As US equities have outperformed non-US stocks over the last several years, some investors may question the role that global diversification plays in their portfolios. It is very easy to get caught up in the market swings during this unprecedented time, along with the outperformance of the largest U.S. companies.
For the five-year period ending April 30, 2020, the S&P 500 Index had an annualized return of 9.12% while non-US Developed stocks (represented by the MSCI World ex USA Index) lost -0.27%, and Emerging Markets stocks (represented by the MSCI Emerging Markets Index) declined by -0.10%.
While non-US equities have recently delivered disappointing results, it is important to remember that investing globally provides valuable diversification benefits. The US stock market represents roughly 54% of world market capitalization, meaning that a portfolio investing solely within the US would have exposure to only about half of global companies.
Looking back to the “Lost Decade” (2000-2009) is a great example of the opportunity cost associated with not investing globally. From January 2000 to December 2009, the S&P 500 Index had a cumulative return of -9.10%, its worst ever 10-year performance. You may even expand the time period by three more years, covering 2000-2012, and see that the mighty S&P 500 Index failed to outperform 1-month US T-Bills. However, looking beyond US large cap equities during the “Lost Decade”, we see that investors who had exposure to other areas of the global landscape were rewarded with positive returns (see table below).
Cumulative performance from January 2000 – December 2019 reflects the benefits of having a globally diversified portfolio, especially a portfolio that targets areas of the market with higher expected returns.
This is why we urge, preach, and teach the benefits of diversified investing over the long term.
|Total Cumulative Return (%)||2000-2009||2010-2019||2000-2019|
|S&P 500 Index||-9.10||256.66||224.33|
|MSCI World ex USA Index (net div.)||17.47||67.89||97.22|
|MSCI World ex USA Value Index (net div.)||48.71||48.79||121.27|
|MSCI World ex USA Small Cap Index (net div.)||94.33||116.76||321.24|
|MSCI Emerging Markets Index (net div.)||154.28||43.50||264.91|
|MSCI Emerging Markets Value Index (net div.)||212.72||22.83||284.13|
Diversification neither assures a profit nor guarantees against loss in a declining market