For those of you who struggle with deciding upon which funds to choose for your 401K, I will be reviewing all of the different categories of funds available to 401K investors. Today, I will be focusing on one of the common 401k investing options - international stock funds.
Many investment professionals encourage investors to own international stock funds in an effort to diversify their portfolios. The idea behind this concept is that certain international stock markets may have better growth potential than the US market. As I will show below, international stock funds are not a good choice for your 401k.
There are a variety of different international stock funds. Some focus only on developed countries. Some focus on emerging markets. Some focus on particular geographic regions like Europe or Asia. Most 401K plans only offer one or two international funds.
When we compare the performance of the US economy and stock market to the rest of the world, we continue to see that US companies are the best in the world by far. To this day, no other country or region performs as well as the US stock indices like the S&P 500 or the Nasdaq.
For decades, forecasters have been predicting the decline of the American economy and the emergence of some other country or region. It has yet to materialize.
When we look at the actual investment results of international stock funds vs. something like the S&P 500 in the table below, the conclusion should be very clear. The results are not even close. Most of the international index funds have not been around for 20 years or more so we can only look at 5-year or 10-year performance but the longer term results are the same.
When your financial advisor tells you that you need international exposure, show them this chart and ask them what they could possibly be thinking? They will say that this data is based on past performance and not future performance. You should then ask them if they are predicting that the international markets will outperform the US indices in the future and on what basis are they making that prediction.
Other reasons to avoid international stocks are currency risks and geo-political risks. Gains you make in international markets can be wiped out by currency fluctuations. Political instability in other parts of the world could lead to losses in your international holdings.
Avoid international stock funds and stick to US stock funds.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
You can simplify your investing life if you know what to pay attention to and what to ignore.
The financial media works really hard to get your attention and they do it with sensational stories. We are all suckers for doom and gloom stories about the economy or the stock market. Stories of the mega-rich and the star investors always sell. Stories about promising new technologies capture a lot of attention. But 99% of what the media and the advertisers push out to you is a complete waste of your time.
In today’s article, I want to help you save time and money by getting you to only focus on the things that matter.
Let’s start with the information and the stories you should ignore:
Stock tips from anyone – people you know, media personalities, Wall Street analysts, and online posts. I’ve said it before and I’ll say it again. You should not be investing in individual stocks. You should only be investing in large cap US index funds for your 401K. Out of the 8 billion people on the planet, less than 10 people can beat the performance of the best index funds by picking stocks. If you are interested in what successful companies are doing, feel free to read about those companies but do not waste your time following individual stocks for your own investments.
Get rich quick schemes – There is a ton of information out there about day trading stocks, stock options and other assets as a way to get rich. Do not waste your time with any of this. The odds of success are extremely low and the investment of time is massive.
The doom and gloom stories – Most of the biggest and boldest financial stories include the reasons behind the next big economic or stock market crash. As humans, we are built with a negativity bias so we are all suckers for doom and gloom stories. Your local news station uses the same approach to their evening news broadcasts. No one can predict upcoming financial crises with any consistency and nobody is ever held accountable for their inaccurate forecasts. Ignore these stories. They will not come true and they will only upset you. The rosy and positive forecasts will also be wrong but they will at least make you feel better.
Anyone promoting investments in alternate asset classes. Ignore the many stories you will see that promote the benefits of investing in commodities like gold, silver, bitcoin, lithium, and international currencies. Investing in these things is gambling and not investing.
We all have busy lives and you can gain time in your day by not wasting any of your precious time on stories like these.
For investing purposes, there are only a few things that you should pay attention to.
The performance of the major market indices like the S&P 500 and the Nasdaq. The Dow Jones Industrial average is the oldest and most frequently mentioned stock market index, but it does not mean that much since it only contains the stocks of 30 companies. The Russell 2000 index is made up of small company stocks and is less meaningful to investors.
Macroeconomic data like unemployment, inflation and economic growth (the GDP). These statistics are reported monthly and get a lot of headlines so they are pretty easy to follow.
Your own saving and investment plan. Focus on the things you can control like how much money you are contributing to your 401K. Once a year, you should review your retirement account and your retirement account projections to the age of 65. Are you getting the full company match? Can you increase your 401K contributions?
There are very few things that you need to pay attention to in the investing world and to follow these few items will take very little of your time. By ignoring the other nonsense, you will find you will have more time in your day and your emotional health will improve.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
SUMMARY:
The stock market continues to trend higher since the end of October.
We are now getting close to the all-time high for the S&P 500 reached at the beginning of 2022 before this bear market began.
The inflation reports have been positive lately. If inflation data continues to show improvement, the concern will then become recession. Can the Fed achieve a “soft landing”?
We expect the volatility to continue until it looks like the inflation battle has been won and a recession has been avoided.
The current year, 2023, has been overall positive for the stock market but it has been anything but a smooth ride.
We saw a strong move higher in May, June, and July only to be followed by a steady decline in August, September, and October. But we have seen a sharp move higher since the end of. October. The report from the Fed last week was positive news for the market.
When we step back and look at the entire bear market that began at the beginning of 2022, we see a two-year period of high volatility. We see both the S&P 500 and the Nasdaq inching closer to the all-time highs reached at the beginning of 2022. As of the market close on Friday December 15th, the S&P 500 is down about 1% from its previous peak at the start of the 2022. The Nasdaq is down about 6% from its all-time high. The small-cap stock index (the Russell 2000) has not recovered as much as the large cap indices – down about 19% from previous high. In the graph below, you can see the nice bounce off the October 2022 lows.
The reality is that no one knows if the worst is over or not. No one is ready to declare victory over inflation just yet. And even though the economy keeps humming along, a recession is still a possibility.
Because of the uncertainty, it is important to follow a disciplined approach to investing. It is critical to have an investing strategy that wins no matter which way the market moves. No one can predict which way things will move in the short term. But we all know that in the long term, the direction of the stock market will be higher. Stay disciplined, my friends.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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