10 Oct Should I get out of international investing with the trade wars?
Q. I invest in mutual funds and 25 percent of my retirement account is in an international stock fund. All this talk about trade wars is making me wonder if I should get out of the fund. What do you think?
A. In investing, it is important to create a diversified portfolio based on your objectives and tolerance for risk.
The reason for including international stocks is that countries outside the U.S. account for three-quarters of the world’s output and there are some very well-run and profitable companies that you would want to invest in, said Deva Panambur, a certified financial planner with Sarsi, LLC in West New York. and adjunct professor of personal finance at Montclair State University.
“They also provide diversification benefits as their performance can be very different from domestic stocks,” he said. “Sometimes, this difference can run for an extended period – for example between 1999 and 2009, a period punctuated by two bear markets, U.S. stocks were essentially flat, while international stocks, especially stocks of companies in emerging economies, performed much better.”
International stocks do come with higher volatility because when you buy them, you are also buying the underlying foreign currency, which increases the volatility, he said.
“However, that should not be a reason for you to get out of international stocks because they are considerably cheaper than domestic stocks and they diversify the sources of return as explained above,” he said.
Panambur said it is also difficult to predict geopolitical events, which can turn on a dime. When these geopolitical tensions subside, international stocks could perform very well and even outperform U.S. stocks, especially if you have picked the right investment vehicle for the exposure.
“If the volatility of the portfolio is making you uncomfortable, then you may want to reduce the percentage of your portfolio in international stocks,” he said. “Ideally, that is a decision you want to take at the outset – before you construct your portfolio – so that the volatility of the portfolio is within your risk tolerance and objectives.”
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This story was originally published Oct. 10, 2019.
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