Is 2019 the time to own international equities?
The argument for owning international equities in 2019 is stronger than ever. And that’s despite their current depressed levels.
Most foreign markets had a bad 2018 – in fact, you would be hard-pressed to find overseas markets that didn’t perform worse than those in the U.S. But remember this, holding overseas equities can help limit your risk, because they diversify your portfolio nicely.1
U.S. Markets Were Down in 2018, But…
Your overall U.S. market returns last year were likely half as bad when compared to the double-digit losses most international markets suffered in 2018.
In fact, contrary to 2017 – when international and emerging markets did better than their U.S. counterparts – 2018 saw markets outside the U.S. fare worse, generally speaking:
- S&P 500 was down 6.2%
- MSCI EAFE was down 16.1%;
- MSCI Europe was down 17.3%; and
- MSCI Far East was down 13.9%.
Further, of the 32 MSCI Indices that track developed global markets, not a single one was in positive territory.
But don’t think that the poor performance was constrained to regions overseas – take a look at the MSCI Indices that track developed countries:
MSCI Index 2018
- Austria -29.30%
- Belgium -28.61%
- Denmark -16.89%
- Finland -6.23%
- France -14.63%
- Germany -23.87%
- Ireland -26.44%
- Italy -20.01%
- Netherlands -15.13%
- Norway -11.61%
- Portugal -14.14%
- Spain -18.29%
- Sweden -16.12%
- Switzerland -11.15%
- United Kingdom -17.74%
While such a wide gap in performance can frustrate investors, realize first that the gap is, in fact, the hallmark of a well-diversified portfolio. Good diversification means that you may expect disappointment in at least one asset class every year.1
The historically long-bull market for U.S. markets – which may or may not be ending – might have tempted you to discard time-tested tactics of diversification, at least when it comes to investing overseas.
Such abandonment usually occurs because you get greedier or you get more scared. It’s important that you don’t panic out of an asset class after a large decline. Equally important, don’t panic into an asset class after a large and sustained rally.
Why Invest Overseas
If hesitant to invest abroad, you’re not alone – especially when the U.S. market outperforms overseas counterparts. Many compelling reasons nevertheless remain for keeping the big, global investing picture in mind:
- Twice the opportunity. The American stock market represents just half of the publically investable stocks worldwide. While it may feel safer to invest in companies close to home, you risk missing out on half of global investment opportunities.
- A smoother ride. While overseas equities’
performance this year lags way behind
domestic returns, foreign markets have
historically produced comparable returns. In
fact, from the period from 1971 through 2018,
half the time foreign stocks have outperformed
their American counterparts.
More importantly, foreign stocks often perform very differently than U.S. stocks in any given year. While long-term returns are similar, shorter-term disparities allow you to smooth out the occasional extremes (and jitters) from investing in one market. The differences also provide great opportunities to sell high and buy low as you rebalance holdings.
- Overall reduction of risk. As overseas stocks recently saw slightly higher volatility than U.S. stocks, adding foreign exposure to lessen your portfolio risk seems counterintuitive. But remember: U.S. and foreign stocks tend to perform differently. What’s up today and down tomorrow historically reverse positions over time.
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- Diversification does not ensure against loss. Back