They’re cheap, rallying and provide diversification.
After badly trailing U.S. stocks for most of the past decade, foreign stocks are suddenly on fire. Is now the time to load up on them, or is it already too late? And what portion of your stock money should you invest overseas?
Consider recent returns. Since the start of the year, the MSCI EAFE index of stocks in foreign developed markets rose 13.3%, and the MSCI Emerging Markets index soared 17.7%. Standard & Poor’s 500-stock index, though it had a not-too-shabby return of 9.5%, is running far behind. (All returns in this article are through July 7.)
But foreign stocks’ recent performance follows a truly abysmal decade, when they returned virtually nothing. Over the past 10 years, the MSCI developed market index returned an annualized 0.8%, and the emerging-markets index returned an annualized 1.4%—even with the recent rally. Many foreign bourses have yet to climb above their 2007 pre-bear-market highs. Over the same 10 years, the S&P 500 returned an annualized 7%.
Vanguard founder Jack Bogle is one of many observers who see little or no benefit to investing in foreign stocks. Roughly 45% of the revenues from stocks in the S&P are earned overseas. Why take the currency and political risks of investing in foreign countries? And in emerging markets, particularly, companies must deal with far more government meddling and corruption than in the U.S.
But over longer stretches, foreign stocks have provided close to the same results as U.S. stocks. Plus, foreign stocks and U.S. stocks don’t move in lock step. Says Ben Johnson, a Morningstar analyst: “If diversification is the only free lunch in investing, investors are leaving a lot on the lunch table.”
From the start of 1970 through June 30, 2017, the S&P returned an annualized 11.0% while foreign developed stocks returned an annualized 9.2%. The performance gap can be almost entirely explained by foreign stocks’ recent slump. From 1970 through 2010, foreign developed stocks trailed the S&P by an average of just one-half of one percentage point per year.
Even more intriguing: Since 1970, foreign stocks and U.S. stocks have taken turns leading each other for multiyear periods. I had Morningstar look at rolling five-year returns over the years since 1970. By this I mean Morningstar computed returns from the beginning of 1970 through 1974, from 1971 through 1975 and so on.
U.S. stocks led foreign stocks over trailing five-year periods from 2011 through the present, from 1991 through 2003 and from 1983 through 1985. Foreign stocks were the winners from 2004 through 2010, from 1986 through 1990 and from 1978 through 1982.
Next, consider valuations. Partly because foreign stocks have been such abysmal performers of late, they’re cheaper on virtually every measure of value you can find—price-earnings ratio, price-to-sales ratio, price-to-book-value ratio, dividend yield and so on.
The S&P currently trades at a lofty 18 times estimated earnings for the coming 12 months. But foreign developed stocks trade, on average, at 15 times earnings, which is right in line with long-term averages. And emerging-markets stocks change hands at a mere 12 times earnings.
I don’t expect stocks in foreign developed countries, emerging markets and the U.S. to trade at the same price-earnings ratios anytime soon. Europe and Asia both face more headwinds than the U.S. Nor do I think foreign stocks will hold up as well as U.S. stocks in the next bear market.
But I do expect that valuations will grow closer to one another over time. Why? Consider some of the largest holdings in the foreign developed stock index: Nestle, Novartis, Roche, Toyota, BP and British American Tobacco. These are not so much foreign stocks as they are global multinationals. Ditto for some of the largest holdings in the S&P: Apple, ExxonMobil, Facebook, Johnson & Johnson and General Electric.
How much should you invest in foreign stocks? About 47% of global stock market capitalization is outside the U.S. Vanguard’s target retirement funds allocate almost 40% of their stock investments to foreign stocks. In a letter to shareholders, Vanguard Chairman William McNabb criticized “home bias,” the tendency of investors worldwide, not just in the U.S., to overweight their own country’s shares. “In their aversion to the unknown, investors can end up increasing, rather than lessening, their risks,” he wrote. “That’s because they’re sacrificing broad global diversification—one of the best ways I know of to help control risk.”
In my view, 40% in foreign stocks is too much. After all, U.S. investors, for the most part, spend dollars, not euros or yen. I recommend that investors put 25% to 35% of their stock money in foreign stocks in the current climate—with younger and more risk-tolerant investors skewing more toward the higher number.
What’s emotionally difficult about owning foreign stocks is that it guarantees you’ll be out of sync with the U.S. market for lengthy periods. And most of the day-to-day investing news we digest is about the U.S. market. The combination would have made it easy to throw in the towel on foreign stocks at the end of last year—which would have been precisely the wrong time.
One of the major demands that the infrastructure bankers and advisors come across from the prospective clients is an investment policy with zero risks. Most people look for such an investment option and still reap high interest - which is practically an impossible demand in the first place.
Most individuals who are retired or would soon be retired have such queries, and some of the top options are the money market funds, certificates of deposit and much more. The first and the foremost thing to be kept in mind when you are going for investment is that do not expect unrealistically high returns. No type of investment plan can bring home such high returns anyway.
Dividend paying stocks
There are many different companies which yield dividend paying stocks that are way higher than many risk free investments. However, at the same time, they help you participate in any capital gain. If you are trying to opt for risk free options with consistent returns, this may appear potentially risky to you. However, at the same time, it is to be taken into consideration that such investment plans and never be entirely risk free, and if it is, the return would not be high enough. You can participate such investment options, but you must keep in mind the liabilities and whether you are ready to undertake those liabilities.
Broker and their services
To ensure that you have consistent returns from the investment plans which you are opting for, it is very important to choose the right broker. The broker would be able to give you a distinct picture about the investment plans and the advantages and disadvantages associated with them. If you are looking for the brokers who know the working of the financial world, it is very important that you opt for their services after interacting with them regarding the same. Talking and knowing our broker well is important to develop a trust about them and work with them quickly.
Study the policies well
There are different types of financial management and investment plans which you can opt for. If you are going for a particular investment option, then it is really essential for you to study the various terms and conditions and the clause associated with them. Only after that should you invest. The brokers would be able to guide you here. When you know the terms and conditions well you can easily decide which investment option is the best choice according to your requirements. The investors would also be able to know the policies well when they opt for studying them.
Consistent and high return is not always possible, and if you are opting for a comprehensive risk-free policy, this is even harder to opt for. However, with the right decisions, you can always make the most of the options you have at hand and reap a good amount of benefit from any investment plans that you are opting for your future.
The lure of big money has continued to throw investors in the lap of stock markets. However, it is quite easy to understand that making money from equities is not an easy task. It requires patience, discipline, sound understanding, and lots of research of the market among others. Additionally, the volatility of the market that has been around for several years has left many investors in a state of confusion.
They remain in a dilemma whether to sell, hold, or invest in such a scenario. You need to know that the main purpose of stocks is to make a fool of as many people as possible. If you are an investor, it is necessary to understand that the system of trading in stocks is always working in its favor. If you want success in stock market investing, you need to work several principles that millions of successful investors have been using for many years.
Setting long-term goals
Before making an investment, you need to understand your target and time limit you want to get back what you invested and put it on the desired task. If you would like to get back your investment after a few years, you need to put your investment somewhere else because the stock market has the volatility that does not promise to avail your capital when needed.
By knowing your future capital requirements and the exact time you will need it, you will be able to calculate the amount you need to invest and the return you require so as to meet your requirements. The idea is that you need to start making early savings in the stocks so that you get the highest possible return as per the philosophy of risk.
Understand your risk tolerance
Risk tolerance is a psychological trait based on genetics, but gets positive influence from income, wealth, education, and negatively by age. Your risk tolerance is the degree of anxiety or how you feel in the presence of risk. Psychologically, you can refer to risk as the extent to which an individual chooses to risk experiencing a less satisfactory outcome of pursuing a more favorable outcome. All human being vary in this trait, and there is no balance.
Tolerance in stock market investing is also affected by the way you perceive risk. In investing, the idea of having a perception is crucial. As you continue gaining knowledge about investing in stocks, you will learn the dynamics of price change, buying and selling stocks, and the ease or difficulty of liquidating an investment. You need to consider investing in stocks to have fewer risks before making the first purchase. Your anxiety will be less intensive as a result of your unchanged risk tolerance and evolved risk perception.
When you understand your risk tolerance, you are likely to avoid investments that will make you anxious. You do not have to make an investment that will deny you sleep at night and peace during the day. Anxiety will stimulate fear that will trigger emotional responses to the stressor.
Diversify your investment
Experienced investors eschew stock diversification with the confidence that they have carried out necessary research to quantify and identify their risk. They are comfortable that they can identify the potential risk that can endanger their position, and will liquidate their investment before incurring a catastrophic loss.
When engaging in stock market investing, the most populous method you can use to manage your risk is by diversifying your exposure. Many investors own stock of various companies in different companies and countries. They have an expectation that no single adverse event will affect all their investments to a similar extent.
It is safe to have stocks in five different companies so that you are sure at least two companies will have good profit margins, two will have small profit margins, and one might dissolve to pay its debts and investors. Diversification will allow you to recover from losing the whole of your investment by the small gains you make from the stocks.
Leverage means using borrowed money to create your stock market strategy. When you have a margin account, financial institutions like banks and Sacco will give you loans to invest in the stock market. Using borrowed money exaggerates the movement of price. This activity will sound great if the stock moves up but what if it moves the other side? You might end up losing your investment plus the levers money. Leverage is neither a right nor wrong tool, but you can consider using it if you have enough experience and confidence in your abilities to make decisions.
Control your emotions
The biggest obstacle to making profits when in stock market investing is the capacity to make logical decisions and control emotions. In the short-term, the companies’ prices will reflect combined emotions of the whole investment community. When many investors are worried about a particular company, its stocks will decline, but when they feel positive about the future of the firm, the tendency of the stock rising in price is high.
An individual that feel negative about the market is known as a bear while the positive one is the bull. During market hours, the ongoing battle between bulls and bears can be seen from the continuous change in the price of securities. Such short-time movement gains their driving power from rumours, hopes, emotions, and speculation, other than using the management, prospects, and assets of the company.
When the stocks perform well, you will have questions about whether to take your profit out or not. These issues will be constant especially if you are price conscious and when you want to make a decision about an action. Since emotions will act as your primary action driver, you might end up making wrong decisions.
From history, stock market investments have been enjoying a significant return on other investments and proving complete visibility, easy liquidity, and existing regulation to provide a fair playing ground for all participants. Investing in stocks is an opportunity to create significant asset values for individuals that are consistent savers. The younger you begin to invest in this market, the greater the results you will have at the end of your projected period.
- Before or at the time of collecting personal information, we will identify the purposes for which information is being collected.
- Donavan Group will collect and use of personal information solely with the objective of fulfilling those purposes specified by us and for other compatible purposes, unless we obtain the consent of the individual concerned or as required by law.
- Donavan Group will only retain personal information as long as necessary for the fulfillment of those purposes.
- Donavan Group will collect personal information by lawful and fair means and, where appropriate, with the knowledge or consent of the individual concerned.
- Personal data should be relevant to the purposes for which it is to be used, and, to the extent necessary for those purposes, should be accurate, complete, and up-to-date.
- Donavan Group will protect personal information by reasonable security safeguards against loss or theft, as well as unauthorized access, disclosure, copying, use or modification.
- Donavan Group will make readily available to customers information about our policies and practices relating to the management of personal information.
Donavan Group is committed to conducting our business in accordance with these principles in order to ensure that the confidentiality of personal information is protected and maintained.
Please read these Terms of Service ("Terms", "Terms of Service") carefully before using the www.donavangroup.com website (the "Service") operated by Donavan Group ("us", "we", or "our").
Your access to and use of the Service is conditioned on your acceptance of and compliance with these Terms. These Terms apply to all visitors, users and others who access or use the Service.
By accessing or using the Service you agree to be bound by these Terms. If you disagree with any part of the terms then you may not access the Service.
When you create an account with us, you must provide us information that is accurate, complete, and current at all times. Failure to do so constitutes a breach of the Terms, which may result in immediate termination of your account on our Service.
You are responsible for safeguarding the password that you use to access the Service and for any activities or actions under your password, whether your password is with our Service or a third-party service.
You agree not to disclose your password to any third party. You must notify us immediately upon becoming aware of any breach of security or unauthorized use of your account.
Links to Other Websites
Our Service may contain links to third-party web sites or services that are not owned or controlled by Donavan Group.
Donavan Group has no control over, and assumes no responsibility for, the content, privacy policies, or practices of any third party web sites or services. You further acknowledge and agree that Donavan Group shall not be responsible or liable, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with use of or reliance on any such content, goods or services available on or through any such web sites or services.
Donavan Group strongly advise you to read the terms and conditions and privacy policies of any third-party web sites or services that you visit.
These Terms shall be governed and construed in accordance with the laws, without regard to its conflict of law provisions.
Our failure to enforce any right or provision of these Terms will not be considered a waiver of those rights. If any provision of these Terms is held to be invalid or unenforceable by a court, the remaining provisions of these Terms will remain in effect. These Terms constitute the entire agreement between us regarding our Service, and supersede and replace any prior agreements we might have between us regarding the Service.
Donavan Group reserves the right, at our sole discretion, to modify or replace these Terms at any time. If a revision is material we will try to provide at least 15 days’ notice prior to any new terms taking effect. What constitutes a material change will be determined at our sole discretion.
By continuing to access or use our Service after those revisions become effective, you agree to be bound by the revised terms. If you do not agree to the new terms, please stop using the Service.