If you are one to watch the stock market, you may have noticed that, over the last 10 years or so, the U.S. equity markets are on a hot streak when compared to international stocks. In fact, the hot streak has gone on so long that many investors ask, “Why should I invest in international stocks or equities anymore?”
It is this exact question on international markets that we will address in today’s blog post, the fourth installment of our 2024 Market Review Series for Q1 2025.
Diversification: It’s Important!
None of us knows the future. This applies to life in general and it certainly applies to investing! This truth means that no one truly knows for sure what asset class will outperform in the future.
As a result, diversification is extremely important, not only across domestic equity markets, but internationally developed and in developing markets as well! The chart below does a great job of illustrating this truth. As you can see, no one asset class remains the top performer from year to year in any reliable pattern.
In fact, asset class performance is so random from year to year, that maintaining exposure to all of them is one of the best long-term investing strategies.
Image: Source
Comparing International and Domestic Market Opportunities
Diversification means that we want our portfolios positioned in a wide variety of asset classes across the entire globe, not just the U.S. market. The chart below shows that, if we only invest in the U.S. equity and bond markets, we will remain unexposed to a substantial 33% of the global stock market and 62% of the global bond market!
Image: Source
A Simple Advantage of Foreign Markets
The final point that we will make in our case that investing internationally is important is illustrated in the following chart. The chart below shows that, due to the outperformance of U.S. equities over the last decade or so, prices are high relative to their long-term average.
In contrast, prices internationally are actually lower than their long-term average.
While past performance is never a guarantee of future performance, it does mean that dollars invested internationally are being invested at a lower price relative to the long-term average.
The Benefits of Foreign Investment to U.S. Citizens is Clear
In conclusion, we have been reminded of a few important investment principles:
- No one knows which asset class will outperform in the future, so be sure to have exposure to all of them!
- The US stock and bond markets are only a part of the global market. Limiting your investment exposure to only domestic stocks and bonds will cause you to miss out on a huge proportion of the entire global market!
- Compared to the long-term average, relative valuations are elevated in the US and lower internationally, which is an interesting data point to note.
If you or someone you know would be interested in engaging further with our team related to your financial situation, do not hesitate to reach out today!
