Does Investing Internationally Still Make Sense?

It’s a fair question to ask ourselves: Should my portfolio be exposed to foreign companies? The answer is nuanced and investor-specific, but ultimately, yes. Buckingham’s Investment Policy Committee (IPC) believes an allocation in your portfolio to companies outside of the U.S. is beneficial. Let’s look at some of the most common reasons people tend to question their portfolio’s international allocation.

Geopolitical Risk

This risk is front of mind for many investors given that the war in Ukraine has been ongoing for longer than a year and shows little sign of resolution. Geopolitical risks, such as a war or health crisis, can affect global companies – and their stock returns – in many ways, including by creating trade disruptions, slowing the economy and weakening local currencies relative to the U.S. dollar. Last year showed the impact: International stocks faced headwinds as the U.S. dollar had its best run in 20 years, which increases costs and lowers profits for businesses operating overseas.

Although geopolitical risks can be worrying for investors, we believe there is no reason to react to the latest news because highly efficient markets incorporate all the relevant, known information into today’s stock prices. That’s also the reason why your portfolio isn’t tactically managed around the timing of different market events; by the time you come across new information, it has likely been baked into current prices. In fact, the IPC believes the best strategy to guard your portfolio against geopolitical risk is to own stocks from as many different countries and regions as possible. By doing so, you will be lowering your country-specific risk, both at home and abroad.

International Business by U.S. Companies

Proponents of a U.S.-only stock portfolio argue that it supplies ample exposure to foreign markets through each company’s international revenue streams: According to Morningstar, U.S. companies source approximately 38% of their revenue outside our borders. While this would provide some international exposure, we believe it falls short from a total portfolio diversification viewpoint. One of the big benefits of investing in foreign markets is the opportunity to own shares of companies that focus solely on their local markets, such as grocery chains and local restaurants. Studies show that these companies provide greater diversification benefits than multinational companies, which source revenue from their home markets and internationally.

Also, investing internationally means you own portions of foreign companies that source part of their revenue from the U.S. For example, U.S. consumers provide more than 20% of revenue for companies based in the U.K., Germany, France, Belgium and Taiwan, among others. By not investing internationally, one would forgo the opportunity to take part in the growth and innovation of well-known, multinational companies like LG, Honda, Nestlé, Anheuser-Busch and many others.

Recent U.S. Stock Market Performance

It can be very easy to anchor your expectations to recent performance when evaluating the holdings in your portfolio. Since the 2010s, U.S. stocks have enjoyed a stretch of superior performance compared with their international counterparts. However, this hasn’t always been the case. International stocks outpaced domestic stocks in the 1970s and 1980s. And although that trend reversed in the 1990s, the following decade — known as the “Lost Decade” because U.S. stocks lost value during the period — international stocks posted modest gains. This reinforces the fact that over any period, U.S. stocks can outperform their international counterparts and vice versa. And because market timing is often ill-fated, it’s best to own stocks from all over the world.

Focus on What You Can Control

As investors, we like to think that we can forecast stock market performance with some degree of certainty, but ultimately, global stock market performance is not within our control. Instead, we should focus on the things we can control, such as the types of risk that we take in our portfolios. Taking on international stock market risk in your portfolio provides the potential for diversification benefits, but if this risk makes you feel too uneasy, consult with your advisor to discuss the appropriate level of international stock exposure in your portfolio.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-5210

The post Does Investing Internationally Still Make Sense? appeared first on Buckingham Strategic Partners.

When Headlines Worry You, Bank on Investment Principles

On Friday, March 10, regulators took control of Silicon Valley Bank as a run on the bank unfolded. Two days later, regulators took control of a second lender, Signature Bank. With increasing anxiety, many investors are eyeing their portfolios for exposure to these and other regional banks.

Rather than rummaging through your portfolio looking for trouble when headlines make you anxious, turn instead to your investment plan. Hopefully, your plan is designed with your long-term goals in mind and is based on principles that you can stick with, given your personal risk tolerances. While every investor’s plan is a bit different, ignoring headlines and focusing on the following time-tested principles may help you avoid making shortsighted missteps.

1. Uncertainty Is Unavoidable

Remember that uncertainty is nothing new and investing comes with risks. Consider the events of the last three years alone: a global pandemic, the Russian invasion of Ukraine, spiking inflation, and ongoing recession fears. In other words, it may have seemed as if there were plenty of reasons to panic. Despite these concerns, for the three years ending February 28, 2023, the Russell 3000 Index (a broad market-capitalization-weighted index of public US companies) returned an annualized 11.79%, slightly outpacing its average annualized returns of 11.65% since inception in January 1979. The past three years certainly make a case for weathering short-term ups and downs and sticking with your plan.

2. Market Timing Is Futile

Inevitably, when events turn bleak and headlines warn of worse to come, some investors’ thoughts turn to market timing. The idea of using short-term strategies to avoid near-term pain without missing out on long-term gains is seductive, but research repeatedly demonstrates that timing strategies are not effective. The impact of miscalculating your timing strategy can far outweigh the perceived benefits.

3. “Diversification Is Your Buddy”

Nobel laureate Merton Miller famously used to say, “Diversification is your buddy.” Thanks to financial innovations over the last century in the form of mutual funds, and later ETFs, most investors can access broadly diversified investment strategies at very low costs. While not all risks—including a systemic risk such as an economic recession—can be diversified away (see Principle 1 above), diversification is still an incredibly effective tool for reducing many risks investors face. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.1 As of February 28, Silicon Valley Bank (SIVB) represented just 0.04% of the Russell 3000, while regional banks represented approximately 1.70%.2 For investors with globally diversified portfolios, exposure to SIVB and other US-based regional banks likely was significantly smaller. If buddying up with diversification is part of your investment plan, headline moments can help drive home the long-term benefits of your approach.

When the unexpected happens, many investors feel like they should be doing something with their portfolios. Often, headlines and pundits stoke these sentiments with predictions of more doom and gloom. For the long-term investor, however, planning for what can happen is far more powerful than trying to predict what will happen.

Learn More

When It Comes to Markets, Better to Plan Than Predict

FOOTNOTES

  1. 1Consider that a study of single stock performance in the US from 1927 to 2020 illustrated that the survival of any given stock is far from guaranteed. The study found that on average for 20-year rolling periods, about 18% of US stocks went through a “bad” delisting. The authors note that delisting events can be “good” or “bad” depending on the experience for investors. For example, a stock delisting due to a merger would be a good delist, as the shareholders of that stock would be compensated during the acquisition. On the other hand, a firm that delists due to its deteriorating financial condition would be a bad delist since it is an adverse outcome for investors. Given these results, there is a good case to avoid concentrated exposure to a single company. Source: “Singled Out: Historical Performance of Individual Stocks” (Dimensional Fund Advisors, 2022).
  2. 2Regional banks weight reflects the weight of the “Regional Banks” GICS Sub-Industry. GICS was developed by and is the exclusive property of MSCI and S&P Dow Jones Indices LLC, a division of S&P Global.

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The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or, representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional Ireland and Dimensional UK, as applicable (each an “Issuing Entity, as the context requires), to be reliable and the Issuing Entity has reasonable grounds to believe that all factual information herein is true as at the date of this document. It does not constitute investment advice, recommendation or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorised reproduction or transmitting of this material is strictly prohibited. The Issuing Entity does not accept responsibility for loss arising from the use of the information contained herein.

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“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd. and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

Diversification neither assures a profit nor guarantees against loss in a declining market.

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

All returns are in USD. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.

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Unsung Money Mentors: The Legacy Dan Wheeler Left Us

Are you familiar with the butterfly effect, or how small actions can have big, often unexpected ripple effects? The classic example (and its name source) is a butterfly flapping its wings in one locale altering the air pressure just enough to generate a tornado halfway around the world.

Next question: Have you ever heard of Dan Wheeler? Unless you are an independent, fee-only financial advisor, probably not. But despite his relative anonymity, Daniel Webster Wheeler, Jr. is acclaimed in our community as someone who changed the advisory profession for the better.

Sadly, Wheeler passed away recently, on February 15, 2023, at age 72. To honor his memory, we want to share with you the larger-than-life butterfly effect he had on our life and yours.

An Unlikely Champion for Individual Investors

Born in East St. Louis, serving as a Vietnam War Marine, bouncing among various accounting, philanthropic, and financial roles (including being comptroller for a Saudi Arabian arms dealer), landing as a broker at Merrill Lynch in the 1980s … Wheeler might seem like an unlikely hero for individual investors.

But perhaps it was his restless nature that made Wheeler perfect for the role.

Pre-Wheeler, the financial industry fed almost exclusively on commissions. From an investor’s perspective, any advice you received would seem free of charge. But behind the scenes, your “advisor” was earning their keep from commissions paid by third-party providers who stood to benefit from your transactions, including broker/dealers, bankers, insurance companies, and fund managers. Your advisor was also usually employed by one of these same providers, beholden to their sales quotas and other profit-generating priorities.

It’s easy to imagine how rife this model could be with conflicts of interest to trade, trade, trade, and to recommend investments that would enhance a firm’s bottom line, whether or not they made best sense for you. After all, earning commissions and chasing incentives was the only way a financial provider could earn their keep, or sometimes, even keep their jobs.

Reimagining Investment Advice

In the late 1980s, Wheeler characteristically called BS on the financial industry’s inherently flawed compensation model. He’d seen the sausage-making, grown disgusted by what it took to “succeed,” and envisioned a new, more meaningful way to deliver solid investment advice to investors who were otherwise too often being thrown to the wolves.

Even then, Wheeler was not alone in his beliefs. But he became among the first to act on them. At age 40, in a brash, virtually unheard-of move, Wheeler quit Merrill Lynch and opened a solo firm. In lieu of commissions, he charged a transparent fee, which clients paid directly to him for his independent advice. He refused to accept any forms of third-party compensation that might influence his recommendations.

The independent, fee-only advisory model was born. Wheeler blazed a new path, in which advisors were free to structure and manage clients’ portfolios, without being beholden to opaque sales incentives, and third-party conflicts of interest.

An Alliance with Evidence-Based Investing

Wheeler also turned to fellow thought leaders to help him implement his vision. As described in this homage by Financial Times Editor Robin Wigglesworth, Wheeler’s next epiphany arrived when “he discovered the works of … Gene Fama, the University of Chicago professor and father of the efficient markets hypothesis. It all suddenly makes sense, Wheeler thought.”

In another butterfly moment, Wheeler crossed paths with a nascent Dimensional Fund Advisors (with Fama sitting on Dimensional’s board). In its early days, Dimensional was providing no-load/no-commission funds that investors could use to efficiently and effectively capture available dimensions of market returns at lower costs compared to most retail fund equivalents. They grounded their strategies in evidence-based insights provided by Fama and other Nobel laureate financial economists. This approach was also virtually unheard of at the time. 

Together, they agreed it was high time for advisors, fund managers, and investors to all sit on the same side of the table—the investor’s side, that is. But there was a wrinkle. Dimensional was serving institutional investors only.

Once again, Wheeler led the charge. He convinced Dimensional they could—and should—create a legion of like-minded, independent advisors to bring evidence-based investing to the world. Dimensional’s co-CEO Dave Butler describes in his post, “Remembering Dan Wheeler”:

“Dan was convinced that there were other financial advisors who would share his enthusiasm for marrying independent and conflict-free financial advice with cost-effective investment strategies grounded in a scientific approach. He just didn’t know who they were, and they didn’t know about Dimensional. With a larger-than-life personality and enough zeal to overcome the odds, he made this vision a reality.”

In 1989, Wheeler joined Dimensional to build up its advisor channel. He retired in 2011 as its director of global financial advisor services. His business strategy had happened, just as he’d described it.

Advocating for a Fee-Only Future

Today, thanks to Wheeler and other early advocates like him, it’s much easier for investors like you to find an independent, fee-only advisor like us. From our perspective, it’s also much easier for us to provide the kind of fairly priced, fiduciary advice we are proud to provide.

Unfortunately, it also remains all too easy for consumers to end up being swayed by commission-based advice, which is still widely available as well.

We’ll continue to work on that. We’ll continue to beat Wheeler’s drum, insisting, as he did, that investors deserve far better than that. One thing is clear: Were it not for Wheeler’s early effect on investment advice as we know it, our voice would not reverberate nearly as loudly as it now does. Wherever he is now, the irascible Dan Wheeler has earned his wings.

The Right Time to Buy? How to Factor in Higher Mortgage Rates

Recent trends in the housing market have prompted many potential homebuyers to ask: Is now a good time? In the past year, mortgage rates have not only doubled, but they also did so at a time when housing prices had reached historical highs. This combination potentially impacts the home purchasing decisions of millions of Americans. Here’s what to consider when deciding if you are ready to become a homeowner this year.

A Decade of Favorable Rates May be Coming to an End

If you purchased a home over the past two decades, you likely locked in a favorable rate. This is especially true in the years following the 2008 financial crisis and accompanying housing market collapse:

  • In May 2013, the average 30-year fixed rate was 3.35%. For most years until 2019, rates fluctuated in the 3% to 4% range, rarely going above 4%. It was only in 2019 when they briefly spiked to over 5%.
  • Then, because of pandemic-driven interest rate declines, mortgage rates fell even lower, to an average of 2.68% in December 2020.
  • In 2022, however, things changed. Mostly because of factors tied to the pandemic, rates shot up between January and October. In that short 10 months, the average 30-year fixed rate went from 3.22% to 7.08%. It took less than a year for rates to fluctuate more than we’ve seen in decades.

Historical context puts today’s rates in perspective

Think mortgage rates seem high now? When looking at the last decade, or even the early 2000s when they averaged 5% to 6%, sure, they’ve increased. But when viewed from a broader historical perspective, a 7% mortgage rate begins to look much better.

Consider that mortgage rates in the early 1990s were nearly 10%. Or, how about this? In 1981, you may have been signing your name to a contract where you agreed to pay back a mortgage loan with a whopping 18% interest rate.

How rates move from here, and how quickly they do so, is still a matter of debate. But inflation appears to be stabilizing, which has allowed the Federal Reserve to slow the speed at which it increases rates. Still, for new buyers, higher interest rates will have an impact on their budgets and monthly loan payments.

Impact of Mortgage Rates on Payments

When planning for a home purchase, one of the biggest factors buyers tend to consider is “the amount of house” they can get for the money. While the total cost of a house is an important factor, often buyers are more concerned with what they can afford on a monthly basis.

When budgeting using a specific monthly payment, a higher interest rate eats away at the price you can spend on a home because you’ll need to allocate more money each month toward interest, rather than the principal loan payment. The chart below illustrates the impact.

 

 

Clearly, higher rates mean potential homebuyers might not be able to afford the same house they could have a year ago. However, for those in this situation, there may still be some options to secure a lower rate.

Opportunities for a Lower Mortgage Rate

  • Shorter Duration Loans: Mortgage loans with shorter durations, such as 15 or 20 years, generally offer lower rates than the more traditional 30-year mortgage. This might be a good option for a buyer who has a larger budget and wants to pay off their mortgage quicker. However, they aren’t usually a great option for those looking to get the most house they can for a certain monthly payment. That’s because even though the rate is reduced, the monthly loan payment will generally increase significantly because the principal portion of the mortgage is compressed into fewer payments.
  • Adjustable-Rate Mortgages (ARMs): ARMs also generally offer lower initial interest rates for a specified period. But, in an uncertain rate environment, ARMs can be risky. When the initial rate period expires, the new rate following the adjustment could be much higher.
  • Compare: Not all lenders offer the same rates. Shop around. An independent financial advisor can also help you compare lenders, rates, terms and other factors to help you find the right loan option for you and your family.
  • Mortgage Discount Points: Sometimes, you’re able to pay a fee upfront to lower your mortgage rate over the life of your loan. This type of fee is known as a “mortgage point.” If you’re planning to live in your new home for a long time, purchasing mortgage points could reduce your interest rate and long-term costs. Since you have to pay an upfront fee, though, there is a breakeven point to make the cost worthwhile. You’ll need to stay in the home long enough so that the amount you save in interest outweighs the cost of the points.
  • Credit Score: If you will be in the market to buy a home in the future and do not have a favorable credit score, it is in your interest to look at ways to improve it. Small changes in your score could have cost-saving benefits when shopping for an interest rate.
  • Down Payment: The amount you put toward your down payment may reduce your interest rate. Also, a higher down payment will lower the principal loan to be paid as well as the associated overall interest.

Mortgage rates aren’t the end of the story, however. There’s another side to the equation: home prices.

 

Predicting Housing Prices is a Tough Task

Typically, when interest rates rise, housing prices are expected to go down because the housing stock rises and the market becomes less competitive. This means that your dream home could still be in reach, even with higher mortgage rates. Unfortunately, there is no clear consensus about where things are headed.

Although housing prices have leveled off, or even declined in parts of the country, the recent increase in mortgage rates has not affected prices as much as many expected. Easing inflation and lack of inventory may mean that prices don’t decline as much as they have in past high interest rate environments. The good news is prices have at least stabilized, which could offer some comfort to homebuyers.

So, is now a good time to buy a house?

There are plenty of factors to consider beyond those in this article when deciding whether now is the right time for you to buy a house, such as where you are in your family life cycle. Current mortgage rates aren’t necessarily something that should outweigh all those other considerations.

Rates are higher, but not outside of historical norms. If they were to decline significantly, there would be opportunities to refinance at more favorable rates. And although home prices have increased since the pandemic, they have been stabilizing recently. If you are planning to live in your new home for 10 years or more, you likely won’t be affected by near-term price fluctuations.

In the end, buying a home is often as much of an emotional decision as it is a financial decision. Even if the current market isn’t considered optimal for buyers, it may still be the right time for you. If you’re thinking about buying a new home, consider consulting with your advisor who can help you evaluate your options.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based on third-party data which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party websites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. R-23-5139