(PUB) Investing 2016

relate to developing countries strug- gling to find their place in a global economy, not the longstanding, devel- oped European economies of Greece, Portugal or Spain. The Brexit vote is only the latest demonstration that there is plenty of political risk to be found in Europe, along with croissants and espressos. Proponents of a U.S.-only stock approach, like Jack Bogle, would argue that you don’t need to introduce these risks to your portfolio by investing overseas. However, the flip side of that coin is that if you don’t diversify your investments, all of your currency and political risk is tied up in a single coun- try—the U.S. I mentioned at the start that the Brexit vote was an example of why one should diversify their portfolio beyond their home borders. Well, imagine for a moment that you were a U.K. inves- tor who only owned U.K. stocks. You just got a double dose of political and currency risk. Not only did your stock portfolio decline 5.6% in two days, but your purchasing power fell 10% or so. Had you diversified beyond the U.K., your foreign holdings would’ve at least benefited from the fall in the pound. So given the need to weigh all these potential risks and rewards, how should you and I incorporate foreign stocks into our portfolios? As discussed above, I don’t agree with either the no-foreign-fund camp or the indexing apostles who suggest that >

Domestic vs. Foreign Stock Leadership 2.00 2.20 Rising line = U.S. market outperforms foreign markets

MSCI EAFE Over 40 Years

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

1.80

1.60

1.40

1.20

1.00

0 500

0.80

Total Stock vs. Total International Stock Index

5/76

5/80

5/84

5/88

5/92

5/96

5/00

5/04

5/08

5/12

5/16

5/96

5/98

5/00

5/02

5/04

5/06

5/08

5/10

5/12

5/14

5/16

having roughly 50% of our portfolio in foreign stocks is the scientifically proven route to take. You have to look beyond the raw data to find the best strategy for you. I think the Model Portfolios are the best place to find an allocation that suits your needs. Only investors with con- servative goals combining growth and income should consider a commitment of 10% or less to foreign equities. Cyclical Noise Regardless of what you decide is the right level of foreign exposure for your portfolio; allow me to offer a word of caution. The difference in performance between U.S. and foreign stocks has been cyclical, and this means that sometimes owning foreign stocks will look very smart, and other times it will look less so. Unfortunately, I’ve noticed that the arguments for and against investing in foreign funds tend

to follow performance. Don’t let your allocation follow the swinging pendu- lum—have a plan and stick to it. Take a look at the left chart above, which shows the relative performance of Total Stock Market Index and Total International Stock Index since the for- eign index fund’s inception, and you’ll see why most investors have remained shy of the foreign markets. When the line is rising, U.S. stocks are outper- forming foreign stocks (all based on U.S. dollar returns, of course). When the line is falling, foreign stocks are leading. As the chart shows, there was a long stretch from the mid-’90s to early 2002 when U.S. stocks led, followed by a long period of foreign stock domi- nance until the middle of 2008. Since then, U.S. stocks have outperformed. Not too surprisingly, those arguing against the need for foreign funds were loudest in the late ’90s. Those arguing for increased allocations to interna- tional 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 psy- chologists refer to this tendency to extrapolate our most recent experience into the future as “recency bias.” And it exerts a powerful 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

U.K. and Europe Not Always on the Same Page 1957: Treaty of Rome is signed by France, West Germany, Italy, Belgium, Luxembourg and the Netherlands, creating the European Economic Community (EEC), the precursor to the European Union. The U.K. withdraws from early talks. 1963: France vetoes the U.K. joining EEC. 1973: The U.K. joins the EEC. 1979: The European Exchange Rate Mechanism (ERM), which was set up to ready European countries for the creation of the euro currency, is established. The U.K. abstains. 1990: The U.K. joins the ERM. 1992: The U.K. is forced to withdraw from the ERM. 1997: The U.K. decides not to adopt the euro. 2011: David Cameron promises an In/Out referendum on E.U. membership if he wins the 2015 general election. 2016: Cameron wins and a date for the referendum, June 23, is announced in February. June 23, 2016: The U.K. votes to exit the E.U.

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