Should investors diversify their portfolio internationally?
Warren Buffett famously said, “never bet against America” — a market that has seen consistent gains throughout history. Despite the S&P 500 being down 18% in 2022 — the U.S. market has still outperformed other global stock markets.
U.S. GDP growth may be slowing, but the country isn’t dealing with some of the major problems other economies are.
Europe is dealing with an energy crisis from the Russian invasion and China is going through a property crisis and slowing economy. Does diversifying internationally even matter?
- In 10 of the past 12 years, U.S. stocks outperformed international stocks.
- But throughout history, U.S. stocks outperformed international stocks 56% of the time (276/493).
First American Trust’s Chief Investment Officer Jerry Braakman is sticking with treasury bonds, cash and defensive sectors in 2022 — avoiding international markets (WSJ).
The case for international
1/ The worse the U.S. does, the better international markets perform. During periods where the U.S.:
- Returned less than 4%: International stocks would outperform 100% of the time (45/45).
- Returned less than 6%: International stocks would outperform 94% of the time (60/64).
2/ Valuations are cheaper internationally. Using the cyclically adjusted price-to-earnings ratio, there are few economies with stocks as expensive as the U.S.
- The last time the Chinese markets were more expensive was back in 2011.
- Today, Chinese markets are trading at a nearly 60% discount from the U.S.
The Trust Company’s Chief Investment Officer Dan Tolomay is considering adding international exposures if valuations widen even further (WSJ).