This summer, I rode in a golf cart with my friend’s brother-in-law.
As we were talking about our jobs, he gave me his view on the stock market.
“The stock market is way too risky for me. I’d rather take my money to Las Vegas!” he said.
Not just for him, but also for his kids, who are going to learn from their parent that the stock market is to be avoided.
In reality, the stock market is probably the safest and easiest way to generate wealth over time.
You really need to do only two things to thrive in the stock market…
First, you must stay invested for a long time. Years, preferably decades.
Yes, there are short-term bumps in the road in the stock market, but over long periods of time, history has shown us that the market continually marches higher.
Second, you must be widely diversified.
The more concentrated your portfolio is, the greater the chance that you miss out on the long-term sure investment that the stock market is.
Index funds and exchange-traded funds (ETFs) have been wonderful gifts for investors.
These are vehicles that allow us to own the entire market and be incredibly diversified across hundreds of companies.
The most common index to own is the S&P 500, which consists of 500 of the strongest companies listed in the United States.
But if I were looking to put new money to work today, I would not be buying the S&P 500…
Diversify Outside of the U.S.
Instead, I would be looking internationally.
The S&P 500 has had an unprecedented run of outperformance over international stocks.
History has shown us that outperformance regularly transfers back and forth between U.S. and international stocks.
With U.S. stocks now having outperformed for more than 14 years, we are long overdue for international stocks to take the lead.
In addition, international stocks have never been cheaper relative to the U.S. market.
Currently, the price-to-earnings ratio for international stocks is almost 33% less than that of the U.S. market.
That is by far the biggest valuation disconnect that we have seen in the 21st century.
I’ve noted recently that market is both extraordinarily cheap and an excellent hedge against inflation.
The iShares MSCI United Kingdom ETF (NYSE: EWU) is a great play to take advantage of the opportunity.
Another, more diversified way to get international exposure is the iShares Core MSCI Total International Stock ETF (Nasdaq: IXUS), which owns more than 4,000 foreign stocks spread across the world.
As global markets move higher in the coming years, you can sleep soundly with this diversified ETF.
If you don’t yet have international exposure in your portfolio, now is the perfect time to get some.