Should I buy or sell foreign stocks given today’s conditions?
Should I buy or sell foreign stocks given today’s conditions?
Today’s Q&A combines two related questions into one, “Should I buy or sell foreign stocks given today’s conditions?”
The first question is from Lou, “I see that the PE ratios on foreign stocks are a lot less than with U.S. stocks. Should I be buying foreign stocks?”
Then there is this from Phil, “I see foreign stocks haven’t done as well as U.S. stocks. Should I be selling my foreign funds?”
We put those together to get “Should I buy or sell foreign stocks given today’s conditions?”
The questions highlight the simple fact that you cannot buy unless someone sells and you cannot sell unless someone buys. Lou and Phil are grappling with the same issue but from different angles.
First, what is a “P/E ratio?” “P” stands for price and “E” for earnings. P/E ratio is simply the ratio of price to earnings. When you own stock, directly or through a traditional mutual fund or exchange traded fund, you own part of the company and have a claim on your share of the earnings. As a general rule, the less you pay for a dollar of earnings the better. Lou sees a lower price as a better value.
One reason the P/E ratio on foreign stocks is lower than U.S. stocks is because the prices of foreign stocks haven’t risen as much as the prices of U.S. stocks. This lagging behind is what has Phil thinking about selling.
What tends to happen is that as foreign stocks lag, the difference in relative value increases, at some point traders want to buy more foreign shares, their price rises and foreign stocks do better than U.S. Stocks. So, Lou is on the right track. However, when exactly this process kicks in and foreign stocks start to do better is not at all predictable. PE ratios are lousy timing tools. The differences in valuation and performance can and has persisted for multi-year periods, many times in the past.
Phil, whether he thinks of it this way or not, is betting that the process won’t kick in any time soon and foreign stocks will continue to lag. Both Lou and Phil are indulging short-term thinking and are closer to speculating than investing.
We think a better way to deal with the differences between how foreign stocks and U.S. stocks perform is to own both on a continual basis and rebalance periodically to a consistent allocation of foreign versus domestic. Doing this has historically produced less overall volatility in portfolios over the long term. This strategy also works well with other asset classes.
Recommended Reading:
How do currency fluctuations affect investments?
Why stay in one fund when another is performing better? – Explains the destructive effects of “returns chasing” and trying to move between asset classes.
Why investing in global markets is important
Why rebalancing can help when markets decline
What will the market do now – Lists principles to adapt to maintain an effective disposition
Beauty is in the eye of the beholder
How to invest for your goals – not for headlines – Explains the importance of diversification and why one should expect differences between asset classes in a well-diversified portfolio.
Making News…
We frequently produce Q&A columns for Florida Today and MarketWatch, a personal finance website of the Wall Street Journal, as well as pieces for Investopedia, Orlando Sentinel, Financial Advisor magazine and others. Below is a sampling from the last three months.
We continue to help the Orlando Sentinel with reader questions for its Ask An Expert feature. Tommy Lucas,CFP® explained how a life-changing event may lower Medicare premiums and Mike Salmon, CFP® helped a reader who asked, “How will I be taxed on the sale of my house?”
Dan Moisand,CFP® continues to write for MarketWatch, Florida Today, and Financial Advisor:
Answers to your questions about Roth conversions
Are annuities in Roth and traditional IRAs a smart move?
Three Strategies Overhyped To Consumers
Four More Strategies Overhyped To Consumers
Even More Overhyped Strategies To Consumers
How can I make sure my money is helping people once I’m gone?
In the News…
Moisand Fitzgerald Tamayo, LLC again made Financial Advisor magazine’s list of the top independent Registered Investment Advisor firms in the U.S. The list is based upon total assets under management.
Dan Moisand did a video interview for the Financial Planning Association during their Retreat conference. FPA spoke with several veteren financial planners and included Dan’s thoughts in this package of tips for new planners. Dan’s top tip was to be patient. Learning is a lifelong process. His clip starts at 0:57
Things We Found of Note
The average amount of savings Americans have for retirement is just $84,821 and,
78% of Americans surveyed say they are “somewhat” or “extremely” concerned about not having enough money for retirement. (Northwestern Mutual survey)
Of retirees that said they were generally happy, 97% credited that to a strong sense of purpose. (Transamerica)
