(PUB) Investing 2015

I believe the argument for investing overseas is strongest when you can find a good active manager with a foreign focus. In foreign markets, just like U.S. markets, there will be winners and los- ers. If I can find a manager with an ability to separate the winners from the losers in foreign markets, that should nicely complement the managers I have partnered with who strive to do the same in the U.S. As for currency risk, it cuts both ways. Currencies can hurt, or they can help. The dollar has been up and down

markets often have a distinct advantage over multinationals, particularly when it comes to more localized businesses. Yes, an oil company or a major drug producer may be able to sell its wares as easily overseas as it does in the U.S., but local cement makers, retailers and service providers probably have a good leg up on their foreign competitors. Do you like Google? Google doesn’t have anywhere near the reach in China of Baidu, which happens to be one of the three or four largest holdings at International Growth .

Not too surprisingly, those arguing against the need for foreign funds were loudest in the late ’90s. Those arguing for increased allocations to international stocks dominated the dialogue beginning in the early years of this past decade, then lost the megaphone again after the Great Recession as U.S. stocks powered ahead once more. Social psychologists refer to this tendency to extrapolate our most recent experience into the future as the “recency bias.” And it exerts a pow- erful pull on investors. Finally, some will argue there are times to be heavily invested overseas, and times when you should keep your money at home. Thanks. That’s like saying you should invest heavily in stocks when they’re going up, but not when they’re going down. Market tim- ing is tough already, and trying to decide whether to focus here versus there is not as easy as the soundbiters would have you believe. Just look at the past seven or so years on the aforementioned relative performance chart. U.S. stocks have the edge in performance over the full time period—though in another six or seven years that might change com- pletely—but it was anything but an easy victory. If you can time those swings, you are far smarter than I am. So what’s the answer? Do the big U.S. multinational firms owned by domestic stock fund managers provide enough foreign flavor to your portfo- lio given their global reach, as Jack Bogle would have you believe? Should we really have 50% of our portfolios invested in non-U.S. companies, or is it sufficient for a U.S. investor to allocate just 10% or 20% or so of their stock portfolio to foreign shares? Unfortunately, there is no answer that will satisfy every investor. The “right” amount is going to be determined by your risk temperament and long-term return aspirations—but generally, you should always make some room for foreign stocks in your portfolio. Foreign funds provide exposure to numerous markets, which may be at dif- ferent points in their economic cycles. Additionally, companies based in for- eign lands with local, feet-on-the-ground expertise and experience in their own

QUOTABLE Moving the Goal Line Will the worries never cease?

First, every time stocks made new highs, it was cause for concern. Today, it’s a different concern, as it’s been a little more than two months since the S&P 500 index last made a new high on May 21. A recent Bloomberg article asks, “Why can’t the S&P 500 get to a new high?” But the idea that “the S&P 500 can’t hold a record” is kind of silly given that markets are constantly on the move (unless of course they’re closed, as has been the case in Greece).

First, reaching new highs was only easy in hindsight. Second, trying to explain every tick in the stock market is a fool’s errand (but does satisfy our need to attach a narrative to everything). Third, should we even pay atten- tion to new highs, or the lack of new highs? The active managers we invest with aren’t buying the index, thankfully, but rather are picking individual stocks within, and some- times outside those indexes. All you and I should care about are those stocks. Longtime readers have heard me say

500 Index Regularly at or Near Record High

$100 $120 $140 $160 $180 $200

At or Within 5% of High 500 Index

$0 $20 $40 $60 $80

this before, but when the market (or your portfolio) reaches a new high, it can only go two ways from there, rising to a new high- water mark or falling below the record. That’s it. Unfortunately, the fact of a new high being reached doesn’t tell you anything about what is going to happen next. I think you’ll love the chart above, which traces the returns of 500 Index over the past 30 years or so. It’s similar to a chart Jeff and I showed you in the May issue. The shaded regions indicate times when the fund was at or within 5% of its record high. The white space indicates periods when the fund was more than 5% below its most recent high. Trading at new or near recent highs is exceedingly common. Over half (53%) of the time in the chart, the index fund was at or within 5% of its record high. Most new highs don’t lead to imminent market crashes, but at some point, we will experi- ence a bear market, and, by definition, it will have been preceded by a new high. Will the May 21 high be that turning point, or will stocks reach the “goal line” of a new record before reced- ing? Not only can we not know the answer ahead of time, but it is entirely out of our control. So all the buzz about being below the high is just noise that investors should try to tune out. 6/83 6/87 6/91 6/95 6/99 6/03 6/07 6/11 6/15 Data from 6/30/1983 through 6/30/2015.

The Independent Adviser for Vanguard Investors • August 2015 • 5

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