This Faith in Finance podcast is underwritten in part by Sound Mind Investing. For more than 30 years, do-it-yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future, and give generously. Learn more at soundmindinvesting.org. Over the past decade, U.S.
stocks have been the center of the investing universe. But does wise diversification mean looking beyond our own borders? I am Rob West. The US market remains strong, but global markets, currencies, and economic leadership are always changing.
So how should investors think about international opportunities without taking on unnecessary risk? Mark Biller joins us today to help us think more globally about investing. And then it's on to your calls at 800-525-7000. This is Faith in Finance, biblical wisdom for your financial decisions.
Well, it's always a pleasure to welcome Mark Biller back to the program. Mark is Executive Editor and Senior Portfolio Manager at Sound Mind Investing, a faithful underwriter of Faith and Finance. Mark, great to have you with us. Thanks, Rob. Great to be back with you.
Mark, in your latest newsletter, you wrote an article titled Diversifying Abroad, a primer on international investing.
So let's start with the basic question as we unpack this article. Why should investors consider looking beyond the U.S. markets? Yeah, there are a few reasons, Rob. You know, the traditional reason to include international stocks in a portfolio has always been diversification.
So foreign markets used to move a lot more independently of the U.S. market. When old guys like me were starting out in the investing business 30 years ago, there was a strong diversification case that you wanted to own some foreign stocks so that when the U.S. market zigged, your foreign stocks might zag.
Now, to be fair, as globalization has advanced over the last few decades, a lot of that diversification benefit has gone away.
So these days, U.S. and foreign markets tend to move in the same general direction. Most of the time. But that globalization piece is important for a different reason. The second big reason to include international stocks in a portfolio today is there are a lot of great companies outside our borders.
So we just don't want to miss out on growth opportunities abroad.
Now, a third reason to consider foreign stocks, and this is more of a theme of this particular article, is more the opportunistic angle. You see, U.S. and foreign stocks tend to trade leadership back and forth. One will run ahead of the other for a decade or so, then it'll tend to flip back the other way. And we can see this over multiple decades going back.
Now, U.S. stocks have been so strong over the last 15 years or so that it seems foreign stocks are likely due to bounce back on a relative basis at some point. And in fact, we did see some of that last year when foreign market returns were very strong. And then lastly, Rob, while the U.S. does still remain the center of the investing universe, we are watching big changes unfolding in the international order right now.
And it's an open question whether those changes are going to cause foreign investors to invest a bit less here in the U.S. and a bit more in their home countries going forward. Yeah, well that's a helpful overview. And listeners, of course, can read the full article we're discussing today at soundmindinvesting. org.
Mark, if the US market has been so dominant for so long, what makes you think that could begin to shift?
Well, one of the points that we make in the article is that U.S. financial assets have been punching way above their weight for a long time now. And what I mean by that is the U.S. share of global financial assets is way larger than its share of global economic production.
So the U.S. economy is still the largest and strongest in the world. We've got all these blessings, natural resources, political stability, and on and on. These are the reasons that the 20th century has been the American century. But it does seem pretty clear the world is shifting from the U.S.
being the global hegemon, full stop, back toward more of the historically typical multipolar world. And in that type of world, there are real questions about the willingness or ability of foreigners to keep funneling so much capital into U.S. markets.
So these recent geopolitical developments have raised. Questions about whether the flows from foreign investors are likely to shift more back towards their home markets.
Well, we'll continue to unpack this after the break. We'll talk about the difference between the U.S. share of global stock markets and its share of global economic output. And we'll also talk about the U.S. market dominance and how it may not continue at the same level.
And therefore, what does that mean for our portfolios? Also, what is a reasonable allocation to the international markets in your portfolio? Mark Biller here today. Check out this article at soundmindinvesting.org and then come back for our next segment. Stay with us.
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Investing isn't just about where the market has been. It's also about where opportunity may be emerging around the world. Today, we're talking about the case for international investing. Mark Biller is here today. He's our good friend.
He's executive editor and senior portfolio manager at Soundmind Investing. If you'd like to read the article in the SMI newsletter, it's available to you. It's unlocked and free. It's called Diversifying Abroad: a primer on international investing. Just head over to soundmindinvesting.org to read the article or to become an SMI member.
Now, Mark, you gave us a strong case for why we should think about international markets as a part of our portfolio, but I'd love to kind of dig a little deeper into the difference between the U.S. share of global stock markets and its share of global economic output. Why does that distinction matter? Yeah, well, the easiest way to think about it. Of this, Rob, is that US stocks currently represent about 64% of the global equity total, and that's way larger than the US share of global economic production, which is closer to 15%.
Now, there's nothing that says a country's share of financial markets has to equal its share of economic production, but there's a big difference between being roughly 15% of the global economy and 64% of the global stock market. And those percentages have always ebbed and flowed over time.
So there's really no reason to think that this current dominant U.S. share is a permanent feature. Yeah, that's helpful. Let's flip that around though. If, Mark, U.
S. market dominance may not continue at the same level, how should investors think about that in their portfolios? Yeah, well, like we were saying earlier, today, the primary benefit of owning foreign stocks is they offer broader growth opportunities than investing exclusively within the U.S. And with such a large portion of global economic activity happening outside the U.S., it's just important for investors to be aware of those opportunities. One area in particular, Rob, is emerging markets.
They represent a quickly growing share of global economic output, and a lot of investors are underexposed to those areas because they tend to focus on their home markets.
So, U.S. stocks have been much better performers for the last 15 years or so. And a lot of U.S. investors have just quit paying attention to foreign markets as a result. Yeah.
Mark, you also point to the role of the dollar in all of this.
So how do currency valuations factor into international investing? Yeah, currency fluctuations have a significant impact on foreign stock returns. And that's an area that most of us Americans don't think a lot about because honestly, for most of us, all of our earning and all of our spending is done in dollars.
So if the U.S. dollar strengthens against, say, the Euro, we really only notice that if we happen to take a trip to Europe or maybe we're buying a European car, and most of us just aren't doing those things regularly.
Now, as investors, it works like this. If an investor puts money into a foreign market and that foreign currency strengthens against the dollar, the investor is basically getting two separate returns. First of all, they get whatever the return of the local stock market they invested in. And then on top of that, they get the return of the foreign currency strengthening against the dollar.
Now, of course, that can go the other way. Way as well. But in the environment we've been in lately with a weaker dollar against foreign currencies, that's generally a negative thing for us in terms of our purchasing power, but it does tend to enhance the returns of foreign investments for U.S. investors. Yeah.
Well, that's a fascinating dynamic, especially in a season where the dollar has been weaker.
So Mark, for someone listening who wants to respond thoughtfully, what are the main ways to add international exposure to a portfolio? Yeah, well, we're always fans of mutual funds and ETFs because of their diversification benefits. And there are a few different types of funds and ETFs to be aware of in this space.
So one group are called world funds. They can invest anywhere around the globe, including the U.S.
So you have to be careful with the world funds because they may have most of their money in U.S. stocks. Then you get to the group that are truly foreign funds. These are the ones that invest primarily in markets outside the U.S. And as you go down the list, you'll find there are also regional or even specific country funds that are focusing in specific regions or specific countries.
And finally, we mentioned the emerging markets funds earlier. Those target the developing, more rapidly growing economies. And each of these different types come with different levels. Of diversification and volatility, which we discuss all of that in this article. Yes.
Again, that's available for you. You can check it out at soundmindinvesting. org. Mark, when we talk about emerging markets, what should investors understand before adding that kind of exposure to their portfolios? Yeah, well, emerging markets are exciting because they have significant growth potential, growing populations typically, and rapidly rising standards of living.
However, those emerging markets tend to also be more volatile, largely because. Capital tends to flow in and out of those markets and cause kind of big waves at times in those markets.
So, I would say that the long-term growth story of emerging markets remains very compelling, but investors do need to be aware that you're dealing with higher risks with emerging markets. Yeah, that's important. You also mentioned China, the president, of course, fresh off a visit to China. How should investors think about that part of the international investing picture? Yeah, China's complicated, obviously, right?
You know, China has had tremendous economic growth. I will say China's stock market hasn't always reflected that economic growth. Returns haven't been as good as you might think, given how prolific China's economy has grown. And then, of course, there are obvious concerns related to the level of government involvement in Chinese markets and the geopolitical risks that are ever present.
So, given all of those factors, some investors choose to limit or exclude altogether exposure to China and just focus on the other emerging market opportunities. And in fact, that's what we do at SMI: we exclude China and use emerging markets excluding China-type products. That sounds like a wise approach.
So, as we tie a bow on all this, Mark, how much international exposure might make sense? For the average investor, it's hard to pinpoint an exact percentage, Rob, but I would say for most U.S. investors, the best answer is probably more. Whatever you have, you probably should have a little bit more. And of course, I'm joking because I don't know how much a person has, but most diversified strategies would likely allocate at least.
15 to 25% of the stock portion of the portfolio to international assets. Given SMI's trend following routes, we'd suggest something like that as a starting point with the flexibility to adjust that percentage higher whenever market trends are calling for it. Very good. Mark, we're out of time today. This has been so helpful.
Thanks for your time. Oh, always my pleasure, Rob. Folks, check out this article on international investing at soundmindinvesting.org. While you're there, consider becoming an SMI newsletter subscriber to get their mutual fund recommendations or take a look at their private client group. Back with your questions after this.
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More information, including a short video webinar on profit and peace of mind no matter what's happening in the market, is available at soundmindinvesting.org. Thanks for joining us today on Faith and Finance. Taking your calls and questions today at 800-525-7,000. That's 800-525-7,000. Let's talk to Michaela in Florida.
Go ahead. Hi, my first question was about having faith in God and, you know, not saving too, too much just to rely on Him.
So I was curious how that works with. saving for retirement? Like can we still save for retirement? And what would that look like? Yeah, it's a great question, Michaela.
And I'm so glad you asked because really everything we do here on this program is about seeing how our faith intersects with our whole life. But as it relates to this program, specifically, our role in managing God's money. And, you know, I think at the end of the day, as we approach both retirement and gifting, it shifts our trust from our resources to our provider. You know, when we're planning for retirement, faith doesn't replace wise preparation. I think it reorients it.
You know, scripture calls us to steward diligently, but it also reminds us that our security is never found in our financial situation. Retirement isn't about reaching a number that guarantees peace of mind, so to speak. It's about faithfully managing what God has entrusted to us while trusting Him with the future.
So we plan wisely, we do our part diligently, but we rest in God's provision. And when finances are tight, you know, it can feel overwhelming. But scripture brings both, I think, freedom and clarity. Here's what the Apostle Paul says in 2 Corinthians 8:12. For if the readiness is there, it is acceptable according to what a person has, not according to what he does not have.
So, God isn't asking you to give what you don't have. He's inviting you to respond faithfully with what you do have.
So that means that we, again, we plan and we prepare. We realize that we're to be workers and be productive throughout our life. And that's going to change over time. And there may come a period in the fourth quarter of life where you are redirected away from paid work, but you still have, as long as you're here with breath in your lungs, an opportunity to take what God has given you and invest in people for God's glory and serve him fully. And the giving component really should never come from guilt or pressure, but from a willing heart that's, I think, shaped by grace.
The grace that's been extended to us should be our motivation.
So, you start where you can, even if it's small. And as you prioritize your needs and seek wise counsel, keep in mind that generosity isn't measured by the size of a gift. But I think it's really about the posture of the heart. And if you know that God is your provider, then even in lean seasons, He's forming your heart to depend on Him. In every season of life.
But let me stop there and get your thoughts on that.
Well, that actually answers both of my questions. Yeah, I've been really struggling with the whole tithing thing because, like, I always hear 10%, 10%, and sometimes that's hard.
So, but that, I think, answers my question, just to make sure that my heart's in the right place with it, kind of. Is that kind of like, I mean, we can look to the Old Testament tithe and we can certainly pull ideas from that, principles. I like the fact that we might say we're going to start with the tithe. I mean, the author Randy Alcorn calls it the training wheels of giving. And so, you know, I think if we can prioritize a systematic, proportionate gift as God provides increase.
That's great. And we should start with the local church. But at the end of the day, you're exactly right. When we look to our giving and we look to the New Testament, we see that in the New Testament, there's really in all the main teachings about money, the word tithe is not mentioned once. And so, what we do is we look and we see in the New Testament that God cares more about our character and our heart posture than a specific number or percentage of giving.
And I think biblical generosity is really more than rules or percentages. It's a fully surrendered life of godliness, which includes honoring Him with our giving, but giving is a response to God's grace. It's given freely and joyfully, it's proportionate to our financial status. And it's directed to those causes on the heart of God, starting with the local church. But it's not about being legalistic or feeling pressured to do something, if that makes sense.
It does. And actually, thank you so much for that. I think I needed to hear that. And then let me just make sure I understand.
So and this is probably going to sound like a silly question, but God wanting us to rely on him doesn't mean we cannot save for retirement, right? Like that's still okay to do. I think that's exactly right. Yeah, because we plan diligently, but we trust God for the outcome. And so I think that means we do our part.
And clearly, what we see in scripture is that we're to be savers. You know, there's precious treasure and oil in the house of the wise, is what Proverbs says, but the foolish person swallows it up. Which means we need to take a portion of what God gives to us today and set it aside for the future. You know, for Joseph, you know, he put 20% aside. And that's what ultimately was there for the famine.
So there's repeatedly, we see this in scripture that part of wise stewardship means taking a portion of what we have today and not consuming it all now. We give first, we enjoy it, we provide, we live on it, but we also set something aside for the future. And we trust God for the outcome. We don't trust our bank account because God is ultimately our provider, but that doesn't in any way negate the responsibility of wise stewardship, which is to be systematic, to invest and save for the future, including for retirement, because we recognize there may come a day where you and I are unable to work for pay. And that's where our savings can support whatever God-given lifestyle we believe he's called us to.
Perfect.
Well, thank you so much for that insight. I really appreciate it. All right, Michaela. Thanks for your call. Let me do this.
I want to send you a copy of my new devotional. It's called Our Ultimate Treasure. And I'd love for you to take the next 21 days and just allow his word to speak into your life through this devotional. I think it'll be an encouragement to you and hopefully even answer some of the questions that you have.
So if you stay on the line, our team will get your information and we'll put the devotional Our Ultimate Treasure in the mail to you.
Okay. Thank you. All right. Happy to do it. Thanks for your call today.
Let's go to Franklin, Tennessee. Rob, go ahead. Um, I am uh helping my son and his wife buy their first home. And my question is, is PMI insurance for any first-time home buyer if the down payment is less than 20%? Yeah, it's a good question.
And the answer is yes. I mean, PMI is required if the down payment is under 20%. That's going to protect the lender, doesn't do anything to help your son and daughter-in-law. It's for the lender, and it's added to the monthly payment. and on a conventional loan.
Under 20% PMI is required, 20% or more equity PMI goes away. There's a few exceptions where the lender pays the PMI or with an FHA loan, the mortgage insurance is required regardless of the down payment. But for most people, PMI is only until you reach 20% equity and then you can request removal. It's automatically removed at around 22%.
So you want to avoid it if you can, just because a bigger down payment means obviously more equity, a lower mortgage payment, but also that PMI monthly payment doesn't do anything for you.
Okay, thank you. All right, you're welcome. Thanks for calling today. Lord bless you. Hey, big thanks to my team today: Devin, Patty, Taylor, and everybody here at Faith By.
Have a great day. We'll see you tomorrow. Bye-bye. Faith in Finance is provided by FaithFi and listeners like you.
