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?

New Ways to Invest in Small Businesses

small biz picture

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

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

How I Plan for the Stock Market Freakout…I Mean Selloff

I got an email from Nate, a client, linking to a story about the stock market’s climb. “Is it time to sell?” he asked me. “The stock market is way up.”


If I just tell Nate, “Don’t sell now,” I think I might be missing something.

At a recent conference, Vanguard senior investment analyst Colleen Jaconetti presented research quantifying the value advisers can bring to their clients. According to
Vanguard’s research, advisers can boost clients’ annual returns three percentage points — 300 basis points in financial planner jargon. So instead of earning, say, 10% if you invest by yourself, you’d earn 13% working with an adviser.

That got my attention.

Jaconetti got more granular about these 300 basis points. Turns out, much of what I do for clients — determining optimal asset allocations, maximizing tax efficiency, rebalancing portfolios — accounts for about 1.5%, or 150 basis points.

The other 150 basis points, or 1.5%, comes from what Jaconetti called “behavioral coaching.” When she introduced the topic, I sat back in my seat and mentally strapped myself in for a good ride. One hundred fifty basis points, I told myself — this is going to be advanced. Bring it on!

Then she detailed “behavioral coaching.” I’m going to paraphrase here:

“Don’t sell low.”

Don’t sell low? Really? The biggest cliché in the world of finance? That’s worth 150 basis points?

But it isn’t just saying
, “Don’t sell low.”

It’s actually that I have the potential to earn my 150 basis points if I can get Nate to avoid selling low. That means I need to change his behavior. Wow. Didn’t I give up trying to change other people’s behavior January 1?

Inspired by Nate and the fact that the stock market is high (or maybe it’s low; the problem is we don’t know), I decided to think like a client might think and do a deeper dive into the research. Why not sell now? Why do people sell low? How can I influence, if not change, client behavior? I’ve got nothing to lose and clients have 1.5% to gain.

One interesting thing I learned in my research: Not everybody sells.
In another study, Vanguard reported that 27% of IRA account holders made at least one exchange during the 2008-2012 downturn. In other words, 73% of people didn’t sell.

Current research on investing behavior, called neuroeconomics, includes reams of studies on over-confidence, the recency effect, loss aversion, herding instincts, and other biases that cause people to sell low when they know better.

Also available are
easy-to-understand primers explaining why it’s such a bad idea to get out of the market.

The question remains, “How do I influence Nate’s behavior?” The financial research ends before that gets answered.

Coincidentally, I recently had a tennis accident that landed me in the emergency room. While outwardly I was calm, cracking lame jokes, inwardly I was freaked out.

Despite my appearance, the medical professionals assumed I was in high anxiety mode, treating me appropriately. The emergency room personnel had specific protocols. Quoting research and approaching panicked people with logic weren’t among them.

They answered my questions with simple sentences and gave me some handouts to look at later.

Selling low is an anxiety issue. And anxiety about the stock market runs on a continuum:

Anxiety Level
Client behaviorDon’t notice the market
Mindfully monitor it.
“Stop the pain. I have to sell.”

That brought me to a plan, which I’m implementing now, to earn the 150 basis points for behavioral coaching.

During normal times, when clients are in the first two boxes, I make sure to reiterate the basics of low-drama investment strategy.

When I get a call from clients in high anxiety mode, however, I follow a protocol I’ve adapted from the World Health Organization’s
recommendations for emergency personnel. Seriously. Here’s what to do:
  • Listen, show empathy, and be calm;
  • Take the situation seriously and assess the degree of risk.
  • Ask if the client has done this before. How’d it work out?
  • Explore other possibilities. If clients wants to sell at a bad time because they need cash, help them think through alternatives.
  • Ask clients about the plan. If they sell now, when are they going to get back in? Where are they going to invest the proceeds?
  • Buy time. If appropriate, make non-binding agreements that they won’t sell until a specific date.
  • Identify people in clients’ lives they can enlist for support.

not to do:
  • Ignore the situation.
  • Say that everything will be all right.
  • Challenge the person to go ahead.
  • Make the problem appear trivial.
  • Give false assurances.

Time for some back-testing. How would this have worked in 2008?

In 2008, Jane, who had recently retired, came to me because her portfolio went down 10%. The broader market was down 30-40%, so I doubt her old adviser was concerned about her. Jane, however, didn’t spend much and had no inspiring plans for her estate. She hated her portfolio going down 10%.

Jane didn’t belong in the market. She didn’t care about models showing CD-only portfolios are riskier. She sold her equity positions. She lost $200,000!

The protocol would have worked great because we could have worked through the questions to get to the root of the problem. Her risk tolerance clearly changed when she retired. She and her adviser hadn’t realized it before the downturn.

Then there was Uncle Larry.

Like a lot of relatives, although he may ask my opinion on financial matters, Larry has miraculously gotten along well without acting on much of it.

Larry is in his 80s and mainly invested in individual stocks. This maximizes his dividends, which he likes. The problem was that his dividends were cut. The foibles of a too-big-to-fail bank were waking him up at 3:00 a.m. Should he sell?

When he called, I suggested that Uncle Larry look at the stock market numbers less and turn off the news that was causing him anxiety. I reassured him that he wouldn’t miss anything important. We discussed taking some losses to help him with his tax situation.

Although he listened, I didn’t get the feeling this advice was for him. Actually, the emergency protocol would predict this; the protocol doesn’t include me giving advice!

Uncle Larry and I discussed his plan. He ended up staying in the market because he couldn’t come up with an alternative. He also thought, “If I had invested in a more traditional way, I’d probably have ended up at the same point that I am at now anyway. So this is okay.”

He’s now thrilled he didn’t sell and, at 87, is still 100% in individual stocks.

by Bridget Sullivan Mermel
originally published on Money.com

What I Tell Clients Who Want to Buy Gold


Sometimes people want gold because of greed, sometimes because of fear. Here's what you should know before you buy it. Read More...

The Five Steps “Say Anything” Advisors Use to Get You to Buy Products You Don’t Need

Consumers don’t know who to trust in the financial industry and the recent re-combinations and melt-downs haven’t helped. I look at how advisors operate on a continuum with two extremes: The Say Anything Advisor, and the Honest John.

The Say Anything Advisor

For the Say Anything advisor, the key goal is making the sale. Here are the five easy steps:

1. Gain trust by listening carefully to what a prospect says
2. Pick up on a prospect’s biggest fears
3. Harp on the fears
4. Offer a solution to the fear that entails using well-researched buzz words that appeal to a prospects emotions
5. Sell the advisor’s products.

Here are some common fears and corresponding buzz words that Say Anything advisors use to hook people into buying products they don’t need:

Buzz Words of the Say Anything Advisor:

Prospective Client Fear
Buzz words to hook you into the “Solution”--repeat often!
Reality behind the “Solution”
I’m paying too much in taxes
Tax loophole
Tax haven
Tax savings
Tax free
Low or no return mutual funds that are only appropriate for the top 1% of taxpayers
I’m might get sick and die

Take advantage of being healthy now in case you can’t get insurance later

Protect your “loved ones”
Life insurance that you don’t need
My investments aren’t returning as much as they could
Beat the market
Outperform the market
We can do better
Overly complex “investment strategies” that seem to go in one direction--down.

Some organizations focus on training Say Anything advisors and developing products to cater to the Say Anything Advisor side of the continuum. MorganStanley SmithBarney, Northwestern Mutual Life: I’m talking about you. I have met some Honest Johns among your ranks, but not many.

What the Honest John Advisor will say

On the other side of the continuum is the advisor I call the Honest John Advisor. The Honest John Advisor follows the following protocol:

1. Gain trust by listening carefully to what a prospect says
2. Pick up on a prospect’s goals
4. Offer solutions that help the client accomplish their goals that entail using well-researched, low cost strategies that take some effort to implement.
5. Help the client implement the strategies.

Strategies of the Honest John:

Prospective Client Fear
Solution proposed by the Honest John Advisor
Additional Comments
I’m paying too much in taxes
Have a qualified professional review your tax returns and see if they can offer suggestions on how you can save money.
Often you can employ strategies retroactively and file amended returns. Also looking at your tax situation in advance often helps know what tax strategies to employ in a particular year.
I’m might get sick and die

Live life to the fullest now! Get life insurance if you have dependents.
Most people don’t need life insurance, but if you do, low cost term is generally available.
My investments aren’t returning as much as they could
Nobel-prize winning research indicates that you can’t beat the market and that relatively simple investment strategies yield the best results.
Your money is better spent getting comprehensive advice rather than overly-complex investment advice from advisors trying to justify their fees.

by Bridget Sullivan Mermel

Crisis: Real or Manufactured?

Is the “debt crisis” something to worry about?

Safe investing


Dear Bridget,
In the 70s, when I was in high school, I shared a Pinto with   
my sister.  She bought the gas, I bought the oil.  When the BP   
crisis hit, inspired by the exhilaration of getting the Pinto   
up to 60 mph with the windows open, I bought some shares.  I   
know it's a risky investment.

I'm wondering what I can buy on the conservative side to   
balance my wild freewheeling.   Maybe my angst is out of line,   
but I would like to buy something that will most assuredly   
maintain its value.  I'm not impressed with the interest rates   
offered by FDIC-insured cash accounts. I've heard some gold   
talk, but it seems like a big step into the back-alleys of   
commissions and swindlers.

I am a regular reader and follow your advice closely to   
maintain some savings.

Pinto Inspired

Dear Inspired,   
I love your reasoning for buying BP!

Pretty much all researchers, including Nobel-prize winners,   
conclude that you can't "beat the market."  In other words,
one can reliably pick stocks that will make more money than the   
.  Still, some people have an emotional desire to pick   
stocks, and there's nothing wrong with that.  Just be smart.

I suggest that you hold your stocks in a separate "fun money"   
Don't let the account grow to over 10% of your total   
portfolio.  When the value of your "fun money" grows to over   
10% of your total portfolio, transfer some to your other   
accounts to bring it in line.

Never add money into your "fun money."  If it runs out, then   
you're stock picking days are over.  You're done.

For the other 90% of your money, design a well-diversified,   
tax-smart, low-cost portfolio.

Since you ask specifically about investments that are not   
I suggest US Treasuries known as "strips" as part of your portfolio.
You can buy these through your broker (like Schwab or Fidelity) or from US   
Treasury Direct.  Currently a buying a treasury strip that   
matures in 2026 costs approximately $5,470 and will pay   
$10,000 in 2026.  That's a yield of around 4%.

Any financial professional who earns money based on   
commissions will discourage you from this strategy.  
earn little if any commission on US Treasuries.  "Oh, the   
yields are so low," is what I've heard.  In fact, treasuries   
protect you against deflation, because even if prices on   
everything start dropping, in 2026, you'll get your $10,000.   
Plus, the yields on treasuries always seem low.  You're buying   
them because they're safe and earn more than a CD, not to try   
to out-earn BP.  The yield seemed low when I bought US   
Treasury Strips in early 2008, but seemed brilliant a year   

In fact, for clients and for myself, I build what is known as   
a treasury bond ladder for retirement.  The ladder is designed   
to have a set amount of treasuries maturing each year.  This   
creates what amounts to a guaranteed paycheck during   

You also ask about gold. 
You don't invest in gold; you   
speculate on gold. 
Gold grows in value when someone else will   
speculate more wildly than you did when you bought it.  Some   
people want gold in case all hell breaks loose.  It makes them   
feel safe.  They like the option of being able to make a run   
for it with their gold stash.  I like feeling safe, too.

If you're in this camp,
you could use 1-2% of your portfolio   
"fun money" to buy some gold.
  Take physical custody of it;   
put it in your safe at home.  Buy enough to get you over the   
border, and remember the practicalities you are trying to plan   
for; small coins will probably work best.  You don't want to   
be stuck trying to get change for $1000 gold bars when the   
banks have closed.

To take the next step down this road, add the following to   
your safe:  guns, ammo, water, and copy of your favorite Mad   
Max movie.  If you can't watch Mel Gibson anymore, I thought   
The Book of Eli was okay and 2012 was even better.  However,   
none of these movies feature a post- apocalyptic gold   
standard.   According to them, if all hell breaks loose,   
you'll want guns, ammo, and perhaps a jet.

by Bridget Sullivan Mermel