A few years ago, my family spent three weeks traveling around Europe. We trekked from Edinburgh to Rome, with several stops in between. We saw amazing and sobering sites, including Edinburgh Castle, the Tower of London, Dachau, the Eifel Tower, The Louvre, the Sistine Chapel, the Last Supper painting, and the Colosseum. It was a trip to remember.
It's an excellent time to visit Europe because the Euro and the Dollar are trading at parity, meaning there is no premium to travel overseas. When I went to Europe, the Euro was trading at a 30% premium to the dollar, so it wasn't cheap.
Visiting foreign soil is a great way to expand the body, mind, and soul. Mark Twain said, "Travel is fatal to prejudice, bigotry, and narrow-mindedness." There are numerous benefits to leaving our homeland, but what about investing in international companies?
I recently talked with a fellow financial planner, and we were discussing how the S&P 500 crushed international investments for the past eight years by more than 100%. In fact, the MSCI EAFE (Europe, Australia, Far East Asia) index has lost money since 2014. If you own a diversified portfolio of stocks, bonds, and funds, you probably have international exposure and are likely not happy with the performance. International markets account for 40% of the global market capitalization, so don't ignore a good chunk of global companies.
However, the S&P 500 has not always dominated international stocks. From 1970 to 2012, the MSCI EAFE index beat our popular index. Before the Great Recession in 2007, the EAFE outperformed the S&P 500 by more than 710% since 1970. From 2002 to 2021, the S&P 500 was the best performing market once when it jumped 12.7% in 2012. Last year our market was up 26.5%, but Austria soared by 41.5%.
International small-caps also bettered the S&P 500. From 1997 to 2012, Dimensional Funds International Small Company Fund (DFISX) beat the S&P 500. Historically, international small-cap stocks outperform large caps, and from 1970 to 2021, they averaged 14.2% per year, compared to 10.2% for the S&P 500.
And, don't forget, the S&P 500 lost 9% from 2000 to 2010. The index produced a negative return for ten years!
Like most markets, Europe is trading in negative territory, and they'll continue to feel the impact of the war in Ukraine. The Eurozone economic statistics are similar to ours. Their GDP grew by 5.4%, and ours jumped 3.5%. Their inflation rate is 8.6%, and ours is 9.06%. On a valuation basis, international markets are cheap relative to our indices.
Diversified portfolios need large, small, domestic, and international holdings to be successful over time, so don't try to time the market or chase returns because no one knows which market will be better than the next from year to year. A suggested allocation to international investments is 10% to 25%, depending on your risk tolerance and willingness to mind the gap.
What goes down usually goes back up if you're willing to be patient and don't hit the panic button. ~ Mark Mobius
July 23, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so you can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM's custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets. We have waived our financial planning fee for the remainder of the year, so your cost is $0.00.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren't suitable for every investor. I enjoyed the train ride from Germany to Rome as we traveled through the Swiss Alps – stunning scenery.