One of the investors I like to listen to is Howard Marks of Oaktree Capital Management. Marks has written that “in the world of investing … nothing is as dependable as cycles.” This doesn’t mean markets follow a set schedule, and no one rings a bell at the beginning or end of an investment cycle. But all cycles eventually end and are replaced by a new trend.
At times, investors seem to forget this — assuming the current trend will continue forever. But when the cycle does end and a new trend begins, opportunity is created for patient, long-term investors.
The current cycle has been one of U.S. stocks leading foreign stocks — both those in developed and emerging markets. As a result, we are nearing a “lost decade” in foreign stocks, and that includes Vanguard international funds. Since peaking at the end of October 2007 through end of June 2017, Vanguard Total International Stock Index (MUTF:VGTSX) has gained just 1.1% and Vanguard Emerging Markets Stock Index (MUTF:VEIEX) has declined 10.3% — yes, that includes dividends. Over the same time, Vanguard Total World Stock Market Index (MUTF:VTSMX) has returned 94.9%.
Is the current cycle coming to an end? The honest answer is that I don’t really know — cycles can last longer and go higher than many would expect.
I do know that foreign stocks and particularly emerging market stocks have been out of favor with investors. The argument that U.S. companies earn so much revenue overseas that investors don’t need to own foreign stocks has once again become popular — a sign that the cycle of U.S. stock dominance may be getting a bit extended.
With the refrain “markets are cyclical” in mind, here are three intriguing Vanguard international funds to buy for the second half of the year.