"America First" is President Trump's economic policy. But that doesn't mean investors should set their 401(k) accounts to "America Only."
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Granted, the urge to dump all stocks from other countries is a tempting one, not to mention understandable. Foreign stocks have been stuck in their own lost decade, dragged down by weak economies and worries about politics, and their returns have been woeful relative to a U.S. market that's set record after record. Add on top of that a president who made pulling out of a proposed Pacific trade deal one of his very first actions, and worries are rising that stocks outside the United States are in line for more struggles.
Don't give in to the temptation, many fund managers say. They acknowledge the disappointing run foreign stocks have been on, plus the challenges still ahead. But they're sticking with the investment mantra to stay diversified: It's riskier to go all-in on stocks from just one country, even if it is one as big and performing as well as the United States. Some managers also see stocks abroad as more affordable buys following the U.S. market's run of dominance. And growth for the global economy seems set to begin accelerating again this year, which would help profits for companies around the world.
Of course, the big caveat is whether protectionist policies emanating from Washington trigger a global trade war. If that were to happen, economies around the world and corporate profits would get hurt. But fund managers say they're skeptical that campaign-trail rhetoric will turn into reality. It would hurt U.S. companies too.
"The agenda may be getting people manufacturing jobs in Michigan, Illinois or Pennsylvania, but it's not clear to me that protectionism is good for America," says Justin Thomson, manager of the T. Rowe Price International Discovery fund and the firm's soon-to-be chief investment officer of international equities.
"You just have to believe that common sense will prevail," he says. "If you go tit-for-tat with trade embargoes, nobody is really a winner in that."
That's one reason Thomson hasn't made big changes to his International Discovery fund, which owns more than 200 stocks from around the world, even after Trump's surprise victory in November.
Thomson looks for smaller companies that look poised for strong growth, whether that's because they sell to the expanding middle classes in emerging economies or export specialty items that are difficult to make. His investments range from Latin America - MercadoLibre, an online marketplace company, is one of his fund's biggest investments - to Japan, where he's seeing a greater emphasis on corporate governance. The fund's 10-year returns rank in the top 12 percent of its category, but it hasn't returned as much as U.S. stock indexes.
At USAA Investments, foreign stocks look more attractive than their U.S. counterparts because they're less expensive, says Wasif Latif, head of global multi-assets. He just cautions investors to be patient with them.
"International stocks are indeed very cheap," he says. "Now, they can get cheaper or remain cheap in the short run, but in the longer run, history tells you that they will outperform."
When fund managers call a stock market "cheap," they're looking at various measures, including what prices are like relative to corporate earnings, revenue and cash flows.
Stocks with cheaper prices relative to their earnings tend to have them for a reason. In Europe, growth has been meager, and the region's central bank has been trying to stave off a vicious cycle of falling prices further weakening the economy. More risks are still on the horizon, with potentially contentious elections upcoming this year in the core economies of France and Germany.
The low price-earnings ratios are also a result of how much worse foreign stocks have performed than U.S. stocks. A $10,000 investment made a decade ago in the largest U.S. stock mutual fund is now worth just over $20,000. The same investment made in the largest foreign stock fund is now merely $11,380.
That split in performance, though, may actually be an encouraging sign. It shows that different markets around the world are behaving differently. And having one investment that zigs when another zags helps to make an overall portfolio more diverse and ostensibly safer. The hope is that when U.S. stocks hit their next round of struggles, whenever that may be, international socks will continue to act differently.
So, how much is enough? Foreign stocks make up about half the world's total, by market value, so some investors start there. Others say because they live and plan to retire in the United States, they want to hold more U.S. stocks. The big mutual-fund companies tend to fall more in the second camp with the funds they've built for retirement savers.
Vanguard's target-date fund aimed at people planning to retire in about 20 years keeps about 40 percent of its stock investments abroad, for example. Fidelity and T. Rowe Price both have about 30 percent.
Fund managers say they're not changing much about their approach, even with all the uncertainty caused by an "America First" president.
After all, foreign stock managers have had lots of practice with uncertainty, says T. Rowe Price's Thomson, who began his career in 1991 and quickly confronted recessions in economies around the world, a long bear market in Japan and various Gulf wars. "There's always something going on."