It’s long been a basic rule of retirement planning—allocate a portion of your 401(k) or IRA to international stocks for better diversification and long-term growth. But I’m not really sure those reasons hold up any more.
Better diversification? Take a look at the top holdings of your domestic large-cap or index stock fund. You’ll find huge multinationals that do tons of business overseas—Apple, Exxon, General Electric. Investing abroad and at home are close to being the same thing, as we saw during the financial crisis in 2008, when all our developed global markets fell together.
As for growth, we've been told to look to the booming emerging markets—only they don't seem to be emerging much lately. Even as the U.S. stock indexes have been reaching all-time highs, the MSCI emerging markets benchmark has had three consecutive sell-offs in 2012, 2013 and 2014, missing out on a huge recovery. That’s diversification, but not in the direction I want for my SEP-IRA that I’m trying to figure out how to invest. (See “My 6 % Mistake: When You’ve Saved Too Little For Retirement.”)
Some market watchers have pointed out that after two decades, the countries that were once defined as emerging—China, Brazil, Turkey, South Korea—are now in fact mature, middle-income economies. If you’re looking for high-octane growth, you should really be considering “frontier” markets, funds that invest in tiny countries like Nigeria and Qatar.
That’s all well and good. But when it comes to Nigeria, I don’t really feel confident investing in a country where 200 schoolgirls get kidnapped and can’t be found. As for Qatar, it’s awfully exposed to unrest in the Middle East. (Dubai shares just tumbled, triggered by escalating violence in the Iraq.)
Twenty years ago, I was more than game for emerging markets and loved getting the prospectus statements for funds listing then exotic-sounding companies like Telefonas de Mexico and Petrobras. But I just don’t think I have the stomach, or the long time horizon, for it anymore.
My new skittishness around international stocks may be signaling a bigger shift in my investing style from growth to value, the gist of which is this: since you can’t always predict which stocks will grow, the best thing you can do is to focus on price. Quite simply, value investors don't want to pay more for a stock than it is intrinsically worth. (Growth investors, by contrast, are willing to spend up for what they expect will be larger earnings increases.) By acquiring stocks at a discount to their value, investors hope profit when Wall Street eventually recognizes their worth and avoid overpriced stocks that are doomed to fall.
As Benjamin Graham, the father of value investing, wrote in his 1949 classic, "The Intelligent Investor," "The habit of relating what is paid to what is being offered is an invaluable trait in an investment." (Warren Buffett, among many others, consider "The Intelligent Investor" to be the investing bible. ) "For 99 issues out of 100 we could say that at some price they are cheap enough to buy and some other price they would be so dear that they should be sold," Graham also wrote. And he famously advised that people should buy stocks the way they buy their groceries, not the way they buy their perfume, a lesson in price sensitivity that I immediately understand and agree with.
Looking at the international question through a value vs. growth lens, my choice is seems more clear—at least on one level. If emerging markets are down, now is probably a good time to buy. But the biggest single country exposure in the MSCI Emerging Markets Index is China, at 17%, and it might be on the brink of a major bubble.
It seems a bargain-hunting investing approach isn't always that much safer, and I'm wondering if it might be worth paying more at times to avoid obvious trouble. Still, I’ve only just discovered my inner value investor. I’m going to keep reading Benjamin Graham and will let you know.
Ruth Davis Konigsberg, a fortysomething journalist and consultant to Arden Asset Management, writes weekly about retirement planning.