Oct 9, 2020
The Role of International Investments in Your Portfolio
Written By: Spencer Kenley
In recent years, the US stock market has significantly outperformed international markets; this performance is exaggerated by the fact that we live in America, so all the financial news is about the performance of the US Market—the Dow and the S&P. As of September 30, 2020, the S&P 500 had outperformed the global market1 over the preceding 5 years by 7.92% per year. This disparity has left many investors to re-evaluate the benefits of holding international investments in their portfolio. While international performance in recent years has lagged behind the US, it’s important to remember that recent performance is not an reliable predictor of future results.
An example of the importance of international diversification is the period from January 2000 through December 2009. This period is known to many US investors as the “lost decade,” as the S&P 500 Index had one of its worst 10-year performances on record, ending the decade with a -9.1% cumulative return. However, if you had been an international investor during this period, your returns would have been much more favorable, as shown by the chart below2!
Investors during the “lost decade” benefitted greatly from international diversification. Likewise, investors who stayed the course and didn’t dump their US stocks in 2009 have reaped the rewards of the recent outperformance of the US market. This reinforces the idea that holding a globally diversified portfolio can position an investor to capture returns, wherever and whenever they occur, both of which are unpredictable when looking to the future.
What will international returns look like over the next decade? Will US stocks continue to outperform, or are we in for another “lost decade”? Academic research has shown time and again that there is no reliable way to predict which countries will outperform others in advance. Instead of trying to outguess the market, we continue to recommend letting the markets work for you by following a systematic, globally diversified approach.
[1] Global market represented by the MSCI All Country World ex USA Index
[2] *Return data from Dimensional Fund Advisors, https://www.dimensional.com/us-en/insights/why-should-you-diversify