This is a question that many investors may have. After all, during the 1990's, domestic equities produced higher returns with lower risk. And currently, a correlation between overseas markets and domestic ones re at near-historic highs and globalization is on the rise. Against this backdrop, why would anyone ant to expose their portfolios to international investing?
Here's why... As shown in the chart below, not once in the last ten years has the United States been the best performing stock market worldwide, and it has been among the top-six performing developed equity markets only two times since 1994.
Surprised? Many people are. When it comes to investing, there are many who believe that U.S. corporations ae the safest and surest investments. As a result, they simply overlook the potential advantages that international equities may bring to their portfolios.
That can be a costly mistake. Both the Standard & Poors 500 and the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Indices confirm that international equities have outperformed stateside stocks for most of the 1960's, 1970s and 1980s. It was only during the extraordinary boom in U.S. markets in the 1990s that overseas opportunities began to look less attractive.
But now - with the 1990's U.S. bull market behind us - it may be time to rethink the advantages of international investing.
Most U.S. retail investors allocate only about 3/5% of their portfolio to international equities, while most investment professionals 00 plan administrators and pension managers - put nearly 3 times as much of their resources into foreign securities.
Why do professional investors and plan administrators include larger amounts of international stocks when they design their investment strategies? Because they recognize that international investing may bring diversity and value to a portfolio.
One of the main objectives of professional investors often is to create a portfolio with the least amount of risk. And, for many investors, diversity may help to reduce risk.
For those investors who experienced the growth surge of domestic equities in the last decade, international stocks may look risky. But overseas equities may actually help reduce risk.
Since 1970, an allocation of 60% S&P 500 and 40% MSCI EAFE has substantially lowered the overall risk to a portfolio, while not sacrificing return.
It wasn't too long ago that those investors were being told value stocks were yesterday's news and the bond market was dead. But - just like the inverse relationship that has historically played out between growth and value stocks and fixed income and equity assets - the outperformance between foreign and domestic stocks often tends to go in cycles. And now the cycle - which has favored domestic equities in the last decade - has begun to favor international equities.
Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
