International Stocks — Opportunity, Trap, or Necessary Diversification?

In this insightful interview, financial expert Gary discusses the strategic shift towards international investing, the importance of having a clear investment thesis, and how geopolitical events influence market opportunities. Learn how to adapt your portfolio for long-term success and avoid gut reactions during volatile times.

Transcript

Introduction: Market Reactions and Staying Calm

Announcer 0:00

Views expressed are solely those of the speakers and do not represent this show or its team.

SPEAKER_02 0:04

I think investors need to make sure that they are not making uh gut reactions. It's okay to make tactical changes to your portfolio rebalancing here and there. Selling because you're afraid of what's going on in the Middle East or buying, uh, going all in on something because you think that there's going to be some outcome, uh, I would stay away from that. So sitting on your hands is a great thing to do at this time.

The Shift from US to International Exposure

Wade Lopez 0:31

Welcome back to Built to Last conversations about wealth, work, and life. So, Gary, we're going to jump right in. And for years, investors have heard the same thing that international diversification matters. But the U.S. has really largely led the way. So let's start simple. Do international stocks matter today more than they have in recent years? And let's cut it down to even a simpler question. And that is is the change we're seeing in the international markets strategic or tactical?

SPEAKER_02 1:03

Wait, that's an important question. And, you know, from our perspective, we think that it is a strategic change that we're making. Um, you know, for a number of years, I was in the same camp, right, where, you know, 55 to 60 percent of the revenues of the S P 500 came from overseas. So we said, well, we can get the benefit of international markets just investing in U.S. stocks. And that's been true. Um, but we think that there's been a strategic change. And you know, for years, you know, leading up to uh 2025, we were about 88% US, whereas the the ACI, the large uh index of global stocks, was about 60% US. So we were really, really overweight US. But in the beginning of 2025, we noticed a couple of things, and we made a strategic shift to move from 88% US to 75% uh US. So increasing our international exposure. And we think that's a strategic shift uh that that we're looking for entry points to go even more into international stocks.

Timing Entry Points for International Stocks

Wade Lopez 2:17

So I guess the next question is timing. What are you looking for to find deeper entry points? And what are the signals that tell you it's it's it's time to maybe add more to the position?

SPEAKER_02 2:30

Well, we're always looking at relative value. And there's a couple of ways to look at relative value, whether it's price to earnings ratios relative to U.S., price-to-book ratios, price to free cash flow. And we're even looking at technical indicators that indicate that you know U.S. markets are oversold and uh or overbought, and international markets are reflecting the exact opposite of that. And you know, we've seen, especially here in March with the war in Iran and uh and then April, the subsequent recovery, that you know, there was huge uh disparate moves uh where you know there was a real risk off, which shifted back to the US, providing good entry points for rebalancing into international stocks. So we're looking for those tactical ways to inch in. But again, we we think it's a strategic benefit to investors to be more international than they used to be a couple of years ago.

Wade Lopez 3:32

Okay,

Geography: Developed vs Emerging Markets

Wade Lopez 3:33

so let's talk about geography. Um, is that still as simple as developed markets versus emerging markets, or has that line kind of gotten more complicated?

SPEAKER_02 3:46

Yeah, this was a real important question, and it's a really good question to ask today, too. Because uh, you know, in in my previous life, when I was a bond investor, we would always see these quote unquote emerging market economies start to exhibit better fundamentals than a lot of their developed market peers, right? They didn't have these legacy uh social programs that needed to be funded. Their economies were growing faster so they were able to support more debt. They were actually uh, you know, implementing uh real changes in their governments and their local governments uh to weed out corruption and to ensure that there were uh you know rule of law starting to make it safer for investors to be there. And at the same time, we've seen developed markets uh, you know, start to exhibit uh problems because uh their debt to GDP ratios have grown so much that they start to look more like what we used to think of as emerging markets. And that translates over into currency issues. Uh, it translates into the dyno dynamism, you know, the ability of those economies to respond to crises. And uh so, yeah, that line is blurred. And so we need to think, we need to go a little bit deeper than what Morgan Stanley is classifying as uh developed market versus emerging market at this point.

Wade Lopez 5:15

It makes sense, but let's talk about bonds and rates. So, how does the international rate environment factor into how you're thinking about the opportunities ahead?

Interest Rates and Currency Risks

SPEAKER_02 5:27

Yeah, I think one of the things that we always have to think of when we're investing internationally is what is what is the currency of that country going to do relative to the dollar? So a crucial part of our thesis for international is that we think the dollar is generally going to decline in value relative to foreign currencies. And so we want to take a look at not only just how much growth is going to be coming from different countries around the world relative to the U.S., but their interest rate policy and their inflation is also gonna be a real big impact because uh one of the theories of currency is called interest rate parity, that if you take the interest rates in the US and you compare them to the interest rates in uh in the United Kingdom, then the differential in the dollar and the pound should have a lot to do with the relative uh level of interest rates in the UK versus the US. So we're really looking at uh what's going on in interest rate markets around the world. And what we've seen is the United States still is in this uh this tentative state where we think that interest rates are likely to go lower, at least short-term interest rates, where especially today with the oil crisis and all the inflationary impacts from that, the you know, the EU, the UK, and all already in emerging markets, we're starting to see central banks start to increase rates. So that's that all else equal should imply that the dollar should decline relative to those currencies that are raising rates while we're still lowering them.

Wade Lopez 7:13

Aaron Powell To be more specific, let's talk about you know what your thesis is right now on international and and with that what's working and maybe what's not working.

The Three Legs of an International Thesis

SPEAKER_02 7:27

Yeah. So our our thesis, anytime we go into a new position, uh, you know, and we we always try to have a thesis. And in my view, a thesis has to have at least three legs. You know, any stool that's gonna be worth sitting on has got to have three legs in order to balance it. Right. So the three legs, the three primary legs of our international thesis are first, that dollar uh decline that we talked about, currency issues. Um, the second is on a relative basis, uh you know, the US PE ratio, you know, price to earnings ratio for US stocks is about 26 times last 12 months and about 22 times forward. If you look at developed markets X US, that number is about 18 times trailing and you know, 16 times forward. And if you look at emerging markets, uh, you know, it's even more attractive than that. So from a valuation perspective, um the you know, US seems overvalued relative to the rest of the world. So that's the second leg. Uh the third leg of the stool would be um that we just think that international markets have a little bit less volatility than they used to have in the past. And part of that is one, because their balance sheets are a little bit better than the U.S. And also we're recognizing that with the Trump administration comes the good and the bad. And part of the bad is more volatility in the U.S. And so when we think about where we want to take risk and how that risk is translated into volatility of returns, we think that we can get a we can get the same returns or maybe even a little bit better returns with less volatility in international markets.

Wade Lopez 9:23

Aaron Powell That brings up the fact that I think a lot of investors just kind of don't really feel like a thesis is important. So let's talk about what it's like to invest without a thesis, why that even matters, and what does it actually mean to invest with the thesis versus without one for those people listening out there?

Why Investing Without a Thesis Is Risky

SPEAKER_02 9:45

So it's I think it's really important when you're when you're doing anything and and investing in particular to know why you're making that investment. And uh and knowing knowing the why of why you're doing something is so crucially important because like you said, it's hard to know whether you're succeeding or whether you're losing. You need a scorecard. And the scorecard is your thesis. And so every time there's a new piece of information, a new headline, a new piece of economic data, uh earnings from companies, um, you need to look at that in the lens of does it support one of my three thesis arguments, or does it undermine that? And so if it undermines it, then you know, well, we may have a problem here. Right. And if too many of those legs get undermined, that's a great reason to sell. You know, we we you know, I used to know a guy who said sell is a four-letter word. Uh, but you know, eventually, you know, we need to sell. And so it's not always price that that is that we can just go on. We can't always just go on, well, the price went up, so it's time to sell. That leads to us selling way too early in a lot of cases. Uh, and if we're not paying attention to it, uh, it also might lead us to sell way too late. That it so so having that thesis, having a reason for me being in a trade, uh, gives me the ability to give myself a scorecard. And if I start if I start winning, I know why I'm winning. And if I start losing, I know why I'm losing and when it's time to get out.

Wade Lopez 11:31

But don't you sometimes just take chips off the table because you're winning very big early?

SPEAKER_02 11:37

Certainly. You know, that comes back to you know, investment guidelines and investment policy statements, you know, like we saw in March and April, like we just talked about, right? International markets were down 12%. And then in April so far, international markets are up twelve percent.

Wade Lopez 11:55

Right.

SPEAKER_02 11:56

So, you know, when those things happen, we're gonna rebalance. But those are more tactical, right? Those are those are reasons for us to be, you know, around the margins.

Wade Lopez 12:07

Absolutely.

SPEAKER_02 12:07

But it's not for us to get out of a position all entirely because once you're out, then you need to have a reason to get back in. And so from my perspective, you know, that thesis gives me the grounding to say, all right, is this a strategic change that is it's a long-term, you know, I expect to be in it or out of it for three to five years, or is it tactical where this is something that is happening over the short term, over the one month, three months, six month kind of time frame?

Wade Lopez 12:36

All right. So uh tell me how this is going to translate to my small business people that are listening. Because you know, they're not managing a portfolio the same way a lot of people do, but they have you know some real exposure. What should they be thinking about today and the the the rest of this year?

SPEAKER_02 12:54

You

Implications for Small Business Owners

SPEAKER_02 12:55

know, I I think this this idea of having a thesis and having three really simple things that you've written down for why you did something, whether it's it's uh it's a big big change for the organization or even a small change, or you're testing out a new employee, or you're testing out a new process that you put in place, is it really working out the way that you thought about it? Because under each of those those three big statements, right? Uh currency, uh valuation, volatility, right? Underneath each one of those are a lot of other uh premises that support that that argument. And so everything that happens in my organization, you know, relative to that idea, you know, I'm watching those things to see if, you know, I I thought that was true, right? I had a hypothesis that I thought this would happen if if X, then Y. But that didn't happen. And why didn't it happen? Um, and that enables you as a business owner to not just sort of go off the seat of your pants. We all have great instincts, right? We wouldn't be successful if we didn't have uh a gut feeling that something was right. But um, but I think that you know, it's not enough just to have the gut feeling and the gut instinct. You need to write it down and you need to test it and and know why it's working and why it's failing.

Wade Lopez 14:23

Yeah, good good idea. And I think a lot of our successful business owners do that thinking about what they do in their business, but they don't necessarily think about it from the investment side. But that's also why they hire us. So we we can't we can't give away too many secrets, right? That's right. So before we wrap this up, you know, I want to close with the three questions that you know um and that we like to close with here. And the first one is, you know, what's the one thing that matters most right now? Be specific.

SPEAKER_02 14:58

The

Key Current Risks: Iran and OPEC

SPEAKER_02 14:59

one thing that matters most right now is uh the Iran crisis still. We need to know what's gonna happen with that. And here's another crucial piece of information. Uh today, as we're speaking, today is April 28th, and the United Arab Emirates has decided that they're leaving OPEC and OPEC plus. Right. You know, this Iran conflict should be front and center for all of us because there's gonna be all kinds of things that we didn't see coming or that were way in the background that are gonna be forced to the surface. Some of them may be good, some of them may be bad. But the Iran conflict is a hundred percent in focus right now because of that.

Wade Lopez 15:45

So the second question, Gary, is what are you watching over the next six to twelve months that our listeners need to understand before it becomes super obvious?

Monitoring Federal Reserve Policy

SPEAKER_02 15:57

Kevin Warsh is going to be confirmed as the Federal Reserve Chair sometime in the next week or couple or month. And he's gonna come in and have a mandate from the president of the United States to lower interest rates. And we think that there's good arguments for lowering interest rates, and there's also good arguments for increasing interest rates. But I think that's the thing that we're gonna need to need to watch. Our hypothesis here at Concord is that we will get a couple of rate cuts before the end of the year.

Wade Lopez 16:29

So the the last question is what do investors need to stop doing or stay away from right now?

What Investors Should Avoid Now

SPEAKER_02 16:38

Right now, I think investors need to make sure that they are not making uh gut reactions um that that are you know more than tactical. It's okay to make tactical changes to your portfolio, rebalancing here and there, as we are for our clients, but uh selling because you're afraid of what's going on in the Middle East or buying, uh going all in on something because you think that there's gonna be some outcome, uh, I would stay away from that. So sitting on your hands is a great thing to do at this time.

Wade Lopez 17:12

Yeah, sometimes you just got to, right? So uh, Gary, thanks a lot. I I think this is very informational, obviously, and we enjoy talking with you. And I think what I've learned today is that if investors, small business owners want a portfolio that they can build that last, they certainly need to look at international exposure. So thank you very much. Thanks for spending time with us today on Build to Last. If today's conversation helped bring clarity to your thinking around wealth, work, or life, that's exactly why we do this. Till next time, stay focused on building something that truly lasts.

Announcer 17:49

This podcast is produced by Concord Wealth Partners, LLC, an investment advisor registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. The information presented is for educational and informational purposes only and should not be construed as personalized investment, financial, tax, or legal advice. Nothing discussed should be considered a solicitation or offer to buy or sell any security or investment product. All investing involves risk, including the potential loss of principal. Past performance is not a guarantee of future results. Individual results will vary based on personal financial circumstances, risk tolerance, and other factors. Concord Wealth Partners does not provide tax or accounting services. Tax and accounting services are offered through Concord Business and Tax Advisory, an affiliated CPA firm. For more information about Concord Wealth Partners, including our Form ADV Part 2A and Form CRS, please visit ConcordWealthpartners.com or contact us at 800 838 4370.