Investing Without Borders


The conventional wisdom is that investors should always have some exposure to foreign funds, and that’s  what many pension plans and roboadvisors suggest. We are global investors, too. We think all investors should consider owning foreign funds, because while the U.S. stock market has had better returns in recent years, it isn’t always going to be in favor. Historically, there have been years when foreign markets led and years when U.S. markets outperformed (see below) – and if you limit yourself to U.S. funds, you’ll miss out when foreign markets are in favor. Foreign funds can also offer additional diversifi ation; these funds may do well in periods when U.S. funds lag.

But keeping a constant position in foreign funds may not be the smartest way to take advantage of global trends. In years like 2015, when most foreign markets did poorly, holding foreign funds would have been a drag on your returns. And in years when foreign markets did well, your participation would be limited to how much you’d allocated to foreign funds.

We change our allocation to foreign and U.S. funds based on recent fund performance. When building a stock fund portfolio, we consider U.S. and foreign funds (as well as growth, value, small- and large-cap funds), and then we seek to own the funds that have strong recent returns. This process has led us to invest in foreign funds when they’ve done well and hold U.S. funds when domestic funds were in favor. The chart shows how performance has driven our international exposure in our flagship Upgrader Fund (FUNDX).

In the midst of a clear foreign trend in 2004-2007, FUNDX had substantial exposure to foreign funds. But when U.S. markets came back into favor, we moved into U.S. funds, and in recent years, we’ve kept the Fund primarily or entirely invested domestically.

Capitalizing on Domestic & Foreign Trends

We’ve been responding to changing markets for over 40 years so we believe that foreign markets will likely come back into favor eventually. And when they do, we expect that international funds and emerging market funds will once again be  a significant part of our Fund portfolios. But we also recognize that market changes aren’t limited to just foreign and domestic markets. The next major trend may be led by small-caps or value stocks–if small-cap or value funds start to bring in good recent returns, we’ll be led to buy in. But for now, U.S. funds are in favor, and that’s where our Fund portfolios are invested.

The MSCI EAFE Index (Morgan Stanley Capital International, Europe, AustralAsia and Far East) is an unmanaged index of over 1000 foreign common stock prices including the reinvestment of dividends. You cannot invest directly in an index.

Index performance is not indicative of fund performance. To obtain fund performance click here.

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