Opinions All Over the Map on Foreign Stocks

Stock investors have faced a classic investing conundrum in recent years. While the U.S. equities that typically make up the bulk of their portfolios have fared well, foreign equities that can help diversify their portfolios have lagged--sometimes badly. Consider that, over the past five years, the S&P 500 Index of U.S. large- and mid-sized company stocks has returned 15.9% per year on average while the MSCI ACWI ex USA Index, which tracks companies of comparable size in developed and emerging markets outside the U.S., has returned just 5.6% over the same time period (both as of Jan. 29). This disparity has been even more pronounced recently. In 2013, when U.S. stocks rose 32.4% (including dividends), foreign stocks gained just 15.3%, and last year, U.S. stocks gained 13.7% while foreign stocks lost 3.9%.

Anyone who pays attention to the news knows there are plenty of reasons to be pessimistic about foreign stocks. Ongoing debt woes in Europe and a slowing Chinese economy head the list, along with instability in the Middle East and the Ukraine. Yet, the strong performance of U.S. stocks since the current bull market began in 2009 has caused some investors to wonder if the market has become overpriced, and whether today's best stock bargains can be found overseas. In fact, last year, investors poured more than twice as many dollars into international-equity mutual funds and ETFs as they did into pure U.S. equity mutual funds and ETFs. Time will tell whether last week's announcement of a bond-buying stimulus program by the European Central Bank continues this trend into 2015.

With so much uncertainty, and perhaps opportunity, surrounding foreign stocks, we asked readers on our International Investing discussion forum whether they are sticking with their foreign-stock allocations, adding to them, or perhaps bailing out of them altogether. Many said they're holding steady, but differences of opinion were plentiful. You can read selected comments below, and you'll find the full discussion here.

Too Late to Bail Those who said they are sticking with their current allocation to foreign equities provided different reasons for doing so. For instance, Cherie wrote, "I have a long time horizon, my international funds are well-diversified across the globe, and I don't want to be overweight in domestic stocks given current valuations."

However, u2edward offered that, "I'm sticking with my hated international stocks because I understand mean reversion. Plus, I love the diversification."

Several commenters said that the valuations of U.S. and foreign stocks suggest they should stay put, at least for now.

"With all of the previously mentioned world problems, I certainly feel that international equities have more current risks than my U.S. equities," said glebbb, "... [but] with higher relative U.S. valuations, international should have a higher potential return over the next few years."

Reader glimpse seemed to agree, writing, "International equities haven't performed as well as the U.S over the past few years, but that may be the best reason for holding your positions in international stocks. Due to their high valuations, and other factors, I believe there's far more risk in U.S. equities now."

In some cases, readers said they've bought additional international-equity exposure just to keep their portfolio allocation on target.

"Pretty much hanging in there with my normal allocation, which meant I bought more [foreign-stock exposure] at the beginning of the year," audreyh1 wrote. "It might take a couple of years to pay off, but by the time it's considered 'safe' again, it will be too late."

Audrey1 wasn't the only one who said that now is hardly the time to abandon foreign stocks.

"My feeling is that if you were going to bail, it should have happened a long time ago," said Racqueteer. "... In my opinion it's too late for that at this point. Lowered [interest] rates, combined with low energy costs, should give smaller businesses, utilities, urban areas, and fuel-intensive industries a boost. If the U.S. is, indeed, due to slow a bit, Europe could benefit as a result of all this."

GoodyearGuy wrote, "My thought is that this is exactly the wrong time to think about bailing on international stocks. While the long-term returns haven't been that great, I can remember years when they outperformed. International continues to do exactly what I want it to do: provide me with diversification in my portfolio."

Waiting for a Rebound Some readers said they are sticking with foreign stocks partly on faith that they are due for a rebound.

MountainMan wrote, "Staying the course with 30% international, which means adhering to the allocation model and trusting that rebalancing ... is adding undervalued assets that will reward me with outsized returns when the tide shifts. It is hard to do considering that the outlook for Europe, as well as Japan and China, does not look promising. Since it is counter-intuitive, it is probably right."

KitCat said, "I am sticking with my international. In the last few years I have upped it a bit and added emerging and frontier markets. Trying to keep the diversification and don't panic when I see poor returns. The down returns will not last forever."

Some readers who said they will continue to own foreign stocks nonetheless said they are making changes within their allocation.

"I cut my funds with large stakes in Russia way before their economy started tanking, mostly due to their Ukraine debacle," wrote SeanDWB. "Switched out my Russian investments for a little bit of frontier market small-caps. I'm young. I have a long time for those investments to grow and was hoping to add some diversification in markets outside the U.S."

Of course, it hasn't been easy for those who have stuck with foreign stocks throughout their underperformance in recent years. Just ask philippi.

He or she wrote, "50% international weighting in equities. That's right, I've been dragging around that millstone for years. Since September 2011, the divergence in performance between

International Optimism One group of readers said that sticking with their former allocation to foreign stocks wasn't enough. In fact, they've added to it.

"I am adding to my international positions because I believe that the fundamentals that drove the U.S. markets are now present internationally," wrote bmontavonjr.

In fact, some were downright optimistic about the outlook for foreign stocks.

"I believe that international stocks will outperform domestic stocks over the next decade," wrote rila3400. "With that in mind, I increased my target international stock exposure from approximately 23% to 30%. To reach this target, all additional investments in my 401(k) and Roth IRA have been directed to three international stock funds since January 2013."

Also adding to his or her foreign holdings is Rohit33410, who said, "I have historically had about 20% of my stock portfolio in international but I am gradually increasing to 25% this year as the U.S. stock market currently seems more overvalued than the international and I believe the rising dollar will hurt U.S.-based companies and help international companies."

While some are making more dramatic additions to their foreign-stock allocations, longameyes is taking a cautious approach. "Maintaining a long-term view and remaining steadfast to a diversified portfolio," longameyes wrote. "I've elected to selectively and slowly add developed Europe and developed/emerging Asia to rebalance very attractive U.S. returns. As a contrarian buy-and-hold investor, I view this to be a reasonable time to put some cash to work."

One reader, AspiringConvert, offered a dose of perspective in explaining why he or she recently began buying more foreign stocks.

"The world is a mighty big place and there's always something going on somewhere that could negatively influence a given country's equity market," AspiringConvert said. "Years back, when I decided to include a broadly diversified international equity fund as part of my overall equity allocation, I made my peace with the fact that I'm not smart enough to be able to make determinations about when it's a good time to 'pull the plug' on the international side of my holdings. Therefore, I just don't worry about country-specific current events. As long as the reason for including international equities in my portfolio (diversification) remains reasonable, I'll stay invested. In fact ... I've even bumped up my percentage of international as part my equities over the past year."

International Pessimism In some cases, readers said they weren't willing to take on the risks posed by foreign stocks and were scaling back or abandoning them altogether.

"Trimmed in December from 28% [of the] total portfolio to 20%," wrote Bruce58.

Dauloix said, "I have pretty much opted out of international investing altogether, primarily because of the consistently and significantly lower returns compared to domestic investing and because of the higher expense ratios. In spite of this, the gurus consistently advise at least 10-20% investing overseas. But, numbers don't lie."

From the sound of some readers' remarks, their patience with overseas markets has been exhausted.

"Currencies falling, economies contracting, geopolitical risks at all-time highs, black swans lurking. What's not to love about investing outside the (relatively) safe and secure good ol' U.S. of A?" wrote seekingreturns. "Follow the international money ... it's coming here! Low [price/earnings ratios] doesn't always mean 'buy'."

"I just exited Europe entirely and did so on a rather fortunate day, when the fund jumped up nicely," said inklime. "The year-end dividend was nice to get, but not spectacular. After 16 months, I'm finished waiting for this fund to do something."

Homebrewer said he or she is retired and gave up on foreign stocks last year. "I just do not see the allure for emerging markets, BRIC, and Europe right now," homebrewer wrote. "Their economies are not expanding and their debt seems to be rising. ... With respect to valuations, I am not sure any market has a good cost-to-fair value ratio. The only good-looking stocks are energy and I do not want to increase my exposure there. The real question is what markets will see job and sales growth. I need to see a few positive quarters before going back."

There were even a few readers for whom pulling back on their allocation to foreign stocks or foreign-stock funds is not possible--because they don't own any.

Cotts said, "I have never invested in foreign issues. I'm OK with investment risk, but when you add political risk and currency risk, I'm not interested. As we have seen in recent years, the entire world is subject to both of those kinds of risk. I'm more comfortable with investing in the U.S. Part of this is because our [time] horizon is getting shorter. [We] can't afford the fluctuations I think may be more inherent in foreign investments."

And for texasboy, avoiding dedicated foreign-stock funds is the result of lessons learned the hard way.

"I'm keeping my dedicated allocation of international the same as it's been for the past 30 years: 0%," he wrote. "All of my diversified funds have a segment and I'll let them make the call. Every time I've looked at international separately I don't seem to make the right calls and have regretted it."

Some comments have been edited for clarity and brevity.