By: Case Eichenberger, CIMA®, Senior Client Portfolio Manager
As the bull market marches on, new highs appear in sight. But investors are not overly optimistic. If they are, there is a good chance they are focusing on a single country — the U.S. I have heard some unique reasons lately why international stocks don’t make sense in portfolios. I run through them below. Enjoy.

But I Live Here!

This was a good discussion I had earlier this week with an investor who is funding her retirement and her child’s education. While she is probably ahead of a large majority of U.S. investors, who may not be considering their retirement so carefully, she had some interesting reasons why she should not invest abroad. She argued that her children will go to school in the U.S. and he/she will retire in the U.S., so why would she want international stocks?
It was a perplexing statement, but it is one I have heard and read before in some of my favorite writings from influential authors. Specifically, it reminded me of Wall Street Journal columnist Jason Zweig’s blog in which he responded to a similar argument.
“Since you already live in the U.S., earn your salary in dollars, and pay your mortgage with dollars, do you really want to tie up 100% of your financial assets in the U.S. stock market? You are taking a multi-layered gamble that no other investment will do as well. If you turn out to be wrong, what will you use to cover your downside — and your backside?”
It is likely no surprise to those who are reading this, but we agree. We are happy to invest a portion of our clients’ money in international stocks.  In the long-term, adding to international stocks has been proven to lower the volatility of a portfolio.  In the short-term, given where valuation measures are, it is a great idea tilt towards international stocks as the cheaper option, with more room for higher returns.

This Time is Different

The legendary investor, and another CLS favorite writer, Howard Marks, recently released a memo on how the U.S. bull run may continue. He lays out the reasons current trends could continue uninterrupted but ultimately concludes he wouldn’t bet on them.
Investing, proper investing (not speculation), is about probabilities and diversifying your portfolio. We believe in both.
There are many complex reasons the bull market may continue or not, but in the endstarting points matter. The chart on historical trends below shows the more you pay for a company’s earnings, the lower your future returns will be. The opposite should also hold true.
How to read the data: The more you pay for a company’s earnings (high CAPE), the lower your returns are in the future. , the CAPE of the U.S. is in the 25-and-higher range. Tilting toward assets of good value helps improve this picture for investors and protects them against areas of excessive valuations that can crash hard.

Large U.S. Multinationals Provide Diversification

Larger companies tend to have a large portion of their revenue tied to the global economy and thus generate sales from other countries. Some say this is all an investor may need.
Meb Faber, co-founder of Cambria Investment Management (and CLS podcast guest), recently shared some research from global index firm MSCI, on how the revenue production of corporations looks on a global scale.

As Faber argues, so what if corporations in the US generate a large portion of their revenue outside the US? Countries across the globe are generating revenue from each other — these are the benefits of free global trade. In a truly global economy, where you can get low-cost access to great companies, it makes sense to find value all over the globe — not just in your own back yard.
At CLS, we regularly try to disprove our own notions. We have challenged our conviction in global diversification and found repeatedly that it continues to make investment sense. The reasons not to diversify globally cited above are half true at best, and it is most likely irrational biases, home bias and hindsight bias, that prompt these thoughts.
Thanks for reading. For more insight into the benefits of international investing, check out this CLS white paper.
0919-CLS-7/19/2019