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I've heard that, overall, international funds don't perform as well as other mutual funds, such as small, mid, or large cap mutual funds that hold domestic U.S. equities.

Is this true? If so, are they still worth investing in just to diversify?

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  • define international. It depends on your country. Commented Jun 29, 2017 at 15:46
  • Where did you hear that. International funds may or may not give better returns. It depends on what countries and time period one is comparing
    – Dheer
    Commented Jun 29, 2017 at 17:33
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    I rephrased the title and am voting to reopen. Commented Jun 29, 2017 at 23:42

3 Answers 3

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Is this true?

The answer is not a simple yes or no. It's like asking if all other colas are better than Pepsi. There are hundreds of international markets and thousands of funds that target those markets, so even if on average all international funds performed worse than all US funds over the past 100 years, it does not mean that you should not invest in them as part of a diversified portfolio. Some funds are going to perform better, and some years international funds on average are going to perform better than US funds. In fact, between 2013 and 2015, international funds had twice the return as the S&P 500.

If so, are they still worth investing in just to diversify?

Absolutely. The main reason for diversifying by adding international funds is because the correlation between them and US funds is likely very low. When you have multiple funds if a portfolio with low correlations, your overall risk (the periodic ups and downs of your portfolio value) are lower. So losses in your US funds would often be partially or completely offset by gains in international funds.

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    "the correlation between [international] and US funds is likely very low" - beware a classic econometrics elephant trap here! The correlation is likely to be very low most of the time - but not when it matters most, and there is a sudden change in sentiment which causes a rapid, large, and global price movement.
    – alephzero
    Commented Jun 29, 2017 at 18:01
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    Yeah, exactly what @alephzero said. In the 2008 crash, just about everything crashed together, including "safe" "crisis hedge" holdings like gold. The only things that really did well were US dollars and dollar-equivalents such as Treasury bonds. Commented Jun 29, 2017 at 18:42
  • @alephzero "correlation is likely to be very low most of the time" this makes no sense from a statistical standpoint. If I flip two different coins and they both come up heads, would you say that they are perfectly correlated? Correlation measures the consistency of movement over many observations, which when observing returns on international and US stocks over several years, is very low. You can't take a short time period like 2008 and claim that they are highly correlated when the rest of the time they are not.
    – D Stanley
    Commented Jun 30, 2017 at 14:33
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"Small, mid, or large cap mutual funds,' typically refer to U.S. mutual funds. So the real question is U.S. versus international, versus "global," that is, both U.S. and "international.

International mutual funds as a group have not performed particularly well since the Persian Gulf War of 1991, that is, during a period of U.S. political and economic supremacy. International funds outperformed from the 1960s-1080s when America was losing the Vietnam War and suffered other global setbacks, e.g. the Iranian hostage crisis of 1980.

That said, in any given year, the stocks of some foreign countries (and their mutual funds) will outperform the U.S. markets. If you are smart enough to know which ones, and why, it might be a good idea to chase those extra returns.

There is a strong "diversification" argument for investing enough in international mutual funds to create a "global" portfolio. Over long periods of time (that is 30-50 years), the total returns might be about the same, but the year-to-year volatility will be less for a global fund than for a pure U.S. fund.

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Consider these three funds:

S&500 FUSVX 1yr:17.43% 3yr:10.10% 5yr:15.37% expense:.05%

PRGTX (Intl Tech) 1yr:36.39% 3yr:23.88% 5yr:26.19% expense:.9%

GLFOX (Intl) 1yr:25.51% 3yr:14.16% 5yr:19.97% expense:1.23%

Considering the degree of PRGTX outperforming the S&P500 it was worth it. GLFox beat the S&P500 but not by much when you consider the expense ratio. Keep in mind investing in the S&P500 does give you global exposure as just about every company in the index sells overseas.

So yes, if you are taking a more active management in your portfolio, no if you are being very passive.

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