This "career risk" keeps investors out of global stocks
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Investing in international stocks may pay off monetarily, but market pros say that's sometimes a hard sell with clients focused on domestic performance.
Why it matters: This is an example of the so-called career risk and home bias trumping market fundamentals. Money managers may prefer to keep clients happy by owning U.S. stocks, even if it could mean lower returns.
What they're saying: "Clients don't fire you for being similar to the S&P…they're watching news channels in the U.S., and those news channels in the U.S. are talking about U.S. stocks," John Luke Tyner, portfolio manager with Aptus Capital Advisors, tells Axios.
- "The quickest way to get fired is have some high conviction" foreign take, he says. "If you're right, the clients don't really care, and if you're wrong, then (the clients are) looking for a new advisor."
Between the lines: International exposure is one of several ways to diversify an investment portfolio, Charles Schwab notes.
- "U.S. and international stocks aren't perfectly correlated. Volatility in the U.S. equity market may not be fully shared by international markets, and periods of U.S. outperformance may be followed by the dominance of international markets," Omar Aguilar, the CEO of Charles Schwab Investment Management, says in a video presentation.
- International stocks in places such as Europe, for example, still have less exposure to technology names that dominate the U.S. market, offering a form of sector and global diversification.
Zoom out: According to business school textbooks, the market is supposed to be efficient. Investors, theoretically, are constantly searching for the most accurate price, which should be reflected in the price action.
- But if you have clients telling their advisors they want investments tied to patriotism rather than fundamentals, it doesn't align with that efficiency.
💭 Thought bubble: In an extremely anecdotal example, a family member recently paid thousands of dollars for investment advice.
- They were recommended a portfolio with zero allocation to global stocks, mirroring what the data shows about domestic advisors underallocating client funds abroad.
What to watch: Whether the outperformance of international stocks versus U.S. equities can convince more American investors to look abroad.
