Are you invested solely in US equities? Do you think you may or may not be diversified when it comes to equities? If you are like most Americans, the answer to the first question is yes and the second is not as much as you should be. Since the Great Recession, the US markets have been on a steady upward trend while its counterparts in the rest of the world have experienced some investing issues. With that said, it is no wonder that Americans have stayed invested in the US markets strictly and avoided the foreign aspect of investing that adds diversification and in many ways additional returns and safety of someone’s portfolio. History has shown that a portfolio that is diversified in US and foreign equities offers greater returns than an entirely domestic portfolio. This is the same for almost any country that is examined and is not unique to the US by any means. Also, by adding an international component to your portfolio, you will also smooth out your annual returns reducing volatility further.
Despite that almost half of the world’s market capitalization lies outside the US, most people invest only in what they are comfortable by that leaving a lot of potential on the investing table. According to a recent study, only about a quarter of American investors invest in equities outside of the US markets. The reason most Americans as well as just about every other investor who abroad tends to invest in what they know and are comfortable. That combined with the recent performance of foreign equities have kept people away from diversifying and investing abroad. In most developed countries, returns have been mediocre at best and developing, and emerging markets have been downright abysmal over the same period. With the S&P 500 returning an annual average of over 15% since 2009 that is more than double that of Europe, Japan, and emerging markets. Not only have the returns of foreign investments been below those available in the US but they are more expensive as well. If you follow my blog with any regularity you know I am a fan of exchange-traded funds over the higher priced mutual funds but in this instance both are more expensive than comparable domestic funds. Some have management and expense fees as high as two or three times that of domestic funds.
The principal players of the world markets equities are the US, Europe, Japan, and emerging markets. While it is not necessary to invest in all of them to be diversified, by investing in one or more it will mean the markets may be kinder to you during moments of volatility and uncertainty.
The US is the world’s leader in the equities markets. Since 2009, the overall market has returned over 15% annually. During this period until recently the markets have been on an upward trajectory. Over the last five years, there has only been one actual correction of the US markets in 2011. And as a rule you can expect at least one of these a year so overall the US markets have been extraordinary with its performance. Also, until the recent pullback that may or may not become a correction the market has been fairly priced when compared to history. The historical price to earnings of major of major stocks has been about 16 and was currently around 18.5. While it may seem overpriced at a glance, it is nowhere near the levels of the early 2000’s and the dot.com boom.
Europe has seen respectable returns on its equities since 2009 but the fact that it shares a single currency and not all countries involved agree on monetary policy can cause among EU members. As Spain and Italy have experienced financial issues in recent years, Germany has dictated the majority of Europe’s monetary policy. As a result of these strong and weaker economies being very tightly intertwined it has caused prolonged recessions in some countries such as Spain and Italy and even the stronger ones such as Germany experiencing a double-dip recession since 2009.
With Japan, it has been a long road to where they are currently. Since 1990, the Japanese economy has been in a recession and equities stagnant. Last year the economy shrank nearly two percent while the US and China, the two economies larger than Japan’s grew. In October of 2014 Japan started a quantitative easing program that is considered even more aggressive than the Federal Reserve’s seems to be helping Japan’s economy some. In the short-term it at least appears to be helping as the Nikkei 225 hit highs not seen since 2007. The Nikkei 225 is the equivalent to the DOW in the US.
As for emerging markets, the best thing you can say is that at least the BRIC countries have not lost you too much money. China while still growing has slowed it growth rate and pace meaning countries such as Brazil are not exporting as many raw materials as they were prior to China’s slowdown of growth. Russia has tied its economy to oil and raw materials as well. As the price of oil has fallen, and the demand on natural resources has lessened as well resulting in Russia’s current recession. Other emerging markets have similar or regional issues that are causing economic turmoil. In many instances, it is also political unrest that may cause instability in emerging markets as well.
With four economies, it is no wonder that people are hesitant to invest abroad. But by doing so you decrease volatility, increase your diversification, and smooth out returns while increasing them in the process. So what is your best option? That is for you to decide and judge for yourself. It is best to consult a professional to see what your risk tolerance is and what your desired target return should be. But if you are not sure about foreign investment look at the traditional target dated funds and see that there is a substantial investment in foreign markets.
For more information or if you have any further questions, please feel free to contact me.