Besides everyone doing the mad scramble to complete their taxes by April 15, this is also a good time to reflect on the market and your portfolio’s first quarter performance. Now, if you listen to the business news channels and they are talking about this sluggish market that is barely holding on to positive performance for the year. As of this past Friday’s close, the S&P 500 is only a little over 2.6% for the year. So, should you just assume that your portfolio is following the same path with an equally sluggish start? Not, if you are a globally diversified investor.
I have preached for years about the benefits of Global Diversification within your well allocated portfolio. This is starting off to be one of those years where you understand why. What if I were to tell you that the market is up around 8% for the year instead of that sluggish 2.6%? That would mean your portfolio is really off to a great start for the year, and you would be pretty happy. However, unless you are globally diversified, you are probably just looking at those 2.6% numbers. But let’s look at the MSCI EAFE Index, which represents the performance of the large companies in the developed international economies. As of this writing, it is returning right around 8% for the year (in US Dollars). Now look at the Emerging Markets (which have struggled the last year and a half) and you will notice they are up over 8.5% (in US Dollars) so far this year. Not too shabby!
The problem is for the last couple years the US stock market has been producing unusually high returns and typical investor behavior has everyone jumping on the bandwagon of the winner and ignoring those investments that are struggling. However, these average returns of 15% that we have been seeing the last few years are a far cry from the normal and not sustainable. Historically the S&P 500 has been about half this pace. Interestingly, the international markets historical average returns are just under the pace of the S&P 500. But recent international market struggles have soured people from international investing and they have either dropped it from their portfolio or only keep a minor position in it. That means opportunity has been missed or people will start jumping on board after most of the gains have already been had.
When it comes to Global Diversification, perception is everything as it relates to investor behavior and how we make investment decisions. See, we sit here and listen to news about economic struggle, geopolitical issues within governments and between nations. We hear about currency issues and sovereign debt issues. All these things taint our views and prevent us from wanting to take the chance of investing in these countries. The funny thing is sitting here in the United States we say that these are the issues of various international countries. However, all these same issues are going on within our own borders. Yet, we still invest domestically. If you peel back the noise you will find great opportunities internationally and that is why it needs to be part of your portfolio. In the long run you will be in a much better position.