U.S. Multinational Companies are not International StocksMy brother and I had a debate the other day about whether or not he needed true international stocks in his portfolio. He read a book whose author suggested that holding U.S. multinational companies offered enough diversification and less risk. I am a big supporter of international stocks and leapt to their defense.
Here’s a quick recap of why you should hold stocks that are traded around the world:
- Over long time periods, U.S. and international stocks are expected to perform similarly. However the fact that they don’t go up and down at exactly the same time gives your portfolio smoother returns. The goal of investing isn’t just to earn the highest returns. It’s also to do so in the smoothest way possible.
- Small company stocks tend not to be multinational. Small companies do most of their business in their home country. So if you’re just relying on U.S. multinationals for your exposure to other economies, you’re missing thousands of small businesses around the world. And small companies tend to outperform big companies over time. Don’t forget that part of the equation.
- No country in history has held economic dominance forever. At one point, the Spanish ruled the world. Then the U.K. did. The United States has been on a good run for the past century, but that may end during our lifetime. If it does, you’ll be glad you hold more than the international stores of McDonalds and Starbucks in your portfolio.
- International stocks are not riskier than U.S. stocks. I have the data to back this up. U.S. stocks just feel safer because we know them better.
So who won the debate? Like true O’Connors we each shared our opinions and moved on with life. Nobody knows.