- If you invested $10,000 into a total US stock index fund
and $10,000 into a total international index fund
30 years ago, then today your US stock portfolio
would be worth around $175,000.
And your international portfolio would be worth
around $41,000.
That international return is horrible enough
to make a grown man cry.
- Am I crying?
No, I'm not crying.
You're crying.
- I'm going to spend this video convincing you
and showing you why you need to start
investing internationally, if you haven't already.
- Investors.
- Possibly you.
- But I am also going to show you when it doesn't make sense
to invest internationally.
Let me explain.
There's this map of the world that I put up in my garage gym
about five years ago.
The main reason was for it to be a constant reminder
of how small and absolutely insignificant I am compared
to the rest of the world.
It's a weird thing to do, I know.
It's also weird that grown men still wet the bed,
but that's besides the point.
- Everybody my age pee's their pants, it's the coolest.
- A map like this is also a good reminder to investors
especially here in the US, that there is more
to investible assets than what's based in the United States.
Some of the most valuable publicly traded businesses
in the world are located in the US.
That's why they account for 60% of the stock related assets
in the whole entire world, but there's still 40% of assets
outside of the border that we need to be aware of.
Not just any assets either, actual businesses
that are continuing to grow, make money, reduce costs
and take over their respective industries
for the benefit of their shareholders.
I point this out because as investors, it's easy to forget
what's behind a stock price and ticker symbol.
When we invest, we are buying ownership in real life
businesses, just like that gas station, grocery store,
or strip club right down the road from you.
(laughing)
And while it's easy to think that this world asset split
will stay where it's at, it won't.
The world is constantly changing and we can't predict
where it's going next.
Many people would say that they can ignore holding
an international fund because their US based stock fund
already gives them international exposure,
since some of those revenues come from overseas.
I used to be one of these people as well
but there's more to it that either they're not telling you
or they haven't even thought of yet.
Technically they're correct.
The largest companies in the S&P 500 like Apple, Microsoft,
Google, and Amazon all make money from countries outside
of the United States.
And as an investor in those companies through my S&P 500
and total stock market funds,
I hope they continue to do so and even work on trying
to increase that.
Right now around 40% of the revenue from S&P 500 companies
comes from outside of the country.
One thing that is rarely mentioned is that if the
overseas revenue for those US based companies
happens to shrink in the future,
then your international exposure through those
will shrink as well.
There goes that indirect international exposure
that you thought that you had through them.
Whoops, but hey, it's okay because you know, America
and stuff and things.
Listen, I'm from the United States.
I love my country and I want nothing more than to see it
succeed like it has in the past.
Heck, I'm about as American as type two diabetes.
- Diabetes, diabetes.
- We need to acknowledge home country bias though
and understand how it affects our decisions
when thinking about the future value of our portfolios.
More about future returns in just a minute, though.
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and you want to help support my dog, Molly,
as well as myself and this channel,
please make sure to hit that thumbs up button.
I don't blame someone who wants to only invest
in the companies they're most familiar with
because that's what they see every single day
within their own country.
But did you know that even some of the most well known
brands that you come across every day are in fact
international companies and for American investors
your US stock funds aren't benefiting from these
international revenues that are happening domestically.
Think well known companies like Nestle, Samsung, Shell,
Toyota, LVMH, Unilever and way more.
These are very well known brands though.
So you might not see any issue with a fund that
holds these stocks.
Your biggest concern with putting some of your money
into an international fund may be that the rest of the 7,797
foreign stocks held within the Vanguard Total International
ETF are super risky because they're, no pun intended,
foreign to you.
Yes, we do need to acknowledge the inherent risks of laws,
politics, corruption, and economics.
But if you think that you are immune to those risks
by only investing in US based stocks,
then I have a cup of my bath water that I wanna sell you.
Just kidding, I take showers, not baths because who wants to
clean themselves in their own filthy water?
Other than, I don't know my dog and the liver king.
In a research paper titled Investor Diversification
and International Equity Markets,
from the highly regarded professor, Kenneth French,
he observed a behavioral bias with the perception of risk
in equity markets.
Investors may not evaluate the risk of different investments
based solely on the historical standard deviation
of returns.
They may attribute extra risk to foreign investments
because they know less about foreign markets, institutions,
and firms.
There are always going to be risks with US based stocks
and international stocks.
The good news is that if you own a broad-based index fund
for both then those rare one-off companies that are super
risky will be offset by the hundreds of other stocks that
aren't as risky.
Speaking of historical returns we need to address
the elephant in the room.
The one that people come at me with all the time
whenever I utter the words, allocation and
international funds in the same sentence.
Heck, it's one of the excuses that I used before starting
to put some of my money into international funds.
The historical returns of international stock funds
have not been good compared to US stocks.
They've lagged the US by 8% over the past 10 years,
3% over the past 20 and 5% over the past 30 years.
I have a word for this that was also the nickname one of
my ex-girlfriends gave me, dumpster fire.
Even though US stocks have gone through waves
of outperforming and underperforming international
in the past, they've still come out ahead.
So why in the world would you even bother putting a single
penny into a broad-based index fund
after seeing these numbers?
Because you and me, we are investing for the future
and not what happened in the past.
Now, could international continue to underperform
over the next 30 years?
Absolutely. But the problem is that none of us know
in the moment how things are going to play out.
It's so easy to look at the recent past performance
of US versus international and conclude that you should
completely ignore international going forward
because they haven't done very well.
If we use that same line of thinking back in 2010
when international had outperformed US for the previous
eight years, then technically we should have had a decent
amount of money allocated towards a broad-based
international index funded because, you know,
line goes up here, so we need to chase that line.
What you wouldn't have known at the time is the insane
bull run US stocks would go on for the next 10 or 11 years.
The point of a well diversified portfolio is that you have
all of your bases covered through a broad range
of different stocks, sectors, and countries.
Except that part of your portfolio will outperform
while other parts will underperform at times.
Not everything is going to go up at the same time,
at the same rate, and that is perfectly fine.
Jumping out of underperforming funds to jump into
outperforming funds is the same thing as buying high
and selling low, which is a huge no-no.
So stop doing that and fight your natural impulse to
want to do that as well.
I'm not saying that getting out of underperforming funds is
a bad thing because a lot of them were trash to begin with.
You just didn't realize it at the time.
I'm going to repeat this to metaphorically
beat it into your brain,
so you stop basing your decisions on past returns.
Optimize your portfolio for diversity and longevity,
then you'll be set up to capitalize no matter what goes up
and down over time across the world.
The point of a diversified portfolio isn't to maximize
returns.
- What did you say?
- It's to improve your risk adjusted returns, prepare you
for anything and stay in the game longer than the people who
go all in on one asset class.
I'm not even saying to make international a large percentage
of your holdings, just a little sliver.
Even if we compared a portfolio that was 100% US index fund
to win 80% US, 20% international allocation,
the diversified portfolio only underperformed
by less than 1% so far.
If you are curious how much others have allocated
to international, here's a poll that I put up
on my YouTube channel community tab.
The 33% of people who like to jump out of airplanes
with no parachute have 0% allocated to international.
31% of them have one to 10%, 20% hold 11 to 20%.
And you can see the rest on screen here.
Let me know when the comments down below
what's your international allocation is
at this point in time.
Bonus points if you want to add some additional commentary
on why you have that allocation set up for yourself.
After everything we just touched on let's talk about
when it might not make sense to add an international fund
into your portfolio.
- What is going on?
What are you doing?
- I could sit here and show you all of the research
in the world on why you should diversify some
of your money into an international fund.
I could pull study after study from the most well known
and well-respected minds out there on the topic.
But you are a living, breathing human with thoughts,
feelings, and personal fears.
Sometimes the things that seem irrational to
the outside world are completely rational to us internally.
We are not robots and our lives don't play out
like the numbers that we put into a spreadsheet,
because of this, if you still don't feel comfortable
putting any of your money into international,
then that's okay and I cannot fault you for doing that.
Trust me, you could be doing much worse than only investing
in a US based index fund.
At the end of the day, a decent plan that you stick to
is better than the perfect plan that you don't.
If you were someone who watched this video all the way
through and you wanna start investing some money
into international, don't do it yet.
Right now my bias for investing in international index
funds is flowing through that intelligent brain of yours
which means that deep down you might not truly
believe in doing that yet.
You have to believe it's right for your investing goals
or else you are going to panic at the first sign of things
not working out.
And to make this successful, you have to be willing
to hold on to funds for very long periods of time.
I'm talking 20, 30, 40, 50 year time periods.
Wait a few days, weeks, or even months to make sure that
this is still something that you should do
with your own portfolio.
To be honest, it took me about a year and a half to even
two years to really feel comfortable adding an international
index fund to my holdings.
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I'll see you in the next one, friends.