Should investors have a global perspective? Or follow recent performance, and stick only with U.S. stocks?
The U.S. is the recent winner
Using the decade of the 2010s as a reference, investors might think that holding only U.S. stocks makes sense. The S&P 500 Index, a proxy for large cap U.S. stocks, had annualized returns of 13.6% from 2010 to 2019, far outpacing international and emerging markets stocks.1 And through the end of May 2020, the trend has continued.
The Lost Decade
However the prior decade, 2000 to 2009, told a different story. The period included both the bursting of the “dot-com” bubble, and the global financial crisis. The S&P 500 Index had a total cumulative return of -9.10%. International developed markets and emerging markets stocks had total cumulative returns of 17.5%, and 154.3% respectively.1 So investors were certainly rewarded for international diversification.
Here's a quick overview of the countries included in international and emerging markets:
|Non U.S. Stock Market||Countries included*|
|International Developed Markets||Japan, U.K., Canada, France, Switzerland, Germany, Australia, Netherlands, Hong Kong, Sweden, Italy, Spain, Denmark, Finland, Belgium, Singapore, Israel|
|Emerging Markets||China, Taiwan, South Korea, India, Brazil, South Africa, Thailand, Malaysia, Mexico, Indonesia|
*not a complete listing
We do know that U.S. stocks, having done so well over the last decade, are trading at significantly higher valuations than international stocks. That is why, in part, that Vanguard has the perspective that international and emerging markets stocks will outperform U.S. market over the next 10 years.2
The lesson - over long periods of time, investors may benefit from consistent exposure in their portfolios to both US and non US equities. While both asset classes offer the potential to earn positive expected returns in the long run, they may perform quite differently over short periods.
What will the future hold?
There is no reliable evidence that investors can predict which area will perform better in advance. An approach to equity investing that combines U.S. stocks with international developed and emerging markets stocks can provide significant diversification benefits.
Do you have questions about international investing? Please connect with us.
1. U.S. Stocks: S&P 500 Total Returns in USD Source: Standard & Poors Index Services Group. Copyright 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. International Developed Market Stocks: MSCI World ex USA Index (net div.) Source: MSCI. MSCI data copyright MSCI 2020, all rights reserved. Emerging Markets Stocks: MSCI Emerging Markets Index (net div.) January 2001 - present: MSCI Emerging Markets Index (net div.) (formerly MSCI Emerging Markets Free Index Net) January 1999 - December 2000: returns simulated by MSCI. Source: MSCI. Total returns net dividends in USD. MSCI data copyright MSCI 2020, all rights reserved.
Past performance, including hypothetical performance, is no guarantee of future results. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
2. Vanguard Market Perspectives, June 2020
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.