How to Use Foreign Funds

June 9, 2017

How should you use foreign funds?

This is a question just about every investor should consider because there are years when foreign markets have had terrific returns, far outpacing U.S. stock funds.

When it comes to foreign investing, you have three choices:  

1. Avoid foreign investments altogether 

It’s natural for investors to have a home country bias, and you could just steer clear of foreign funds entirely and invest only in the U.S.

But foreign markets present tremendous opportunities. From 2003 through 2007, for example, the developed market EAFE index strongly outpaced the domestic S&P 500 index. When foreign markets are in favor, limiting your portfolio to only domestic funds can limit your returns.

2. Stay invested in foreign at all times

 You could keep a fixed part of your portfolio invested in international funds. This way, you’ll own foreign in years like 2003-2007 when overseas markets were the place to be. But you’ll also be stuck with those foreign funds when they are out of favor, sometimes for years at a time. This can be a real drag on your overall performance. For the past eight years, for example, U.S. markets have outpaced most foreign markets.

3. Adjust your foreign allocation over time to capitalize on market trends 

Foreign investing doesn’t have to be all or nothing. There are strategies like our Upgrading approach that have a proven track record of helping you invest internationally during sustained foreign trends and domestically when U.S. markets are bringing in stronger returns.

Upgrading Adapts to Foreign & Domestic Trends

The last 15 years included a major foreign trend (2003-2007) and a lengthy U.S. trend (2008-2016), and as the chart below shows, Upgrading adapted to these trends.

The table shows calendar-year returns of U.S markets, as represented by the S&P 500 (orange), and foreign markets, as measured by the EAFE (Europe, Asia, and the Far East) index (blue). The mountain chart, below, shows the percent our growth portfolio had invested in foreign funds during these years.

As you can see, our growth portfolio owned mostly (80%) foreign funds when the EAFE index had stronger returns, and it moved out of foreign funds as U.S. markets, as measured by the S&P 500 index, were the place to be.  

Market trends typically move in fits and starts, and there were times, like 2005, when we were led to reduce our foreign exposure in the midst of what we now know was a clear foreign trend, and there were years like 2012 when we began moving back into foreign funds only to see U.S. markets once again take the lead. Over the long term, Upgrading has a good record of capitalizing on major trends and limiting the damage from these kinds of fake-outs along the way.  

Is this the time to own foreign funds or are U.S. funds still a better bet? Find out in NoLoad FundX. Click here to sign up.

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