Foreign Investing Is Not Mandatory

Includes: AFL, BP, BUD, DEO, GE, KO, MCD, PG, RDS.B, UL
by: Tim McAleenan Jr.

A common bit of conventional financial wisdom suggests that foreign stocks are a mandatory component of any investor's portfolio. The advice given by David Nicklaus, a financial writer for the St. Louis Post-Dispatch, often makes arguments like this:

Why not dump those international funds you bought back when the global economy was booming? Things may not be exactly rosy in the U.S.A., but at least you understand the economy and the companies that operate in it. That sort of thinking, financial experts say, is a big mistake...

Walther recommends that investors put about a third of their stock portfolio outside the U.S., owning both developed-country and emerging-markets funds. If you follow his advice, you'll be much more globally diversified than your neighbors: Overall, U.S. residents invest just 13 percent of their money overseas. U.S. companies, however, account for only 45 percent of global stock market value. If you ignore the other 55 percent, you do so at your own peril.

This line pretty much sums up my objection to the notion that foreign investing is mandatory: at least you understand the economy and the companies that operate in it. That sort of thinking, financial experts say, is a big mistake. One of the most important lessons that I have picked up from Buffett and Lynch is this: buy what you know. Financial advisers can prey on this perceived need for international diversification by effectively saying: Of course you don't know anything about German and Japanese stocks. Invest in my funds. We'll take care of it.

There's nothing wrong with owning foreign stocks. Heck, I think BP is a great company, and I hope to eventually own Unilever (NYSE:UL), Anheuser Busch (NYSE:BUD), Nestle (OTCPK:NSRGY), Royal Dutch Shell (NYSE:RDS.B), and a few others. And I have no objection to someone who owns international mutual funds. But my objection is when we elevate foreign investing up to this sine qua non pedestal where it becomes a portfolio component that is deemed absolutely necessary.

In his book "Wall Street People", the author Charles D. Ellis offers up this great quote from Warren Buffett:

Except for a position in Guinness (NYSE:DEO), Berkshire owns no foreign stocks-ignoring as usual the latest Wall Street fad. Buffett said, 'If I can't make money in the $4 trillion US market, I shouldn't be in this business. I get $150 million earnings pass-through from the operations of Gillette (NYSE:PG) and Coca-Cola (NYSE:KO). That's my international portfolio.

There can be this sense that we're "missing something" if we don't check off all of the investing boxes by owning a little bit of everything. But we're very fortunate that we're American investors. U.S.-multinationals got a huge head start in the WWII aftermath to establish domestic dominance and then lead international expansion. When we fill a portfolio with the likes of McDonalds (NYSE:MCD) and General Electric (NYSE:GE), we are constructing an international portfolio. If you want to own a Japanese stock, buy Aflac (NYSE:AFL). If you want to make profits in every country but Cuba and North Korea, buy Coca-Cola.

If you are comfortable building a portfolio of U.S. multinationals, there is absolutely no need to deviate from that strategy. It's fun and financially beneficial owning a collection of blue-chip stocks that are about as automatic at raising yearly dividends as the double-play combination of Tinkers-to Evers-to Chance. Your portfolio is not incomplete or inadequate if you go this route. Financial advisors can make you feel like you're missing out on global growth if you don't own foreign companies, but if you own a basket of US multinationals, nothing could be further from the truth.

Disclosure: I am long BP.