(PUB) Investing 2015

The Independent Adviser for Vanguard Investors

•

August 2015

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Not too surprisingly, those arguing

against the need for foreign funds were

loudest in the late ’90s. Those arguing

for increased allocations to international

stocks dominated the dialogue beginning

in the early years of this past decade,

then lost the megaphone again after the

Great Recession as U.S. stocks powered

ahead once more. Social psychologists

refer to this tendency to extrapolate our

most recent experience into the future as

the “recency bias.” And it exerts a pow-

erful pull on investors.

Finally, some will argue there are

times to be heavily invested overseas,

and times when you should keep your

money at home. Thanks. That’s like

saying you should invest heavily in

stocks when they’re going up, but not

when they’re going down. Market tim-

ing is tough already, and trying to decide

whether to focus here versus there is

not as easy as the soundbiters would

have you believe. Just look at the past

seven or so years on the aforementioned

relative performance chart. U.S. stocks

have the edge in performance over the

full time period—though in another six

or seven years that might change com-

pletely—but it was anything but an easy

victory. If you can time those swings,

you are far smarter than I am.

So what’s the answer? Do the big

U.S. multinational firms owned by

domestic stock fund managers provide

enough foreign flavor to your portfo-

lio given their global reach, as Jack

Bogle would have you believe? Should

we really have 50% of our portfolios

invested in non-U.S. companies, or is it

sufficient for a U.S. investor to allocate

just 10% or 20% or so of their stock

portfolio to foreign shares?

Unfortunately, there is no answer that

will satisfy every investor. The “right”

amount is going to be determined by

your risk temperament and long-term

return aspirations—but generally, you

should always make some room for

foreign stocks in your portfolio.

Foreign funds provide exposure to

numerous markets, which may be at dif-

ferent points in their economic cycles.

Additionally, companies based in for-

eign lands with local, feet-on-the-ground

expertise and experience in their own

markets often have a distinct advantage

over multinationals, particularly when it

comes to more localized businesses.

Yes, an oil company or a major drug

producer may be able to sell its wares

as easily overseas as it does in the U.S.,

but local cement makers, retailers and

service providers probably have a good

leg up on their foreign competitors.

Do you like Google? Google doesn’t

have anywhere near the reach in China

of Baidu, which happens to be one of

the three or four largest holdings at

International Growth

I believe the argument for investing

overseas is strongest when you can find

a good active manager with a foreign

focus. In foreign markets, just like U.S.

markets, there will be winners and los-

ers. If I can find a manager with an

ability to separate the winners from the

losers in foreign markets, that should

nicely complement the managers I have

partnered with who strive to do the

same in the U.S.

As for currency risk, it cuts both

ways. Currencies can hurt, or they can

help. The dollar has been up and down

QUOTABLE

Moving the Goal Line

Will the worries never cease?

First, every time stocks made new highs, it was cause for concern. Today, it’s a different

concern, as it’s been a little more than two months since the S&P 500 index last made a new

high on May 21.

A recent

Bloomberg

article asks, “Why can’t the S&P 500 get to a new high?” But the idea

that “the S&P 500 can’t hold a record” is kind of silly given that markets are constantly on the

move (unless of course they’re closed, as has been the case in Greece).

First, reaching new highs was only easy

in hindsight. Second, trying to explain every

tick in the stock market is a fool’s errand (but

does satisfy our need to attach a narrative to

everything). Third, should we even pay atten-

tion to new highs, or the lack of new highs?

The active managers we invest with aren’t

buying the index, thankfully, but rather are

picking individual stocks within, and some-

times outside those indexes. All you and I

should care about are those stocks.

Longtime readers have heard me say

this before, but when the market (or your

portfolio) reaches a new high, it can only go

two ways from there, rising to a new high-

water mark or falling below the record. That’s

it. Unfortunately, the fact of a new high being reached doesn’t tell you anything about what is

going to happen next.

I think you’ll love the chart above, which traces the returns of

500 Index

over the past 30

years or so. It’s similar to a chart Jeff and I showed you in the May issue. The shaded regions

indicate times when the fund was at or within 5% of its record high. The white space indicates

periods when the fund was more than 5% below its most recent high. Trading at new or near

recent highs is exceedingly common. Over half (53%) of the time in the chart, the index fund

was at or within 5% of its record high.

Most new highs don’t lead to imminent market crashes, but at some point, we will experi-

ence a bear market, and, by definition, it will have been preceded by a new high. Will the May

21 high be that turning point, or will stocks reach the “goal line” of a new record before reced-

ing? Not only can we not know the answer ahead of time, but it is entirely out of our control.

So all the buzz about being below the high is just noise that investors should try to tune out.

500 Index Regularly at

or Near Record High

6/83

6/87

6/91

6/95

6/99

6/03

6/07

6/11

6/15

At or Within 5% of High

500 Index

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Data from 6/30/1983 through 6/30/2015.