In this week’s episode of Retire in Texas, Darryl Lyons, CEO and Co-Founder of PAX Financial Group, explores the role of international investments in a well-balanced portfolio. While many investors focus on domestic markets, international stocks have shown significant potential – sometimes even outperforming U.S. stocks. Darryl unpacks insights from leading financial institutions, including Hartford and Fidelity, to assess whether now is the time to increase international exposure.
Key highlights of the episode include:
• Why international stocks are gaining traction and how they fit into a diversified portfolio.
• The difference between domestic, international, and global investments – and why it matters.
• How emerging markets like Brazil, Russia, India, and China compare to developed markets in Europe and Japan.
• The risks of international investing, including currency fluctuations, geopolitical tensions, and different accounting standards.
• Why experts suggest a shift toward higher international allocations in portfolios over the next decade.
A well-structured investment strategy considers more than just past performance, it looks at evolving global trends, economic shifts, and risk management. As interest rates, inflation, and trade policies change, now may be the time to reassess your international allocation.
For more insights and to connect with a PAX Financial Group advisor, visit http://www.PAXFinancialGroup.com.
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Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. And you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. So, I can’t believe, it’s hard for any of us to believe that the international piece of our portfolios are doing really good this year.
Now, I was looking a couple weeks ago, and one international piece of a portfolio was up 8% on the year. And if you get that in the first like two months of the year, you multiply that times six and you’ve got pretty darn good returns. And that’s in the international piece of your portfolios, not yours specifically.
But generally, if you look at international, if you have a 401k or any type of investment account, look at that international piece and you’d be pleasantly surprised. Now that is at a certain point in time. So, by the time you listen to this, it could be totally different. Hartford, recently said, this is what Hartford funds, a big respected international financial services company said, we think international versus U.S. stocks isn’t an either or decision, but rather a both and situation.
Fidelity said, despite short term obstacles, Fidelity researchers believe international stocks have the potential to outperform U.S. stocks over the next 20 years. Very interesting. So, there’s this case of now, are we going to have a debate international versus domestic? Some terms that you should know to be able to navigate this. First of all domestic is US, which may include Greenland.
That’s a joke. Or I guess it’s Greenland. May include a 51st state just north of us, but no, domestic is just the United States. And I know I’m stating the obvious, but the international is outside the US. Global though. Global is different. Global is, by definition. And used interchangeably is world. When you hear that it could be U.S., it could be international, it could be a combination of the two.
Usually, it’s a combination of the two. So, if you have a global fund that could have U.S. and it could have international, it probably has both. Emerging markets, another definition to know is, typically we think of those strategies to include Brazil, Russia, India and China. Juxtapose that with the developed markets, which would be namely Europe and Japan, more established infrastructure systems, a Federal Reserve taxation policy that has been well defined.
So, the emerging markets is interesting, in fact, there’s a quote I want to share with you by, Antoine van Agtmael, a world bank economist. He actually coined the phrase emerging markets in 1981 because the use of the phrase third world countries just, you know, was kind of demoralizing, I guess. But he said avoid emerging markets when everyone talks about them and invest twice as much as usual when nobody likes them.
That doesn’t always work. But it’s pretty interesting because it can, I guess, historically, if you look at it, there’s just a lot of volatility associated with emerging markets. Again, Brazil, Russia, India, China, South Korea. But there has been seasons. I know in my investing experience since 1999, there’s been seasons when, man owning emerging markets is really good idea.
And developed markets or world or international and the question I think we have to ask now is like, is it that time again? Is it time that international becomes part of our portfolio is maybe in a bigger chunk? As we build out the recipe, should it have more of our pie chart? There’s a lot of different ways to own international.
You know, you can have an index, which is just going to let a computer pick a bunch of companies outside the United States, or you can have a fund where a manager or a suit in New York is going to buy and sell, do the research, maybe even fly over to Japan and meet the companies, look inside a barrel to make sure there’s actually oil there and do those kind of things, like really boots on the ground research.
You can own a strategy, which we often do strategies. Those are called separately managed accounts where you actually buy the stocks, the individual stocks. And then there’s a fourth way that’s, we do this a lot. We like this is called ADRs. ADRs are a way for you to own international stocks. But it takes away the currency risk.
So, there’s four different ways. The international market actually, not just being international has a difference like mechanics, but you’re generally not going to get a lot of like banks and financial services companies. You are going to get a lot of tech companies, commercial services, communication services. They have been, relative to the United States, investing market cheaper.
You can find more deals overseas. The United States relative to the international markets has been pretty expensive. But again, whenever you think about this, if you’re like man, I should probably dip my toe in water, have more international investments just based on what I’m hearing so far. Just remember the risks associated with international investing.
Currency risk. We’ve seen the dollar accelerate, but, you know, these things can vacillate and change. Morningstar India index, the Morningstar India Index posted some incredible returns from 2010 to 2024. The returns were about 13%. But when you actually took that money and brought it back overseas to the United States, you net it out because of the currency exchanges, 8.3%.
So, you lost like 5% in just exchanges. And yeah, you would still be happy with your net return, but it doesn’t always work out that way. So, the currency is, and the ADRs, by the way, take away that currency risk. But currency risk is a risk for international investing. Of course, geopolitical risks. You don’t know if Russia’s going to invade the country that you want to invest in.
I actually years ago was talking to a real estate company about investing money in high end commercial real estate in Russia. And the demographics were very interesting and the rising population, but I actually read a book by Joel Rosenberg that talked about Gog and Magog and being, the history of Russia and the threats to the future of our world.
It’s a very interesting topic. Joel Rosenberg, if you haven’t read it yet. And I got to tell you from just a spiritual lens, I just said, you know, I’m going to, I know everyone’s excited about Russia, but I’m going to sit this one out. From where I sit, based on some of these, the biblical conversations, certainly, was happy with that.
Don’t always, you know, integrate, you know, some of that spiritual context, especially in the revelation context into the screening of investment decisions. But I can’t help it. That’s just kind of a part of who I am. But that was a, you know, it was good to at least say, you know, the risk associated with Russia, even the recent history, the communist history.
And then if you go back into the biblical context, there was just a lot of risk. And, sure enough, the invasion of Ukraine is when that risk manifested. And so, yeah, you have that type of risk that exists in international markets. You have different accounting standards. Some people say that China has one set of books that they give to you as investors, and then they have another set of books.
That is what they use to make business decisions. Different accounting standards that exist can be very problematic, as you would imagine, trade tensions, of course. We see that a lot right now. And then, and I think you collectively look at all that and you said the risk has to be worth it. We do have home country bias.
There’s no doubt we anchor to, you know, investing in the United States is something that we know. I’m convinced of American exceptionalism. Some people don’t buy into it. I’m not well, well traveled. I’ve traveled internationally. And I have friends internationally. I just, there’s just some secret spice here in the United States where we’re willing to risk capital in our future.
Of course, there’s something to be said about the LLC structure. There’s just some things here that do lead me to believe that investing in America is and will continue to be the best place. But that home country bias does get in the way of us not having some portion of our investments overseas. And so having some portion is important.
I’ll get to how much in just a second. The timing of investing internationally is interesting because, you know, what worked over the last ten years may not, in fact, work over the next ten years because the environments are certainly different. Interest rates are not extremely low anymore. They’re not zero anymore. Inflation is now present in our lives.
It may not be accelerating, but it’s not going away. And then, of course, we’ve got this new trade and tariff thing happening. So, the environment’s absolutely different. And so, I don’t know, you look at past international investing over the last ten, 14 years specifically and you’re like, I don’t know if I like it.
I don’t know if that’s a good framework for decision making. I think there has been pockets of history where international has done extremely well. Look at 2000 to 2010. I think this environment may be one where we do say, yeah, we’re going to own a piece of the international markets again, I’ll tell you how much in just a second.
The reality is there’s good companies overseas and some of them it’s just a P.O. Box. Most of their revenues are global in nature. But, being headquartered in certain areas does present other risks, other factors to consider. But the really sweet spot is when a company is located overseas, they maybe have, people are buying their products and services all over the world, but the country itself is consuming those specific company’s products and that country.
The makeup is a growing middle class, that’s kind of the right recipe for owning a good company and India is a great example, as you got a younger population and a growing middle class. Canada is maybe one that, you know, the country in and of itself doesn’t excite me personally. Again, I’m not, by the way, PAX doesn’t claim to be an international expert, but we have experts that we tap into, some of the best in the entire world.
So, we have access to some of the best international managers, as you would imagine. And so, we lean on them. So, when I talk about Canada, I’m not putting myself out as an expert. I just hear from stuff like Suncor, a great company. There that should pipeline expansion occur between the United States and Canada, you’re going to want to own a company like Suncor, despite the fact that Canada is generally known not to be business friendly.
So, you know how and how much is subject to managers that we hire. They do that, they say, okay, we like India and we’re going to own this company in India, and we’re going to own this company in Canada. We want managers who can understand all those risks that I mentioned earlier, the currency risks, the geopolitical risk.
And, you know, demographic trends that are favorable, you know, even like the emerging markets can be tricky because I don’t know if you remember years ago, Greece, this was 2011 Greece almost defaulted on their loans, the equivalent of the U.S. treasuries. And they’ve always struggled. I say always, they’ve struggled as of late to be a relevant contributor to the global economy.
But we would all love to go to Greece. I’ve never been to Greece. I mean, Greece is like, if you said, hey, do you want to go to Greece this summer? That’s interesting. I’d love to go to Greece. Well, tourism is still hot. I mean, there’s just no doubt about that. So, there’s a company there. And again, I’m not going to promote anything.
Don’t go out and buy these stocks, but like Athens International Airport, they’re a smaller company, but they, you know, run those duty-free shops in the airport. So, somebody’s got to run these shops and make sure that, you know, people pay rent, and things are being sold and they’re open and they’re staffed.
Well, so you can invest in that. So, like, maybe Greece isn’t great, but it’s hard. But maybe the tourism space is something that might be interesting. So, there’s all different ways to do this. And I think that makes it a lot of fun. Again, fun for me, not fun as in, hey, I’d rather look at the international markets, but it does make my job completely, absolutely interesting.
And, I enjoy trying to determine, through evidence not just throwing darts. And collectively, we do this as an organization. How much of a client’s portfolio should be allocated to international? In the 2000’s, this was, you know, we were following an analyst called Lincoln Anderson. We were 50% US, 50% international.
That’s how much growth we were getting from the international markets. Today, many portfolios will run at 15% to 25% international. And we’re going to start seeing some managers, I would suggest over the next several years, suggest that portfolios get closer to 30 to 40% international. I can see that day coming here soon, but I still like that, 15 to 25%.
So, if you’re more aggressive, you’re going to want to own the 25%. If you’re less aggressive, it’s 15. And then within that, the more emerging markets you have, which is Brazil, Russia, India and China and South Korea, that’s going to be much more aggressive than the developed countries, Japan and the European countries. So not only do you make sure that the piece of your recipe is reasonable within that recipe, but you also want to check with your advisor and make sure you got the right ingredients.
Morningstar has some good commentaries on the international markets. I’ll put some of Hartford studies in the show notes, some of Fidelity’s, and I’ll put some of Morningstar’s. But I think the Morningstar had some good commentary about their earnings growth coming from, in other words, Morningstar liking the earnings growth coming from India, Indonesia and some other markets, even some of the surprising upside that may exist because people are fearful of China and Brazil and Mexico.
You may have some moral reservations of China, and I completely understand why. I don’t know if the clean energy transition is ever going to happen. The reality is, we don’t need to transition. We need to add energy resources. So, it’s not like I think the story of replacing fossil fuels with different types of energy is gone.
I think now we’re just like, we just got to add different energy resources for a growing economy. So, basic materials that can be found in other countries are interesting, like copper. And so just as we see the whole tariff thing happen and supply chains happening, I think you’re going to see some interesting times for the international piece of your portfolio.
So, check with your advisor and see how that’s being constructed. And if you have some more curiosity and if you read some of these pieces that I put in the show notes, you talk with your advisor, you may want to just adjust that allocation for this next chapter of investing. It’s certainly, these next ten years will certainly be different than the last ten years.
And that’s what keeps us all on our toes. Of course, if we had a crystal ball, we know exactly what to do. So, we diversify and sometimes things zig and other things zag. But collectively, if we’re paying attention and not tinkering with it too much, a good, diversified portfolio at the end of the day will help us meet our goals, which, typically for many of us are, you know, retiring, not running out of money and leaving this world better than we found it.
So, hope that helps today. Again, this is not life changing, but do consider how that construct of your international is to your overall game plan. And then, as always, you think differently when you think long term. Have a great day.
Resources:
Investing | international stock outlook | Fidelity
Could Emerging-Markets Stocks Outperform US Stocks? | Morningstar
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