A sample from Focus 360, ghostwritten for Dan Ray:
Hot Topics: U.S. vs. Foreign Stock
By Dan Ray, CFP® and Client Advisor
At Regency, we’ve been in the investment business long enough to have seen several cycles where U.S. stocks completely outperformed foreign stocks. As a recent example, in 2014 U.S. stocks rose 13.69 percent, while foreign stocks declined 4.9 percent. That’s an 18 percent difference in a single year.
During times when there’s such a difference in performance, investors may feel that they want to be out of foreign stocks completely. It’s an understandable tendency, but one that’s simply unsupported by the long-term data.
We’ve seen plenty of cycles where exactly the opposite occurs, when foreign stocks dramatically outperform their domestic counterparts. For example, in 1986 foreign stocks rose 69.4 percent and U.S. stocks rose “only” 18.6 percent. The same goes for 1977, when foreign stocks rose 18 percent while U.S. stocks actually declined 7 percent.
Over periods of three to five years, those differences in performance can look even more dramatic. For example, there’s been a five-year period recently where U.S. stocks outperformed foreign stocks by 167 percent. But on the other side, there’s another five-year period when the opposite occurred, with foreign stocks outperforming U.S. stocks by 137 percent.
The real story about U.S. vs. foreign stock performance? Either class outperforming the other in a given year is no justification for shunning one class completely. Over the 44 years during which the indices exist for directly comparing U.S. and foreign stock performance, U.S. stocks have outperformed foreign stocks 21 times, while foreign stocks have outperformed U.S. stocks 23 times. That’s more or less a tie.
It would be nice if one could predict with confidence exactly when one stock class is going to outperform the other, or exactly when to get in and out of either class. At Regency, we do not believe it’s possible to make that kind of prediction with confidence. That would be an example of attempting to time the market, and it’s simply less likely to generate consistent returns over time.
Instead, taking all of that performance data into account, we believe that good things happen when an investor combines both U.S. and foreign stocks in appropriate weightings. By maintaining a stock portfolio that’s disciplined, with an appropriate balance between U.S. and foreign stocks, investors are more likely to generate returns with less risk of extreme swings, less volatility, and better-managed risk.
If this sounds familiar, that’s because it’s one more example of the benefits of diversification. Shunning one class because it’s down means the investor will miss the returns when it rises.
Past performance is not indicative of future results, and inherent in any investment in the market is a possibility of loss. There are inherent limitations in making assumptions due to the cyclical nature of the market.
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