Do Foreign Stocks Still Make Sense?

Recently, I keep hearing versions of the same question from investors: “Should I stay in foreign stocks?” They’re reviewing their statements and noting the following: As of October 31, year to date the S&P 500 has returned 11.0%, while the MSCI EAFE Index of developed-country stocks has lost 2.8%. Moreover, it seems to be of a pattern: from January 1, 2012 to October 20, 2014, the S&P returned a cumulative 70.5%, 30.5 percentage points ahead of EAFE and a whopping 51.2 points better than the MSCI Emerging Markets Index. So why do I encourage investors to resist the temptation to exit foreign stocks and move to a US-centric portfolio?

In the wake of recent US stock market outperformance, investors are questioning the merit of globally diversified portfolios. Shifts in market and risk sentiment are difficult to predict, but our research reveals that over long time periods global stock portfolios have consistently produced better returns than US-only ones. Since we cannot predict the future, I firmly believe in global diversification, a strategy that has in fact made sense in virtually every long-term period we’ve studied. We like to use rolling returns, which are overlapping cycles starting on the first day of the month and provide a more accurate picture of performance than a snapshot during a single time period.

Source: Forbes

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