Yes, the stock market has been doing well, but just how well and what categories did the best? As it turns out, a big theme for the first quarter was the big returns from diversifying internationally. Matson Money’s International Fund was up 8.02% in just 3 months.
Below is commentary from Matson Money about the 1st Quarter in the market.
The 1st quarter of 2017 built upon a strong 4th quarter and continued to provide positive returns across broad markets. Many members of the media and so-called “experts” warned of a financial downturn resulting from Donald Trump being inaugurated as President, but it seems as if these predictions were unfounded, with stocks up worldwide since President Trump took the reins. U.S. stocks performed well in the first quarter, with large stocks leading the way up 6.07% as represented by the S&P 500. However, despite the warnings of some pundits that President Trump’s protectionist policies would sink international stocks, both developed and emerging market stocks saw an even greater lift than those domestically, with the MSCI EAFE Index index up 7.39% and the MSCI Emerging Markets Index up 11.49%.
This overperformance by international equities as compared to domestic equities marked a contrast to what we have seen over the last few years, and can be a great lesson for investors. Leading up to 2017, the five-year period ending in 2016 saw the S&P 500 gain 98% while the EAFE was up only 40%. Naturally, many investors fell into the trap of thinking that this was the “new normal” and that it was prudent to invest in all U.S. stocks and ignore those abroad. The only thing that is “normal” about this performance disparity is that when one invests in different asset classes with the goal of diversification, they get just that – asset classes with dissimilar price movements, which is the earmark of diversification. This time period is one of many that can highlight why this kind of diversification is a good thing and is so important for investors. Without a crystal ball to tell an investor which of the asset classes will perform better over any short-term period, it can be extremely detrimental to be over-weighted in any one and take asset class specific downside risk or miss out on a boom in another. Consider the following example of varying five-year periods of U.S. equity (S&P) performance as compared with international (EAFE):
1971-1975 – EAFE outperformed the S&P by 48%
1979-1983 – S&P outperformed the EAFE by 60%
1984-1988 – EAFE outperformed the S&P by 257%
1989-1993 – S&P outperformed the EAFE by 85%
1995-1999 – S&P outperformed the EAFE by 166%
2002-2006 – EAFE outperformed the S&P by 70%
2012-2016 – S&P outperformed the EAFE by 58%
When looking at this most recent period through the lens of history, it no longer appears to be an extraordinary shift in market paradigms; rather it can be viewed as just another of the many examples of U.S. and international stocks performing differently. What IS truly extraordinary is that during this entire period (1971-2016), both asset classes had an average annualized return of 10% per year – these returns just occurred unpredictably at different times. It can be challenging to not get caught up in a current trend, but taking a more prudent, historical outlook can prove to be rewarding. For investors who chose to forsake diversification and chase what had recently been hot, they may have missed out on potentially sizable returns.
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 will only 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.
By Jimmy Hancock
- Matson Money. “Account Statement.” Letter to James Hancock. 20 Apr. 2017. MS. N.p.
- Globe with International Flags. Digital image. Freeimageslive.co.uk. N.p., n.d. Web. 25 Apr. 2017.