The following is from Matson Money Quarterly Statements. It is a good reminder to focus on long term historical returns rather than panicking about short term returns.
“The 3rd quarter of 2018 saw domestic equity markets hit all-time highs, meanwhile outside of the U.S., the decline in international markets that persisted in the first two quarters of the year, stalled out and various international asset classes achieved positive returns. U.S. stocks rose by 7.71% for the quarter as represented by the S&P 500 index, while international stocks as measured by the MSCI World Ex-USA Index returned 1.31%. Large cap value stocks gained momentum, after going into negative territory earlier this year, and moved higher to the tune of 5.7% as measured by the Russell 1000 Value Index.
2018 thus far has seen a divergence in the performance of domestic equities vs international stocks. While domestic equities are hitting all-time highs, international stocks have seen a decline from their performance in 2017. The myopically focused nature of mainstream media and market watchers seem to just focus their attention on one index to represent the investment landscape, the S&P 500. In the good times, investors seem to compare their diversified portfolios to the S&P 500 and get frustrated when they can’t keep up. You’re hearing stocks are at all-time highs so why isn’t your portfolios at an all-time high as well? Its important for investors to understand this is an apples to oranges comparison. A sound investment solution involves diversification and not just in the U.S. equity markets but international ones as well. It involves owning stocks that have low correlation to one another so that when one goes down, another one does not go down as much. It’s not fair to tell yourself, “if only I owned more U.S. Large Cap (S&P)” There are many other asset classes in the world that have historically done better than the S&P 500, however they are not the ones being referenced on your nightly news show.
To highlight the benefits of global diversification, let’s look back to 1970 and examine the relationship between U.S. stocks, as represented by the S&P 500 Index, and international stocks, represented by the MSCI EAFE Index. From 1970-1989, international stocks outperformed the U.S., then from 1990-1999, U.S. stocks outpaced international, then from 2000-2017, international stocks outdid the U.S. These decade-long tradeoffs in performance is exactly why clients need to stay focused on their long-term investing goals and remain diversified. Developed countries have similar long- term expected returns, but as the data has shown, they achieve these returns at different times. Over the entire period, 1970-2017, the S&P 500 average annual return was 11.95%, while the MSCI EAFE index had an average annual return of 11.78%. They each took different routes to get there, but in the end, they achieved a similar result.
In the end, choosing a wise financial strategy -and sticking to it -can have tremendous impact on an investor’s long-term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it can reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market. ”
- Matson Money. “Account Statement.” Letter to James Hancock. 15 Oct. 2018. MS.