Global capital markets are impacted by news every day. Over the past several weeks, headlines have highlighted the hasty withdrawal of U.S. forces from Afghanistan, the rise of the Taliban, and the potential for further destabilization in the Middle East and central Asia. More recently, markets were shaken by the potential failure of Chinese real estate giant Evergrande and its impact on the broader Chinese economy. Such events are understandably worrisome to investors with global exposure. Yet the rationale for global diversification remains intact.
International exposure simply extends the wisdom of diversification to foreign capital markets. By maintaining exposure to many different countries, investors are poised to capture higher returns where they appear. Outperformance in one market can help offset lower returns in another. The data are clear – over time, a globally diversified portfolio helps provide more reliable outcomes.
The enclosed tables demonstrate this point. In both developed and emerging markets, we rank global calendar year returns since 2001, from high to low. Each color represents a different country. The randomness of these returns is evident. It is challenging to predict which country will outperform from year to year.
Investors around the world exhibit strong home bias. Individuals tend to invest proportionally more in their home country relative to its market capitalization. For example, non-U.S. stocks account for roughly 43 percent of world market capitalization, but most U.S. households prefer to allocate less than 43 percent of their holdings to foreign stocks.
For U.S. investors, home bias has been rewarded in recent years, but a closer look is warranted. Between January 2011 – December 2020 U.S. investors who overweighted U.S. equities were rewarded. U.S. stocks provided an 11.8 percent annualized return during this period, outperforming all other developed markets over the full decade. However, the U.S. ranked first during only one of those calendar years (2014) and was among the bottom half during two years. The previous decade ending December 2010 conveys further caution. U.S. stock market returns ranked in the bottom half during seven of those years. For investors, the bottom line is simple. Invest globally, as one country’s burden may be another’s boom.
Also In This Issue
Medicare Options And Annual Enrollment
What To Do When You Suspect Cyber Fraud
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Asset Class Investment Vehicles
Equity Returns of Developed Markets
Equity Returns of Emerging Markets