a 15% to 30% equity allocation in international funds. Through June, international and global funds had registered $106 billion in net flows for 2006, dwarfing the $22 billion into domestic equity, according to Financial Research Corp.
Looking ahead, there are signs that international funds, which were about three percentage points ahead of their domestic counterparts in July, will continue to outperform broadly into 2007. The dollar continues to show weakness abroad, and European economies reported strong growth in the second quarter.
If You Are Heavy on the International Side Right Now, You Might Want to Lighten Up a Bit
Yes, a 15% to 30% allocation in international funds is a good idea, once those funds have taken a good hit from where they are now. Until then, this investor is going to avoid index investing in foreign markets like the plague. Of course, there are appealing undervalued individual investments anywhere you look, but international indexing? I’ll wait for the next international crises to move a good portion of my assets overseas, thank you very much. And I recommend anyone sitting on heady gains in such areas to consider lightening up and shifting their assets elsewhere.