Equity markets have experienced a sharp decline to start 2016, leading some investors to reevaluate their asset allocation. As US stocks have outperformed developed ex US and emerging markets stocks over the last few years, some investors might consider reevaluating the benefits of investing outside the US.
While there are many reasons a US-based investor may prefer a home bias in their equity portfolios, using return differences over the last few years as the sole input into this decision may result in missed opportunities that the global markets offer. We recognize that stocks in non-US developed and emerging markets have delivered disappointing returns relative to the US over the last few years.
However, it is important to remember that:
1) International stocks help provide valuable diversification benefits.
2) Recent performance is not a reliable indicator of future returns.
A DIVERSIFIED APPROACH
Over long periods of time, investors can benefit from consistent exposure in their portfolios to both US and non-US equities. While both asset classes offer the potential to earn positive expected returns in the long term, they may perform quite differently over shorter cycles. While the performance of different countries and asset classes will vary over time, there is no reliable evidence that performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide both diversification benefits as well as potentially higher expected returns.