In the last lesson, I mentioned that a portfolio of international stocks appears to consistently show an annual return of about 1% less than a portfolio of U.S. stocks. This means that there seems to be no advantage to diversifying internationally, especially in European stocks. You may, however, be enamored of emerging economies like the BRICS countries:
- Brazil
- Russia
- India
- China
- South Africa
There are mutual funds that invest just in stocks of those countries. I would not, however, put all of my investment in that one basket. Ten percent or twenty percent of your cash seems reasonable.
But why does a U.S. domestic firm mutual fund outperform a European portfolio of stocks? First, Europe (and the BRICS nations) do not have the innovative, high-flying tech companies that we do. The top tech companies are often referred to as the FAANGs: Facebook, Apple, Amazon, Netfix, and Google (now called Alphabet). Some investment gurus put Microsoft in this exclusive club (the FAANGMs) and some do not. Those who do not say that the recent growth of Microsoft’s stock has not been as meteoric as the FAANG stocks.
Twenty years ago it was a better idea to diversify with European stocks, as at the time the economies of the U.S. and Europe were countercyclical. That is, when the U.S. was in a recession, Europe was not; European companies were doing well when U.S. companies were slumping. This is no longer true. Globalization is so widespread that the U.S. and European economies are now procyclical.
Finally, most of the largest European companies are listed on both a European stock exchange and the New York or NASDAQ stock exchange. If you buy a widely diversified stock mutual fund like an S&P 500 Index Fund, you will still get stock of the largest European companies in the fund.