Fidelity: Five Myths of International Investing

Why Investors Shouldn’t Ignore International Stocks

Many investors are ignoring or avoiding international stocks, often due to some common misperceptions. A new paper from Fidelity Investments, “Five Myths of International Investing,” examines and debunks that prevailing conventional wisdom.

“Having a globally diversified portfolio shouldn’t be a foreign concept”

“Having a globally diversified portfolio shouldn’t be a foreign concept,” says Tim Cohen, chief investment officer at Fidelity Investments. “Many U.S. investors incorrectly assume that having international exposure is too risky. On the contrary, international stocks within a globally balanced portfolio can provide enhanced diversification and increase the potential for better risk-adjusted returns over the long term.”

Myth 1 - International investing is too risky
Reality: In combination with U.S. stocks, international exposure can actually lower risk in an equity portfolio. Over the past 60 years, a globally balanced hypothetical portfolio of 70% U.S./30% international equities has produced better risk-adjusted returns (Sharpe ratio)1 and lower volatility than an all-U.S. portfolio.

Myth 2 - U.S. stocks usually outperform foreign stocks
Reality: Historically, the performance of international and U.S. stocks is cyclical: One typically outperforms the other for several years before the cycle rotates.

Myth 3 - U.S. multinationals provide adequate international diversification
Reality: While U.S. multinationals may provide some exposure to foreign markets, they still offer only a fraction of the currency diversification offered by overseas markets.

Myth 4 - Investors should hedge their currency exposure
Reality: While it might sound good in theory, the effort and expense involved in currency hedging might not be worth it. Since 1973, currency hedging has detracted from returns in 54% of quarters, and helped in only 46% of quarters.

Myth 5 - Index funds beat active funds in international
Reality: Investing in companies overseas comes with political, liquidity, and currency risks, all of which can create price inefficiencies within individual stocks. Taking advantage of these inefficiencies requires specialized local knowledge, careful research, and efficient trading. Active managers can maneuver a portfolio to take advantage of these inefficiencies and have a demonstrated ability to outperform their index, producing significantly greater excess return compared to passive strategies.

Even investors who had a well-diversified portfolio of global stocks may find their allocation out of balance after several years of U.S. stocks outperforming international markets.

Now may be an ideal time to re-examine stock allocations and add more international equities to your investment mix, especially actively managed strategies. - Fidelity