With the US stock market generating substantial gains over the past several years, many investors are questioning why they should have exposure to foreign stocks in their portfolio. Over the past 3 years (ending 4/30/14), the MSCI World Index (ex-US) has averaged 5.0% per year while the S&P 500 has gained 13.8% per year, so you can see why investors may be questioning a strategy of diversification. We must go back longer (over multiple periods) to really see why diversification can add value:
S&P 500 MSCI World (ex-US)
- 1970-1980 5.9% 9.6%
- 1980-1990 17.6% 20.7%
- 1990-2000 18.2% 7.1%
- 2000-2010 -1.0% 1.6%
- 2010-4/2014 15.3% 7.7%
In addition, since 1970 foreign stocks have outperformed US stocks in 54% of all rolling 10 year periods. Abandoning an asset class just because it has not performed well recently is a bad strategy, especially when you look a the historical data showing the value this asset class can add to a portfolio.
If you believe that foreign stocks should remain a fixture in a portfolio, the next question logically is how much? We’ll dive into that question in a future blog post.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.