Why Invest Outside the U.S.?
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.