Why You Need More International Investments

Why You Need More International Investments Eric Schurenberg: Wise investing means different things to different people but to Larry Swedroe, it starts with the lessons of history. Larry's the Director of Research for The Buckingham Family of Financial Services and a prolific writer and he likes nothing more than busting myths and leaving people smarter about their money than he found them. Hi, Larry, glad to have you in the studio. Larry Swedroe: Good to see you Eric. Eric Schurenberg: Now, one of your most recent posts was about the Greek situation, naturally and your take on it was very interesting. What's the point? Larry Swedroe: I always ask people, they say, “Larry, shouldn't I get out of the market because this is a big risk and could turn into a disaster?” Well, the right answer to ask yourself is this, “Are you the only one who's aware of that information?” and obviously, the answer is no, unless, it's inside information about a stock, which is illegal to trade on. Eric Schurenberg: Yes. Larry Swedroe: Okay. So, if everyone knows it then the assumption is that the smart people of Goldman Sachs and Morgan Stanley and all these hedge funds, of course, they know it and because they do most of the trading, they've already built that into prices. So, the right way to think about it is this, if things turn out to be just as bad as everyone already expects, stock prices are likely to do nothing. They're only likely to go down is if things are likely to get worse than already expected. Eric Schurenberg: All right, so it's an expectations game. Larry Swedroe: That’s right. You have to understand that unless it's something the market doesn't know, it's too late to do anything about it. Eric Schurenberg: All right Larry Swedroe: So, it does you no good. Eric Schurenberg: All right, now one of the things you do in your blog all the time is go against the conventional wisdom. Larry Swedroe: Right. Eric Schurenberg: So, I'm going to give you cases of conventional wisdom from very smart people, people who have very good reasons for saying what they say. I want to hear your take on them. Larry Swedroe: Okay. Eric Schurenberg: Okay, so let's start with Fidelity who says, “More Americans need to invest in international investments.” What do you say? Larry Swedroe: I agree completely with that and the reason is that Americans like people all over the world, so Americans aren't unique here, make the mistake of confusing familiarity with safety. They tend to view things they're familiar with as less risky. Great example, Eric, investors in the good state of Georgia own a disproportionate share, I bet you could guess which company. Can you guess Atlanta's? Their headquarters? Eric Schurenberg: Coke. Larry Swedroe: Coke, right. Is it any safer to own Coca Cola stock if you live in Georgia or in New York? Clearly it isn't. Eric Schurenberg: Yeah. Larry Swedroe: So, why do people own Coke? They think it's safer because you're familiar. The U.S. is only about 40% of the global equity market now. So, I think owning not 40% U.S. and 60% international, a good starting place is to own 50% international and 50% U.S. Eric Schurenberg: Okay. Larry Swedroe: For very logical reasons. Eric Schurenberg: All right, great. Jeremy Grantham. Larry Swedroe: All right. Eric Schurenberg: “High-quality growth stocks are a free lunch right now.” Larry Swedroe: I would have to disagree and I don't think really even that makes any sense, unless, you believe the market's completely irrational, which I think it does get on very, very rare occasions. But other than those very rare cases, what you have to believe is this, growth stocks, these large companies, if you believe they're gonna have higher expected returns than say small companies, then you have to say they're more risky and that doesn't make sense. Eric Schurenberg: Right. Larry Swedroe: Those large companies are riskier than small companies. So, I don't believe that's true and the same thing is true of growth versus value stocks. To me, value companies are always the companies of riskier stocks and there are very simple explanations that are intuitive or in academic papers. Value companies tend to be the stocks that companies have more leverage, higher volatility of earnings. They may have other problems and that’s why their stocks are distressed. And so to me, if you tell me growth stocks you think are going to have higher returns, then that tells me you must think they're riskier and that to me doesn't make sense. So in general, I believe that almost always small companies are riskier than large, value is riskier than growth and therefore, they should have higher expected returns. Just like stocks always should have higher expected returns than bonds, unless, we're in a bubble which does happen about once a generation or so. Eric Schurenberg: Okay, Bob Reynolds, CEO of Putnam, has staked his company's future or its reputation on something called absolute return funds. It sounds like a great thing. Who wouldn't want always to be up and have a positive number even if it's low relatively? What about absolute return funds? Larry Swedroe: Absolute return funds are an oxymoron. I mean that's the simplest way to -- there is no such thing as an absolute return fund although people call them that. In 2008 I think proved that if you didn't believe it before because many absolute return funds lost their shirt. There is no such thing as a free lunch except diversification. So, if you want higher returns then a risk less treasury instrument, you must take risk. On occasion, that means the risk will show up. Anyone who uses the term “absolute return fund,” in my opinion, should wear a shirt that has some kind of saying that says, “I don't know what I'm talking about” on it. Eric Schurenberg: All right, we'll see if we can fit Mr. Reynolds for that. Larry Swedroe: Yeah. Eric Schurenberg: Larry, thanks. That was very interesting as always. Larry Swedroe: My pleasure. Happy to come back any time, Eric. Eric Schurenberg: That's great, and thanks for watching.