Weekend Reading – Should you own international stocks?
Hi Everyone!
Welcome to a new Weekend Reading edition: asking the question should you own international stocks?
Before a take on that, and what I do now in my portfolio, some recent reads and reminders:
Last Weekend Reading I discussed the stocks that have some moats and why they have a home in my portfolio:
Related to that, I also wrote why my desire to live off dividends and ETF distributions continues into semi-retirement – to a point!
While dividends and distributions may be great, it’s important to know what really drives stock returns.
Weekend Reading – Should you own international stocks?
Humm, I’ve thought a lot about this over the years…
The short answer is “yes”.
But I would caution with owning too much.
Financial experts will highlight that diversification is the only free lunch that comes with investing.
Take a Nobel Prize laureate Harry Markowitz for his word, not mine!
The thinking is: diversifying broadly across different asset classes, economic sectors and regions of the world, you avoid the risk of a catastrophic fall in the value of your portfolio that comes with being too heavily concentrated in one particular area.
The opposite of diversification is piling everything into one single security.
Makes sense. Going all-in at the table has risks.
So, diversification is not about putting all your investment eggs in one financial basket. It’s about spreading out your money across a variety of securities so that you’re not exposed to one risk.
Consider the terrible tales of Enron, Nortel and many more. Too much of one good thing can turn out very, very poorly.
Here are some important considerations for portfolio diversification:
1. Include multiple securities: Individual companies can go to zero but entire markets won’t. At least history hasn’t demonstrated that yet! So, while there is an upside for your stocks, there should be (more on that below) you can compensate in your portfolio by using more stocks to avoid any 1 or 2 companies going to zero or at very least dropping dramatically in price.
2. Include multiple asset classes: Depending on your goals and risk tolerance, including both stocks and bonds in your portfolio can have different reactions to the changing market and reduce the volatility of your portfolio. Although not always! See 2022.
In fact:
“The typical 60% stock/40% bond portfolio declined about 16% in 2022—a painful period for balanced investors that has raised doubts about the viability of this strategy.”
Sure, the “annualized return for the 10 years through 2022 was 6.1% for a globally diversified 60/40 portfolio” but bad things can happen to seemingly good, simple portfolios.
3. Include multiple sectors: You’re not fully diversifying if you own TD, RBC, BMO and other bank stocks. That can lead to concentration risk. These stocks are all within the same sector so they may react similarly, not identically, to the same market data. There is value to consider other sectors so they may react differently to market conditions, hopefully, favourably over time.
4. Include multiple *geographies: While our economy has become globalized, we know that countries’ economies don’t all move in lock-step. So, investing outside of Canada, and outside of the U.S. market, can lower your risk *but that may or may not yield better returns – especially when you dive deeper into your investing goals and time horizon.
*So, while diversification is called the only free lunch because you reduce the risk within your portfolio by adding more non-correlated securities, it could impact your personal return in an unknown financial future.
I’ve read on various sites touting the merits of a pure-indexed approach that you may be giving into some form of recency bias if you decide to limit your international stocks % in your portfolio.
Well, a decade+ is hardly recency bias for me. That could be 1/5th of your investing career assuming you start investing in your 20s or 30s more seriously:
Source: https://www.portfoliovisualizer.com/backtest-portfolio
The data talks.
A total international stock fund that some advisors tout, while helpful, has hardly kept up with Canadian returns over the last decade and has been clobbered by U.S. returns over the same time period.
While the performance of different countries and asset classes will vary over time, there is no reliable evidence that this performance can be predicted. Historically, we have quilts that demonstrate things are quite random from the past and only look clear/are better understood in hindsight:
Source: https://awealthofcommonsense.com/2023/01/updating-my-favorite-performance-chart-for-2022/
An approach to equity investing leveraging global stocks can provide diversification benefits as well as potentially higher expected returns. Sure, returns could be higher. But higher expected returns, from global equities, sometimes don’t just happen. Check out emerging markets for the last 10 years above. A totally lost decade.
Weekend Reading – Should you own international stocks?
Yes.
I do too!
I happen to own low-cost ETF XAW for my ex-Canada diversification that includes some 50% exposure to the U.S. market at the same time. But XAW doesn’t over-rotate into global equities and I don’t think you should either.
While Nobel Prize-winning economist Harry Markowitz famously described diversification as “the only free lunch” available when it comes to investing, including global equities to help navigate correlation risks, being overly bullish on just global stocks beyond Canadian and U.S. borders could bring disappointing portfolio results at times.
More Weekend Reading…
My friend GenY Money uses her Manulife (MFC) dividend income as reminders for few chores around her place. A nice reminder – when she pulls in over $400 each quarter from MFC alone! Nicely played!
Rob Carrick is aligned witih my thinking on the new FHSA (First Home Savings Account) – as in for 20- and 30-somethings, get one/open one.
Read on here who should have one, why and what to own (subscription).
“Eligible investments for FHSAs include the same choices available for TFSAs and RRSPs, including stocks, bonds, exchange-traded funds, mutual funds and guaranteed investment certificates. A suggestion for building an FHSA over 10 to 15 years: Start with an asset allocation ETF using a growth mandate, which means 80 per cent stocks and 20 per cent bonds. When your house-hunting gets serious, reduce the risk level by parking your funds in high interest savings account ETFs or mutual funds.”
Great stuff from Jessica Moorhouse on the FHSA as well:
What's the deal with the new First Home Savings Account? Here's a quick breakdown of the rules and benefits…https://t.co/3CbMO5hS5d
— Jessica Moorhouse, AFCC® (@jessi_moorhouse) April 5, 2023
Questrade recently launched their Tax-Free First-Home Savings Account (FHSA), more FHSA 101 details here.
Millennial Revolution wondered: Dude, where’s my yield?
My other west coast friend Bob Lai thinks you should consider what you are retiring to.
Absolutely my/our long-term plan all along…and I look forward to keeping my readership updated on that FIWOOT journey.
Some wise words from Physician on FIRE, especially when it comes to encouraging fellow physicians to watch out and avoid burnout.
I think these words could apply to anyone in any career:
“You’ve heard that time is money. The inverse is also true. Money can buy time, and a lack of personal time is a frequent factor in career burnout.”
“Money may not buy happiness, but good money management can help reduce burnout in your career. Save as much as you spend, and when you do spend, spend wisely. Take care of your mind. Take care of your body. Do what you can to influence change at higher levels.”
Looking for smooth-sailing returns? Consider Dale’s Sunday Reads advice to stay the investing course with mostly equities for the long-haul.
On success and succeeding / the genius behind keeping it simple:
“When you first start to study a field, it seems like you have to memorize a zillion things. You don’t. What you need is to identify the core principles – generally three to twelve of them – that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.”
— John T. Reed, American Businessman.
Have a great long weekend and time with family this Easter weekend.
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Hello Mark Thank you for your reply to my comment ( from a few days ago) . Your question inquiring about how many stocks we hold motivated me to think carefully and consider why we own just over 50 stocks. This number seemed to be too many to monitor and manage well. Along with a substantial cash type position, I consider our 30 strong dividend payers/ regular growers ( financials, utilities, pipelines, infrastructure, telecom, REIT’s, health care and some larger cap, mainly integrated energy equities ) our core, quality, long term hold positions. These equities along with our cash positions, are about 85% of our portfolio.
About a year and a half ago, we sold our by the lake cottage property.A substantial amount of cash was realized which we have been using over time to continue to build our stalwart dividend positions, many at attractive historic high yield points. ( as well, many dividends have been reinvested in more shares and income) At this time , I also had a strong conviction regarding the low cyclical state of the Canadian oil/ gas sector. With a relatively small initial outlay, we selected a basket of small/ mid cap energy positions which we still hold.This accounts for many of the additional stocks presently in our portfolio. We also started positions in Stella Jones ( since sold as the price ran up ) and Canadian Tire at high historic yields. At some point, sales will be required to be made in these additional positions.
Thank you for prompting my evaluation and evaluation of the number of stocks we hold. Regards Mike
30 stocks is still a good bundle…basket of stocks for sure. I’m sure in Canada, beyond a handful here and there, the names are the same. Otherwise, you’d just index invest potentially!
Congrats on selling the property. I continue to have a strong conviction regarding the O&G sector, likely more returns and needs to come!
Everyone was leaving O&G years ago and now they all want back. Funny stuff this investing thing 🙂
All my best, Mike. Stay in touch here.
Mark
Hi Mark: The reason I mention CSU is because it is around $2400 now and $100.00 shares would set you back $240,000.00. For someone starting out that is a lot of bread to lay out. In my Portfolio in the Globe and Mail they have an analytics section and according to it I am not to diversified. As mentioned I have banks, lifecos, utilities, communication companies, Russel Metals and an airline conglomerate. Most of my companies are Canadian but the companies have branches world wide. Take TD for instance. A friend of mine married a girl and her sister married a long time friend. This guy got a job at TD and his first place was Houston. Later the bank moved him to New York City and then to London, England. After being in London for a few years he was brought home and became the new president of TD Waterhouse. So as you can see TD is international in scope. According to the portfolio I am 55% diversified but I have Canadian companies that are world wide.
Yes, TD is very diversified and trying to do more over time. Some Canadian companies have built-in diversification, which is great of course!
Mark
Hi Mark: I find difersification over blown as well. There are a lot of stocks in Canada that are branched out into other countries such as the banks, utilities, Brookfield, Lifecos, Russel Metals, EIF, etc. When we would travel to Mexico or the Caribbean I noticed that the phone service being used was Vodaphone so I looked it up when I got back and found it attractive but never invested in it. Vodaphone had a rough time right after that but is doing better now. I too find the consumer section expensive and so have never invested in it. I also don’t invest in the mining sector. Once I did on a whim. While working in the basement of GE I would be one of the first to get the works news. In one there was an article were GE was building a ball mill for Great Lakes Nickel. I showed it to dad and thought that if GE was building them a ball mill it should be a safe stock. I bought 150 shares at $.70/ share and it promptly dropped to$.32 and then rose to $1.50 and then retreated and we sold at $1.15/ share. It then proceeded to drop right off the board but we did make a profit. My next foray into the mining sector would be Teck in 2008 but alas I didn’t pull the trigger on this one. If I had I would have been in over $400,000.00. I have found a lot of red herrings in the mining sector. That is why I stick to large blue chip stocks. One news letter I subscribe to touts small cap stocks but I find that they don’t usually pay dividends and they are also into tech with one of their starter stocks being CSU but if I find some ordinary stocks expensive then I’m not going to pay over $2000.00 for CSU for one share.
CSU does seem expensive but it keeps going up and up and up!
Good Canadian growth story.
I would agree with the mining sector.
I do like Brookfield for some international diversification.
Mark
Hi Mark: Both Enron and Nortel were great companies. Enron went down the drain because the management got greedy and tried to play the electrical energy market. This not only harmed Enron but also secure companies like TransAlta. The heads of Enron moved money out of Enron and into their own private companies. I was given Nortel and John Roth tried to enlarge the company by buying smaller companies who made routers. A lot was paid in stock. I saw the shares outstanding and it was 2 BIL. GE had 13 BIL. outstanding and Nortel was no GE. Also travel helps when you are investing. When we traveled to the Caribbean I noticed that most of the phones were Vodaphone so I thought it would be a good stock to buy. I didn’t but it has piqued my interest. According to my portfolio I’m not too diversified but I have banks, utilities, pipelines, a steel distributor, REITs, an airline conglomerator and a world wide infrastructure company.
Yes, a theme there = bad management.
Sounds like you have a decent portfolio though and more importantly, more $$ coming in vs. what you can spend!!
Mark
Fortis and Emera are equities, but act like bonds. In that they pay very consistent and rising dividends and the stock price does not fluctuate like many stocks. They act like a bond but are more productive in the long run. You don’t need real bonds in a BTSX like portfolio.
I understand that you have a lot of readers and you need to keep feeding them. The premise I thought was simple investing for DIY’ers. These last couple of articles are quite convoluted, especially the one about where returns come from. All of this is theory and can confuse a lot of new investors and make them thing it is too complicated for the.
Conventional wisdom has some merit, but more stories about results from actual investors would be more helpful. Diversification is way overplayed by most writers. That is the simple advice but doesn’t tell the whole story. We have the best regulations in Canada for banks. Our banks are diversified over the entire country and also have international exposure. Large cap US companies do business all over the world and are way better managed then Emerging Markets. ETFs have everything, good, mediocre, and bad. Why do we need that? Our bonds are our Canadian utilities like Emera and Fortis. Look at the actual track record of the BTSX. That is the story for new investors to know, and build on as the learn more. Keep in ABSOLUTLY simple. Keeping it simple has the best results.
So Emera and Fortis are bonds? Now I’m confused…
Thanks, Div. I appreciate the feedback. I was writing those posts to help highlight a few things from readers in my inbox.
“Diversification is way overplayed by most writers.”
This seems to be where indexers hang their hats though. I.e., if you don’t index, you’re doing it all wrong. I don’t like that noise of course because I’m a DIY investor and many readers are – they are not pure indexers and prefer it that way.
Great points on the history of the BTSX which is very impressive but I don’t know of anyone that follows that strict approach of selling assets every year even though the list doesn’t change too much year to year – they simply buy and hold and buy some more.
Thanks for your comment and assertive insights! I know you are a passionate investor too but I was just trying to answer a few emails/letters to the editor!
Mark
Hello Mark; Thank you for your post and many insights with helpful information. I agree, including international stocks helps in the diversification of a well balanced portfolio. Some sectors are not well covered here in Canada and having equities in these areas would be helpful to portfolio balance and returns if chosen carefully. I favour dividend aristocrats in several mainly defensive sectors; consumer staples
( KO, PG), health care (JNJ, SYK,AMGN) and technology ( CSCO, ADP) as well as ITW in the industrial space. Early in my investment journey I discovered a system to identify value from a book called ” Dividends Don’t Lie” by Geraldine Weiss. Her way to select quality stocks was based on their historic high and low yields. Using this method enabled us to enter a number of quality positions at value type prices. ( incidentally, I also have used this system over the years to identify and enter our Canadian positions as well.) I could go into more detail and give examples if this would be helpful. Regards Mike
Thanks, Mike!
I am familiar with that book and very similar to other books on the subject as well, given Canada is not very deep with technology, consumer, or healthcare stocks let alone major multinationals. Higher yields can signal value and good entry points.
How many stocks do you own now?
Mark
Hi Mark,
In regard to “not very deep with Consumer”, I’ve been able to cobble at least one Canadian in Consumer Discretionary that I’m happy with. CTC.a. OK, other stocks in that sector have been disappointments in our portfolio over the last few years like CSW.a, XTC, LNF, and MG. I guess one can’t win them all but perhaps one year they’ll start increasing their dividends decently again. Just have to wait and see. Notice I don’t mention capital gains. That’s just the icing on the cake. If I get it, I get it, if not I’m not too concerned about it, since it’s the dividend and what each company does with that dividend that’s important to me.
In regards to the Consumer Staples companies in Canada, we own, ATD, EMP.a, MRU and NWC. So far, I’m happy owning all of them. Since L has started to pick up as well over the last few years, I suppose we could of added that too, but alas, enough grocery store chains in the portfolio.
Ya, I find the consumer sector in Canada is fickle. I have considered owning CTC but never pulled the trigger. I do like ATD and own some, same goes with MRU. Other than that, happy with my usual suspects for income and some dividend growth. Ha.
Mark
Hello Mark, great post and topic as usual.
I started as an index investor few years ago and then I switched to holding Canadian dividend growth companies and for me I never looked back and I’m happy that I’ve made that move because for me it make sense and I still believe that whatever strategy you take is fine I personally started buying real estate at age of 19 and that’s how I made the money that I have today , so for me starting early is the main key to succeed whether it’s real estate / index investing/ holding dividend growth stocks etc…the reason why I switched away from indexing is the over diversification because when you look at an etf like VEQT for example and it holds only 🙂 13602 companies from God knows where I ask myself why do I need all this ? if I’ve invested 1 mil$ in VEQT and lets assume for a second that those 13602 are held in equal weight that like 73.50$ in each , for me it’s no thank you I would rather hold some 25-30 companies that I know and I can follow and read what they’re doing with my money and following your strategy of keeping less then 5% in each company works wonders.
but at the end of the day to each their own and I’ll say it again that each strategy is good but the key to get to your goal is to save and invest in stocks or physical real estate etc…
Thank you so much for all you do Mark.
Happy Easter to all.
Yup, with VEQT or similar ETFs you own all the stars and the dogs. Not right or wrong, just what is.
I’m still a fan of all-in-one ETFs for folks if that approach helps them meet their goals. Who am I to argue with that? 🙂
That said, I like income. I like getting paid. I like capital gains too. I get that via my DIY portfolio.
Thanks, yes, keeping give or take 3-5% or so in some 20-30 companies will do wonders for many investors I think; including managing some risk. Keep cash too. Otherwise, get outside and live your life 🙂 Ha.
I always appreciate your thoughtful comments, Gus!
Best wishes to you.
Mark
I hold shares in XEF ETF for international exposure and VUN for US exposure. However I don’t like a lot of the companies listed in the top 20 holdings in both of these ETFs.
As I am a senior and in the next couple years will be looking for income from my international and US investments, I am considering moving some or all of XEF and VUN to Canadian stocks that have business exposure in other countries – for example ATD, BAM, BNS, BMO, etc. I think this would simplify my portfolio in retirement and I would welcome your or your readers’ feedback on the merits of this approach.
XEF is a good fund overall but I wouldn’t put too many eggs in that basket. I like XAW since you have the bulk (50-55%) in the U.S. market and then, what, about 30% in XEF? That seems about right to me.
I like XAW since I happen to own all of those companies you mentioned directly for that built-in international exposure. Those include but are not limited to: ATD, RY, TD, BMO, BAM, BNS, WCN and more.
I suspect most of my readers are DIY investors, who happen to own many of the same stocks I do for income and growth, and hopefully they will chime in a bit. Just be mindful of individual stock risk, that’s all. Maybe consider my 5% rule = no one stock should be much higher than 5% of your total portfolio value; just in case!
Thanks, Bev.
Mark
Mark, your comments about the value of having international stocks made me think.
I recently saw an article (using US$) where a couple started out in 1991 with a $500K. They made no more contributions. The author made a comparison of investing all their money in an S&P 500 ETF, versus investing in EFTs spread between 35% U.S. Stocks, 25% International Stocks, 40% U.S. Bonds.
They withdrew about 4% per year over the 21 years. Totals in the accounts in March 2023? S&P 500 ETF had $6,496,209. Mixed US, international stocks and US bonds had $2,089,211. Of course the portfolios differ–one portfolio has bonds. Still….
I also looked at 10 year returns for international stock ETF’s like VIU. Yikes! 3% or so barely beat inflation when it was low. Today?
I’ve decided to stay with some international exposure, but less and am moving funds to VFV. I’m also switching to VIDY for international exposure-it is a little more expensive, but its three-year returns of 8% or so look more attractive.
I have no problem with international exposure, and the devout indexers will say you should anticipate higher, expected returns from global stocks over time but some folks have been saying that for 20 years. It just hasn’t happened. Now, that could occur in the future but nobody knows what the financial future will bring. Everything is just a somewhat educated guess.
I think VFV is an outstanding low-cost ETF. 🙂
Mark