We’re facing a year in which the returns on domestic stocks are significantly higher than their international counterparts, which can lead one to question the value of diversification. We live in a world of interdependent global economies and over the long-term, no single economy can dominate all others indefinitely, which is why we believe in the power of diversification.
Having said that, diversification is a two-edged sword; it works, even when you don’t want it to. The inclusion of international stocks can either help or hinder portfolio returns over any given time period. Thus the most recent performance of international stocks is not unusual, even if disappointing.
As a general rule, most investors have short memories. How far back do we have to go to find a year in which international stocks outperformed? The answer…not very far! The following table compares the returns of domestic and international large stocks and small stocks for the first nine months of 2018 and for the full year of 2017:
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|
Thru |
| |
2017 |
9/30/2018 |
| |
|
|
| U.S. Large Stocks |
21.7% |
10.5% |
| International Large Stocks |
24.2% |
-1.5% |
| |
|
|
| |
|
Thru |
| |
2017 |
9/30/2018 |
| |
|
|
| U.S. Small Stocks |
14.7% |
11.5% |
| International Small Stocks |
31.0% |
-2.3% |
It’s also worth pointing out that the worst performing asset class of 2018 is Emerging Markets, which are down 7.7% through the third quarter. However, during 2017, it was the highest returning asset class with a positive return of a whopping 37.3%! This is why we diversify and this is why we take such a long-term view of investing.
No one has developed a time-proven method to determine which securities, markets or asset classes will produce the best returns over a particular time period. Until then, diversification and discipline will remain the cornerstone of our investment policy.
