In this episode of FTFP, John and Bridget discuss the considerations and strategies for investing in international stocks. Bridget shares her journey of understanding international investing and explains the importance of diversifying one's portfolio. They also touch on the biases people may have towards investing in stocks from their own country and the potential growth in emerging markets.
The discussion includes insights on dimensional fund advisors and their approach to investing in international companies, as well as the breakdown of global market capitalization and the number of companies in different regions. John and Bridget emphasize the need for a broad distribution of investments to navigate the fluctuations in international markets.
John's firm website: https://www.trinfin.com
Bridget: When I started in the financial industry, I had no idea how much to invest internationally. And what we're going to talk about today is what I figured out. Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And before we talk about international national investing, I want to remind all our viewers to hit that subscribe button. It helps other people find this information and helps our ratings on YouTube.
And with that, I'm interested in sort of the discovery process, Bridget, and how you came out with things. I know what I do with my international investing, and I think it's a really interesting discussion. And for me, I've been around a little bit longer, so it's hard for me to think back on that. You, however, can remember distinctly when you first started. Tell us how that evolution was for you.
Bridget: Well, one of the reasons I got in the industry in the first place is because I went to a financial planner who, when I was asking her how to invest, she's said, “What do you want your asset allocation to be?” I thought, “You're supposed to know that.” So I did a lot of research and tried to figure out how to figure out the industry. The first thing is, do you want to be an international at all, because it can seem scary and frankly, foreign.
But if you look at the statistics about the foreign markets over time, you kind of want to be in, and the ideas about having a well-diversified portfolio, which is really compelling when you actually get into the stats; in short, the more diversification you can get, the better. And I think that really came home when I started working with dimensional fund advisors. And that was really what they said: invest in all companies, but they do sort out certain specifications for a country. Do they have property rights, for instance, and things like that.
In other words, a basic functional economy, so that we can count somewhat on this country’s standards. And then they invest in the stock market. What's in the stock market? Great, we'll invest in it. And they also invest in the proportion. So if Apple is a bigger company, then they invest more in Apple. If that's bigger than some other country, that's okay. They just stick with that. And so, I found that I try to track the actual companies in the world and in my portfolio.
And I use the same percentages as they are in the world. I try to have some objective measure for how to invest too, so that I can say, “Okay, should I be changing this?” And what I found is that 40% in international and 60% in US, that's what dimensional shows. That's the number of companies in the world. That's how it breaks out. 60% US, 40% international. That's what I say.
John: That's great. And I use dimensional funds too and believe in some of those things. You made me think of when I first started doing this 1000 years ago, and how I came up a similar path. But it's interesting that there are studies that show that whatever country a person lives in, their bias tends to be investing in stocks in that country. I remember the study was Canadian investors generally have like 40% of their money, 50% of their money in Canadian stocks, because that's what you know. And when you look at the world economy, Canadian stocks account for something like 3% of the whole economy in the world.
So it's this idea of thinking, “I know US companies because I live here and do these things,” while these other things seem scary as you just described. And you go, “Wait a minute, that's not necessarily the case.” I'm going to pull up a graphic here from dimensional fund advisors. And I really love this thing. It's laid out from left to right like a flat map of the world, with North America over on the left, and Europe going over into Russia and Asia. But the different sizes of these boxes correspond with how much part of the world economy that country is with their market capitalization in their companies.
And that's the one thing I just wanted to edit maybe a little bit. It's not that there's 60% of companies in the US, but 60% of the world capitalization, that is world investments are in the US. And you can kind of see down here on the bottom left, they break it out into the US on the left, developed countries there in this sort of yellowish box, and then emerging markets countries in that greenish box over there. 60% is in the US and 40% is overseas. Our portfolios run similarly to that as well. And as you just described, we want to spread these things out because we don't know who the winners are going to be long term with things.
And we've had folks that come in, even from other advisors, and they have 80% or 90% of their stock portfolio portion is in US stocks. Again, it's what we know. They're the biggest companies. And you go, “Well, wait a minute, look at this map of things. Look at where that allocation is.” And golly, I don't think we want to be too US focused on things. There's one little piece here, it shows Apple. I think it says 2 trillion. That's how big Apple is. Whenever the date is, this year sometime. And look at that, as we look at that big map from side to side. The market cap of Apple versus countries in Europe. And this goes back maybe 10 or 15 years.
Remember, Greece was having a problem and defaulting on their debt, and it was a big issue. And you look at the size of Greece compared to the size of Apple, and you can fill in some other of the big stocks in the world and you go, “Wait a minute, on a scale basis, it's sort of interesting taking a look at what's out there and what's not out there.” The other thing I wanted to point out before we move on is just down in this bottom left corner here it shows 59% of the market cap in the world is US stocks. But it notes the number of companies there. Just take a look.
We have a little over 3500 companies in the US. In those foreign places, if you add together emerging markets and the developed countries, there are 15,000 companies. And so, you think US companies tend to be larger, and we don't know which ones of those companies will play out and be the winners going forward. We talk to our clients who say, “We wish we'd invested in Google or Microsoft and Internet Explorer.” I reply, “But remember back in ‘90s Netscape was one of the big browsers. Ask Jeeves was one of the major search engines.”
You didn't know that Google was going to be Google back then. You could have invested in a bunch of different things, so spreading that out makes sense. As we're having this conversation, I thought, “I'm going to bring up this map.” We don't talk about this enough with folks. But this is really powerful to say, “Listen, we want to be invested in a global economy.” We've always done it, but this really hits home for me.
Bridget: Well, John, I want to pull out a couple of things from what you said. One is that sometimes you see portfolios that you get from people have started working with us and when they look at the portfolio that they had with previous advisor, most times it doesn't have as much international as we go with. But sometimes it's because they say, “International is down. Why would I invest in that?” And that's exactly what we don't want to do.
We don't try to say, “Okay, is international up or down right now? Are emerging markets up or down right now?” They go up, and they go down, and even the crazy PhD people that have so much knowledge about this stuff can't figure out any kind of pattern. They go up and down in a random way, so the way to make money on it is to have as broad of distribution as possible. So that's one thing I wanted to mention. The other thing is about emerging markets. I think emerging markets as somewhat of an acquired taste because it's very volatile.
So what we typically do with emerging markets is, again, we use the same proportions and they're not that big of a proportion of the entire capitalization. Because when we think of international, a lot of times we think emerging markets, but a lot of international is something like Nestle, big brands that we use. Anyway, I don't know where Nestle is based, but I associate with Swiss, but I don't know.
Bridget: Anyway, I think one something that people don't realize about international is that doesn't mean emerging markets. We invest about 9% or 10% of the equity portfolio in that, but sometimes people say, “I don't want international, because it's too risky.” And I would say, “Okay, take the emerging markets part out if you really want to ditch something because that is more valuable.” But again, when it's up, it's really up. And we do special things with it, like try to put it in the accounts that don't have any tax, so when it grows a lot, we can capture that and not pay tax. That's just an extra little tip outside of the context of today's show.
John: I just want to throw in one thing before we wrap up here on that idea of emerging markets, and this goes back 20 years or more when I was at a conference, so the data is outdated but the concept is the same. And this was late ‘90s, early 2000s, and this presenter was talking about emerging markets and specifically in China at that time. He said that in the previous year if every resident of China would drink a six pack of Coke per year in the next year, so one Coke every other month, all the Coke that was produced in the entire world in the previous year would go just to China.
So if everybody had one coke every other month, all the world's coke would go there. And the point is, you think about some of these emerging economies where there's so much potential. Yes, there's a lot of risk. But man, when things come in, the amount of growth that's possible in some of those places is a really powerful argument for saying we should have at least a little bit of money there to take advantage of some of that growth. Anyway, with that, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: And I’m Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both members of the Alliance of Comprehensive Planners, which is a national group of tax focused, fee-only, fiduciary financial planners that work comprehensively. And if you are interested in finding an advisor who's in your local area, you can check out acplanners.org.
John: And don't forget to hit that subscribe button.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.