International and Emerging Market stocks have significantly underperformed their US counterparts over the last 5 years. But should a period like this cause investors to re-think their choice to diversify their portfolios around the globe?
First of all, a period like this is not unusual. It is somewhat reminiscent of the 1990’s, when the largest US companies produced some of their best returns ever. I can recall more than one occasion when my radio show callers would pretty much heckle me for my stance on remaining globally diversified. My stance on maintaining global diversification got even lonelier toward the end of the 1990’s as “dot.com” stocks soared. In all fairness, it did seem like everyone was getting rich by handing over all of their money to a few young geniuses, investing in their high tech companies with no earnings. It could have been easy to get swept up into believing that concentrating all your money in the “winner” asset class was the only way to have a successful investment experience.
Then, in the first decade of the 2000’s, what some refer to as “the lost decade” for stocks, global diversification came to the rescue just when we needed it the most.
The first few years of that decade, investors that ridiculed global diversification based on the prior decade paid dearly for that view. The broad US market fell by 50% between the beginning of the year 2000 and mid-year 2003; the dot.com stocks were wiped out. During that same period, a globally diversified portfolio (using the Vanguard Global Index Fund as a proxy) fell by less than 20%. Over the entire decade that spanned 2000-2009, the value of $100,000 invested in the Vanguard Index 500 fund would have declined in value to approximately $90,000, which is why this time period was given the ominous title of “the lost decade.” That same $100,000 invested in the Vanguard Global Index Fund would have had an ending balance of approximately $170,000. Of course as we must always mention, past performance is not an indicator of future results.
Return differences between US stocks and their overseas counterparts clearly go both ways, and though it would be nice to only own the winner over any given time period, developing an investment strategy to systematically do so is simply impossible. Constant commitments to investing in stocks around the globe is the only way to ensure you will own the “winner” asset class, with the even larger benefit that your financial plans will never be derailed by being too heavily invested in the worst asset class. I recognize the challenge for those investors that commit themselves to remaining globally diversified, as they will never do as well as the best-performing country or asset class over any period of time. I firmly believe this is a prudent tradeoff to ensure that no single asset class can cost them their financial independence and dignity, and I don’t think that will ever change.