For much of the past decade, U.S. stocks have been on a tear, outpacing foreign investments in most major markets. But with U.S. shares reaching lofty valuations and fundamentals firming up in many other countries, financial advisors would be wise to consider adding an international allocation or increasing a client’s non-U.S. holdings.
While investors are influenced by the facts and reality of the current investing landscape, mythical thinking can also drive investor behavior. Here are 4 myths or misunderstandings I have noticed that advisors hold onto when it comes to investing outside of the U.S.
Myth 1: The U.S. market always outperforms international markets
With strong performance and a strong dollar, U.S. stocks widely outpaced foreign competitors over the past ten years. But that is not always the case.
Over the last 5 decades, the picture is very mixed. International markets have the slight majority, outperforming the U.S. in 26 of those 50 years. When measured decade by decade, international markets have outperformed 3 of the last 5.
From 2000-2009, the “Lost Decade” of the Global Financial Crisis, the tables turned decisively. Looking at returns in local currencies, China’s index returned 164%, or 10% per year, while Europe, Japan, and the U.S. all had negative returns over the entire 2000-2009 decade.
But because of a weak greenback, MSCI Europe Index returns jumped from -11% to +27% for the decade when returns were calculated in dollars and the Shanghai Stock Exchange Index increased from 164% to 220%, an improvement of over 2%/year.