A longtime financial planner who started in the early 1980s, Stephen Barnes has been a believer in the benefits of investing outside the U.S. from the beginning. The economics side of his original degree in economics and business, he said, “introduced me to the non-U.S. side of the world,” while his later CFA program “really opened my eyes to opportunities for returns and diversification.”
When he transitioned his firm to fee-only in the late 1980s, non-U.S. diversification was “one of the core things we put into our original investment philosophy.” And the interest went even deeper: Barnes was also a former staff writer for the Motley Fool, and used that fascination with investing beyond U.S. shores to cover foreign markets from 1994–1998.
Plus, there was the practical side of what he saw as an advisor in Arizona. “We’re close to and hear a lot about Mexico,” he said, “and the late ’80s was a really amazing time to be invested in Mexico—and then became awful with the Tequila crisis [in 1994] and that made me want to learn more.”
Back then, he said, Mexico’s Bolsa—the Mexican Stock Exchange, Bolsa Mexicana de Valores (BMV) “had quite a run, with amazing returns not unlike the dotcom bubble in the U.S. But the intriguing thing was, for a non-peso investor, you gave away most of those returns with the depreciation of the peso. It was a quick education on how currency exchange rates can impact returns negatively or positively.”
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While Barnes uses international investing in portfolio diversification, he said that it’s definitely not the main factor to consider. The main factor is risk.
“On a valuation basis, with very few exceptions, anywhere in the world is cheaper than the U.S., and I think that has important implications for long-term investment returns. The problem with valuation-based returns is that it’s not a good timing tool. If you think you can make a quick killing—by selling or buying a cheap region—you can get into trouble,” he said.
“Stupid cheap areas are Greece, Russia, those kind of places. You can buy world-class businesses there at ridiculously cheap levels.” In the U.S., he said, there just aren’t that many cheap companies available for investment. But, that said, “[t]he other thing to bear in mind any time we talk about foreign vs. domestic investing is that it’s a distant number two in terms of things to look at in diversifying a portfolio. The biggest decision is risky vs. nonrisky; the stock/bond mix drives the risk and return of the portfolio. Whether or not you diversify them geographically is a distant number two.”
Another point he makes is that there’s not a lot of diversification in non-U.S. developed countries. However, there’s “clearly a differentiation in terms of the pattern of returns between emerging markets and the rest of the world.”