Joel Dresang: Steve, let’s talk about international stocks. Domestic stocks did pretty well in 2014, not so much international. What would you say to investors who look at that and say, “Is this a good time to get out of international?”
Steve Giles: Actually Joel, I think that international investments right now present a pretty compelling opportunity for bargain hunters that are looking for long-term opportunities in their portfolio. Consider that the valuations right now in international, because of the bad year that they had last year, presents a good entry point for investors that have some money to put aside that they know they’re not going to need for another five, eight, 10, 15 years.
Joel: What about dividends?
Steve: Well, that’s another reason that makes international right now pretty compelling. Dividend yields here domestically are just above 2%. When you look at the international markets, we’ve got dividend yields up in the mid-3s, around 3½. For me, I like to focus on getting a good deal for what I buy longer-term, and the dividend yield is one of those things that we like to look at.
Joel: So you want to have international stocks in your portfolio. Is there a certain percentage that you shoot for?
Steve: Yeah. General rule of thumb, Joel, is around 15% international in your total portfolio. But because of the pullback that we saw last year in international markets and because of the run-up that we had here domestically, some of that international exposure may be lower than that general rule of thumb.
Joel: What about risks? What kind of risks are involved in international stocks that you wouldn’t have to worry as much in domestics?
Steve: Well, one of the main risks – and this is something that investors can’t control – and that’s currency fluctuation. Another risk for investors has to do with the emerging economies in those international investments in some countries right now that we may want to limit our exposure to. Consider Russia. Consider what’s going on in Ukraine right now.
It depends on your time horizon, and it of course depends on your tolerance for risk. As much as we think that the valuations overseas for international right now are pretty attractive, we have to be selective in the international investments that we pick.
Brian Kilb talks about the risks in international investing in a Money Talk Video.
I think emerging markets are a much different animal than your developed international investments. When I think emerging markets, I think of the BRIC nations. You’ve got Brazil, Russia, India, China.
I would much rather have more of the developed markets. Look at Europe. Look at the current valuations we have there. International markets also involve and include countries like Australia, like Canada. I mean these are countries that are developed, and right now the valuations overseas, outside of our borders in those regions, I think make a lot of sense for the long-term investor.
Joel: But overall you still want to have an international component in a diversified portfolio?
Steve: It all comes back to risk control. We want to make sure that we build portfolios that no matter what happens, you’re still going to look smart. I think it reiterates the importance for diversification. I think it reiterates for investors the importance of making sure you have a balanced portfolio because you just never know what’s going to do well this year.
Steve Giles is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted March 3, 2015)