U.S. Stocks May Dominate, but You Still Need International Stocks

U.S. stocks continue to outperform international stocks in 2018. According to The Wall Street Journal, the Standard & Poor’s 500 Index of U.S. large company stocks has outperformed international stocks, as measured by the MSCI World ex USA Index, over the past one, three, five, 10, 15, 20, 25, 30, 35, 40, and 45 years.  

That’s a lot of time periods and a lot of years. Had you invested $10,000 in each index 45 years ago in 1973 and re-invested your dividends, the U.S. investment would be worth $1,060,000 compared with the international stocks at $356,000. This may lead an investor to scratch one’s head and ask, “Why am I diversified internationally?” 

“Looking back in time from today, U.S. stocks seem to have dominated over the long run only because they have done so extraordinarily well over the past few years,” writes Jason Zweig in The Wall Street Journal. “Lofted by a strong currency and trillions of dollars of fiscal and monetary stimulus, U.S. stocks rose so swiftly out of the financial crisis that they left the rest of the world behind. That spectacular recovery has obscured the historical record.” 

Consider these facts:

  • The U.S. was one of the worst-performing stock markets in the world in the 1970s, 1980s, and 2000s.

  • For the 10 calendar years ending in 1986, international stocks outperformed U.S. stocks by an average of 6.2% annually.

  • For the 10 calendar years ending in 2007, international stocks outperformed U.S. stocks by an average of 3.1% annually.  

As we often say, our crystal ball is no clearer than yours, but the statistical concept of “reversion to the mean” and the belief that cycles swing and even out over time certainly apply to investments.

U.S. stocks may be at the peak of their cycle versus international stocks given they are at their highest valuations on record. According to Bank of America Merrill Lynch, U.S. stocks are trading for twice as much, as measured by price to net worth, as international stocks.

Successful investing is a contrarian process: Sell high, buy low, don’t chase recent hot performance, and follow Warren Buffett’s famous quote: “…be fearful when others are greedy and be greedy when others are fearful.” Investors who are diversified should sleep better.

Turning to financial planning matters, the next few months are the open enrollment period for corporate employee benefit plans. As part of this process, be sure your primary and contingent beneficiaries for group life insurance and retirement plans are correct. Medicare Supplement open enrollment period begins, too, so plan ahead.

As always, please contact us with any questions, news, or comments.