Transcript
Apple Card Announcer (0:00)
This message is brought to you by Apple Card. Isn't it time you earn daily cash back on your everyday purchases? Apply for Apple Card in the Wallet app to see your credit limit offer. Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch terms and more@applecard.com this message is brought to you by Apple Card. Isn't it time you earn daily cash back on your everyday purchases? Apply for Apple Card in the Wallet app to see your credit limit offer. Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch terms and more at applecard.com.
Krista Dibiaz (0:36)
Welcome to Ask an Advisor. This week's show I'm very excited about Wes. We've got some good questions for you. I'm Krista Dibiaz here with Wes Moss.
Wes Moss (0:43)
You're Krista Dibiaz and I am Wes Moss. And I'm excited that you're excited for the show.
Krista Dibiaz (0:49)
I am. Because first of all, the topics you're talking about, the first topic, a lot of questions come in about this international stocks versus domestic stocks. Is it time for us to load up on international stocks? You're going to answer that question for us and then you're going to answer some of the questions that came in from the listeners and viewers of this podcast. And you're also going to talk about the one retirement number that still matters this year. And I don't know what that is. So I'm excited to hear that.
Wes Moss (1:16)
It's a rule of thumb ratio that is super important.
Krista Dibiaz (1:19)
Okay. Awesome.
Wes Moss (1:20)
Most of this is prompted by real life questions and real life concerns that I hear about whether I'm watching the financial media or getting feedback. Because all the questions we get, the awesome questions we get here that you all send in.
Krista Dibiaz (1:35)
And curious Krista wants to know this, too. I really do.
Wes Moss (1:39)
Curious Krista, good. I love that you're starting to use that a little bit because the questions are just, they are always making us think here on the show. So I love it and we appreciate them and we appreciate you listening. And this, this comes from not a direct question, but I can start to feel as tides are changing by the mentions of certain things that are happening in the news. And one recently is the mention of international, international, international. And part of the reason I am getting more and more questions about that and really when someone asks about, hey, how much do I have in international? I'd like to figure that out, they're really asking, shouldn't I have more international? And the reason is because over the past year, international stocks have done really, really well. Now they're definitely playing catch up over the last couple of years. But over the last year the s and P 500 is up, let's say roughly 16%. And international stocks, just a broad international ETF, it's 36%. This is a big difference. 20% win or 20% gap when it comes to international. And investors are starting to ask, hey, am I underweight international? Should I be shifting more to overseas? Is this the start of a new global investment regime? So it's certainly an important question to ask because if you think about it inside your 401 plan, you think about the choices. You've got us large cap and small mid and they've got international and usually you don't. You may have international options that are large, small growth value, but a lot of 401k plans are just an international index. So it is one of of a few important choices. But just a couple points of caution is that we do have what I would consider is a very pronounced behavioral idea when it comes to investing. That's called recency bias. It kind of says what it means, which is we think very quickly what is just done well or pretty recently. Is this going to continue to do well? We're great. We humans are so good at extrapolating. We are the best extrapolators. If something's going up by 2 per year, we think it's going to go up by 2 for every year. If something's outperforming by 20% a year, our brains are saying, well, it's going to. Isn't it going to continue? Of course it's going to continue. I want to make sure people don't get overly excited about international because of the recency of the rates of return. Leadership and reversion to the mean happens in markets and it's one of the few immutable rules around markets is that when you have one place that's led for too long, you have another place that starts to catch up. This last year is probably a good example of that. Small cap US stocks have done really well this year and have played catch up to large cap, which has been winning for a lot of years. It's somewhat of a reversion of the mean. International stocks have done well relative to us, but US has kind of crushed international stocks over the past three years and five years. So there's just some catch up happening here. And this goes back to why asset allocation is important. We don't know when that leadership necessarily turns out. But if you look back over the course of economic and market history, if an asset class has averaged 10% a year, but it's only averaged 4% a year for the last few, usually it's due for a catch up. We just don't know when the catch up typically rotates. We're seeing it now though. Then there's the worry. And this is the other fear that pushes these questions about international. Hey, do I need international? Not just because of the rate of return, but because of a story like this cover of Barron's story. Fairly recently, the reign of the dollar is coming to an end. What's that tell you? It tells you that, well, maybe I shouldn't just be in the US if our own very dollar has its reign has come to an end, do I want to be in the US Dollar? So then there's some fear pushing us towards international. Now I do think that we have seen the gist of this story is that central banks, so think about the Federal Reserve here in the US but in other countries, the European Central bank, the bank of Japan, Swish national bank, et cetera, they have huge amount of dollar reserves, US Dollars mostly in Treasuries. There's this thought that they've been dumping US Treasuries to buy gold. That's not true. They have just been adding less. And they've, the article used this. They kind of intimated US central banks have kind of been quiet, quietly quitting US dollar. So not just throwing it out and getting rid of it, just they're not adding, they're letting bonds mature and they're not buying as many Treasuries. So they're reducing their dollar reserves at least a little bit. And the US dollar is down relative to the other six major currencies by about 8% over the past 12 months. So there has been a shift. But it's not as though there's some global panic or collapse and every bank is getting out of the US Dollar for other currencies because the US Dollar is still, and this is where I think a really important way to think about the dollar relative to every other currency. Are we going to ever lose our reserve status for the dollar? Think of just the economic machine that is the global economy. It's hard to even know exactly what it the number is. Let's call it $100 trillion. It's just gargantuan. The US dollar and other dollar peg currencies are about 60% of all global commerce. So if you look at all the transactions money, all the, almost everything in the United States obviously is US dollar and we're a giant part of the global economy. International payments from country to country, buying countries, buying oil from other countries. 60% of global transactions in a year are $. Then you've got the euro which is roughly 15%. Then you've got the Chinese yuan at about 5% and then you have the Japanese yen at 3 and the British pound at 3. And then everything else is in the low single digits. And by the way, someone asked me the other day about Bitcoin digital currency. It doesn't even show up as a, it's not even a rounding error. It's a 0.001 when it comes to digital currency. So imagine how entrenched and large that system is that that has been using the dollar. And by the way, I remember 15 years ago I did a radio story about this and those numbers are almost exactly where they were 15 years ago. I remember thinking, wow, 60. It's just hard to unseat the dollar. And I've been looking at this over the last month. I remember. Well, it's really the same as I did a story on this 15 years ago. So I'm not worried about the US dollar losing its current, its reserve currency. Should you load up on international. I think that it should be part of a well diversified asset allocation. Also remember, and this is one of the reasons I've been biased towards US stocks is that 40% of the revenue generated from S&P 500 companies is from overseas. You have big companies like as an example, McDonald's, 60% of their revenue is from outside of the United States. Can you think of a more American brand? Apple over 50% of their revenue outside the US intel over 70%. Nike over 50%. Procter and Gamble, I think it was a very US centric company. 55% of revenue outside of the United States. So think about a company does business so it makes a sale that's €1,000 in another country. And then the US dollar weakens and that currency strengthens. When it gets converted back to the United States, what happens? You get more dollars. So there is a hedge to some extent against a declining dollar by owning global or multinational companies. So before you get your US stocks to try to have a larger portion in non US domiciled companies, take a look and just see what you own. If you own a bunch of large multinational companies, you're already getting at least a partial hedge against a weakening dollar because of global companies doing business all over the world.