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February 01, 2023 at 04:03 PM
In January each year, Morningstar’s director of personal finance and retirement planning, Christine Benz, issues the long-term stock and bond return forecasts of several well-regarded investment firms.
A recent blog post by Susan Dziubinski, senior product manager for Morningstar.com, quotes Benz saying that long-term return projections can be useful and perhaps “mission critical” from a financial planning perspective.
“Without some expectation of what market returns might be, it’s difficult to know how much to save, whether a retirement nest egg is adequate or if an in-retirement spending rate is too high,” Benz writes. “Long-term historical returns might fill that role, but at various points in time, such as early 2000 or early 2022, they might be unrealistically high.”
Benz noted that most of the firms in Morningstar’s survey have raised their expectations for stock and bond returns for the next decade, and “every firm expects better returns for international stocks than for U.S. stocks over the next decade.”
For investors who would like to increase their exposure to non-U.S. equities, Morningstar lists 10 international-stock and seven ETF ideas.
Individual Stocks
Morningstar’s strategy for stock investing applies around the globe, Dziubinski writes. First, investors who are comfortable investing in individual stocks should favor companies with durable competitive advantages, or economic moats. These companies should be able to fend off competition and outearn their costs of capital for years to come.
Then, they should buy these companies when their stocks are trading below what they are worth — in analysts’ parlance, below their fair value estimates. Undervalued stocks with economic moats make excellent long-term investments, Morningstar says.
ETFs
For investors who aren’t keen on individual stocks, a multitude of ETFs provide broad-based exposure to international stocks. Dziubinski lists seven funds that earned a Morningstar Analyst Rating of Gold, as of Jan. 27.
She said investors should read an ETF’s analyst report for information about what regions it invests in, the size companies it favors and the like. “Knowing how an ETF’s portfolio diverges from the average allows for better performance expectations — and better investor outcomes.”
She noted, for instance, that emerging-markets stocks tend to be more volatile than developed-markets ones. As a result, international stock ETFs with higher emerging-markets stakes will exhibit performance very different from their peers’ when emerging markets soar or sink.
See the gallery for the best international stocks and ETFs for 2023.
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