U.S. stocks are at record highs and many analysts are saying they're overpriced. This has motivated American investors to diversify their portfolios into cheaper international stocks. According to Investment Company Institute (ICI) data, investors have moved a net $6.3 billion from U.S. stock funds this year, while putting $60.5 billion in foreign stock funds.
The draw of foreign stocks is not new to long-time investors. And in fact, the move into international stocks this year is part of a natural, gradual process of diversification in investor portfolios that’s been going on for quite a while. According to additional data released from ICI, domestic stock mutual funds made up 57 percent of assets in all equity, bond and hybrid funds in 2003. At the end of May of that year, that was down to 41 percent. In the meantime, fund investors took extra helpings of foreign equity funds, which went from 10 percent to 15 percent of assets.
A few decades ago the typical American investment portfolio was pretty simple: The choice was U.S. stocks or U.S. bonds. In the 1980s and 1990s, the U.S. stock market surged. By the 21st century, older investors -- including the large Baby Boom generation -- ended up with portfolios heavily weighted toward U.S. stocks.
This lack of interest in hometown stocks is exactly the opposite of what you'd expect of U.S. investors. Individual investors have a well-deserved reputation for following the herd, and the S&P 500 has offered twice the return of non-U.S. stocks since early 2013. It’s hard to believe, therefore, that they’ve all become astute value investors overnight with a sudden appreciation of buying low and selling high.
Rather than crediting the mass of investors with new investment wisdom, other forces seem to be at work. The shift toward foreign stocks owes more to long-term trends as Americans age and retirement plans get more sophisticated.
Some investors are deciding for themselves to diversify abroad. Many more are being prodded by financial advisers or even their retirement plans. The proportion of U.S. 401(k) and other retirement plans offering emerging-market funds doubled from 2011 to 2013, according to benefit consultants Aon Hewitt, from 15 to 30 percent. Target-date funds, the default option in many 401(k) plans, are also getting much more popular and are designed to create a diverse portfolio without investors lifting a finger.
In the end, many Americans are making smart moves with their investment portfolios without even knowing it.