If there is one issue facing retirement investors — aside from not saving enough — is that their portfolios may be just a tad bit too U.S.-centric.
The average investor in or near retirement has more than 72% of their portfolio tied to U.S. stocks. One-third of them are significantly overexposed to the U.S. — with absolutely zero exposure to international stocks. Market pundits have dubbed this propensity to favor U.S. equities over international stocks as “hometown bias.”
And the phenomenon could be costing you some serious money over the long term.
That’s because as we’ve become more of a global and interconnected economy, the U.S. has seen its leadership position slip. When looking at the world’s stock market capitalization, back in 1985, the U.S. was the leader and made up around 50% of the total. By 2012, that amount had dwindled to just 35%.
Meanwhile, international companies are quickly becoming the global leaders across various sectors. Think about it. You’re just a likely to see a Toyota (TM) on the road as you are a Ford (F) these days. By being so U.S.-focused, retirement investors are missing out on the vast bulk of the world’s opportunities.
Adding a dose of international stocks these days is critical for retirement investors. Luckily, it’s pretty easy to add that dose. Here’s one stock, one exchange-traded fund (ETF) and one mutual fund to get you started.
International Stocks For Retirement — Diageo plc (DEO)
For retirement investors looking for a single firm in order to boost their exposure to international stocks, the company should be a global leader in its respective industry. And you can’t get much bigger than spirits maker Diageo plc (DEO).
Booze brands like Johnnie Walker, Smirnoff, Captain Morgan and Guinness are global powerhouses within their respective beverage categories. All in all, DEO’s brand range includes 14 of the top 100 premium distilled spirits brands and seven of the top 20 premium spirits brands worldwide.
That edge gives DEO some pretty decent pricing power. It also provides some pretty hefty cash flows and earnings. While full-year 2014 earnings ended up dropping versus 2013, the DEO has really rewarded shareholders over the long haul. Over the past 15 consecutive years, Diageo has managed to hike its dividend payment and currently yields 3.5%. Meanwhile, over the past decade, DEO stock has had averaged annual gains of about 11.5%.
Global reach, steady cash flows and a recession resistant product are exactly what retirement investors should be looking for in international stocks.
International Stocks For Retirement — Vanguard Total International Stock ETF (VXUS)
How would you like to buy the whole world outside the United States with just one ticker?
Well, that’s just what the Vanguard Total International Stock ETF (VXUS) does. The ETF tracks the FTSE Global All Cap ex US Index, which covers 98% of the world’s non-U.S. markets. That’s almost every small- mid- and large-cap stock in Europe, the Pacific, North America as well as emerging markets. The largest countries represented in the index are Japan, the United Kingdom, Canada, Australia and France. Emerging markets make up around 19% of the VXUS.
That’s a staggering 5,798 different firms all under one ticker.
All in all, VXUS makes adding international stocks and boosting your weighting a piece of cake. And since it’s from Vanguard, you know that the ETF’s expenses are going to be cheap. VXUS only charges 0.14% — or $14 per $10,000 invested — to own. That’s significantly less than the 1.36% than the average charge from funds focused on international stocks. Not to mention that VXUS yields a U.S.-beating 2.83%.
As for returns, the fund’s benchmark has managed to return a decent 6.89% annual return over the last ten years.
International Stocks For Retirement — Fidelity International Capital Appreciation Mutual Fund (FIVFX)
For retirement investors looking for an actively managed mutual fund to gain some more exposure to international stocks, the Fidelity International Capital Appreciation Fund (FIVFX) could be a good choice.
FIVFX is diversified international stocks fund that tends to eschew towards growth stocks. Under the fund’s mandate, manager Sammy Simnegar can buy stocks of any size from any nation in the world — including emerging markets. He selects stocks that are benefiting both from long-term “megatrends” and what he calls the three B’s — brands, barriers to entry and best-in-class management teams. He then screens for fundamentals and selects 30 to 50 stocks to buy.
So far, that strategy has worked well. FIVFX has managed to outperform its benchmark throughout the life of the mutual fund — including down periods. All in all, FIVFX has managed to turn $10,000 invested in 2004 into nearly $18,000 today.
Expenses for this mutual fund of international stocks are more than a passive option at 1.12%, but they are still below the Lipper average cost for similar mutual funds. And considering how well Simnegar has done, paying that fee may be worth it. The minimum investment for FIVFX is $3,000.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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