Portfolios: Made in America
Look up ‘dedication’ in the dictionary and you might find a picture of someone who owned foreign stocks for the last 15 years.
To increase return, take more risk, or so the story goes. Investing in companies outside the U.S., and in emerging markets’ (EM) stocks in particular, is often considered riskier than buying U.S. business giants. And 15 years seems like more than enough time for the market to compensate investors for the additional risk. Back to that in a minute.
Look at the chart below. U.S. stocks have grown at about 8% per year for the last 15 years and tripled in value. Not too shabby, especially when you consider that stretch includes the 2008 financial crisis, the COVID-19 pandemic, and the current inflation-induced bear market.
Developed markets like western Europe and Japan barely broke even. The total cumulative return would have been a measly 7.7%, or 0.5% per year.
And then there’s the emerging markets. EM stocks as a group have actually lost money over the trailing 15-year period.
Fifteen years ago, we were still using the BRIC acronym in a loving way. BRIC stands for Brazil, Russia, India and China, and was coined by Goldman Sachs economist Jim O’Neill in the early 2000s to capture the countries projected to be on the fast track to growth. By the end of 2007, they had fueled the EM index to a five-year total return of over 380%. The S&P 500 delivered a total return of 83% during those five years, for comparison. Those gawdy returns may have also set the table for the 15 years that followed.
For many US-based investors, this may be the evidence needed to sit back and proudly mutter, “Told ya.”
Home bias is the tendency for investors to have most of their investable assets tied to their ‘home’ country. For Americans, this has been a financial blessing in recent years. Investment portfolios ‘Made in America’ worked better than internationally diversified alternatives.
It is difficult to pinpoint the exact details, but according to Forbes article from 2018[1], American investors on average allocated 85% of their portfolios to US stocks and just 15% to foreign stocks.
The last significant period of prolonged outperformance by international stocks happened in the mid-2000s, between the tech bubble bursting in 2002 and global financial crisis in 2008. Prior to that, you’d have to look all the way back to the 1980s when Japan’s stock market was reaching extraordinary heights.
As one of my partners often reminds me, there’s a reason a car’s windshield is a lot bigger than the rear-view mirror. As investors, we look forward.
Why might this be relevant today? Here are a couple thoughts to consider.
The almighty dollar is in headlines everywhere you look today. A strong U.S. dollar can have many benefits, but it also is a headwind for Americans owning foreign investments denominated in dollars.
The chart below shows the real exchange rate of the US dollar since 1994 (the green line). The last time the dollar was this strong was the early 2000s. That also happened to coincide with the starting point for the best five years of relative performance for international markets since the late 1980s (the shaded green and gray areas). Any time the shaded areas are above zero, it means international stocks outperformed from that date during the following five years.
Should foreign currencies strengthen relative to the US dollar, international stocks would be more attractive due to the additional return from appreciating currencies. Similarly, if the dollar continues to get stronger from here it would act as a headwind for foreign investments.
Bear markets often accompany opportunity. In case you haven’t been paying attention, nearly everything is down this year (except inflation and prices we pay for things). Bear markets can be a good time to make sure your financial house is in order. Part of that includes ensuring your mix between U.S. stocks, foreign stocks, bonds, etc. is reasonable for where you want to go.
What worked in the past may not work as well going forward. Yes, U.S. stocks have been big outperformers in recent memory. Will the conditions that fueled those returns change going forward? Now may be an opportune time to have that conversation.
Interested in talking more? Email me at eric@divviwealth.com or set up time with the Divvi team to continue the conversation.
Opinions expressed herein are solely those of Divvi Wealth Management and our editorial staff. The information contained in this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
[1] https://www.forbes.com/sites/simonmoore/2018/08/05/how-most-investors-get-their-international-stock-exposure-wrong/?sh=622f00eb6aac
