2,557 Reasons Why You Should have International Stocks in your Portfolio


needle in haystayck
Even before Brexit passed, I got questions if it still makes sense to include international stocks in our portfolios. So I asked one of my favorite bloggers if she would be a guest blogger on this topic.

Welcome, Michelle Morris, CFP®,  EA from BRIO Financial Planning! I just love what she wrote about why we should include a healthy mix of international stocks in our portfolio:

My father was a real "Buy American" guy. I came of age in the 70's and early 80's in the rural Midwest. Ethnic food did not arrive in my hometown until 1982 in the form of a Mexican fast food joint called "Aunt Chilottas". My father worked at an automotive parts store. The rare intrepid soul who walked in asking about parts for a Japanese car was promptly dismissed as foolish and often the subject of scorn at our dinner table.

The world has changed a lot since then. Notably there are Japanese cars everywhere and many Americans partake of international food, products, culture and travel. These add richness and diversity to our lives. So it is for international stocks also.

My Dad has passed away and while I doubt that he would have ever bought a foreign car, I'm pretty sure I could have talked him into some international stocks and maybe even some Mexican takeout!

 When I review prospects' portfolios I often see minimal or even no allocation to international stocks. But if you limit yourself to only US stocks you are missing a big piece of the global capital marketplace.

This cartogram, from Dimensional Fund Advisors, shows the global market share for stocks of countries all over the world. The US is the biggest at 52%. This means that of the total value of the world stock market, the US accounts for 52%.

In other words, the US accounts for just over ½ of the total value of the world stock market. By limiting yourself to US stocks you've lost exposure to 48% of the global stock market!

Last year we heard a lot about Greece. Note Greece’s square on this chart – it’s tiny! In fact Apple stock alone is more than 20 times bigger than the entire Greek stock market.

This year we are hearing about “Brexit” and its possible effect on markets. Certainly these issues may cause volatility, but the world has faced innumerable crises in the past and will undoubtedly continue to do so in the future. Don't let the news dissuade you from sticking with a broadly diversified long-term investment strategy.

Some think buying US stocks provides exposure to international economies due to the large international presence that many US companies maintain. This is true to some extent, but limiting yourself to US companies means you have no stake in leading companies based in other countries such as Toyota, Samsung, or Nestle.

Certainly US stocks have had a good run recently. The US had the highest annual return of the 19 developed market countries tracked by MSCI in both 2013 and 2014. In 2015 the US fell to 7th place. (The winner was Denmark!) In 2004 the US was dead last. What will the winning country be in 2016? 2017 and beyond? I have no idea, but guarantee you that I and my clients own it in our diverse portfolios.

Remember, don't look for the needle in the haystack, just buy the haystack!

One easy way to "buy the haystack" is through an index mutual fund: a basket of stocks that holds every stock listed on a particular index. One of the international stock funds I use from Vanguard (VFWAX) has 2,557 stocks. (Hence the title of this post).

The expense ratio of this fund is a mere .13%. This means that for every $10,000 you hold in the fund, you pay just $13 to the mutual fund. Never before have ordinary people had such inexpensive access to huge swaths of the global capital marketplace. It is a marvelous age we live in.

So take a look at your portfolio, are you missing out on a world of opportunity?
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Deep Dive into Credit Cards


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Recently a client emailed me to ask, “What is the best credit card?” Then, at a family holiday, four of my nieces and nephews asked the same thing.

I have mixed feelings about credit cards.

As with most financial planning decisions, picking a credit card is a good opportunity to check in with your values. Can you express your values while picking a credit card? The answer is a qualified yes.

The best deals, however, are reserved for the people who express the value “I value the best deal.”

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Draft Brett Farve to Start Your End-of-Life Plans

Favre

It's awkward to have "the talk" with your parents. Here's how to get started.

We should all have an ongoing conversation with our loved ones, especially the older ones, about their end-of-life plans. Yeah right. We should, but we don’t.

Because clients dread bringing up the topic so much, some financial planners refer to it as “the talk.”

Thanksgiving gives us a great opportunity to start a simple, direct conversation.
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Give Money, Feel Happy

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“How should a client think about giving money to charity?” was the question my colleague posted on an adviser forum.

I should know this, I thought.

But since I couldn’t coherently answer my colleague’s question, it seemed like a good time to review the latest thinking on the subject and update what I tell clients.

Turns out, there are four steps to giving money away. Even better, they’re pretty easy.

1. Develop a donation strategy.

That’s right, a donation strategy. That might sound like off-putting jargon, but we all have a donation strategy, whether or not it’s fully baked and conscious.

For instance, a lot of people I’ve worked with seem to give money to anyone who asks. A lot of people give money to their college. For some people, the more desperate an emotional appeal, the more likely they’ll give. For most people it’s more hodgepodge than a strategy.

A lot of charities are de-emphasizing outreach that seeks donations by evoking pity. The poverty-stricken face of a child who seems to be saying, “Just donate to this charity and my suffering will be alleviated,” may be on the way out. After seeing enough of these ads, empathy overload kicks and you start to wonder, are these kids being exploited?

Celebrity causes are changing too.
This parody is a plea for Africans to send radiators to freezing Norwegians. Hey, frostbite kills, too!

Instead of pity and celebrity identification, charities are trying to appeal to people based on effectiveness.

Develop your donation strategy by asking these two questions:

What problem am I trying to solve?
What do I value?

To make it easier, you probably don’t even have to answer both questions. If one seems easy, just start there.

Next, consider the balance between what’s near to you (your church, your alma mater) vs. what’s far (ending extreme poverty, disaster relief). You might have different ideas for each.

Here’s what Bill and Melinda Gates did. First they thought, and I’m paraphrasing here, “What problems is capitalism crappy at solving?” The thing that bothered them the most was inequity. Globally, they asked, “What’s the biggest inequity?” And for them that it was children dying and/or not getting enough nutrition to develop.

Locally they took a different approach and said, “Okay, our educations really helped us. We want to help alleviate the inequities in the US education system.”

If you want help pinpointing global issues,
Philanthropedia has thirty-six different causes. You can weigh the causes against each other and figure out which is most important to you.

Close to home, if you’re looking for ideas beyond what initially comes to mind, it makes sense to check out your local community foundation. These are organizations that help budding philanthropists figure out their donation strategy. You can find them quickly through the
Council on Foundations.

2. Figure out which charities will fulfill your strategy.

Next, explore charities that prove they are effective at having an impact in the areas you value.

Figuring out your local charities might be easier than the global charities. When you give money close to home, you can pretty easily get a handle on how effective the organization is.

When you give away globally, it helps to have third parties evaluate which charities are the best. They take out their measuring sticks and examine the numbers. They research: What charities fulfill their missions in the most efficient way?

Three websites that summarize data and report on the effectiveness of specific charities are:

charitynavigator.org
givewell.org
guidestar.org

It’s a good idea at this stage to use your intuition as well. Melinda Gates said, “We come at things from different angles, and I actually think that’s really good. So Bill can look at the big data and say, ‘I want to act based on these global statistics.’ For me, I come at it from intuition. I meet with lots of people on the ground, and Bill’s taught me to take that and read up to the global data and see if they match.

“And I think what I’ve taught him is to take that data and meet with people on the ground to understand, Can you actually deliver that vaccine? Can you get a woman to accept those polio drops in her child’s mouth? Because the delivery piece is every bit as important as the science. So I think it’s been more, a coming to, over time, towards each other’s point of view. And quite frankly, the work is better because of it.”

3. Donate and feel good.

Giving money away makes us feel better than spending money on ourselves.

Elizabeth Dunn and Michael Norton report in their book
Happy Money: The Science of Smarter Spending, “The amount of money individuals devoted to themselves was unrelated to their overall happiness. What did predict happiness? The amount of money they gave away. The relationship between prosocial spending and happiness held up even after taking into account individuals’ income. Amazingly, the effect of this single spending category was as large as the effect of income in predicting happiness.”

4. Pay attention to results.

This doesn’t have to include spreadsheets or anything fancy.

Notice the communication you get from the charities. Is it always a pitch for more money? Do they communicate their results?

Do you see where your money is going? Are they fulfilling the mission that you were contributing to when you donated?

Keep in mind that not every donation is going to succeed. For instance, Bill Gates says that his involvement in the attempt to develop a better condom didn’t get the results he was hoping for. He doesn’t detail exactly what was so ineffective about the project, except mentioning with a vague smile, “We got a lot of ideas.”

By Bridget Sullivan Mermel
Originally posted on Money.com
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New Ways to Invest in Small Businesses


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When nonprofessional investors are able to put money into small businesses, everyone can benefit.

I met with Paul on Tuesday. He is the CFO of a business start-up. He’s not sure if the next phase of his company’s financing is going to go through. Although he believes in the business model and the mission of the company, some days he thinks he won’t have a job in three weeks.

I met with David on Wednesday. While he’s a great saver and earns a decent buck, he isn’t wealthy. He wants to invest in small companies so much that we’ve set up a “fun money” account, which is 10% of his otherwise well-diversified, passively managed portfolio. “Fun money” is specifically set aside so that he can make individual investments he believes in.

Because of the way small business investing is structured in this country, the likelihood of Paul and David connecting has been infinitesimally small.

This drives me mad.

It’s not just these two who are missing out. Because small companies drive job and economic growth, the economy of the country loses when Paul and David don’t connect. And because the current system of funding is biased, some small businesses are a lot less likely to get funding despite their worthy ideas.

Recent developments could change all this.

To raise their initial start up money, small business owners typically first use their savings, and then appeal to their friends and family. Next, they go to banks. If they get big enough and have certain ambitions and contacts, they can get venture capital funding or private equity funding, which is what Paul was waiting on.

These sources of capital are all enhanced if you are affluent and well connected. Do your friends and family have extra money to invest in your business? Do you know anyone you can talk to at a bank? What about impressing people in the venture capital world? A lot of people with good ideas are shut out.

Enter the Internet. Raising money got a lot easier.

The Power of Reward Sites

With reward sites, startups with good ideas raise money in exchange for rewards.

Sesame, which opens doors remotely from smartphones, raised over $1.4 million on Kickstarter.com. The reward here was a chance to order the device.

Then there is
Lammily, Barbie’s realistically proportioned cousin, whose designer raised almost $500,000 through Tilt.com. The reward for funding Lammily was the chance to pre-order the doll, and sticker packs with stretch marks, cellulite, freckles, and boo-boos.

The reward sites show that companies can raise large amounts of money through small contributions from a large number of people. Research suggests that Kickstarter.com
reduces company funding gender bias by an order of magnitude and reduces geographic bias as well. Reward sites cater to consumers who love new products and want to support new ideas.

You may get first dibs on a cool new doll, but sending money to a reward site isn’t investing.

The Risks of Private Equity

Traditionally, to get private equity funding, you have to sell to
accredited investors — the richest 1% of the population, roughly speaking.

Accredited investor regulations were set up in in the wake of the 1929 crash, when a lot of people got ripped off because they invested in dubious enterprises. The idea was that people with a high level of wealth are sophisticated enough to understand investment risk. Unfortunately, this leaves the Davids of the world — investors who are sophisticated but wealthy — shut out of these types of investments.

Private equity placements are not always a great deal. When I’ve looked into them for clients, I’ve concluded they are expensive, risky, and difficult to get out of, even if you die. The middlemen who offer these and the advisers who sell these seem to be the ones most likely to make money. The best deals I’ve looked at weren’t hawked by sales people or investment advisers, but came through clients’ friends and family.

The rise of Internet portals set up to connect small companies with accredited investors has the potential to cut down on intermediary costs. Still, the sector remains small.

In 2012, President Obama signed the JOBS act, which directed the Securities and Exchange Commission to devise rules opening up small business investing to non-accredited investors.

Some organizations didn’t wait for the SEC to issue the rules. Instead, they dusted off exemptions in the securities legislation that most of us have ignored for 80 years.

States Get Into the Act

Some
states have picked up on crowdfunding to boost their economies. Terms vary, but generally investors are subject to investment limits and companies are subject to a cap on raising money. Each individual, for example, might be limited to investing $10,000; each company might be limited to raising $1 million. Both investor and company are generally required to reside in the state.

This is music to ears of people who want to invest locally. The first successful offering using this type of exemption was in Georgia in 2013, where
Bohemian Guitars raised approximately $130,000 through SparkMarket.com.

Other Exemptions

Village Power is another example of raising money using an exemption. This intermediary helps organizations set up and fund solar power projects. Village Power coaches their community partners to use an exemption in the SEC rules, which allows for up to 35 local, non-accredited investors.

New Rules Open Doors

New rules issued March 25 by the SEC removed a lot of the barriers for companies raising money and for non-accredited investors.

Companies will be able to raise up to $50 million. Non-accredited investors are welcome to invest, sometimes with limits — 10% of their net worth, say, or 10% of their net income.

Although Kickstarter has said that it won’t sell securities, other fundraising portals, such as
Indiegogo, are looking into it.

And if all goes well, Paul, David, and I can start looking for the new opportunities in June of 2015.

by Bridget Sullivan Mermel
Originally published on Money.com
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