International Diversification Is Free

Today concludes our discussion on international stocks and whether investors should consider them in their portfolios. Negative tracking error has resulted in my receiving an increasing amount of calls questioning the wisdom of investing in international stocks.

To help you avoid making the mistake of recency, here are two questions to ask yourself:

First: While the economic news from the developed and emerging markets has been concerning, am I the only one aware of the news? If I’m not, which is surely the case, the negative news must already be embedded in prices. That’s why international stocks have done relatively poorly. It doesn’t tell me what they will do in the future.

Second: Do I really want to sell now at a time when international stocks are selling at discounts relative to U.S. stock—that is, they have lower price-to-earnings ratios multiples—and thus international stocks have higher expected returns?

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