“What’s the importance of having international funds in my portfolio?” an investor asked us. “These funds seem to be a drag on my accounts.”
US stocks have outpaced foreign stocks almost every year from 2010-2019, so if you owned foreign funds during this time period, they probably didn’t add much to your returns.
But don’t give up on foreign funds entirely. These funds could turn out to be a great investment in the future, and we may be on the cusp of a new foreign trend.
Why foreign stocks could do well in 2021
Market themes tend to change in each decade, and since US markets led in the 2010 decade, foreign stocks could be the place to be in the 2020 decade.
The US dollar has fallen in 2020, which benefits foreign stocks. “International stocks are subject to currency fluctuations, so if the dollar falls, that means your foreign stocks are worth more once they’re converted to our currency,” Fortune explained. In fact, “in years of dollar weakness, foreign stocks have risen 85% of the time,” Fortune found.
The pandemic is another factor: the US may take longer to recover than other countries. As BlackRock noted in its November 2020 outlook, “Better management of Covid outbreaks means that China's activity should return to the pre-Covid trend far ahead of both developed and emerging market peers.”
It’s good to keep an open mind about which stocks could do well in the future and consider investing in foreign and US funds. But remember that even though there may be good reasons why foreign stocks could do well in 2021, that’s no guarantee of future performance.
There were plenty of good reasons why emerging markets were expected to outperform in the 2009-2019 decade, but instead US stocks did best. During this time, analysts have pointed out that US stocks were overvalued and foreign stocks offered a bargain, but US stocks continued to strongly outpace those overseas.
The FundX approach to global investing
How do you know when to own US funds, and when to invest globally? Many mutual funds and investment advisors keep a static allocation to foreign or US stocks. We take a different approach: we change our allocations over time in an attempt to adapt to changing market trends.
The Upgrading investment approach that we use to manage the FundX Upgrader Funds has a good track record of capitalizing on US and foreign trends, as you can see on the chart below.
The chart compares the performance of US stocks (as measured by the S&P 500) and foreign stocks (as measured by the MSCI EAFE index). You can see that foreign stocks did best in the 2000s and US stocks did best in the 2010 decade.
Below the index returns, you can see how much the FundX Upgrader Fund (FUNDX) had invested in foreign funds over this time period. FUNDX had more exposure to foreign funds when the EAFE was in favor. At times, it had nearly 80% invested internationally. And FUNDX had much less exposure to foreign stocks over the last decade, when the S&P 500 had stronger returns.
The S&P 500 Index is a broad-based unmanaged Index of 500 U.S. stocks, which is widely recognized as representative of the U.S. equity market. The MSCI EAFE (Europe, AustralAsia and Far East) Index is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. You cannot invest directly in an index.
FUNDX didn’t have perfect timing, as you can see. There were times like 2005 when we reduced FUNDX’s foreign exposure only to buy back in as the foreign trend continued, and there were years like 2012 and 2017 when we began to buy into foreign funds only to move back into US funds. But the takeaway here is that we actively changed FUNDX’s allocations.
Investors who owned FUNDX during this time weren’t stuck with a static allocation to US funds during the foreign years or a big investment in international funds during the US decade. They owned a portfolio of funds that actively adapted to changing markets without having to predict these changes in advance.
Invest in FUNDX
You can invest in FUNDX at most major brokers, including Charles Schwab and Fidelity, often without transaction fees. You can also invest directly through our shareholder services: call 1-866-455-3863 to get started or you can set up an account online here.