With US stocks booking strong gains for years, and leading most of the rest of the world in returns, many investors may wonder why they should go anywhere else. For the five-year period ending October 31, 2018, the S&P 500 Index had an annualized return of 11.34%, while non-US markets as benchmarked by the MSCI World ex USA Index returned only 1.86%, and the MSCI Emerging Markets Index returned a disappointing 0.78%.
US stocks did something like six times better than non-US stocks like those in Japan and Europe, and something like 15 times better than emerging markets’ stocks like those in China, Russia, and South America.
So with non-US stocks lagging so bad, why do so many investment advisors and accepted strategies insist that some money be put in non-US stocks?
Besides the risk-reducing benefits of diversification, the odds may be very good that big profits may be in the cards for non-US stocks in the years ahead.
It’s happened before, and not that long ago. For 2000–2009, the S&P 500 booked its worst ever 10-year performance with a total cumulative return of –9.1%. At the same time, many non-US markets did substantially better, from about 26% better to about 221% better than US stocks over the same period.
This was no fluke. Going back over 100 years to 1900, and looking at performance for each of the 11 ten year periods from then to 2010, the US market outperformed the world market in five decades and underperformed in the other six.
You never know when performance leadership will switch, but with US stocks considered pricey compared to non-US by many observers, it may be sooner than you think.
